Integrative Business Management

Seminar 1

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 What Strategy Is: Gaining and Sustaining
Competitive Advantage

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 Strategy

• Strategy: a set of goal-directed actions a firm takes

to gain and sustain superior performance relative to
competitors
• To achieve superior performance, companies
compete for resources:
– New ventures: for financial and human capital
– Existing companies: for profitable growth
– Charities: for donations
– Universities: for the best students and professors
– Sports teams: championships
– Celebrities: media attention

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 Elements of a Good Strategy: Analysis

• Analysis
– Diagnosis of the competitive challenge
– Accomplished through strategy analysis of the firm’s
internal and external environments

Example: Twitter
• Competitive challenge: grow its user base
– Become more valuable for online advertisers
– Also: Facebook allows advertisers to target their online ads
precisely based on demographic data

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 Elements of a Good Strategy: Formulation

• Formulation
– Guiding policy to address the competitive challenge
– Accomplished through strategy formulation, resulting in
the firm’s corporate, business, and functional strategies

Example: Twitter
• Rather than formulating a guiding policy to grow active core
users, Twitter defined its user base more broadly.
• Defined users into 3 types to compare with Facebook
• User types were hard to track and less valuable to advertisers.

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 Elements of a Good Strategy: Implementation

• Implementation
– A set of coherent actions to implement the firm’s guiding
policy
– Accomplished through strategy implementation

Example: Twitter
• Different user definitions confused management and limited
guidance for employees.
• Consequences of the unclear mission:
• Frustration among managers and engineers
• Turnover of key personnel
• Internal turmoil resulted, including management demotions
and promotions of CEO friends.

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 Competitive Advantage

• Competitive Advantage: a firm that achieves

superior performance relative to other competitors
in the same industry or the industry average
– Always relative, not absolute
• To assess competitive advantage:
– Compare firm performance to a benchmark
• Performance of other firms in the same industry
• An industry average

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 Competitive Advantage: Examples

• In digital advertising: Google

– Google has a competitive advantage over Facebook,
Twitter, and Yahoo

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 Competitive Advantage: Key Points

• Competitive Advantage
– Superior performance relative to other competitors in the
same industry or the industry average
• Sustainable Competitive Advantage
– Outperforming competitors or the industry average over a
prolonged period of time
• Competitive Disadvantage
– Underperformance relative to other competitors in the
same industry or the industry average
• Competitive Parity
– Performance of two or more firms at the same level

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 Strategy Is About Creating Superior Value

• The rewards of superior value creation and capture

are profitability and market share.
– Sam Walton (Walmart): offered lower prices.
– Steve Jobs (Apple): “put a ding in the universe.”
– Mark Zuckerberg (Facebook): made the world open and
connected.
– Larry Page and Sergey Brin (Google): made information
accessible.

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 Strategic Positioning

• Stake out a unique position within an industry to

provide value to customers, while controlling costs.
• The greater the difference between value creation
and cost:
– the greater the firm’s economic contribution.
– the more likely it will gain competitive advantage.

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 Strategic Positioning Requires Trade-offs

• Managers must make conscious trade-offs.

– Enables competitive advantage
• In the retail industry, for example:
– Walmart: “everyday low prices”
– Nordstrom’s: professional sales people in a luxury setting

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 Unique Positioning

• The key to successful strategy: combine activities for a unique

position in an industry
• Competitive advantage has to come from:
– performing different activities or
– performing the same activities differently than rivals

• Example: Walmart’s strategic activities strengthen its position

as cost leader
– Big stores in rural locations
– Low corporate overhead
– Low base wages

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 What is Apple’s Competitive Advantage?

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 The Multidimensional Perspective for
Assessing Competitive Advantage

• What is the firm’s accounting profitability?

• How much shareholder value does the firm create?
• How much economic value does the firm generate?

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 Accounting Profitability

• Helps assess competitive advantage:

– Accurately assess firm performance.
– Compare firm performance to competitors / the industry
average.
• Standardized accounting metrics
• Form 10-K statements
• Profitability ratios
– Return on invested capital (ROIC), return on equity (ROE),
return on assets (ROA), and return on revenue (ROR)

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 Exhibit 5.1
Comparing
Apple and
Microsoft:
Drivers of
Firm
Performance

Jump to Appendix 2 long image

description
SOURCE: Analysis of publicly available data.

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 Limitations of Accounting Data

• All accounting data are historical and thus backward-

looking.
• Accounting data do not consider off–balance sheet
items, such as:
– Pension obligations
– Leasing obligations
• Accounting data focus mainly on tangible assets,
which are no longer the most important.
– Innovation, quality, customer experience are important.

