Midterm Notes PDF

Exam: If you see these words this what shes talking about: Industry - porter five forces Firm level performance - value capture - competitive advantage Overtime - growth and tradeoff 1. Strategic Positioning / Competitive Advantage Possible questions: What is the positioning and exemplify 4 a...

Exam: If you see these words this what shes talking about: Industry - porter five forces Firm level performance - value capture - competitive advantage Overtime - growth and tradeoff 1. Strategic Positioning / Competitive Advantage Possible questions: What is the positioning and exemplify 4 activities that support the positioning? - choose a positioning and explain how the activity system supports that What is company X’s strategy? What do they do to achieve this strategy? What is company B’s competitive advantage? A criticism of X company is that it does not have a clear position. Propose a clear positioning (e.g., low-cost or differentiation) for the company and provide details on at least two activities that they would have to alter or introduce in order to achieve this positioning in the market. Only options of strategic positioning is: - Low cost - bottom of value stick - cost and wts - Differentiation - top of value stick - price & wtp Points: - 1 pt for positioning - 1 pt for 4 activities / things they do that aligns with the positioning 2. Sustainable Comp. Adv. / Imitation Possible Questions: - How does a company protect itself from imitation? - Is company Y’s competitive advantage sustainable? - What is protecting company from imitation / what is their sustainable competitive advantage Notes: - Fit of activities/positioning: - Prioritize the activities you talk about - talk about the important ones - think about the order in magnitude 1. Consistency - Consistent to their positioning - whether its low cost or differentiator - Activities drive consistency - The same activities but how do you phrase your answer - Are they consist with differentiation - Meaning this increases the WTP - Ex. Natura - These activities increase the WTP - Long-term relationships with suppliers  - Direct sales model - Strong R&D - Sustainable practices - These activities, sourcing locally, sustainability, relationships they are consistent with their differentiation strategy bc they are focused on increasing their WTP 2. Reinforcement - draw on activities from the case - Activity set / system - Meaning the sustainable competitive advantage does not rest on one thing it relies on several things - it protects u from imitation 3. Optimization of effort - draw activities from the case - You can’t do everything - Related to trade offs From Slides:Walmart Example - Consistency: the activities are coherent with Walmart’s low-cost positioning - Reinforcing: complementarity between activities so that increasing one activity makes the other more attractive - Optimization of effort: optimization of activity system by exploiting substitution effects between activities - 2 and 3 are important in guarding against imitation! From Reading: 1. First-order fit is simple consistency between each activity and the overall strategy. This ensures that the competitive advantages of activities cumulate and do not erode or cancel themselves out. 2. Second-order fit occurs when activities are reinforcing. ○ Ex. Neutrogena offering their products to upscale hotels. Hotels want a soap recommended by dermatologiests. Their medical and hotel marketing activities reinforce eachother. 3. Third-order fit goes beyond activity reinforcement to optimization of effort. Coordination and information exchange across activities to eliminate redundancy and minimize wasted effort are the ost basic types of effort optimization. Product design choices as well can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves. Similarly, coordination with suppliers or distribution channels can eliminate the need for in-house activities such as end-user training. why do tradeoffs protect from imitation: - because any imitator would have to replicate the whole activity system including the tradeoffs 3. Value Stick Possible Questions: - Using value capture theory, do you expect firm X to capture greater value from their suppliers than firm Y? - How does company C create value? 4. porter five forces: industry attractive/not Potential Questions - How are current trends and challenges the industry faces affecting its profitability? Point System: - 1pt - assess if industry as attractive not attractive - BONUS can compare to economic growth - “sniff test” - above economic growth in that industry - Sniff test - is it out performing the economy - if it, it’s attractive - Need to argue whether its attractive or unattractive - 1pt - if the force is high or low. The industry is attractive bc porters five forces is low, etc. - 3pt - some forces are not as important, substitution or buyers or suppliers or not that important Threat of new entry - Economies of scope - multiple using it - network efforts - luxury goods (hype) - Economies of scale - capital requirements, distribution networks 