Strategic Management 1 PDF

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STRATEGIC MANAGEMENT: UNIT 1 VALUE CREATION AND CAPTURE

Wtp Value captured by buyer Price Value created Cost

Value captured by seller

Competitive advantage and value creation • A firm is said to have a competitive advantage only if it can create more economic value than its competitors • A firm’s ability to create value depends on its cost position as well as its benefit position relative to its competitors Strategy: Choice of a future Two key questions: 1. How do we create value? 2. How can we capture (some of the) value we create? Value creation and captured

Maximum Willingness to Pay and Consumer Surplus • Maximum willingness to pay - Price at which the consumer is indifferent between buying the product and not buying

• Consumer surplus is the difference between the maximum the consumer is willing to pay (monetary value of the perceived benefit) and the prevailing market price

Consumer Surplus and Competition • Consumer surplus needs to be positive for the purchase to occur. • If there is a choice between two or more products consumer will choose the one with the largest consumer surplus. • To compete successfully firms need to deliver consumer surplus. Competition in Price-Quality Continuum • A firm can increase consumer surplus:

• •

By increasing the perceived benefit or By lowering the price •

• When products differ in quality, competing firms can be viewed as submitting consumer surplus bids with their quality-price combinations • When a firm fails to offer as much consumer surplus as its rivals, its sales will decline Value Map • Points on the indifference curve represent price-quality with the same consumer surplus • The steepness of the indifference curve reflects the tradeoff between price and quality that the consumers are willing to make

• Products A and B exhibit consumer surplus parity • Product C has a higher consumer surplus than A and B • Product D has a lower consumer surplus

Product D: above the curve: higher price for a given quality. Less consumer surplus. Product C: Below the indifference curve; higher consumer surplus for a given price. It is the area where consumers will go. • B = Maximum willingness to pay • P = Price of the product • C = Cost of making the product • Value created = B – C = (B - P) + (P - C) • Value created = Consumer surplus + Producer surplus If it is positive, everyone is better off. • If B - C (the value created) is not positive the product will not be viable. • If B - C is positive, all parties are better off because the product was made and sold Value Creation and Market Segments • Value creation occurs with respect to particular customers. • A firm may be successful in creating positive value (B – C) in one segment while it takes another firm to do the same in another segment Demand side: WTP. Has subsegments, a set of customers with very similar preferences, For who do you want to create value?? such as a high end market (rich people w/very specific needs and requirements) vs the same industry creating value for low-end customers. Supply side: cost Value Created and Economic Profit • To achieve competitive advantage, a firm must produce more value than its rivals • Consumers will demand the same consumer surplus from the firm as from its rivals • With superior value creation, the firm can offer as much consumer surplus as the rivals and still make an economic profit We are interested in going away from a theoretical situation of 0 economic problems, goal of a firm is to lower them as posible. Example: Dinner at Bulli: Because of the innovations they pushed the willingness to pay (Different and unique). They closed to focus only on innovation of dishes and no longer serve them.

Igor either has more money or values a lot the experience of eating there.

Demand Price Cost

Strategies to create more value: 2 sides 1. Decrease costs 2. Create value and push willingness to pay: everyone is willing to pay more Best way: Both? No, you have to be clear about your strategic positioning, or you will create tensions among the firm. Very few firms can achieve it.

Creating and Capturing Economic Value – The Essence of Business Strategy • Business strategy is ultimately about the creation and capture of economic value

• The term, “value proposition”, is often used to describe the specific way that a firm creates economic value and shares some of that value with its customers • The value created by the firm may also be divided among a broader set of stakeholders, including resource providers and suppliers • Any firm that fails to create, capture and share economic value will fail to survive

External Value creation and capture Internal...