Competitive Strategy - Dec '23-Jan '24 PDF

COMPETITIVE STRATEGY The Concept of Value 30th December 2023 © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 WHAT CONNECTS THESE COMPANIES? Indian Oil was replaced by Apollo Hospital Enterprises Ltd. in the Nifty 50 index in March 2022. The other firms in the l...

COMPETITIVE STRATEGY The Concept of Value 30th December 2023 © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 WHAT CONNECTS THESE COMPANIES? Indian Oil was replaced by Apollo Hospital Enterprises Ltd. in the Nifty 50 index in March 2022. The other firms in the list were removed from the Nifty Next 50 index. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 TWO TESTS OF A GOOD STRATEGY ✓ Does the firm have a Unique Value Proposition? ✓ Does the firm have a tailored Value Chain to create and deliver the value proposition? © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 ECONOMIC VALUE ADDED Your Added Value Supplier Opportunity Cost The cost under which the suppliers won’t sell to us; Also called as Willingness to Sell (WTS) © Mukundhan K.V., All rights reserved Customer Willingness to Pay The maximum price buyers are willing to pay for our offering (WTP) PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 THE CONCEPT OF VALUE CONSUMER SURPLUS PRICE (P) VALUE (WTP – C) CONSUMER WILLINGNESS TO PAY (WTP) PROFIT (P-C) COST (C) © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 VALUE CREATION Value Created to Customer = f (Value Proposition, Value Chain Activities) ▪ Value Proposition: A statement that summarizes why a customer should buy a company’s product or use its service ▪ Value Chain: A set of activities that a firm operating in a specific industry performs in order to deliver a valuable product or service to its customers The activities carried out by the company help it create and deliver the value proposition to its customers Decisions taken on value chain activities also influence how much of the value created by the firm can be captured by it © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 WHERE DO WE SEE VALUE PROPOSITIONS? Firms do not arrive at the appropriate value proposition at first. They are ‘learned’, ‘figured out’ and ‘perfected’ over time They are conveyed through advertising campaigns Each such campaign highlights a set of value drivers underlying the value proposition These campaigns inform their customers how their product creates value vis-à-vis rivals and substitutes © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 THE ELEMENTS OF VALUE PROPOSITIONS A value proposition answers 3 questions – each of which can be a starting point for customer segmentation Which Customers? Which Needs? What end users? What channels? What Relative Price? Which products? Which features? Which services? Premium? Discount? Source: Chapter titled “Creating Value: The Core” from Understanding Michael Porter by Joan Magretta, Harvard Business School Press © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 VALUE PROPOSITIONS CHANGE OVER TIME! © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 HOW TO DRIVE UP FIRM REVENUES? © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 VALUE DRIVERS THAT INCREASE CUSTOMER WILLINGNESS TO PAY BAIN’S B2C VALUE DRIVERS BAIN’S B2B VALUE DRIVERS https://www.bain.com/insights/eov-b2c-infographic/ https://www.bain.com/insights/eov-b2b-infographic/ © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 ADVANTAGES OF DELIVERING ELEMENTS OF VALUE Source: https://www.bain.com/insights/delivering-what-consumers-really-value Consumers are Willing to Pay for firms that deliver more elements of value © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 ADVANTAGES OF DELIVERING ELEMENTS OF VALUE Source: https://www.bain.com/insights/delivering-what-consumers-really-value Firms delivering higher scores on most elements of value stand to improve their market shares significantly over a period of time © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 ADVANTAGES OF DELIVERING ELEMENTS OF VALUE Source: https://www.bain.com/insights/delivering-what-consumers-really-value Firms delivering the higher scores on most elements of value demonstrate significantly higher revenue growth rates © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 ADVANTAGES OF DELIVERING ELEMENTS OF VALUE Source: https://www.bain.com/insights/the-amazon-effect-onwhat-consumers-value-snap-chart/ How Amazon’s Value Drivers have changed over time: The company was over-delivering on ‘Quality’ in 2015. It has cut back spending there in 2018 The focus of the company continues to be on deep-discounting as it is evident from the focus on the value driver ‘Reduces Cost’ The company is constantly overhauling its interface to make the right product ‘easily’ available to the customer, thereby ‘Saving Time’ and ‘Reducing Effort’ for customers With multiple delivery options, a favorable return policy and a prompt customer service, it is ‘Avoiding Hassles’ for customers The company has cut down on its free coupons and cashbacks as can be seen from the reduced focus on ‘Rewards Me’ in 2018 The anxiety that customers had while shopping online has reduced on an average and Amazon’s specific expenses to ‘Reduce Anxiety’ have come down in 2018 © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 HOW TO DRIVE DOWN FIRM COSTS? © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS MULTIPLE ROUTES TO ACHIEVING COST EFFICIENCY Economies of Scale Economies of Learning Production Techniques Technical Input or Output Relationships Learning / Experience Curve Effects Process Innovation Indivisibilities Specialization Product Design Input Costs Capacity Utilization Standardization of Designs & Components Location Advantages Ability to adjust capacity to economic downturns Access to Low Cost Inputs Business Process Reengineering Design for Manufacture Residual Efficiency Eliminating Redundant Resources Non Unionized Labor Corporate Culture Bargaining Power Management Systems and Processes Source: Chapter 7 titled “The Sources and Dimensions of Competitive Advantage” from ‘Contemporary Strategy Analysis’ by Robert M. Grant. