Business Model Systems Thinking in Creating Sustainable Competitive Advantageous Strategies

Business Model Systems
Thinking in Creating
Sustainable Competitive-
Advantageous Strategies
DR. C.C. TAN, SENIOR LECTURER
SCHOOL OF MANAGEMENT
MAE FAH LUANG UNIVERSITY
2016
E-MAIL: DRCCTAN@YAHOO.COM
WWW.FACEBOOK.COM/ TAN.CHAI.CHING

19-Jun-16COPYRIGHT TO DR CC TAN 2016 2

To create an organizational ambidexterity, capable of
simultaneous pursuit of exploration (i.e. innovation and
R&D) and exploitation (i.e. asset utilization for
productivity and operations excellence), side by side.

Strategy – as hub that aligns the
different activity spokes of the
wheel in order to exploit
opportunities (given and created)
that has sustainable return and
competitive advantage, while
fulfilling social needs.
Strategy – as a pattern or theme
that gives coherence to the
decisions of an individual or an
organization, and amplify the
patterns.

Strategy as simple rules. That is, strategy is about how
you create value, capture value and sustain it. Only three
core logics on value creation.
The logics of value creation –
i.e. Value creation through position – identify the market,
pick up a position in the market, build a huge barrier to
entries to keep competitors out (i.e. patents, economies of
scales). The military notion is finding a “high hill,” and
build a fortress around them, with machine guns, wires, to
keep rivals out.

i.e. Value creation through resource approach – i.e. core
resources. The idea here is not about positioning; only
having control of the resources that have certain
characteristics, i.e. rare, valuable (creates value for the
customer, and thus price premium), difficult to imitate (i.e.
brand takes time to build). The military analogy is to have
better military technologies like the USA and Russia have
the nuclear weapons and keep other countries from
having those weapons. Superior resources is the
approach to that strategy.

i.e. Value creation by filling the gap in the marketplace,
identifying un-served customer needs, and assembling
the resources behind you to pursue the gaps in the
marketplace. You don’t own the position, you don’t own
the resources; you create value by taking the profits after
paying off the costs of the resources. In military view, this
opportunity approach allows you to win on the battlefield
by finding the golden opportunities and finish it strong.
The idea is in this opportunity approach, you get in there,
you swamp the big opportunities.

Strategy – as a coordinating device. The greatest
challenge of managing an organization is coordinating
the actions of different organizational members.
Strategy can promote coordination.

Note the trend towards value co-creation : to attend to the
quality of co-creation experiences, not just to the quality
of the firm’s products and processes. The firm must
efficiently innovate “experience environments” that
enable a diversity of co-creation experiences. It must
build a flexible “experience network” that allows
individuals to co-construct and personalize their
experiences.
Example: a house boat purchase that allows you to
involve all the way, and thus gives the customers a great
level of knowledge and expertise about houseboats, and
with it a great degree of self-esteem.

Example: Also, dialoguing with the employees and
tracking progress of the boat along the factory floor
creates a sense of emotional bonding with the product
and the company. The firm’s transparency and willingness
to dialogue enhances the customer’s readiness to trust
the company and believe in the quality of the product. In
addition, the access to the community of the firm’s
customers increases the consumer enjoyment of the
houseboat.

Thus, the basis of value for the customer shifts from a
physical product to the total co-creation experience,
which includes co-designing as well as the other
interaction among the customers, the company and the
larger community of houseboats.
Preference Desire Space
Total Experience Space
Network Space

Strategy – as target. Strategy is forward looking. It is
concerned not only with how the firm will compete now
but also with what the firm will become in the future. A
key purpose of a forward-looking strategy is not only to
establish a direction of the firm’s development but also
to set aspirations that can motivate and inspire
members of the organization.

Strategy gives people mission and vision, a
purpose and direction, and connects them with
the higher-level purpose of the organization.

