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Strategic Positioning for Competitive
Advantage
Besanko, Dranove, Shanley, and
Schaefer
Chapter 11
1
Agenda

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
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Define Competitive Advantage
Discuss Maximum Willingness-to-Pay
and Consumer Surplus
Discuss Value Map and Value Creation
Look at the Logic of Cost Leadership
and Benefit Leadership
Discuss the importance of Elasticity to
Competitive Advantage
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Defining Competitive Advantage

It is the ability of a company to
outperform the average performers in
an industry.

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One of the keys to this definition is
defining the industry.
The performance measure for this
definition is usually economic profitability.
3
Maximum Willingness-to-Pay

A consumer’s maximum willingness-topay is the maximum amount of money
the consumer is willing to give up to get
a good.

Any amount above this would cause the
consumer to not want the good.
4
Consumer Surplus

One definition of consumer surplus is
that it is the difference between the
consumer’s maximum willingness-to-pay
and the price the consumer must pay
for the product.

Given competing goods, the consumer
would prefer to purchase the one with the
highest consumer surplus.
5
A Value Map
Price
Indifference Curve A
Indifference Curve B
Quality
6
Value Map Questions


Any two products that is on a particular
indifference curve has the same consumer
surplus.
Indifference curve B represents a higher
consumer surplus.
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Why?
Why does the shape of the indifference curve
make sense?
What does the slope of the indifference curve
tell us?
7
Competition Between Firms
Considering the Value Map


Each firm must decide on the price it is
going to charge as well as the quality
that it will provide in the product.
The consumer is going to choose the
product that gives him the highest
consumer surplus.
8
Value-Created
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Define:
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B as the maximum willingness-to-pay for a
consumer
C as the cost of production for the producer
P as the products price
Value Created = B-C = (B-P)+(P-C)
Value Created = Consumer Surplus +
Producer Surplus
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Value Creation and Competitive
Advantage

Positive value creation is a necessary
condition for a firm to be viable, but it is not
sufficient.

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Competition can bid prices down to cost, leading
the producer with no surplus.
This implies that a firm must create more
economic value than its rivals to be successful.

This value must be difficult for other firms to replicate.
10
Value Creation and the Value
Chain

At each step of the vertical chain of a
product, it is expected that a company
is creating some form of value in the
product.

Each point in the value chain can add both
benefits and costs, but in the end the
benefits should outweigh the costs.

When might this not be true?
11
Cost Leadership Strategies

A firm can choose to:
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Offer a product with the same benefits as the
other firm’s products (benefit parity) at a lower
cost.
Offer a product with the slightly lower benefits
than the other firm’s products (benefit proximity)
at a lower cost.
Offer a product with strictly lower benefits
(qualitatively different) than the other firm’s
products at a lower cost.
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Logic of Cost Leadership
$
PA
PB
As long as PA – PB < CA – CB, then cost
leadership and offering a lower quality
product makes sense
A
Indifference Curve
B
•
•
CA
CB
QB
QA
Quality
13
Benefit Leadership Strategies

A firm can choose to:
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Offer a product with the same cost as the other
firm’s products (cost parity) with a higher benefit.
Offer a product with the slightly higher cost than
the other firm’s products (cost proximity) with a
higher benefit.
Offer a product with strictly higher costs than the
other firm’s products with much higher benefits.
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Logic of Benefit Leadership
$
PA
PB
As long as PA – PB > CA – CB, then cost
leadership and offering a lower quality
product makes sense
A
Indifference Curve
•
B
•
CA
CB
QB
QA
Quality
15
High Price Elasticity with a Cost
Advantage


Under this situation the firm can greatly
increase market share from a price cut.
The firm should exploit its advantage by
gaining market share by under-pricing
its competitor.
16
High Price Elasticity with a
Benefit Advantage


Under this situation the firm can lose
market share from a price increase.
The firm should exploit its advantage by
gaining market share by maintaining
pricing parity with its competitor and
gain share through higher benefits.
17
Low Price Elasticity of Demand
with a Cost Advantage


Under this situation the firm gains little
market share by cutting prices.
The firm should exploit its advantage by
maintaining pricing parity with its
competitor and exploit its advantage of
higher profit margins.
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Low Price Elasticity of Demand
with a Benefit Advantage


Under this situation the firm loses little
market share by increasing prices.
The firm should exploit its advantage by
increasing prices over its competitor
and exploit its advantage of higher
profit margins.
19
“Stuck in the Middle”

When a firm tries to engage in both cost and
benefit leadership simultaneously and fails at
both, it is known as being “stuck in the
middle.”
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While it is possible for companies to focus both on
costs and benefits, there is evidence that it can
have an adverse effect on competitiveness.
This does not imply that the two are completely
incompatible.
20
Broad Coverage Strategy Vs.
Focus Strategies


A broad coverage strategy is going to try to
serve all customer groups with a full line of
related products.
A focus strategy will focus on either a
particular group of customers for a single
product, a particular product for many
customer groups, or focus on selling a variety
of products to a variety of customer groups in
a narrowly defined geographic area.
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