 Compaq: tried to reverse engineer IBM's tech

o Merged with HP - demonstrates lifespan

 Firm's competitive advantage depends on positioning in industry
 Profitability
o Industry Effect - some industries are just naturally more profitable (19%)
o Corporate parent effect - 4%
o Unexplained variation - luck or other; don't know (43%)
o Year effect: based on economy; recessions for example (2%)
o Business unit effect: 32%
 Effect of strategic positioning
 Consumer surplus: max WTP - price
 PS: P - C
 Add both to get TS or value created
 More surplus flows to consumer usually (like PC)
 In highly concentrated industry, price is usually higher and more PS (like if monopoly)
 Framework
o Market econ - industry etc + value created relative to competitors = econ profitability
 To get more profitability
o Increase benefit or decrease cost = increasing value creation
 Can firm increase B-C when allowing C to rise
o Must offer something better to the customer or else inefficient
o Luxury goods - increase quality to give reason for higher prices
o Free mise-en-bouche - increase cost but increase benefit enjoyed by customer
 Firm decrease C without decreasing B?
o Increase efficiency, econ of scale, cheaper suppliers
o Return old stock
 Example of industry where lots of supply created but not much captured by firms?
o Email, smartphone apps
 Example of industry where firms capture lots of surplus
o Monopolistic companies: pharmaceutical companies, OPEC (cartel)
 P-Q Pair
o Benefits vary for differentiated products
 Refer to this as quality
o Firms can be viewed as submitting CS bids
o Highest bidder --> increase in market share
 o Curve = indifference curve (same surplus throughout)
o Shift curve down = higher CS
 To achieve competitive advantage
o Business must create more value than others
 Generic strategies
o Cost advantage: offer same benefit as competitors at lower cost
 If F has cost advantage over E, F can decrease P to cost of E --> E can't start price war
bc that's where their MC is
 F can drive firm E out of the market and get a monopoly
 What amazon does in ebook market
o Benefit advantage: firm with benefit/differentiation can offer higher CS than rivals
 Difference in quality is much greater than difference in cost
 Firm F higher quality, firm E lower quality
  Firm F would increase quality, firm F can keep E out of the market by switching to
lower IC with same cost as E
 When CA should be sought
o When nature of product doesn't allow benefit enhancement - concrete
o When consumers relatively price sensitive
o When product is search good rather than experience good
 Experience good: product/service where product characteristics are difficult to
observe in advance (hard for consumers to compare)
o Search good: p/s with features/characteristics easily evaluated before purchase
o Unexploited economies of scale or learning effects
 World's largest semiconductor foundary
 Economies of scale crucial of efficiency for this company: improve just a little, huge
cost advantage
 When benefit advantage should be sought
o When consumers are WTP a premium for benefit enhancements
o When economies of scale and learning have been already exploited and differentiation is
best route to value creation
 Example burberry
 Strategy: brand momentum, marketing innovation, product excellence
 Efforts: product design, ads, people
 Firm that follows cost advantage vs differentiation strategy
o CA: Dell - initially PC manufacturers sold to channels but Dell sells directly to customers
which lowers cost
 Can firm have both cost & differentiation strategy