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 Shareholder Value Creation

• Shareholders
– Own one or more shares of stock in a company
– The legal owners of public companies
• Risk Capital
– Money provided for an equity share in a company
– Cannot be recovered if the firm goes bankrupt
• Total Return to Shareholders
– Stock price appreciation plus dividends
• Market Capitalization
– Dollar value of total shares outstanding
– Number of outstanding shares x share price

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 Limitations of Shareholder Value Creation

• Stock prices can be highly volatile.

– Makes it difficult to assess firm performance
• Macroeconomic factors affect stock prices.
– Economic growth or contraction
– Unemployment, interest and exchange rates
• Stock prices can reflect the mood of investors.
– Can be irrational

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 Economic Value Creation

• The difference between:

– A buyer’s willingness to pay for a product / service
– And the firm’s total cost to produce it
– The difference between value (V) and cost (C)
• Competitive advantage can be based on:
– Economic value creation because of superior product
differentiation
– A relative cost advantage over rivals

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 Exhibit 5.4 Firm B’s Competitive Advantage:
Same Cost as Firm A but Firm B Creates More Economic Value

Firm B’s advantage is based on superior differentiation leading to higher

perceived value

Jump to Appendix 3 long image

description

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 Exhibit 5.5 Firm C’s Competitive Advantage:
Same Total Perceived Consumer Benefits as Firm D, but Firm C Creates More Economic Value

Firm C has a competitive advantage over Firm D because it has lower

costs.

Jump to Appendix 4 long image

description

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 Producer & Consumer Surplus

• Producer surplus (also called profit)

– The difference between the price charged (P) and the cost
to produce (C)
• Consumer surplus
– The difference between what you would have been willing
to pay (V) and what you paid (P)
• Both parties capture some of the value created

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 Exhibit 5.7 Competitive Advantage and
Economic Value Created

Jump to Appendix 5 long image

description

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 Opportunity Costs

• The value of the best forgone alternative use of the

resources employed
• Example: Opportunity Costs of an Entrepreneur
– (1) forgone wages if employed elsewhere
– (2) the cost of capital invested in the business
• vs. the stock market
• vs. U.S. Treasury bonds

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 Limitations of Economic Value Creation

• Determining value for consumers is not simple.

• The value of a good in the eyes of consumers
changes.
– Based on income, preferences, time, and other factors
• To measure firm-level competitive advantage, we
must estimate the economic value created for all
products and services offered by the firm.

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 Business Models:
Putting Strategy into Action

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 What Is a Business Model?

• Details the competitive tactics and initiatives

• Explains how the firm intends to make money
• Stipulates how the firm conducts its business
– Buyers, suppliers, and partners

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 Popular Business Models

• Razor-razorblades
• Subscription
• Pay as you go
• Freemium
• Wholesale
• Agency
• Bundling

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 The Razor–Razorblade Model

• Initial product is often:

– Sold at a loss or
– Given away for free
• Helps drive demand for complementary goods
• Money made primarily on replacement parts
• Example: HP
– Charges little for its laser printers
– Imposes high prices for replacement toner cartridges

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 The Subscription Model

• Traditionally used for (print) magazines and

newspapers
• Users pay for access to a product or service
• Examples:
– Cable television
– Satellite radio
– Health clubs

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 The Pay-as-You-Go Model

• Users pay for only the services they consume

• Examples:
– Utilities providing power and water
– Cell phone service plans

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 The Freemium Model

• Free + premium business model

• Provides the basic features free of charge
• Users pay for premium services
– Such as advanced features or add-ons
• Examples:
– Software trials with an option to buy

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 The Wholesale Model

• The traditional model in retail

• Products sold at a fixed price to retailers
• Retailers mark up the prices to make a profit
• Example:
– Books are originally purchased from a publisher
– Re-sold at 50% markup from a retailer

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 The Agency Model

• Producer relies on an agent or retailer to sell the

product.
– At a predetermined percentage commission
• Producer may also control the retail price.
• Example:
– Entertainment industry
• Agents place artists or artistic properties.
• They then receive a commission.

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 The Bundling Model

• Products or services for which demand is negatively

correlated at a discount
• Example:
– The Microsoft Office Suite
• Instead of selling Word and Excel $120 each,
• Microsoft bundles them at a discount, say $180

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 Business Models Evolve Dynamically

• Business models can be combined.

• Business models can evolve.
• Business models can be disrupted.
• Businesses must respond to disruption & adapt.
• Legal conflicts can arise.

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 THE END

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