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: ECONOMIES OF SCALE Cost Driver How the Cost Driver creates Cost Advantage a) b) Economies of Scale c) © Mukundhan K.V., All rights reserved Technical input-output relationships: In many activities, increases in output do not require proportionate increases in input. A 10000-barrel oil storage tank does not cost five times as much as a 2000-barrel tank. Similar volume related economies exist in ships, trucks, and steel and petrochemical plants. Indivisibilities: Many resources and activities are “lumpy”—they are unavailable in small sizes. Hence, they offer economies of scale as firms are able to spread the costs of these items over larger volumes of output. In R&D, new product development and advertising, market leaders tend to have much lower costs as a percentage of sales than their smaller rivals. Specialization: Increased scale permits greater task specialization. Mass production involves breaking down the production process into separate tasks performed by specialized workers using specialized equipment. Division of labour promotes learning and assists automation. Economies of specialization are especially important in knowledge-intensive industries such as investment banking, management consulting, and software development, where large firms are able to offer specialized expertise across a broad range of know-how. PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: ECONOMIES OF LEARNING Cost Driver How the Cost Driver creates Cost Advantage The experience curve has its basis in learning-by-doing. Repetition develops both individual skills and organizational routines. ▪ In 1943, it took 40,000 labour-hours to build a B24 Liberator bomber. By 1945, it took only 8000 hours. Economies of ▪ Intel’s dominance of the world microprocessor Learning market owes much to its accumulated learning (Learning / in the design and manufacture of these Experience Curve incredibly complex products. Effects) Learning occurs both at the individual level through improvements in dexterity and problem solving and at the group level through the development and refinement of organizational routines © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: PROCESS INNOVATION Cost Driver How the Cost Driver creates Cost Advantage Process Innovation: Superior processes can be a source of huge cost economies. Ford’s moving assembly line reduced the time taken to assemble a Model T from 106 hours in 1912 to six hours in 1914. Production Techniques When process innovation is introduced into new capital equipment, diffusion is likely to be rapid. Between 1979 and 1986, General Motors spent $40 billion on new process technology with the goal of becoming the world’s most efficient manufacturer of automobiles. Major efficiency gains from improved processes may come from process redesign without significant technological innovation. Dell’s cost leadership in personal computers during the 1990s resulted from its reconfiguration of the industry’s traditional value chain. Toyota’s system of lean production combines several work practices including just-in-time scheduling, total quality management, continuous improvement (kaizen), teamwork, job flexibility, and supplier partnerships. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: PROCESS REENGINEERING Cost Driver Production Techniques How the Cost Driver creates Cost Advantage Re-engineering of Business Processes: “Re-engineering gurus” Michael Hammer and James Champy define Business Process Reengineering (BPR) as: “the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality, service, and speed.” BPR begins with the question: “If we were starting afresh, how would we design this process?” In recent years BPR has been partly superseded by business process management, where the emphasis has shifted to the broader application of information technology (web-based applications in particular) to the redesign and enhancement of organizational processes. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: PRODUCT DESIGN Cost Driver How the Cost Driver creates Cost Advantage Standardization of Designs and Components: Standardization makes it easier for parts to be pulled into assembly (instead of ordering and waiting) by reducing the number of part types to the point where the remaining few standard parts can receive the focus to arrange demand-pull just-in-time deliveries. Fewer types of parts ordered in larger quantities reduces part cost and material overhead cost. Product Design Design for Manufacture: Design-for-manufacture—designing products for ease of production rather than simply for functionality and aesthetics—can offer substantial cost savings, especially when linked to the introduction of new process technology. ▪ Volkswagen cut product development and component costs by redesigning its 30 different models around just four separate platforms. The VW Beetle, Audi TT, Golf, and Audi A3, together with several Seat and Skoda models, all share a single platform. ▪ In printed circuit boards (PCBs), design-for-manufacture has resulted in huge productivity gains through increasing yields and facilitating automation. Service offerings, too, can be designed for ease and efficiency of production. Motel 6, cost leader in US budget motels, carefully designs its product to keep operating costs low. Its motels occupy low-cost, out-of-town locations; it uses standard motel designs; it avoids facilities such as pools and restaurants; and it designs rooms to facilitate easy cleaning and low maintenance. