Value Creation and Win Win Business Opportunities

No product can be viable without creating positive economic value. If B C was negative, there would be no price that consumers would be willing to pay for the product that would cover the costs of the resources that are sacrificed to make the product. Manufacturers of the product, along with their input suppliers, would be unable to make a profit. Vacuum tubes, rotary dial telephones, and dedicated word processing units are products that at one time created positive value, but because of...

Perceived Benefit and Consumer Surplus

A particular computer software package is worth 150 to you. If its market price was 80, you would buy it because (from your perspective) its perceived benefit ( 150) exceeds its cost ( 80). This purchase makes you better off you have given up 80 to receive something more valuable a software package whose perceived benefit is worth 150. The extent by which you are better off 70 ( 150 > 80) is known as consumer surplus More formally, let B denote a product's perceived benefit to a consumer. It...

Value Creation at Prochnis4

Consistent value-creation is hard enough for a firm and its managers to achieve in the absence of dramatic environmental change. Competition, even under a constant set of technological and regulatory conditions, keeps most firms from earning positive economic profits on a continuing basis. When environmental conditions change dramatically, however, the value-creation problem the firm and its managers face becomes even more difficult, because the basic ways in which the firm has grown used to...

The Economic Logic of Benefit Advantage

A firm that creates a competitive advantage based on benefits creates more value than its competitors by offering a product with higher B for the same, or perhaps higher, C. A firm can exploit a benefit advantage by setting a price that allows it to offer higher consumer surplus than its rivals, while also achieving a higher profit margin. Figure 12.11 illustrates this point. Firm E sells a moderately priced product that provides a respectable quality, qE. Its unit cost is CE. Firm F offers a...

What Matters More for Profitability The Market or the Firm

The framework in Figure 12.2 implies that the economics of the firm's market and the firm's position in that market jointly determine the firm's profitability. But how would we determine which is more important To answer this question, imagine taking a broad sample of different companies or business units over many years and calculating their profitability (e.g., using standard accounting measures, such as return on assets, or more sophisticated tools, such as Economic Value Added, aimed at...

And Benefit Advantage

Competitive advantage cannot be reduced to a formula or an algorithm. Even if such formulas or algorithms could be concocted, describing them in a textbook such as this would make them valueless because they would be accessible to everyone. But although there is no single formula for success, we can discern broad commonalities across industries in the different ways that firms position themselves to compete. For example, as discussed in the introduction, American Airlines' strategy in the...

Chapter Summary

A firm achieves a competitive advantage if it can earn higher rates of profitability than rival firms. A firm's profitability depends joindy on industry conditions and the amount of value the firm can create relative to its rivals. Consumer surplus is the difference between the perceived benefit B of a product and its monetary price P. A consumer will purchase a product only if its consumer surplus is positive. A consumer will purchase the product from a particular seller only if that seller...

Extracting Profits from Cost and Benefit Advantage The Importance of the Price Elasticity of Demand

A firm that creates more value than its competitors would like to keep as much as possible of that value for itself in the form of profits. However, competition limits the firm's ability to capture profits. In the simple model presented in this chapter, competition takes an especially stark form. Because we have assumed that consumers have identical preferences, if a firm provides the highest consumer surplus to one consumer, it also provides the highest consumer surplus to all consumers in the...

Questions

How can the value chain help a firm identify its strategic position 2. Analysts sometimes suggest that firms should outsource low value-added activities. Do you agree or disagree 3. Two firms, Alpha and Beta, are competing in a market in which consumer preferences are identical. Alpha offers a product whose benefit B is equal to 75 per unit. Alpha's average cost Cis equal to 60 per unit, while Beta's average cost is equal to 50 per unit. a. Which firm's product provides the greatest value...

Tobacco

Tobacco firms include some of the largest and most profitable companies in the world. Philip Morris and RJR Nabisco rank in the top 75 firms in the Fortune Global 500. Though highly diversified, these giants earn a disproportionate amount of their income from tobacco. Even though Philip Morris, for example, owns Kraft, General Foods, Miller Beer, and Oscar Mayer Foods, it obtains 40 percent of its sales and 60 percent of its profits from tobacco. RJR Nabisco is also highly diversified, selling...

Hospital Markets Then and

Hospitals have experienced some financial difficulties in recent years. Hospital bankruptcies were once rare. Since die mid-1980s, however, an average of 75 hospitals a year has gone bankrupt about 1.5 percent of the nation's total each year , and many others struggle to stay solvent. At the same time, some hospitals have been very successful financially. A comparison of the five forces at two points in time, 1980 and today, demonstrates the problems that hospitals have grown accustomed to and...

Value Creation Within a Vertical Chain Integrated Delivery Systems in Health Care

Just as individual firms compete to create and deliver economic value to consumers, entire vertical chains can also be viewed as competing to create economic value. A recent development that .highlights this point is die competition between integrated delivery systems ID S s and traditional nonintegrated delivery systems within the health care industry in the United States An IDS combines many elements of the health care vertical chain under common ownership. A typical IDS, such as the Heniy...

Strategies for Coping with the Five Forces

A five-forces analysis identifies the threats to industry profits that all firms in die industry must cope with. Firms may pursue several strategies to do this. First, firms may position themselves to outperform their rivals, by developing a cost or differentiation advantage that somewhat insulates them from the five forces. Chapter 12 and 13 discuss positioning strategies in detail. Second, firms may identify an industry segment in which the five forces are less severe. For example, in the...

Coopetition and the Value

Porter's five forces is an enduring framework that remains widely used for industry analysis. In their book Coopetition, Adam Brandenberger and Barry Nalebuff identify an important weakness of the framework. From the viewpoint of any one firm, Porter tends to view all other firms, be they competitors, suppliers, or buyers, as threats to profitability. Brandenberger and Nalebuff point out that firm interactions may be positive as well as negative, and emphasize the many positive interactions...

Substitutes and Complements

Although the five-forces analysis does not directly consider demand, it does consider two important factors that influence demand substitutes and complements. Substitutes erode profits in the same way as entrants by stealing business and intensifying internal rivalry. Complements boost the demand for the product in question, thereby enhancing profit opportunities for the industry. Bear in mind, however, that changes in demand can affect internal rivalry, entry, and exit. Be sure to consider...

Internal Rivalry

Internal rivalry refers to the jockeying for share by firms within a market. Thus, an analysis of internal rivalry must begin by defining the market. Be sure to include all firms that constrain each other's strategic decision making, as described in Chapter 7, and pay attention to both the product market and geographic market definitions. For example, if you are performing a five-forces assessment of hotels, note that most consumers have specific geographic preferences when selecting a hotel....

Performing a Five Forces Analysis

When performing a five forces analysis, you must remember that it is not a set of principles per se. The relevant principles have been developed in preceding chapters. Instead, the five-forces framework is a tool for assuring that you systematically use these principles to assess the current status and likely evolution of an industry. As you work through the five-forces, you should appeal to the economic principles that are relevant to each force. For example, when assessing the power of...