5. Growth: Potential Questions - How should the company grow - is their strategy good? - Firm X is considering two growth opportunities: option 1 and option 2. Which option would you recommend to the firm? Why or why not? - For example, what if natura wants to expand to 170 countries and they want to open 5 different markets? How will they do that? Do you think their growth strategy is good? - “Should Natura expand into Russia? - If yes, how? Propose and justify a model. - If no, why not? Where should they focus instead? Propose and justify a new market Point System: - 1 pt if it’s a good strategy - 2-3 pts on competitors / competitors landscape - how they’re going to react - Bonus: Suggest an alternative strategy Adv and disadv of franchising/upscaling - Franchising: - Company owns stores, everything is integrated - Franchise gives you scale but u give up control - Growth: - Think in context of competitors - they're not gonna watch u grow, they’re gonna respond - Talk about a reaction from competitors - consider competitive landscape - im level performance, value capture, competitive advantage - overtime sustainability - growth and tradeoffs  Lecture 1: Strategic Management - A process of decision making with intention to cause improvements in the firm’s performance over the (appropriate) long run, in relation to an appropriately defined reference group Strategic Decisions - Are difficult to reverse - Affecting multiple subunits and functional areas - Taking into consideration the behavior of other agents Strategy Is a plan to create value What is Strategy? - Long-run differences across industry and differences within an industry’s value chain and differences between firms in the same industry Performance (Productivity) Differences = PPD - You earn a higher profit than your competitors - Productivity - focus on quantity of results (how much a business gets out of its resources: money, time, labour) - Performance - focus on results quality (how well the resources are used to reach intended goals) How do firms generate persistent performance differences? - continually improving quality - lowering costs - Innovating Porter suggests effective strategies follow three principles 1. Strategy is more important than operational effectiveness 2. Strategy means making tough trade-offs 3. Strategy requires investments in a coherent and sustainable set of activities What is strategy? 1. Strategy is NOT operational effectiveness - Operational effectiveness means striving to be better - Doing the same things but better - Choosing what to do, not just how to do it 2. The essence of strategy is in the activities - choosing to perform activities differently or to perform different activities than rivals - By activities we mean the actions a company takes to design, produce, sell, deliver and service goods (or services)  - Activities are what drive costs but also value to buyers - Organizing a coherent system of interdependent activities increases the cost and difficulty to imitate 3. A sustainable strategic position requires trade-offs - Choosing a unique position is not enough, Sustaining a unique position requires tradeoffs - Tradeoffs are conditions that crease the need for choice: - Providing more.less of A necessitates less/more of B - Serving customer X better/worse means serving customer Y worse/better - Making tradeoffs increases the cost of imitation (through inefficiencies produced by incompatibility between activities) and causes competitors to not want to imitate (inconsistency with their brand or reputation) - Tradeoffs protect from imitation b/c any imitator or new competitor would have to replicate the entire activity system including their tradeoffs. Strategy requires investments in a coherent and sustainable set of activities Activity System - Strategy and competitive advantage is about offering producgts/services through a distinct ser of activities (different from competitors) - Competitive advantage rests on all rather than on particular activity choice (system of interdependent activities) - Sustainability of advantage is also determined by fit between individual activities to produce an interlocking system difficult to imitate. EXAM *SUSTAINABLE COMPETITIVE ADVANTAGE*: Fit Between Activities - Are activities consistent with each other? For example, are all activities aligned with a low-cost competitive positioning? - Are activities reinforcing each other? Does investing more effortin an activity benefit other activities? - Is there an optimization of effort not at the activity level but at the activity system level? (e.g coordination and information exchange across activities, product design choices to reduce and need for after-sale service and free up time for specific service activities Lecture 2: Strategy must integrate everything the firm does with everyone and everything its environment and anticipate how all of this is likely to change over time “Why do some firms persistently perform better over time than others, even when others can see what those firms are doing?” - A unique and valuable