Introducing Competitive Strategy - Department of … differentiation and firm-level price elasticity...
Transcript of Introducing Competitive Strategy - Department of … differentiation and firm-level price elasticity...
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Department of Economics
Introducing Competitive StrategyEcon 466Spring, 2010
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Department of Economics
Concepts and vocabulary in strategyCompetition is a driving force in market economies• How do firms compete?• What determines a firm’s competitive strategy?• How is strategy related to firm performance and
success?• Use competitive strategy as a way to discuss
Financial managementFinancial intermediationMarket for financial services
Based on Besanko et.al. Chapters 6,10,11,12,13
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Department of Economics
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US Total Farm Debt Market Share by Lender1961 to 2008
Comm. Banks FCS FSA Life Ins. Cos. Ind & Others CCC Loans
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Department of Economics
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Department of Economics
Competitive advantage• The ability of the firm to outperform its industry –
to earn a higher rate of return than the industry norm
• A competitive advantage is “sustainable” if superior performance persists despite the actions of competitors
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Department of Economics
How does a firm create a sustainable competitive advantage?
• By creating more value than its competitors.
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Department of Economics
Created value• The difference between the perceived or
determined value of a finished good, service or input• And the value that is sacrificed to produce it
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Department of Economics
Framework for competitive advantage
Benefit positionrelative to competitors
Market Conditions
Cost position relativeto competitors
Value added Profitability
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Department of Economics
Industry and business unit effects in explaining productivity
43%
24%19%
4%
32%
Effect
UnexplainedYearIndustryParentBusiness Unit
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Department of Economics
How does the firm create value?
• Michael Porter’s value chain
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Department of Economics
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Department of Economics
SKETCH OUT A VALUE CHAIN#2 YELLOW CORNAGRICULTURAL LENDING
TTYN
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Department of Economics
How does the firm create value?
• Michael Porter’s value chain• Firm-specific assets
Resources (Have)Capabilities (Do)
• Change the value chain (business model)• Improve the value chain
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Department of Economics
Examples of firm-specific assets• Resources
Patents or trademarksBrand name reputationOrganizational culture
• CapabilitiesWorker’s expertise and knowhowOperational processesRecruit and reward employees
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Department of Economics
EXAMPLES OF FIRM-SPECIFIC RESOURCES, FARMING AND LENDING
TTYN
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Department of Economics
Generic value creation strategies
Cost Advantage• maintain B and reduce C
Benefit Advantage• maintain C and increase B
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Department of Economics
Concepts and terms we havemastered, thus far ….
• Competitive advantage• Value creation• Value chain• Firm-specific assets
ResourcesCapabilities
• Cost advantage• Benefit advantage• Value map
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Department of Economics
Cost advantage is best if:• Economies of scale or learning exist – but rival
firms are not exploiting them• Product or service does not lend itself to benefit
enhancement• Consumers are very price sensitive• Search good
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Department of Economics
Benefit advantage is best if:• Consumer is value conscious• Most economies of scale or learning have been
exploited• Experience good
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Department of Economics
SKETCH OUT AN EXAMPLE OF A COST LEADERSHIP STRATEGY THAT COULD BE PURSUED BY A FARM BUSINESS
TTYN
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Department of Economics
NOW TRY A BENEFIT LEADERSHIP STRATEGY –AGAIN FOR A FARM BUSINESS
TTYN
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Department of Economics
Firm-level price elasticity of demand
• Assumes imperfect competition• Differentiated products or services• Incorporates perceived behavior of rivals• Percent change in demand resulting from a
percent change in the firm’s price
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Department of Economics
Vertical differentiation• Attributes of a product that makes it clearly
superior to those of competitors• Examples?
AttributesProducts or services
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Department of Economics
Horizontal differentiation• Attributes of a product or service that are valued
by some consumers and not by others• Examples?
AttributesProducts or services
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Department of Economics
Horizontal differentiation and firm-level price elasticity of demand
Weak horizontal differentiation• High elasticity of demand
Strong horizontal differentiation• Low elasticity of demand
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Department of Economics
LIST SOME EXAMPLES OF AGRICULTURAL PRODUCTS WITH WEAK AND STRONG HORIZONTAL DIFFERENTIATION
TTYN
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Department of Economics
Pricing strategy and horizontal differentiation
• Margin strategyWiden margin
• Share strategyIncrease market share
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Department of Economics
Pricing strategy and horizontal differentiation
Horizontal Differentiation
Cost Advantage Benefit Advantage
Weak(High price elasticity)
ShareUnderprice competitors to gain share
ShareMaintain price parity, gain share
Strong(Low price elasticity)
MarginMaintain price parity
MarginCharge price premium
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Department of Economics
So … who is my competitor?Substitute products or services?
Product performance characteristicsOccasions for useGeographic market
• Empirically measure cross-price elasticity of demand
∂Qy/∂Px (Px/Qy )> 0?
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Department of Economics
HOW IMPORTANT IS GEOGRAPHY IN FINANCIAL SERVICES MARKETS?
TTYN
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Department of Economics
And how will the industry impact the competitive strategy of the firm?
• Michael Porter (again) and his Five Forces Analysis framework
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Department of Economics
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Department of Economics
Concepts and terms we havemastered
• Competitive advantage• Value creation• Value chain• Firm-specific assets
ResourcesCapabilities
• Cost advantage• Benefit advantage• Value map
• Cost leadership• Benefit leadership• Firm-level demand elasticity• Vertical differentiation• Horizontal differentiation• Search good• Experience good• Margin strategy• Share strategy• Five-Forces analysis
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Department of Economics
NOW LETS TRY THEM OUT!OK