Strategy thus appears to managers as a way or journey into
the defined vision of the organization, which can be
interpreted as a reference to be the spiritual macro-
discourse.
Strategy is portrayed as the “way,” “plan,” or “choices” on
how to reach the “vision” – a journey into salvation for the
strategy believers. This kind of journey metaphor was
commonly used in every case organization to illustrate the
nature of strategy.

The spiritual macro-
discourse also brings
up the sense of
belonging.
According to it, faith
in strategy gets
people to feel as if
they belong to the
organization and
invest in realizing its
purpose.

While committed to the “values” of the organization, they
feel a sense of purpose and significance. Hence, the spiritual
discourse emphasizes the symbolic nature of strategy.
Strategy is a sacred mission or vision that requires faith in
order to live according to it.

It is interesting how the terms “vision” and “mission,” both
of which derive from spiritual rhetoric, are (re)produced by
the managers so frequently and consistently. This may
indicate that these expressions are not only deeply rooted at
the case organizations but also at strategy discourse,
although the consumers, here managers, might not
recognize or acknowledge the religious underpinnings.
Suominen, K. and Mantere, S. (2010), Consuming Strategy:
The Art and Practice of Managers’ Everyday Strategy Usage.
In J.A.C. Baum and J. Lampel (Eds.), The Globalization of
Strategy Research (pp. 211-245), Bingley, UK: Emerald
Group Publishing Limited.

Thus, the role of
managers is to
believe in strategy
sincerely, in order to
be able to make their
own subordinates
believers and
disciples of the
strategy too. Their
obligation is to
share and spread
the gospel of
strategy further.

Having become believers
of strategy, the
subordinates become
spokesmen for the
strategy themselves.

Strategy – to generate competitive advantage. A firm
can achieve a higher rate of profit (or potential profit)
over a rival in one of two ways: either it can supply an
identical product or service at a lower cost, or it can
supply a product or service that is differentiated in such
a way that the customer is willing to pay a price
premium that exceeds the additional cost of the
differentiation. In the former case, the firm possesses a
cost advantage; in the latter, a differentiation
advantage.

By combining the two types of competitive advantage
with the firm’s choice of scope – broad market versus
narrow segment – Michael Porter has defined three
generic strategies: cost leadership, differentiation and
focus.

The drivers of cost advantage:
 Economies of scale
 Economies of learning
 Production techniques
 Product design
 Input costs – location advantages, bargaining power
 Capacity utilization
 Residual efficiency – Slack, motivation and
organizational culture, managerial effectiveness

Strategic Fit – Fundamental to this view of strategy
as a link between the firm and its external
environment is the notion of strategic fit. For a
strategy to be successful, it must be consistent with
the firm’s external environment, and with its internal
environment – its goals and values, resources and
capabilities, and structure and system.

Strategy as discourse. Knowledge is grounded in
dominant ways of seeing, thinking, and acting. Systems
of thought are rooted in “notions, institutions, judicial
and police measures, and scientific concepts” (Foucault,
2006, p. xxxiii) which condition modes of perception, i.e.
in which strategy is perceived and lived.
Foucault, M. (2006), Preface to the 1961 Edition. History
of Madness, London Penguin Books.

Discourse is enacted in major narratives, “formulae,
texts, and ritualized sets of discourses which are
recited in well-defined circumstances: things once said
and preserved because it is suspected that behind them
there is a secret or a treasure” (Foucault, 1981, p. 56).
Again, the discourse of strategy is no different. The
treasure it offers is “competitive advantage” and the
wealth that this brings to top management.
Foucault, M. (1981), The Order of Discourse. In R. Young
(ed.), Unifying the Text: A Post-structuralist Reader,
Boston: Routledge & Kegan Paul.

Strategy, like other disciplines, is shaped by the
“discursive moves” of its proponents and their claims
to substantive, methodological and conceptual primacy
(Moldoveanu, 2009).
Moldoveanu, M. (2009), Why and How do Theory Groups
Get Ahead in Organization Studies? Groundwork for a
Model of Discursive Moves, Strategic Organization, 7,
pp. 235-276.