position, involving a different set of activities than your rivals  - To defend this position against potential imitation, this strategy must involve trade-offs (sustainable advantage) - Choosing what NOT to do is as important as choosing what to do - Choosing a system of activities (not just one) that are interdependent Industry analysis is about recognizing the main structural features of an industry and understanding how they impact the intensity of competition and overall level of profitability in the industry. It is industry structure that drives competition and profitability, not whether an industry is emerging or mature, high tech or low tech, regulated or unregulated. Horizontal Integration - The acquisition of a business producing the same or similar goods and services - Results in higher market share, better synergy and less competition Vertical Integration - A strategy that allows a company to streamline its operations by taking direct ownership of various stages of its production process rather than relying on external contractors or suppliers Sniff Test - Is the industry outperforming the economic average? - Yes - All industry forces are LOW - No - One or more forces are HIGH Industry Structure Definitions: The Five Forces Framework Bargaining Power of Buyers - Low buyer power = firms can charge higher prices Can buyers influence the price the industry can set? - Bargaining leverage (able) + price sensitivity (willing) if… - Yes - Then industry firms will be forced to carhge low prices - No - Then industry will be able to charge high prices What affects buyer power/bargaining leverage? - Size and concentration of buyers relative to focal industry (a few large buyers who put downward pressure on price) - Capacity for backward integration into sellers’ industry: instead of buying, buyers do it themselves - Price sensitivity: Product cost relative to total cost, buyers’ profitability, impact on quality/performance - Volume of purchases - Product differentiation - Buyer information - Alternative products - Switching costs What can firms do to reduce buyer (bargaining) power? - Diversify the client base - Differentiation: make substitution more difficult - Focus on customer loyalty - Streamline their products - standardizing - so that its easier to change suppliers - Diversification - Horizontal Integration - Contracts - Increase volume of company - Information - ex. I know it doesn’t cost that much to create that Bargaining Power of Suppliers - Low Supplier Power = firms have lower input costs Can suppliers exert power over industry firms? - Yes - then industry firms will be forced to pay higher prices for inputs - No - then industry firms will be able to lower their input costs What affects supplier power/bargaining leverage? - Supplier concentration (a few large, profitable suppliers who control price) - Capacity for vertical integration (costs of suppliers integrating forward) - Product differentiation: availability of alternatives/substitutes - Volume - Costs of bargaining or searching for lower prices - Switching costs: the costs that customers must bear when they switch from one product to the other What can firms do to limit supplier (bargaining) power? - Deal with multiple parties - Backward integration - “Lock in” advantageous rates Substitutes - Substitutes you need to think industry wise, not within the industry. Ex. Makeup substitutes would be not wearing any or cosmetic surgery - Low threat of substitutes = less downward pressure on prices MIDTERM: Substitution vs rivalry - Rule of thumb - operating in same industry it is under rivalry - Substitutes are outside of the industry Natura ex - Rivalry - loreal, other beauty brands - Substitutes not wearing anything at all - not doing it, substitute for cosmetic industry not naturua substitute would be fashion or going to gym, or intelligence bc that increases attractiveness. What can substitutes do? - They can put downward pressure on prices or upward pressure on quality (leading to higher costs) When are substitutes particularly threatening? - Favorable price-performance - Appeal to a significant fraction of customers - Lower buyer switching costs Rivalry - Intense rivalry can drive prices down (perfect competition scenario) - price competition or costs and quality up (increasing fixed and marginal costs when competing on innovation, marketing) - non price competition What affects the threat of rivalry? Concentration: - The number and size distribution of firms competing with the industry - Low concentration hampers coordination of prices and increases the likelihood that one firm will initiate price-cutting. - Declining or slow industry growth rate can exacerbate competition Exit Barriers & Commitment: - Costs associated with capacity leaving an industry - When exit barriers are high, low-performing firms that should have exited remain and there is excess supply. Rivalry intensity persists Scope for differentiation: - For commoidty0type products price can be the sole basis of competition - When products are highly differentiated, competition tends to focus