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Content
Introduction to Profitability Analysis Willingness to Pay & Supplier Opportunity Cost Concepts:
Added Value Unrestricted Bargaining Scarcity
Activity Analysis
Conclusion
Why?
Pharmaceutical Industry
Patent protection Product differentiation
Steel Industry
Excess capacity Limited differences across products Slow growth Steel customers search for the best-price producer
Expanding demand
Users hesitate to switch among products
Competitive Rivalry
Competitive Advantage
When a firm, compared to rivals, has driven a wider wedge between the willingness to pay it generates among buyers and the costs it incur
The essence of creating advantage is finding an integrated set of choices that distinguish a firm from its rivals
However, by the late 1980s a new producer of cranes entered the market and Harnischfeger started making little profit on its sales...
Unrestricted Bargaining
Lets assume that a firm manages to strike a deal that allows it to gain more than its Added Value: the value left for the other participants is less than the value they would generate by arranging a deal among themselves
The remaining participants, therefore, might form a separate pact that improves their collective lot
Any deal that exceeds its Added Value is fragile because of the reason explained above. The graph below explains what happens when Kranco enters the market, making Harnischfeger capture little or no Added Value
The TVC by Harnischfeger participating in the deal is now $6.0 million (new WTP - new SOC), whereas the TVC if it opts out and Kranco provides the product is $5.5 million (Kranco WTP - Kranco SOC)
Thus, in order to increase its Added Value, Harnischfeger widens the gap between the WTP and the SOC
WTP
SOC
Activity Analysis
How to identify opportunities to increase the margin between willingness to pay and costs? Sheer Entrepreneurial Insight or Dumb Luck!?
Activity Analysis
Analysis of the activities can help insight:
Design Production Selling Delivering Services
These are costs of the firm and the fuel to boost willingness to pay!
1984-2002
It is important to analyze:
Cost. Cost drivers: why activity costs rise or fall Competitors costs analyzed by comparison
Cost Drivers:
Delivery costs depends on numbers of stops Outbound logistics increases costs because of higher product variety Product nature increases costs (more preservatives requires less deliveries)
Focus on differences on single activities not only total costs Include all the costs which are determinant in the creation of costs
Smaller cost components may be important cost drivers Analyze cost drivers which differe from one another eg. Location. Sentisivity analysis: bear in mind you are estimating
In others it is difficult to quantify them and there is the need to use different market research tecniques
Success of the firm relatively to its competitors Relate differences in success to the differences in meeting customers needs
Vertical differences
one product is better, but how are they willing to pay for better product
Responses:
Segmentation Mass customization
Disadvantageous when:
Discontinuities instead of economies of scales Will to serve heterogeneous goods could bring up difficulties in production chain or blur the message of the firm towards its customers
Whole
Processes
Whole
Steps 1, 2 & 3
Landscape Metaphor
Helpful to describe the dilemma facing managers who are searching for a favorable set of choices In conceptual terms, the managers of a firm operate in a high-dimensional space of decisions
Quantities:
Each point in this space represents a different set of choices, a different configuration of activities The elevation corresponding to each point is the added value generated by that configuration
The goal of the senior management team is to guide its firm to a high point on this landscapea set of decisions that, together, generate a great deal of added value
Conclusions
A successful firm does not simply participate in an attractive industry. It also strives to generate more economic profits than the typical firm in its industry The ability to make profit comes from the concept of Added Value. A firm has added value when the network of customers, suppliers, and complementors in which it operates is better off with the firm than without it; the firm offers something that is unique and valuable in the marketplace.
Conclusions
To have added value, a firm must drive a wedge between customer willingness to pay and supplier opportunity costindeed a wider wedge than rivals achieve. A firm that attains a wider wedge is said to have a competitive advantage A firm can use its analysis of activities to generate and assess options for creating competitive advantage. In doing so, the management team must decompose the firm into parts, but also craft a vision of an integrated whole
Thank You