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: INPUT COSTS Cost Driver a) b) Input Costs c) d) © Mukundhan K.V., All rights reserved How the Cost Driver creates Cost Advantage Location Advantages: The prices of inputs, and wage rates in particular, vary between locations. In the US, software engineers earned an average of $82,000 in 2014. In India, the average was $11,000. In auto assembly the hourly rate in Chinese plants was about $3.50 an hour in 2014 compared with $28 in the US (not including benefits). Ownership of Low-Cost Inputs: In raw-material-intensive industries, ownership of low-cost sources of material can offer a massive cost advantage. In petroleum, lifting costs for the three “supermajors” (ExxonMobil, Royal Dutch Shell, and BP) were about $18 per barrel in 2013; for Saudi Aramco they were about $5. Non-unionized Labour: Labour unions result in higher levels of pay and benefits and work rules that can lower productivity. In the US airline industry, non-union Virgin America had average salary and benefit cost per employee of $79,161 in 2013 compared with $98,300 for United (80% unionized). Bargaining Power: The ability to negotiate preferential prices and discounts can be a major source of cost advantage for industry leaders, especially in retailing. Amazon’s growing dominance of book retailing allows it to demand discounts from publishers of up to 60%. PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: CAPACITY UTILIZATION Cost Driver How the Cost Driver creates Cost Advantage Over the short and medium terms, plant capacity is more or less fixed and variations in output cause capacity utilization to rise or fall. Underutilization raises unit costs because fixed costs must be spread over fewer units of production; pushing output beyond normal full capacity also creates inefficiencies. Capacity Utilization ▪ Boeing’s efforts to boost output during 2006–2011 resulted in increased unit costs due to overtime pay, premiums for night and weekend shifts, increased defects, and higher levels of maintenance. Hence, the ability to speedily adjust capacity to downturns in demand can be a major source of cost advantage. ▪ During the 2008–2009 recession, survival in hard-hit sectors such as house building, construction equipment, and retailing required fast response to declining demand: Caterpillar announced it was cutting 20,000 jobs on January 28, 2008, the same day it reported a downturn in its quarterly sales. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 COST DRIVERS: RESIDUAL EFFICIENCY Cost Driver How the Cost Driver creates Cost Advantage Even after taking account of the basic cost drivers—scale, technology, product and process design, input costs, and capacity utilization— unexplained cost differences between firms typically remain. These residual efficiencies relate to the extent to which the firm approaches its efficiency frontier of optimal operation which depends on the firm’s ability Residual Efficiency to eliminate “organizational slack” or “X-inefficiency.” These excess costs have a propensity to accumulate within corporate headquarters—where they become targets for activist investors. Eliminating these excess costs often requires a threat to a company’s survival—in his first year as CEO, Carlos Ghosn cut Nissan Motor’s operating costs by 20%. At Walmart, IKEA, Ryanair, and Amazon, high levels of residual efficiency are the result of management systems and company values that are intolerant of unnecessary costs and glorify frugality. © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 A TAILORED VALUE CHAIN © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 THE VALUE CHAIN The Value Chain indicates those sets of activities that a firm carries out to create and deliver the value proposition to its customers The value chain represents activities involved in the various stages of the product as it moves from input stage to the final stage that reaches the customer It represents two sets of activities – Primary & Support Activities A firm need not perform all the value chain activities by itself. However, taking control of key value chain activities is central to capturing the created value © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 THE VALUE CHAIN Primary Activities Inbound Logistics – the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required Operations – the processes of transforming inputs into finished products and services. Outbound Logistics – the warehousing and distribution of finished goods Marketing & Sales – the identification of customer needs and the generation of sales Service – the support of customers after the products and services are sold to them Support Activities include human resources, accounting and finance operations, technology, and procurement © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 THE STANDARD VALUE CHAIN REPRESENTATION Firm Infrastructure Human Resources Support Activities Technology Development Procurement Inbound Logistics Operations Outbound Logistics Marketing & Sales AfterSales Service Primary Activities © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 VALUE CHAIN OF AN IT CONSULTING COMPANY Firm Infrastructure Human Resources Support Activities Accounting and Finance Procurement Pre Sales Estimation Bidding Project Management Installation Maintenance Contracts Customer Relationship Management Primary Activities © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 VALUE CHAIN OF A PASSENGER CAR COMPANY Firm Infrastructure Human Resources Support Activities Accounting and Finance Procurement Inbound Logistics Design Assembly Sales & Marketing After Sales Service Primary Activities © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 VALUE CHAIN OF A PERSONAL CARE (FMCG) COMPANY Firm Infrastructure Human Resources Support Activities Accounting and Finance Procurement Research & Development Product Development Operations Marketing Sales & Distribution Primary Activities © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24 THE CONSTRUCTION VALUE CHAIN Firm Infrastructure Human Resources Support Activities Technology Development Project Finance Project Financing Design Materials Inbound Logistics Construction Maintenance Primary Activities © Mukundhan K.V., All rights reserved PGCSM03 – Competitive Strategy – Dec ‘23-Jan ‘24