on quality, brand promotion and customer service rather than price Threat of Entry - Low barriers to entry make entry easy, increasing competition for share and putting pressure on prices - Note that is is the threat of entry - and not whether entry actually occurs - that lowers acreage profitability Entry Is made difficult through: 1. Economies of scale - Large incumbents have a substantial cost advantage because of economies of scale: - Capital costs of becoming established in the industry is so large it discourages all but the largest companies 2. Economies of Scope - Network effects = when a buyer’s willingness to pay for product/service increases with the number of other buyers who also buy - First-mover advantage - Requires entrants to build up large customer base quickly 3. Incumbency advantages - Unit cost advantage - Strong brand identity - New entrants must spend a lot on advertising and promotion to establish brand awareness/loyalty Access to distribution channels - Retailers are generally reluctant to carry a new manufacturer’s product due to: - Limited shelf space - Risk aversion - Fixed costs associated with carrying an additional product - For many new suppliers of consumer goods, the principal; barrier to entry is gaining distribution 4. Government and Legal Barriers - Food labeling, patents, licensing requirements 5. High Threat of Retaliation - May take the form of aggressive price-cutting, increased advertising, sales promotion or litigation - If new entrants wish to enter an industry where incumbents retaliate, they may initiate small scale entry into a marginal (or unprofitable) market segment 6. High Switching Costs Industry Structure Analysis: A Checklist of Factors to Consider Lecture 2: From Readings 1. Threat of Entry New entrants bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete. Particularly, entrants diversifying from other markets can leverage existing capabilities and cash flows to shake up competition. ○ Ex. Apple entering the music distribution business, Pepsi entering the bottled water industry, etc. Threat of entry puts a cap on the profit potential of an industry because incumbents must hold down their prices or boost investment to deter new competitors. The threat of entry in an industry depends on the height of entry barriers. Barriers to entry  1. Supply-side economies of scale: arise when firms that produce at larger volumes enjoy lower costs per unit because they can spread fixed costs over more units, employ more efficient technology, or command better terms from suppliers. 2. Demand-side benefits of scale: also known as network effects arise in industries where a buyer's willingness to pay for a company's product increases with the number of other buyers who also patronize the company. 3. Customer switching costs: fixed costs that buyers face when they change suppliers. May arise because buyers must alter product specifications, retrain employees to use a new product, or modify processes or information systems. 4. Capital requirements. 5. Incumbency advantages independent of size: incumbents may have cost or quality advantages not available to potential rivals stemming from proprietary technology, preferential access to the best raw material sources, preemption of the most favorable geographic locations, established brand identities, or cumulative experience allowing incumbents to learn how to produce more efficiently. 6.Unequal access to distribution centers: dealing with displacing others from supermarket shelves, dealing with limited wholesale or retail channels. 7. Restrictive government policy: government policy can hinder or aid new entry directly, as well as amplify or nullify the other entry barriers. For example, liensing requirements and restrictions on foreign investment, regulated industries, subsidies, funding, etc. Expected retaliation: newcomers may fear expected retaliation if incumbents have previously responded to new entrants, they possess substantial resources to fight back, they seem likely to cut prices to retain market share, or if industry growth is slow so newcomers can gain volume only by taking it from incumbents. 2. The Power of Suppliers Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. A supplier group is powerful if: ○ It is more concentrated than the industry it sells to. ○ The supplier group does not depend heavily on the industry for its revenues. If the supplier serves many industries it will extract maximum profits from each one. However, if a large portion of profits come from one industry the supplier will act more reasonably to protect it. ○ Industry participants face switching costs in changing suppliers. ○ Suppliers offer products that are differentiated. ○ There is no substitute for what the supplier group provides. ○ The supplier group can credibly threaten to integrate forward into the industry. 