 But we can transcend through a more creative
design approach, by stepping outside from the
influence of traditional analytics and norms.
 Find the appropriate form to generate an
innovative design project and to create the
shared sense of distributed responsibility
necessary for its realization.
 Look for new forms of social interaction in
design, for example, involving users and other
stakeholders in the design process
 Experiment and learn to manipulate concepts
as means of generating new perceptions.

Thus, strategy as a process through which something
new and innovative is created.
 For instance, Tim Brown (2008, p. 86) of IDEO defines
design thinking as “a discipline that uses the
designer’s sensibility and methods to match people’s
needs with what is technologically feasible and what
a viable business strategy can convert into customer
value and market opportunity”
 Brown, T. (2008), Design Thinking, Harvard Business
Review, 86(February), pp. 84-92.

Thus, if the challenge of strategic management is to
become a more integrative process which aims to be
inclusive, human-centered, and empathic in seeking co-
created solutions to problems, then design thinking may
facilitate this practice as it builds on the principle of
integrative thinking. Integrative thinking is based on an
abductive logic that lies between “the past-data-driven
world of analytic thinking and the knowledge-without-
reasoning world of intuitive thinking” (Martin, 2009, p. 26).
Martin, R. (2009), The Design of Business: Why Design
Thinking is the Next Competitive Advantage, Boston, MA:
Harvard Business Press.

Martin (2009) contends that by adopting design
thinking, organizations have the possibility of
combining exploration of new knowledge for innovation
with exploitation of current knowledge for efficiency.
Martin (2009) contends that A.G. Lafley has used design
thinking to change P&G from a traditional reliability-
driven organization facing cost and innovation
challenges into a more innovative and efficient
organization by maintaining a balance between analytic
thinking and abductive reasoning to double its market
value in three years. P&G called upon a network of
external design experts to help them in this task.

Lafley also changed the process of strategy review from
one based on reliability and justification via lengthy
presentations to one based on genuine dialogue about
what “could be” (Martin, 2009, p. 2). He rejected the idea
that all innovation should be homegrown and developed
an approach to R&D called “Connect +
Develop” whereby they could connect with
external innovators for internal development in P&G.
Design is thus being recognized by policy makers as a
crucial ingredient to competitiveness.

Design is thus being recognized by policy makers as a
crucial ingredient to competitiveness.
For example, China is seeking to move from a
manufacturing economy captured by “Made in China”
to one symbolized by “Designed in China” (Thomas,
2009).
Thomas, E. (2009), Why Design should be Rated
alongside Science, Education Guardian, December, 15,
p. 6.

Strategy Development Approaches
Analytical* Market Observation Design
Theory Driven Data Driven Innovation

Sense and response to opportunities:
 Opportunity arises when customers are
unable to satisfy the requirements with their
own capabilities.
 An opportunity arises when there are
demands to be fulfilled with our capability
and capacity, or when our competencies give
rise to new ways of playing the game.
 An opportunity arises when there are gaps
in the market for us to position differently
from others.
 An opportunity arises when we are able to
lead to solve sustainability issues i.e.
population growth issues.
 An opportunity to fulfill 3A (Accessibility –
Making the products more likable and
desirable, Availability, Affordability)
 Opportunity arises to use technology i.e.
internet and APPS to create single-platform
for suppliers and customers, or allow
universe of small vendors to compete with
much larger companies by piggybacking on
global e-commerce platforms i.e. Amazon,
Alibaba, Uber.
 Opportunity to deliver unique functional
and hedonic values to customers.

View Thought (Strategies) Behaviors States of Mind
Strategy:
Free from the influence of
Source: Tan (2015), Noble Eightfold Path
Markets are diverse enough to give companies a wide
degree of strategic freedom in choosing the “how” of
strategy.

