1. MKT 310 Entrepreneurship Mishari Alnahedh

2. LECTURE 2: NEW VENTURE STRATEGY

3. What is the value to be delivered to the customer ?
Customer Value Proposition
Mishari Alnahedh
The starting point of a new venture strategy is the Customer Value Proposition
What is the value to be delivered to the customer ?
In other words, why should a customer buy your product or use your service ?
What unmet needs will the product/service address?
Which customer needs are you satisfying?
Which one of your customer’s problems are you helping to solve?
How does your product/service solve the problem?

4. Customer Value Proposition
Mishari Alnahedh
What is customer value? The satisfaction a consumer feels (the customer experience) after making a purchase of goods or services relative to what she must give up to receive them (the next best alternative).

5. What is Strategy ? Why do some companies outperform their competitors?
Mishari Alnahedh
Why do some companies outperform their competitors?
Management is about HOW to get things done
Strategy is about WHAT things need to get done

6. Definitions of Strategy Strategy is about making choices
What is Strategy ?
Mishari Alnahedh
Definitions of Strategy
“Strategy is about adding value through a mix of resources, capabilities and activities different from those used by competitors in your industry.”
Strategy is about making choices

7. What Is Strategic Management About ?
Mishari Alnahedh
Sustainable competitive advantage occurs when a firm implements a value-creating strategy of which other companies are unable to duplicate the benefits or find it too costly to imitate.

8. Two Elements of Strategy
Mishari Alnahedh
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT ABOVE THE COMPETITIVE LEVEL
Which businesses should we be in?
CORPORATE STRATEGY
How do we make money?
COMPETITIVE ADVANTAGE
How should we compete?
BUSINESS STRATEGY
© 2013 Robert M. Grant

9. A useful framework for analyzing competitive advantage
Mishari Alnahedh
In strategy a source of performance differences is the “competitive advantage”.
Competitive advantages reflect rents earned by a firms assets. The value of these assets is determined by the relative advantages they give a firm over its competitors.
A useful framework for analyzing competitive advantage
Activities: what does it do that is different from its competitors?
Added value: How much extra value does the firm add? (to the market)
Sustainability: How hard is it for the firm’s competitors to replicate the sources of added value?

10. Added Value Ghemawat and Rivkin, HBR (2006) Value = Benefits - Costs
Competitive Advantage
Mishari Alnahedh
Added Value
Ghemawat and Rivkin, HBR (2006)
Value = Benefits - Costs
Benefits: Willingness to pay (WTP)
WTP = maximum consumer will pay for product
Cost = minimum cost of provision (includes opportunity costs of inputs)
© 2010 Chad Syverson Chicago Booth School of Business
Competitive Strategy Notes

11. Competitive Advantage
Mishari Alnahedh
Added Value
A customer is willing to pay $12 for a pizza. The price of the pizza is $10 and it costs $7 to make the pizza.
Will the customer buy the pizza ?
Consumer Surplus  $12 - $10 = $2
Producer Surplus  $10 - $7 = $3
Economic Value  $12 - $7 = $5
© 2010 Chad Syverson Chicago Booth School of Business
Competitive Strategy Notes

12. © 2014 Joe Mahoney University of Illinois Urbana Champaign
Economic Value as Competitive Advantage
Mishari Alnahedh
If the economic value created is
Greater than its rival  competitive advantage
Equal to its rivals  competitive parity
Lower than its rivals  competitive disadvantage
© 2014 Joe Mahoney University of Illinois Urbana Champaign

13. Two Paths to Competitive Advantage via Added Value
Mishari Alnahedh
Consider two firms
Firm 1: Benefits or V1 = B1 – C1
Firm 2: Benefits or V2 = B2 – C2
Assume V2 > V1  (B2 – C2) > (B1 – C1)
Added value of firm 2 with competitive advantage = (B2 – B1) – (C2 – C1)
Two paths to added value
Can add value by lowering costs (reducing C2)
Can add value by enhancing WTP (raining B2)
Often this increases costs – firms must raise TWP more than costs rise

14. Two Paths to Competitive Advantage
Mishari Alnahedh
Examples
FlyDubai:
Apple:
LuLu Hypermarket:
In-N-Out Burger:

15. Two Paths to Competitive Advantage
Mishari Alnahedh
Examples
FlyDubai: Low Cost
Apple: high WTP + high cost (Differentiator)
LuLu Hypermarket: Low Cost
In-N-Out Burger: Low Cost + High WTP (dual)

16. Sources of Competitive Advantage
Mishari Alnahedh
COST
ADVANTAGE
Similar product
at lower cost
COMPETITIVE
ADVANTAGE
Price premium
from unique product
DIFFERENTIATION
ADVANTAGE

17. How Do Resources Lead to Competitive Advantage ?
Mishari Alnahedh
How Do Resources Lead to Competitive Advantage ?
Valuable
Does it create “value” for the customer?
Rare
Do other firms have similar resources?
Difficult to Imitate/Substitute
Unique Historical Conditions
Causal Ambiguity
Organization
Are you organized to take advantage of your resources?

18. Trading markets vs. Production markets
Competitive process in different market settings
Mishari Alnahedh
For competitive advantage to exist, there must be some imperfection (or inefficiencies) of competition
What types of resources and capabilities are necessary to compete?
What are the circumstances of the availability of the resources and capabilities?
Trading markets vs. Production markets
Trading involves arbitrage across space (trade) and time (speculation)
Production involves the physical transformation of inputs into outputs

19. Competitive advantage and imperfections in the competitive process
Mishari Alnahedh
SOURCE OF
IMPERFECTION
OF COMPETITION
OPPORTUNITY
FOR COMPETITIVE
ADVANTAGE
MARKET
TYPE
TRADING
MARKETS
None (efficient markets)
Imperfect information availability
Transactions costs
Systematic behavioral trends
Overshooting
None
Insider trading
Cost minimization
Superior diagnosis
(e.g.... chart analysis)
Contrarianism
Barriers to imitation
Barriers to innovation
Identify barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, barriers to resource replication) & base strategy upon them.
Difficult to influence or exploit.
PRODUCTION
MARKETS

20. Trading markets Production markets
Sources of imperfections to the competitive process
Mishari Alnahedh
Trading markets
Imperfect availability of information
Transaction costs
Systematic behavioral trends
Overshooting as a result of imitation
Production markets
Barriers to imitation
Barriers to innovation

21. How long will it be before the first rival imitates the first mover?
Barriers to Imitation
Mishari Alnahedh
How long will it be before the first rival imitates the first mover?
How fast does new imitation occur once it starts?
These two factors determine “appropriability”

22. Barriers to Imitation REQUIREMENT FOR IMITATION ISOLATING MECHANISM
Mishari Alnahedh
REQUIREMENT FOR IMITATION
ISOLATING MECHANISM
Identification - Obscure superior performance
- Deterrence--signal aggressive
Incentives for imitation intentions to imitators
- Pre-emption--exploit all available
investment opportunities
- Rely upon multiple sources of
Diagnosis competitive advantage to create
“causal ambiguity”
- Base competitive advantage upon
Resource acquisition resources and capabilities that are
immobile and difficult to replicate

23. Barriers to Innovation
Mishari Alnahedh
The more complex an industry in terms of multi-dimensionality of customer choice criteria and the number of value chain activities, the greater the potential for creating “new game” strategies
New rules of the game
Value chain reconfiguration such as disintermediating
Innovative business models to create value for customers from novel experiences, products, product delivery or bundling, process technologies, and organizational formats