3. The Power of Buyers Powerful customers can capture more value by forcing down prices, demanding better quality or more service, and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants. Buyers have negotiating leverage if:  ○ There are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor. High fixed costs and low marginal costs amplify pressure on rivals to keep capacity filled through discounting. ○ The industry's products are standardized/undifferentiated. ○ Buyers face few switching costs in changing vendors. ○ Buyers can credibly threaten to integrate backward and produce the industry's product themselves if vendors are too profitable. A buyer group is price sensitive if: ○ The product it purchases from the industry represents a significant fraction of its cost structure or procurement budget. ○ The buyer group earns low profits, is strapped for cash, or is under pressure to trim its purchasing costs. ○ The quality of buyers' products or services is little affected by the industry's product. ○ The industry's product has little effect on the buyer's other costs. Consumers act similarly to business-to-business customers. Whereas intermediate customers (assemblers or distribution centers) have one important addition which is that they gain significant bargaining power when they can influence the purchasing decision of customers downstream. 4. The Threat of Substitutes Substitute products or services limit an industry's profit potential by placing a ceiling on prices. The threat of a substitute is high if: ○ It offers an attractive price-performance trade-off to the industry's product. ○ The buyer's cost of switching to the substitute is low. 5. Rivalry among existing Competitors This takes many forms such as price discounting, new product introductions, advertising campaigns, and service improvements. The degree to which rivalry drives down an industry's profit potential depends first on the intensity with which companies compete and second, on the basis on which they compete. The intensity of rivalry is greatest if: ○ Competitors are numerous or are roughly equal in size and power. ○ Industry growth is slow which precipitates fights for market share. ○ Exit barriers are high. ○ Rivals are highly committed to the business and have aspirations for leadership, especially if they have goals that go beyond economic performance in the particular industry. ○ Firms cannot read each other's signals well because of lack of familiarity, diverse approaches to competing, or differing goals. The dimensions on which competition takes place, and whether rivals converge to compete on the same dimensions, have a major influence on profitability. Price competition is most liable to occur if:  ○ Products or services of rivals are nearly identical and there are few switching costs for buyers. ○ Fixed costs are high and marginal costs are low. ○ Capacity must be expanded in large increments to be efficient. ○ The product is perishable. Lecture 3: Structural Determinants of the Five Forces Pepsi Vs. Coke Industry Analysis Raw Materials → Concentrate producers → bottlers → retail→ End consumer Suppliers they are the incumbents buyers (coke & pepsi) You only go one behind and one ahead - If u were analyzing the bottlers the concentrate producers would be the suppliers and the retailers would be the buyers Coke vs. Pespi Case: Which forces do the franchise system affect? (and why?) 1. Threat to Entry: Exclusive franchises preventing entry to new bottlers 2. Supplier Power: High switching costs for bottlers, high bargaining power 3. Rivalry: Limit competition between bottlers for the same brand What was the logic of the Franchise System? - Franchising bottlers to make it accessible all over the US - Locked in bottlers and prices Why did Pepsi and Coke buy back bottlers? More control over the bottling network: - Increase economies of scale - Introduce new packages and products - Better control over national marketing campaigns - Phase out under-performing bottlers Company owned bottlers could respond faster and with greater efficiency Lecture 4: Strategy.. - Is not only operational effectiveness (i.e., performing the same activities as your competitors but better) - It is the creation of a unique and valuable position, involving a different set of activities (doing different things, or doing the same things differently - A unique position that drives a wider wedge wedge between buyers’ willingness to pay and firm’s costs allows it to earn superior profits Creating competitive advantage is linked to industry analysis - Devise strategies that neutralize the unattractive features of the industry and exploit the attract features - Some industries are more restrictive (firms have little room to establish a superior wedge) - Tension between managing industry structure and pursuing an advantage within that structure The “Value Stick” WTP - The highest price the buyer is willing to pay - (above that price they do not purchase) OC/WTS - The smallest amount that market actor will accept for its services and/or resources - Determined by the value of the “next best option” outside of its current market Total value created = WTP - WTS/Supplier OC A necessary condition for value to be created in a market is that the buyer’s WTP is higher than the supplier’s OC