4.3. Competitive advantage Flashcards Preview

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Flashcards in 4.3. Competitive advantage Deck (34)
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1
Q

Define competitive advantage

A

the ability of a company to outperform (in terms of profitability) its competitors in a given industry

2
Q

Define willingness to pay

A

maximum amount a customer would pay for a unit

3
Q

Define opportunity cost

A

lowest price suppliers is willing to sell the input for

4
Q

In reality, what’s the problem with willingness to pay and opportunity cost?

A

defining willingness to pay for each individual customer is difficult because it differs among them. same logic applies to opportunity cost

5
Q

What’s the ideal outcome?

A
  • willingness to pay = price
  • opportunity cost = cost
  • added value = profit captured
6
Q

What’s the reality of the outcome

A
  • price < willingness to pay
  • opportunity cost < cost
  • added value > profit captured
7
Q

How firms create competitive advantage?

A
  1. pushing cost to opportunity cost barrier

2. pushing price up to willingness to pay

8
Q

Ways to create competitive advantage

A
  1. Differentiation strategy: increase consumers’ willingness to pay without increasing costs
  2. Cost strategy: decrease firm
    cost without decreasing consumers’ willingness to pay
  3. Dual strategy: increase consumers’ willingness to pay and at the same time decrease firm cost
9
Q

Example of cost strategy: Southwest

A

Basic strategy:
- competing only on cost
- focus on most price sensitive customer segment
- fly in small airports and from small cities to big cities
=> operate in a niche
How does strategy work:
- lower labour costs and higher usage of planes (lease)
- utilisation - pilots and airplanes are in the air longer hours - economies of fixed cost absorption
- less rigid contracts
- no meals, no services, standardised planes, smaller airports without congestion

10
Q

Example dual strategy: JetBlue

A
  • is not “no frills”, it is “selective frills”:
    + in flight entertainment
    + leather seats
    + premium price on convenient routes (NYC, Miami)
    • Don’t fly the “frumpy” routes (e.g. the routes Southwest would fly)
    • Employees are not unionized; strong culture; innovative recruiting for non-pilot jobs (e.g. college students saving $ for travel)
    • We discussed how there is little differentiation in general (when talking about existing rivalry) but somehow JetBlue managed to differentiate.
11
Q

Niche strategies

A
  • Identifying a specific customer segment and only targeting them (e.g. understanding preferences and habits and ignoring all other potential customers)
  • The danger is often that successful firms want to grow out of their niche and gain different customers. In the process they may loose their competitive advantage
12
Q

2 types of industry structure

A
  1. Cost leadership approach (total market
    or niche)
  2. Differentiation approach (total market or niche)
13
Q

When to use Cost leadership approach (total market

or niche)

A
  • The nature of the product does not allow benefit enhancement (e.g. a commodity)
  • Consumers are price sensitive (elastic demand)
  • Economies of scale => invest more to become the biggest player in the market
14
Q

When to use Differentiation approach (total market or niche)

A
  • Consumers are willing to pay a premium for benefit enhancements
  • No economies of scale/learning left and differentiation is the best route to value creation
  • “Experience good” (product complex to evaluate before the purchase/use … )
15
Q

Dual strategy

A
  • difficult to maintain

- exceptions might be if the firm has economies of scale but can still differentiate

16
Q

Where does economic performance result from?

A

2 forces:

  • industry structure (industry attractiveness)
  • strategic positioning (build/sustain competitive advantage)
17
Q

Porter’s opinions on strategic positioning

A
  • the essence of strategy is performing different activities from rival’s or performing similar activities in different ways (not about being better, about being different)
  • competing to be best = run the same race
  • competing to be unique = run a different race
    => operational effectiveness is not equivalent to strategy
18
Q

Operational effectiveness

A
  • means performing similar activities better than rivals (reducing defects faster, outsourcing production to a cheaper location,…etc.)
  • differences in OE are important differentiators in profitability among rivals as OE directly affects relative cost positions and levels of differentiation
  • BUT it is not strategy (according to Porter)
19
Q

How does a company figure out what is unique about them?

