Slides3_CompAdv

Slides3_CompAdv - The Economics of E-commerce and...

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The Economics of E-commerce and Technology Competitive Advantage 1
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2 Industry analysis looks at what determined average profitability What makes individual firms within an industry different? To create an advantage, a firm must do something unique and valuable Goal: Understand why some firms earn superior profits, and use this knowledge to evaluate strategic options. Porter: “Competitive Strategy is about being different”
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3
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4
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Two Questions 5 How does a firm create a competitive advantage? How can a firm position itself differently from its competitors? What activities can a firm adopt that will differentiate itself? About short-run profitability. What makes a competitive advantage sustainable? What assets, resources or capabilities prevent imitation? How can firm leverage existing assets, resources and capabilities? About long-run profitability.
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Added Value 6
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The Value Pie Total value of industry Utility of consumer minus opportunity costs of inputs Added value of firm Reduction in total value of industry if your firm is annihilated. Firm Suppliers Customers Competitors Complementors 7
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Value Creation: Example 8 In 2009, Ruud Lighting signed deal with city of Los Angeles for 140,000 LED streetlights. Total value LA saves $100m by switching to LED Price is $57m Ruud‟s costs are $30m. Total value = $70m, LA gets $43m, Ruud gets $27m. Ruud‟s added value What if Ruud is only LED company? What if ACME can produce $90m savings for cost $25m?
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Added Value 9 Claim: A firm‟s profits cannot exceed added value. Idea: If firm‟s profits exceed added value, the other parties can jointly become better off by working around this firm. Right questions are not Is this an attractive industry? Is demand for product growing? Right questions are: Can I make product at lower cost than competitor? Can I create more value than my competitor?
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Added Value 10 Ruud and ACME example Ruud‟s profits are at most $5m, so price is at most $35m. Level of profits Whether Ruud‟s profits are $0 or $5m depends on economics of industry. What is Ruud‟s bargaining power? Who chooses prices? If hold auction, profits = $5m If LA city names price then profits = $0 What is total/added value in perfectly competitive industry?
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11 Added value and industry economics Benefit position relative to competitors Cost position relative to competitors Added value Industry economics Economic profitability
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Differentiation 12
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13 Product differentiation In the LED example, only one firm (the one with the greatest added value) can earn positive profits Often, consumers are heterogeneous (not just firms) Some people prefer Android features, others iPhone features Some people place low value on data plan and have old Nokia Many firms can have positive added value and earn profits Understanding consumer heterogeneity is key to successful strategy
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Product Differentiation: Classification 14
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