Value is divided by the firm’s cost from suppliers and price to buyers - Price is determined by both buyers’ willingness to pay and relative cost position to competitors - The value a firm appropriates (profits) is the price it receives for its goods minus the cost it pays The “Wedge” and Bargaining Power - A firm with a wider wedge has a competitive advantage - A firm with competitive advantage has added value and therefore the potential for profit Differentiation vs. Low Cost Strategy Differentiation Strategy: Raise WTP with only a slight increase in costs Low-Cost Strategy: Reap large cost savings with only slight decrease in customer WTP What is Differentiation? When we say that a firm has differentiated, we mean that it has boosted the WTP for its output and can command a price premium. Scenario 1: Firm 2, lower price A second firm enters at a lower price point (assume identical cost and no output constraint) - downward pressure on price till the price equals the cost - B/c price = cost the firm makes no profits and buyer share of value is maximized - Firm 1 lowers its cost just below the competitor - Buyers switch, and profits are captured through low-cost strategy’ New value stick: —> Scenario 2: Firm 2, higher WTP - Second firm that enters has higher WTP but higher costs ——> - Buyers choose firms where their surplus is maximized and some profits can be appropriate by each firm (provided firm firm lowers price to reflect lower WTP Cost-based positioning (I) - product of acceptable quality at lowest possible cost - Achieve lower overall costs than rivals by… Performing activities differently (cheaper) → Cost Leadership An integrated set of activities taken to produce goods or service offered at the lowest cost (relative to that of competitors) with features that are acceptable to customers - Invest in assets to lower expenses - Achieve above-average profitability with relatively low prices - Open a significant cost gap over competitors Challenges: - Maintain proximity in quality with competitors - Often involves tradeoffs in terms of product differentiation (relatively standardize products/services) How can Firms generate a cost advantage? 1. Economies of Scale – as output goes up, costs per unit go down - Spreading fixed costs over large volume 2. Learning and experience 3. Proprietary knowledge can lower cost especially for complex products/services - Ex. optimizing inventory management, reducing waste and storage costs 4. Lower Input Costs – lower suppliers opportunity costs, source from low-cost locations - Work cooperatively with suppliers 5. Use a different business model – e.g., physical stores vs. online only Differentiation-based positioning (II) - valuable product at highest acceptable cost - Differentiate the firm’s product or service and command a premium (because of higher WTP) =Performing different (valuable) activities → Benefit Leadership An integrated set of activities taken to produce goods or services (offered at an acceptable price) that customers perceive as being different in ways that are important to them. - Invest in assets to maximize the generation of value for buyers - Offer products acknowledged as superior on at least one dimension (ex: durability, bundled services, easier to use, greater variety, etc.) - There may be multiple dimensions of differentiation in an industry (functional versus emotional/social) - Selectively incur costs necessary to create differentiation Challenges: - Differentiation only leads to above-average profitability if the firm maintains proximity in cost to their competitors How can firms generate a WTP advantage? 1. Product/service features valued by buyers - Offer products that have: - superior features (e.g Dyson Vacuum) - More functional features (e.g. iPhone) - Unique product features (e.g Linkedin) 2. Branding (i.e., social and emotional dimensions rather than functional dimension) - Perceived value - Companies attempt to associate their products with positive image in the mind of customers 3. Customization of features or service Defining Competitive Scope: - Broad Scope: The firm competes in all or most customer segments - Narrow Scope: The firm selects a segment or a few segments in the industry and tailors its strategy to serving them at the exclusion of others Focus Strategies: the advantage lies in the limited scope - Select narrow target segments with distinct needs - Configure the organization to serve only targeted segments Firms Choose this b/c: - Large firms may overlook small niches - Ability yo serve a narrow market more effectively than large competitors - Focusing allows the firm to build competitive advantage through specific activities - Lack of resources needed to compete in the broader market General Ways of getting a Competitive Advantage Ex: what are zara’s distinctive activities that support its strategic positioning - 4 main activities 1. Design 2. Sourcing and Manufacturing 3. Distribution 4. Stores/Retailing Lecture 4: Reading A firm is said to have a competitive advantage over its rivals if it has driven a wide wedge between