Introducing Competitive Strategy

Department of Economics

Introducing Competitive Strategy

Econ 466

Spring, 2010

Concepts and vocabulary in strategy

Competition 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

9

Financial management

9

Financial intermediation

9

Market for financial services

5 10 15 20 25 30 35 40 45 50

Market Share Percent

US Total Farm Debt Market Share by Lender

1961 to 2008

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

How does a firm create a sustainable competitive advantage?

• By creating more value than its competitors.

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

Framework for competitive advantage

Benefit position relative to competitors

Market Conditions

Cost position relative to competitors

Value added Profitability

Industry and business unit effects in explaining productivity

43%

19%

4%

32%

Effect

Unexplained Year

Industry Parent

Business Unit

How does the firm create value?

• Michael Porter’s value chain

SKETCH OUT A VALUE CHAIN

#2 YELLOW CORN

AGRICULTURAL LENDING

TTYN

How does the firm create value?

• Michael Porter’s value chain

• Firm-specific assets

9 Resources (Have)

9 Capabilities (Do)

• Change the value chain (business model)

• Improve the value chain

Examples of firm-specific assets

• Resources

9 Patents or trademarks

9 Brand name reputation

9 Organizational culture

• Capabilities

9 Worker’s expertise and knowhow

9 Operational processes

9 Recruit and reward employees

EXAMPLES OF FIRM-SPECIFIC

TTYN

Generic value creation strategies

Cost Advantage

• maintain B and reduce C

Benefit Advantage

• maintain C and increase B

Concepts and terms we have mastered, thus far ….

• Competitive advantage

• Value creation

• Value chain

• Firm-specific assets

9 Resources

9 Capabilities

• Cost advantage

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

Benefit advantage is best if:

• Consumer is value conscious

• Most economies of scale or learning have been exploited

• Experience good

SKETCH OUT AN EXAMPLE OF A COST

LEADERSHIP STRATEGY THAT COULD BE PURSUED BY A FARM BUSINESS

TTYN

NOW TRY A BENEFIT LEADERSHIP STRATEGY –

TTYN

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

Vertical differentiation

• Attributes of a product that makes it clearly superior to those of competitors

• Examples?

9 Attributes

9 Products or services

Horizontal differentiation

• Attributes of a product or service that are valued by some consumers and not by others

• Examples?

9 Attributes

9 Products or services

Horizontal differentiation and firm- level price elasticity of demand

Weak horizontal differentiation

• High elasticity of demand

Strong horizontal differentiation

• Low elasticity of demand

LIST SOME EXAMPLES OF AGRICULTURAL PRODUCTS WITH WEAK AND STRONG

HORIZONTAL DIFFERENTIATION

TTYN

Pricing strategy and horizontal differentiation

• Margin strategy

9 Widen margin

• Share strategy

9 Increase market share

Pricing strategy and horizontal differentiation

Horizontal Differentiation

Cost Advantage Benefit Advantage Weak

(High price elasticity)

Share

Underprice competitors to gain share

Share

Maintain price parity, gain share

Strong

(Low price elasticity)

Margin

Maintain price parity

Margin

Charge price premium

So … who is my competitor?

Substitute products or services?

9 Product performance characteristics

9 Occasions for use

9 Geographic market

• Empirically measure cross-price elasticity of demand

9 ∂Q

/∂P

(P

/Q

)> 0?

HOW IMPORTANT IS

GEOGRAPHY IN FINANCIAL SERVICES MARKETS?

TTYN

And how will the industry impact the competitive strategy of the firm?

• Michael Porter (again) and his Five Forces

Analysis framework

Concepts and terms we have mastered

•

Competitive advantage

•

Value creation

•

Value chain

•

Firm-specific assets

9

Resources

9

Capabilities

•

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

NOW LETS TRY THEM OUT!

OK