Markets are diverse enough to give companies a wide
degree of strategic freedom in choosing the “how” of
strategy.
An illustration of the Degree of Freedom for Strategy:
 Wide product lines
 Narrow product focus
 Target the high end of the market
 Go after the middle or low end
 Strive for competitive advantage based on low cost
 Aim for competitive advantage based on product superiority or personalized customer service or
added convenience
 Position in only one part of the industry’s value chain (Center of Gravity of Value Chain)
 Partially or fully integrated
 Confined to local or regional markets, or opt to compete nationally, internationally, or globally.
 Decide to operate in only one industry, while others diversify broadly or narrowly into related or
unrelated industries, via acquisition, joint venture (JV), strategic alliances, internal start-ups.
 Offensive strategy
 Defensive strategy, emphasize gradual gains in the marketplace, and defending against the latest
maneuvering of rivals.
 Carbon-copy strategies

Strategy:
 Strategy is not strategic planning (although it is a platform for strategy crafting).
 Revolution, reinvention and renewal
 Strategy is about breaking free from an obsession with management tools that are spectacular and
seductive in improving operational efficiency but are not strategy
 Free from industry dogma – an industry is a group of organizations with similar
capabilities and supply technologies, while a market is defined by customer needs and
demands.
 Free from industry rules – Gary Hamel says there are three kinds of companies in all
industries: rule makers, who built the industry, rule takers, who follow and imitate, and
rule breakers, like IKEA and Virgin, who implement revolution in the industry and re-
invent the business.
 Free from the present to create the future, and particularly not trying to preserve the
past – Hamel and Prahalad estimate senior managers spend only 1-3% of their time
looking at the future.
 Hamel, G. and Prahalad, C.K. (1994), “Competing for the Future,” Harvard Business
Review, July/August, pp. 122-128.
 Freedom from tactics – Strategy is revolution, everything else is tactics.
 Freedom from sameness – Michael Porter argues that a company can only outperform
its competitors if it establishes a difference that delivers greater value to customers or
creates comparable value at a lower cost (or both);

Strategy:
 Strategy is freedom from hostility to change – change is seen as unpleasant and is resisted
mainly when it is something nasty imposed on us from above, not when it is about growth, new
ways of doings things and new activities that we choose for ourselves.
 Strategy is also about much more than just breaking free of these constraints and burdens –
it is about defining what we are going to be in the marketplace, or what Hamel and
Prahalad have called building a “strategic intent”: a stable but stretching perspective of
how to win, based on our core competencies as an organization. But beware too!!!
Constraints and Burdens What we are going to be in the marketplace
Break Free:

Strategy:
 Free from Biases:
 One of the biggest challenges managers face in developing effective strategy is to ensure
that the strategy is not a product of the biases (and possibly the ignorance) of the
existing management team – those biases are likely to be rooted in the organization’s
past successes not its future needs.
Organization’s past successes: Inertia Future needs?
Strategy
Aware of being biased: complacency Strategic Thinking?

Issues for strategic thinking:
 The growth mandate: Revolution, reinvention and renewal
 The limitations of imitation – playing catching up and benchmarking.
 Imitating competitors’ strategies is unlikely to develop the radical new ideas that can change industries.
Leadership may be about:
 more than simply market share. It may be about new types of market power other than achieved
by size and volume. Steve Jobs had the iPod idea that has transformed the online music business,
and undermined most traditional music companies.
 Leadership in ideas and influence in a market or industry – intellectual leadership – may be one of the most
potent strategic weapons that frees our thinking from an obsession with the market share.
 Radical innovation – Proactive cannibalization, Disruptive innovation, Value Innovation, Big Idea.
 Timing and speed
 Crisis and future
 Social legitimacy in meeting both societal and business goals – CSR, moral concerns.
 Strategic dilemmas
 Strategic thinking needs to generate emotional engagement as well as intellectual excitement.
Interestingly, gut feeling or intuition often beats considered reasoning in complex choices – this is
the intelligence of the subconscious.
 Beyond / Free from the mindset of operational efficiency. For instance:
 We have invested much time and effort in getting good at operational marketing activities – the “4Ps” –
and far less in developing strategic capabilities in marketing.

