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Strategic Positioning for Competitive Advantage

A. Tony Prasetiantono Week 11

Introduction: Deregulation in the U.S. Airline Industry, 1978
Until the deregulation in 1978, most major the US domestic airlines competed in the same way: by scheduling more frequent and convenient departures and by enhancing amenities, such as meals and movies.  Deregulation of the industry led to new entry and new ways of doing business.

Deregulation in the Airline Industry (1)
American Airlines (AA) developed a nationwide route structure organized around the hub-and-spoke concept.  It built traveler and travel agent loyalty through frequent-flier programs and travel agent commission.  Maximize revenue through sophisticated computerized reservation system.

Deregulation in the Airline Industry (2)

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USAirways has tried to avoid head-to-head competition with the major airlines by serving smaller markets that the large carriers exited following deregulation. It has consistently enjoyed the highest yield of any airline. But its smaller planes, lower load factors, and generous labor contracts also give it the highest average operating costs in the industry.

Deregulation in the Airline Industry (3)

Continental launched a new strategy aimed at shedding unprofitable routes, increasing worker morale and productivity, and enhancing the overall quality of services, with particular emphasis on on-time performance, a traditional Continental weakness.

Deregulation in the Airline Industry (4)

Southwest, eschewing the hub-and-spoke concept, flies passengers from one city to another in one or two short hops. With less restrictive work rules than other major airlines, a fleet that consists only of Boeing 737s to economize on maintenance and training, Southwest has enjoyed the lowest average operating costs in the industry. Southwest emphasizes low fares and reliable ontime service, rather than attempting to capture traveler loyalty with frequent-flier programs, and providing drinks and cheerful attendants.

Deregulation in the Airline Industry (5)
JetBlue Airways has outfitted its airplanes (brand-new Airbus A320s) with lather seats and free satellite-television programming.  Providing service out of New York’s Kennedy airport to a limited set of cities, JetBlue has tried to a convey an urban “attitude” to appeal to tough, jaded New Yorkers.

Competitive Advantage: Revisited (1)
Industry conditions are an important determinant of a firm’s profitability.  Firms in some industries, such as pharmaceuticals, consistently outperform firms in other industries, such as airlines.  However, profitability does not only vary across industries, but also varies within particular industry.

Competitive Advantage: Revisited (2)

A firm’s profitability depends jointly on the economics of its market and its success in creating more value than its competitors. The amount of value the firm creates compared to competitors depends on its cost and benefits position relative to competitors.

Competitive Advantage: Revisited (3)

A firm’s economic profitability within a particular market depends on the economic attractiveness or unattractiveness of the market in which it competes and on its competitive position in that market. Whether a firm has competitive advantage or disadvantage depends on whether the firm is more or less successful than rivals at creating and delivering economic value.

What matters more for profitability: the market or the firm?
Business unit effect (31.71%)  Industry effect (18.68%)  Corporate parent effect (4.33%)  Year effect (2.39%)  Unexplained variation (42.89%)

Competitive Advantage, Consumer Surplus and Value Creation
Market: Supply and Demand Curves  Maximum willingness to pay for the product  Equilibrium  Consumer Surplus  Producer Surplus  Value Created = Consumer Surplus + Producer’s Profit

Value Created (1)
Firm’s cost = $30  Consumer’s maximum willingness to pay = $100  Value created = $(100 – 30) = $70

Value Created (2)
Firm’s cost = $30  Consumer’s willingness to pay = $100  Price = $55  Firm’s profit = $(55 – 30) = $25  Consumer surplus = $(100 – 55) = $45

Value Creation and Michael Porter’s Value Chain
Porter distinguishes between 5 primary activities and 4 support activities.  Five primary activities are (1) inbound logistics, (2) production operations, (3) outbound logistics, (4) marketing and sales, and (5) service.  Four support activities are: (1) firm infrastructure, e.g. finance, accounting, legal; (2) human resources management; (3) technology development; (4) procurement.

Cost Advantage (1)

A firm with a cost advantage creates more value than its competitors by offering products that have a lower cost. The firm can achieve benefit by exploiting economies of scale to lower average costs relative to rivals. The firm automates processes that are better performed, hires fewer skilled workers, purchases less expensive components. Yamaha’s cost advantage over Steinway & Sons, is a good example of this.

Cost Advantage (2)
A firm may offer a product that is qualitatively different from its rivals. Many people continue to use the U.S. Postal Service rather than private delivery services, such as Federal Express, because the cost savings are worth the lower quality for some services.  See Figure 11.14, page 385.

Cost Advantage at Cemex (1)
Mexico’s Cemex is the 3rd largest cement manufacturer in the world behind France’s Lafarge and Switzerland’s Holcim.  Cemex now operates worldwide, claiming market leadership in Mexico, Egypt, Spain, the Philippines, and a number of Latin American markets.  In 2000, it posted annual revenues of US$5.6 billion.

Cost Advantage at Cemex (2)
By exploiting economies of scale, increasing automation, and exploiting information technology, Cemex has maintained the low costs and flexibility necessary to markedly outperform its rivals in these markets.  However, Cemex is not without problems. It is saddled with debt, mainly from its many acquisitions. (In Indonesia: they have 25% shares in Semen Gresik Group).

Benefit Advantage

A firm that creates a competitive advantage based on benefits creates more value than its competitors by offering a product with higher benefit for the same, or perhaps higher, costs. 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. See Figure 11.15, page 388.

“Stuck in the middle”
Michael Porter has coined he term “stuck in the middle” to describe the position of a firm that has neither a cost advantage nor a benefit advantage in the market in which it competes.  Firms that are stuck in the middle are typically much less profitable than competitors that have staked out clear positions of benefit leadership or cost leadership.