the willingness to pay it generates among buyers and the costs it incurs 1. Must do something unique and valuable - added value 2. The essence of creating advantage is finding an integrated set of choices that distinguishes a firm from its rivals The larger the firm’s added value, the greater is its potential for profit - The notion of added value highlights the fact that competitive advantage derives from scarcity Establishing an Advantage 1. Differentiation Strategy: Firm raise WTP without incurring a huge increase in supplier OC 2. Low Cost Strategy: Reduce supplier OC without sacrificing too much WTP Activity Analysis  To analyze competitive advantage, strategists typically break a firm down into discrete activities or processes and then examine how each contributes to the firm’s relative cost position or comparative willingness to pay. The activities undertaken to design, produce, sell, deliver, and service goods are what ultimately incur costs and generate customer willingness to pay. Differences across firms in activities—differences in what firms actually do day-to-day—produce disparities in cost and willingness to pay and hence dictate competitive advantage. By analyzing a firm activity by activity, managers can (1) understand why the firm does or does not have a competitive advantage, (2) spot opportunities to increase a firm’s competitive advantage, and (3) foresee future shifts in competitive advantage. Cost Drivers Cost drivers are the factors that make the cost of an activity rise or fall - size of the firm: - economies of scale, economies of experience, economies of scope, capacity utilization, - Others relate to differences in firm location, functional policies, timing (e.g., first-mover advantages), - institutional factors such as unionization, government regulations such as tariffs, and so forth. Use Activities to Analyze Relative Willingness to Pay Differences in activities account for differences in willingness to pay and hence for competitive advantage and differences in profitability. - any activity in the value chain can affect customers’ willingness to pay for a product. the product design and manufacturing activities that influence physical product characteristics—quality, performance, features, aesthetics, durability—affect willingness to pay. - a firm can boost willingness to pay through activities associated with sales or delivery—the ease of purchase, speed of delivery, availability and terms of credit, convenience of the seller, quality of presale advice, etc - Activities associated with post-sale service or complementary goods—customer training, consulting services, spare parts, product warranties, repair service, compatible products—also affect willingness to pay - Signals conveyed through advertising, packaging, branding efforts, etc. also play a role in determining willingness to pay Landscape Metaphor - Guide firm to a high point on the landscape - a set of decisions that, together, generate a great deal of added value. - The search for high ground is made difficult by the fact that the different choices interact with one another: production decisions affect marketing choices, distribution choices need to fit with operations decisions, compensation choices influence a whole range of activities, and so forth.  - Each interaction implies that a choice made on one dimension affects the cost and willingness-to-pay impact of another choice. - Lecture 5: Strategy is about winning against competitors in an industry over time Firms compete in industries … - Industry attractiveness Porter’s Five Forces Firms compete with each other … - Competitive advantage & coherent set of activities (activity system) - Positioning & set of activities - Value capture Firms compete over time (sustainable)… - Fit between activities: consistency, reinforcement, optimization of effort - Trade-offs - Growth strategies Fit Drives Both Competitive Advantage and Sustainability A competitive advantage comes from the ways a companies activities fit and reinforce one another. Types of Fit 1. First-order fit is simple consistency between each activity and the overall strategy. This ensures that the competitive advantages of activities cumulate and do not erode or cancel themselves out. 2. Second-order fit occurs when activities are reinforcing. ○ Ex. Neutrogena offering their products to upscale hotels. Hotels want a soap recommended by dermatologiests. Their medical and hotel marketing activities reinforce eachother. 3. Third-order fit goes beyond activity reinforcement to optimization of effort. Coordination and information exchange across activities to eliminate redundancy and minimize wasted effort are the ost basic types of effort optimization. Product design choices as well can eliminate the need for after-sale service or make it possible for customers to perform service activities themselves. Similarly, coordination with suppliers or distribution channels can eliminate the need for in-house activities such as end-user training. General Ways of Getting a Competitive Advantage Natura’s Value Stick Lecture 6: