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(Online Program on Strategic ManagementBusiness Strategy: Cost Leadership…
Online Program on Strategic ManagementBusiness Strategy: Cost Leadership and DifferentiationSession 1 & 2
�BusinessfromthePerspectiveofValue
�Porter�sGenericStrategy
Instructor: Dr. IndrajitMukherjee, XLRI -Jamshedpur
Some definitions��.
�Monetary worth of an asset, business entity, goods, service, liability, obligation
�Worth of all benefits and rights arising out of ownership
�The extent to which goods and service meets customers needs and wants
�Important and worthwhile
Synonyms:
merit, worth, usefulness, utility, practicality, advantage, desirability, benefit, gain,
What is Value?
Some Fundamental Understanding about Value
Same resource provides different value to different entities (individual or business)
Image result for glass of water
Image result for sweating
Image result for feeling cold
To whom will the water
be more valuable?
Where will this trolley be more useful?
Retailer�s Warehouse?
Retailer�s Outlet?
https://5.imimg.com/data5/PP/WF/MY-1911864/heavy-duty-trolley-500x500.png
Image result for fresh food warehouse
Image result for retail outlet
Some Fundamental Understanding about Value
Different attributes of the same resource provides different value to different
entities (individual or business)
Image result for car
Image result for young teenager
Image result for ceo
Image result for car
Image result for car
Image result for toy car
Image result for tall man
Value is created when the product/service
attributes match the need of customer/user
better the match �higher the value
Value of resource owned
X
X
Y
Y
VAX
VAY
VBX
VAX
VAY
VBY
VBX
VBY
Value creation by transferring X from A to B = VBX-VAX
Value creation by transferring Y from B to A = VAY-VBY
To motivate an exchange both
parties must gain value
Value creation by exchange = (VBX+ VAY�VBY -VAX)
Entity A
Entity B
Resource
Entity A
Entity B
Resource
Value appropriation by A = (VAY-VAX)
Value appropriation by B = (VBX-VBY)
Value of resource not owned
AFTER
EXCHANGE
Value Creation & Appropriation In Transaction
Value of resource owned
X
X
Value of resource not owned
Y
Y
VAX
VAY
VBX
VAX
VAY
VBY
VBX
VBY
Entity A
Entity B
Resource
Entity A
Entity B
Resource
Now let VAX,VAY,VBXand VBYbe the value for one unit of product, and 1 unit of
X is exchanged with r units of Y
Value creation by exchange = (VBX �r.VBY) + (r.VAY�VAX)
For both parties to have positive value of exchange: VAX/VAY< r < VBX/VBY
Feasible rangeof �r� -
scope of bargaining
If Y is money, then rY is price of X
AFTER
EXCHANGE
Value Creation & Appropriation In Transaction
Value Creation & Appropriation In Transaction
Implication of the fact that all entities in a transaction must gain:
�Unless all the stakeholders to a transaction gain something positive
in the net, it is not possible to sustain the transaction with them.
�Extending the above argument �all stakeholders must gain
something positive for a sustainable business/business model
Value Creation & Appropriation in Business
RICE MILL
Farm
Customer
Employee
1.5 Kg Paddy
(at farm)
Rs. 18
1 Kg Rice
(at market)
Rs. 10
Rs. 40
Operation,
Logistics &
Administrative
service
Rs. 15
Rs. 50
Factor
Cost
0.5 Kg
Waste Husk
Bank
Rs. 5
Capital
Business Includes:
�Resource Transaction �economic processes
�Resource Conversion �technological process
�Resource Accumulation �physical capital, intangible assets/capabilities
Flowing Resource �
gets consumed,
and also stored
Capital
Resource �
long term
strategic
investment
Value Creation & Appropriation in Business
RICE MILL
Farm
Customer
Employee
1.5 Kg Paddy
(at farm)
Rs. 18
1 Kg Rice
(at market)
Rs. 10
Rs. 40
Operation,
Logistics &
Administrative
service
Rs. 15
Rs. 50
Factor
Cost
Supplier�s cost
Purchase Price
Total Cost
Sales price
Customer�s
Utility
Rs.15
Rs.18
Rs.33
Rs.40
Rs.50
Supplier
Employee
& Bank
Firm
Customer
VALUE
APPROPRIATION
0.5 Kg
Waste Husk
Bank
Rs. 5
Capital
Rs.23
VALUE
CREATION
Value Creation = Value Appropriation
Requires
collaborative
effort of all
stakeholders �
Who gets what how much depends of the price points -
bargaining for
the share of pie,
and conflict
cooperation, and
coordination
The following are important for developing and sustaining a business:
�Ascertain all stakeholders gain something positive balancing the overall value
creation with the overall value appropriation
�The above is not in the complete control of the incumbent as the intents and
actions of multiple stakeholders is involved �
�suppliers, customers, and alliances/JV partners -coopetition
�value chain participants �indirect influence on demand and supply
�competitors, substitutes and new entrants -adverse
�complementors�beneficial
�regulators �any type of influence
Business from the Perspective of �Value�
Business
Ecosystem
The following are important for developing and sustaining a business:
�Increasing value creation makes it easy to achieve the above balance
�better attributes of product/service �innovation, co-creation
�non-pecuniary exchanges �status, power, knowledge, etc.
�Trust based relationship:
�saves resource (and therefore value) wastage through transaction cost reduction
�Facilitates collaboration required for co-creation of value
�Internal Efficiency resource stock, flow and conversion �technology, control
Business from the Perspective of �Value�
Porter�s Generic Strategy
Cost
leadership
Differentiation
Focused
Cost leadership
Focused
Differentiation
Sources of Competitive Advantage
Low Cost Uniqueness
Competitive Scope
Broad Target
Narrow target
Competitive Strategy by
Michael Porter, 1980
Attempting both differentiation and cost
leadership strategy would result in getting
struck in the middle
Exceptions:
�industries in transitions
�Innovation adopted by firms
Porter�s Generic Strategy
Dual
Cost
leadership
Differentiation
Focused
Cost leadership
Focused
Differentiation
Sources of Competitive Advantage
Low Cost Uniqueness
Competitive Scope
Broad Target
Narrow target
Hill and Jones, 1981:
�Argued that both differentiation and cost leadership is implemented successfully by many companies
�Came out with a theory to explain why both can be achieved at the same time
Today it is accepted that dual strategy is possible without getting stuck in the middle��..
But does that prove Porter wrong?
Porter�s Generic Strategy
Dual
Cost
leadership
Differentiation
Focused
Cost leadership
Focused
Differentiation
Sources of Competitive Advantage
Low Cost Uniqueness
Competitive Scope
Broad Target
Narrow target
V
V
V
P
P
P
C
C
C
Cost leadership
Differentiation
Firm without
generic strategy
Introduction
�ValueCreationandAppropriation
�WhatisValue
�ValueCreationandAppropriationinBusiness
�SomeFundamentalUnderstandingaboutValue
�ValueCreationandAppropriationinTransaction