© 2016 Hart E. Posen 1

SESSION 06Prof. Hart E. Posen

hposen@wisc.educalendly.com/hposen/20min

• Turn-off and put away laptops, tablets, phones.

• Use name cards in every class session. I will not call on students without name cards.

• Sit in your assigned seat.

"A COMPANY CAN OUTPERFORM RIVALS

ONLY IF IT CAN ESTABLISH A DIFFERENCE THAT IT CAN PRESERVE"

— Porter 1996

ISOLATING MECHANISMS

“economic forces that limit the extent to which a competitive advantage can

be duplicated or neutralized.”

… Moats that keep rivals at bay, maintaining uniqueness/rarity.

WHAT IS THE SOURCE OF ADVANTAGE?

• Competitive advantage• A firm has a competitive advantage over

its rivals if it has driven a wide wedge between the WTP it generates among buyers and the costs it incurs—a wider wedge than its competitors have achieved.

• Is my “wedge” bigger than your “wedge”? Why or why not?

Prof. Hart E. Posen University of Wisconsin

WTP

Cost

WTP

Cost

WTP

Cost

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Differentiation Advantage

Greg Waldorf, CEO of eHarmony, has hired you as a consultant.

He asks you to analyze eHarmony's competitive position and recommend a response to the wave of attacking rivals (most notably, Match’s Chemistry in the “long-term” segment).

COMPETITIVE ADVANTAGE• A firm has a competitive advantage over its rivals if it has driven a wide wedge

between the WTP it generates among buyers and the costs it incurs—a wider wedge than its competitors have achieved.

• Differentiation — Higher WTP at same Cost (increased WTP more than increase Cost);

• Cost — lower cost at same WTP (decrease Cost more than decrease WTP)

• How can we establish a difference that can be preserved?

• What activities should we perform & how should you perform them?

• Characteristics of activities or assets: Inimitable, non-substitutable

• Incentives: May not be profitable to imitate/sub, or hard-to-make decisions.

Prof. Hart E. Posen University of Wisconsin

DIFFERENTIATION

• Horizontal differentiation — • Vary in characteristics that appeal to some customers and not others.

• Some buyers are WTP more for one product than another, but other buyers have preference for (and higher WTP) more for another product.

• I like high MPG cars and you like SUVs.

• I am willing to pay $30k for high MPG car and nothing for an SUV, and you are willing to pay $30k for an SUV and nothing for a high MPG car. Total WTP is the same.

• Vertical differentiation — • Unambiguously differ in quality (all buyers in market agree)

• Higher WTP for the more vertically differentiated product.

• All else equal, everyone would prefer a car with higher MPG — and are WTP more for it.Prof. Hart E. Posen University of Wisconsin

Provision of Uniqueness

SOURCES OF DIFFERENTIATION ADVANTAGE

• Product features and performance

• Complementary services

• Intensity of marketing

• Location

• Technology in design or product

• Employee skills

• Extent of vertical integration

• Capabilities and effort in activities (Quality control, sales visits)

Key challenge for any firm is figuring out how to achieve this and then isolate it from rivals…

Firm choices that drive the extent of uniqueness

Recommend a response to the wave of attacking rivals.

• On-line dating industry, on average, has some moderate differentiation, but entry is very easy.

• eHarmony pursues a unique differentiation approach, focusing on individuals specifically seeking long-term relationship only.

• What choices did the eHarmony make to address this core problem?• What are eH’s mechanism for isolating their competitive advantage from rivals?• Does the problem remain valuable?• Are rivals’ actions able to undermine these isolating mechanisms?

• What should eHarmony do?• Chemistry not viewed as big threat. Reducing questionnaire length/cost undermines both WTP and isolation.

• But other current problems remain: niche sites are growing (e.g., jdate, LDSPlanet) that substitute other important attributes for “long-term”, and current problems related to the role of social networks, Facebook etc. also grow.

• Other growth opportunities are interesting, but don’t necessarily address the question of the chemistry.com threat. This include horizontal growth into related businesses (wedding etc), geographic growth into new markets (if there is no real science in the questionnaire, then its use is not geographically constrained).

ANALYTICAL PROCESS• Industry Analysis - Understand the basic economics of the focal industry.• What is the core problem/opportunity the firm addresses in the industry?

• Whose problem is it (rival’s, buyer’s etc)?• Is the problem valuable?

• If solved, is there substantial value created? Can this value created be captured?

• What choices did the firm make to address this core problem/opportunity?• How do these choices (regarding assets and activities) function to address the problem?• What assets did they build (brand, technology, capabilities, etc) and how do assets address the

problem?• Are these assets better than rivals’? That is, do they create greater WTP or have a lower cost?• Are they assets hard to imitate or substitute? (per RBV of competitive advantage).

• What trade-offs are involved in their choice of activities?• Trade-offs reflect interdependencies in the activity system (per Porter’s view of competitive advantage).

• Is the value creation and capture (related to problem/opportunity) under threat?

• Current problem: How is it threatened?• Is it value creation or value capture that is eroding?• What actions might the firm take to defend its position?

Prof. Hart E. Posen University of Wisconsin

WHAT IS NEXT?

• Quiz 1 — You must bring your laptop to class.

• s07 — Is corporate culture a asset that may be a source of competitive advantage — and if so, what is the isolating mechanism?

Prof. Hart E. Posen University of Wisconsin