Strategy is designing and
delivering winning values:
Value Innovation:
Away from settlers (me-too
values) to migrators (those
offer conventional value
improvements over
competitors) to pioneers
that represent real value
innovations i.e. Dyson
Fans, Swatch watch.

Strategy is concerned with
matching a firm’s resources and
capabilities of, for instance,
differentiation and cost-leadership,
and lean management, to enable the
business to position its products
and services effectively in the
marketplace and to deliver the
expectation of experience and
needs and wants of customers;
thus yields competitive advantage.

 In Maslow’s hierarchy of needs (Maslow, 1943) there are
at least five sets of goals which we may call basic needs.
 These are as follows: physiological, safety, love, esteem,
and self-actualization. Maslow believed that human
beings aspire to become self-actualizing. If the
physiological needs are relatively well gratified,
consequently, a new set of needs emerge, which may be
categorized roughly as the safety needs.
Physiological
Safety
Social
Esteem
Self
Actualization
Buyer’s Needs and Preferences:
Customer Needs:
 Needs motivate people to act
 Consumers attempt to match their needs with
the products that satisfy the needs.
 People have a variety of needs, including basic
physiological needs (food, rest, sex), and the
need for safety, the need for relationship with
other people (friendship), personal satisfaction
needs.
 Understanding the nature and intensity of
these needs is important in
 (1) determining how well a particular
brand may satisfy the need, and
 (2) Indicating what changes in the
brand may be necessary to provide a
better solution to the buyer’s needs.

 Example: Food and Tourism
 The safety needs represent the desire to be free of
danger . While we may expect that more experienced
tourists seek to satisfy higher order needs, while less
experienced tourists are more likely to be occupied with
lower order needs such as food and safety.
 Also, mass tourists perceived strange food to be more of
a concern than individuals. Furthermore, men perceived
less risks than women. The perception of risk associated
with strange food varied:
 From an organizational perspective, food
safety is a multi-disciplinary problem. That
includes food processing and legislation;
management systems and organizational
culture; microbiological, chemical and physical
hazards; and human behavior.  Strategies
and research in the future are likely to
recognize not only the importance of
food safety management systems but
also the role of individuals working
within a business food safety culture.
Physiological
Safety
Social
Esteem
Self
Actualization

 Example: Food and Tourism
 If both the physiological and safety needs are fairly well
gratified, subsequently the needs for love, affection and
belongingness arise .
 The belongingness or love needs of the individual
represent a wide variety of needs from a sense of
affiliation (group membership, clubs, churches, work
affiliations, etc.) to friendship and love of spouses,
children, and parents. We call these needs social
needs, e.g. affection, love, and friendship.
 All people have a need or desire for a stable, firmly
based, high evaluation of themselves, for self-respect, or
self-esteem, and for the respect of others. The esteem
needs represent an individual desire for a feeling of self-
confidence and adequacy. This may reflect internal
feelings of strength, achievement,
independence, or external desires of
reputation, prestige, recognition, attention, etc.
Physiological
Safety
Social
Esteem
Self
Actualization
Internal Effect External Effect

Elite/Super
Premium
Upscale
Premium
Mid-Priced
Economy
Price/Quality
Highway Downtown Airport Resort
Overnight lodging
Meeting
Vacation
Extended Stay

Positioning Concept:
 Symbolic positioning relates
to the buyer’s internally
generated need for self-
enhancement, role position,
group membership, or ego-
identification, e.g. Rolex
watches.
 Finally, the experiential
concept is used to position
products that provide
sensory pleasure, variety
and /or cognitive stimulation,
e.g. BMW’s automobile
brands.
 If 2 or more positioning
concepts, for example,
functional and experiential,
are used to guide positioning
strategy, the multiple
concepts are likely to
confuse buyers and perhaps
weakens the effectiveness.

