WHO is our customer? >>> In terms of customer segments >>> in terms of geographic regions, WHAT >>>in terms of products & services, HOW to do business? how to get the products to the customers, terms of distribution channels…………….External consistency (e.g. what is the logic on how you create value for your customer?) Internal consistency (e.g. what is the logic on how your choices strengthen and fit with each other?) Porter Five Forces: Competition among rivals: is intense, lowering profits, when: There are numerous rivals, Products seem fairly similar to buyers, Rivals are committed to the industry for non-economic reasons, Rivals have a reason to sell even at lower margins (e.g., perishable products, large fixed & low marginal costs) The threat of entry is lower: making it more profitable for incumbent rivals, when barriers to entry are high. Barriers to entry are high when there are: Large economies of scale, Large switching costs for consumers, High capital requirements, Superior resources for incumbents. The threat of substitutes can decrease the profits of incumbent rivals by limiting the maximum price in the industry. The threat of substitutes is lower, making it more profitable for incumbent rivals, when: There is a large difference in price-performance between the industry’s product and the substitute, Buyers face switching costs when moving from the industry’s product to the substitute. Buyers can decrease the profits of incumbent rivals by demanding lower prices and/or better quality & more services to be provided to them. Buyer power is lower, making it more profitable for incumbent rivals, when: There are several alternative buyers, Buyers face switching costs when moving from one rival firm to another, Products are differentiated/not standardized. Suppliers can decrease the profits of incumbent rivals by charging higher prices and/or limiting the quality & services they provide. Supplier power is lower, making it more profitable for incumbent rivals, when: There are several alternative suppliers, Costs of switching among suppliers are low, Suppliers depend heavily on the industry. Limitations: (1) Their original design was static (2) The forces are not independent, they influence one another, so keep an eye on the argument to avoid analyzing all forces with the same effect. (3) Their original design was not meant to explain innovation. In some settings the 5 Forces can help innovation analysis but in others they cannot… we will see more modern concepts with broader application
Valuable: Does it add value to your customers? In other words, is it connected somehow to at least one dimension of merit in your value curve? Does it add value beyond the cost it imposes? Rare: Limited Supply, Inimitable: Can’t be copied or substituted. Limitations (i) How to measure value-added? Some of this is Marketing Research: how to add value for the customer, Some is Activity-based Accounting: what can we do with the resources we have, (ii) Difficult to see when the real value is the interaction of several resources Sources of Competitive Advantage: Generic Strategies (a) Cost Advantage (b) Differentiation Advantage Drivers of Cost Advantage
Economies of Scale: Indivisibilities, Specialization & division of labour Economies of Learning: Increased dexterity, Improved coordination/organisation Production Techniques: Mechanism and automation, efficient utilization of materials, increased precision Product Design: Design for automation, designs to economise on materials Input Cost: Location advantages, ownership of low-cost inputs, bargaining power, supplier cooperation Capacity Utilization: Ratio of fixed to variable costs, costs of installing and closing capacity Residual Efficiency: motivation, managerial skill
The nature of differentiation: “Providing something unique that is valuable to the buyer beyond simply offering a low price”. (Michael Porter) Total customer...
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