A

Activity analysis:

  1. Catalog activities (the value chain) - primary activities engaged in for the primary purpose of making a profit
  2. Analyse relative costs
  3. Analyse willingness to pay
  4. Explore options and make choices
20
Q

Analyse relative costs

A
  1. must calculate the costs associated with each activity
  2. quantification and comparison of those costs
  3. determine the cost drivers associated with each activity
  4. compare to competitors
21
Q

Analyse the willingness to pay

A
every activity in the value chain generates not only costs but also willingness to pay
it heavily depends on intangible factors and perceptions (hard to measure):
• Who is the real buyer of your
product/service?
• What the buyers want (final
consumer of supermarket)?
• How successfully are you, and
your competitors, at fulfilling
consumer’s needs?
• Which activities satisfy these
needs?
- analyse in terms of price, brand image, freshness, variety, size
22
Q

Important remark about willingness to pay and relative costs

A
  • Reducing (increasing) costs drastically lowers firm cost, but often it also lowers (raises) willingness to pay
  • What is the ultimate effect on firm profit, and its relative size (i.e. compared to competitors)?
    • How are our customers reacting?
    • How are competitors reacting?
    • More generally, eliminate costs that do not contribute to willingness to pays
23
Q

What does sustainable positioning require?

A

Trade offs

24
Q

Trade offs

A

• Trade-offs occur when activities are incompatible
• Trade-offs arise for 3 main reasons:
1. inconsistencies in image/reputation
2. different positions require different activity
sets
3. internal focus requires priority setting
• A trade-off means firms must actively decide NOT to do something

25
Q

Failure of evaluating trade offs: Air Berlin

A

Air Berlin – low performance for almost a decade; now bankruptcy.
Why?
• Probably several reasons, one being the close relationship between Lufthansa and the German government (some speak of anti-competitive behavior)
• Also note: “Air Berlin had some massive structural challenges. One basic problem: The airline never settled on a strategy. For a long time, it wanted to be a discount airline focused on attracting leisure customers. But it never could get its costs to to match other low cost airlines in Europe.” (half ass)

26
Q

IKEA strategy

A
do:
- low cost appeal for mass market
- low cost, ready to assemble furniture
- display products in room like setting
- self service model
- in house design
- target young price sensitive customers
not do:
- both high end and low cost furniture
- high level of service
- manufacture own furniture
- target all kinds of customers
27
Q

Why does competitive advantage do not last in perfect competition?

A

In perfectly competitive markets, profits will tend to zero and competitive advantage cannot be sustained
• Homogeneous products: price competition
• Non-homogeneous products: free entry and costless imitation

28
Q

Why does competitive advantage do not last in monopoly?

A
  1. Imitation

2. Substitution

29
Q

Imitation

A
Imitation increases the supply of what a firm “uniquely” provides
• Sources:
– Herd behavior
– Risk aversion
– Following the path of least resistance
30
Q

Barriers to imitation

A
  • Economies of scale and scope
  • Learning / private information
  • Contracts and relationships / legal restrictions - patents
  • High switching costs
  • Complexity (we’ll look at IKEA again)
  • First mover advantage / Upgrading
31
Q

Substitution

A

• Substitution reduces the “demand” for what a firm uniquely provides by shifting the demand elsewhere
– Due to changes in technology, customer needs, input prices, etc.
– Provides higher WTP and / or lower costs to substantial segment of customer base
• Substitution threats can be subtle and unexpected
– Videoconferencing vs. air travel – On-line vs. conventional trading – Analog vs. digital photography

32
Q

Responses to substitution

A

• Fight the threat
– Face up to your loss of uniqueness, and reduce price before the substitute gets a foothold
• If you can’t beat them, join them
– Will you have a competitive advantage? – Will you accelerate cannibalization?
• Take the money and run

33
Q

Process of strategy

A
  1. Analysis: internal and external
  2. Formulate strategy
    • Strategies at business level and corporate level (diversification, acquisitions…)
    • Use your resources/capabilities including intangible things like culture, leadership
  3. Implementation
34
Q

How to stay unique?

A
  1. Activity Analysis: understand what your customers actually value, understand what actually drives your costs
  2. Resources, resources, resources: understand the value of your tangible and intangible (culture, values) and
    human capital (employees’ skills, motivation)
  3. Trade Offs: Understand that a strategy means doing something and not doing something else (opportunity cost)
  4. Threats to your uniqueness (imitation, substitution): be aware and address if possible