Strategy
Strategy is a set of integrated actions to maximize firm performance
Draw the value creation diagram
…
What is the goal of strategy?
To maximize the gap being the customer’s WTP and the opportunity cost (OC) of suppliers
How is value created?
(1) increase WTP
(2) decrease OC
→ The gap between the willingness to pay of its customers and
the total cost it must incur to carry out its business
Competitive advantage
Competitive advantage is what makes it possible for a company to sell its products or services at a greater economic profit than rival firms operating in the same business. It requires value creation.
Porter’s 5 forces
- Competition among rivals (8)
- Threat of new entrants (6)
- Bargaining power of suppliers (7)
- Bargaining power of buyers (7)
- Threat of substitutes
List the factors that affect competitive rivalry
- level of differentiation
- number of competitors and concentration
- industry growth
- fixed costs
- switching costs
- exit barriers
- competitors with high strategic stakes
- capacity increased in large increments
List the factors that affect the threat of new entrants
- level of differentiation
- economies of scale
- fixed costs
- switching costs
- access to distribution channels
- value of experience
List the factors that affect buyer/supplier bargaining power
- concentration among buyers
- buyer’s total product costs as a fraction of industry product costs
- importance of industry’s product to quality of buyer’s product
- standardization
- buyer’s profit level
- buyer’s ability to integrate backwards
- buyer’s knowledge of industry profits
What does the availability of substitutes affect most?
It puts a ceiling on the consumer’s WTP.
How can you increase WTP?
- differentiation
- perceived differentiation
- complement
How can you decrease cost?
- economies of scale
- access to resources
What kind of resources create competitive advantage? Give examples.
- rare
→ land for Walmart - inimitable
→ company culture - valuable
→ data for AI companies - non-tradeable / non-separable from the firm
→ Coke’s brand image
What kind of competitive advantages are more sustainable?
- those based on rare, inimitable, non-tradeable resources
- those based on intangible resources
- those based on choices/actions that are based on an interdependent system of organizational choices
Two features of good strategy
1) Allowing trade-offs
2) Being consistent
Why is it hard to be profitable as an airline?
- capital intensive
- competition on price
- substitutes
List some of the actions taken by Southwest for value creation
- frequent service
- fleet of same aircraft
- short-haul routes
- no meals
- uncongested airports
- no membership in reservation system
- no seat assignments
- single-class service
- no baggage transfers
- point-to-point system
What are some of Southwest’s trade-offs? How does that benefit or hurt them?
- Single class (no meals, no seat assignment, no reservation)
→ Savings in turn-around time, Savings in costs of meal, Eliminates intermediary cost, Lower training costs
→ Giving up higher paying
customers: business class
passengers - Point-to-point (not hub-and-spoke)
→ Shorter flights for more capacity utilization, smaller airport which allows savings on landing fees and on time performance with reduced taxi and in-air waiting
→ Flying to and from small
cities: No possibility of connection/transfer, Cannot do long-haul flights