Positioning Concept:
 The general meaning that is understood by customers in
terms of its relevance to their needs and preferences.
 The positioning concept should be linked to buyer’s value
requirements. The focus of the concept may be functional,
symbolic, or experiential.
 A functional concept applies to products that solve
consumption-related problems for externally-generated
consumption needs, e.g. Crest toothpaste for cavity
protection.

Strategy and Strategic Management:
 There are many ways to go about strategic
management. But a more business research
oriented way is by adapting “organizational
intelligence” concept, which refers to the capacity
of the firm to innovate, acquire knowledge, and
apply that knowledge to relevant situations.” In
other words, firms need to develop the ability to
perceive, interpret, organize and respond to their
environment in such a way as to meet their goals
and satisfy their stakeholders. (See the Model)

 Strategy – the firm’s theory of how to compete (Barney, 2002)
 Strategy as the totality of its activities and not just a few critical or key ones (Porter, 1996)
Barney, J.B. (2002), Gaining and Sustaining Competitive Advantage, Reading, MA: Addison-Wesley.
Porter, M.E. (1980), Competitive Strategy, New York: Free Press.
Theory development Theory
Testing
(Hypotheses)
 By good theory, we mean one that, when executed, lead to the firm to competitive
advantage and superior performance
(Execution)
Results

Supply-side Activities Value Curve Demand-side Activities
Research Questions:
 How well do these totality of a firm’s activities represent the firm’s theory of how to compete?
 If things are not going well, is it a good theory but poorly executed? Or is it just a bad theory? (Research
Process Quality)

 The firm’s theory of how to compete is a simplified abstraction from the complexity of any real
business situation.
Complexity of the competitive situation and the stakeholder
environment
The strategy frameworks allow us to abstract from all of that
detail and capture the essential elements of competition. (Business Model)
But as we move toward execution, the detail becomes more
important.
(Business Plan and Balanced
Scorecard Experimentation)

Perceive the Data i.e. Market,
Performance, Consumer Behaviors
Interpret through
Analysis
Organize into Knowledge
Respond with Strategies
and Business Model
Shared Purpose
Resources
Creativity and Control, Exploration and Exploitation
The 7-S Alignment for Effective Business Model
Implementation:

Market Differential
Value
Market Opportunity
Market Relevance
Society
Environment
Technology
Political/Legality
Economics
Trends:

Competitors:
 Business history is replete with examples of firms who are
blindsides by new competitors. Despite its pioneering retail
experience, Sears did not accurately foresee the new type of
retailing that Wal-Mart represented. Despite its technology
leadership, IBM did not fully understand the implications of the
personal computer.

Competitors:
 New competitors arise in many ways. Some competitors
emerge through growth and diversification. Established
companies enter into related markets. Entrepreneurs start up
new firms. Start-ups and local companies expand and become
regional, national, or global competitors. Mergers and
acquisitions change the direction and focus of established
businesses.
 Managers can make some predictions about growth and
diversification by monitoring existing rivals and by
understanding the changing needs of their customers and the
evolving abilities of their suppliers.
 Competitors also arise or change fundamentally as a
consequence of innovation. Andrew Grow of Intel observes
that “only the paranoid survive,” meaning that successful
companies are those that are aware of competitive threats and
react to them in time. Grove refers to the times of fundamental
change as inflection points. The difficulty lies in identifying
those critical inflection points and distinguishing them from the
normal course of technological change.

Competitors:
 What makes identification of
prospective competitors so
difficult is that it requires
anticipating the competitive
impact of innovation. Three
different types of innovation
are associated with the three
types of competitive
advantage: process innovation
(i.e. cost-leaders), product
innovation (i.e. substitutes),
and transaction innovation (i.e.
intermediaries and
entrepreneurs).

The 7-S
Alignment for
Effective
Business Model
Implementation:

Balanced Scorecard
Creating competitive
advantage: i.e. in terms of the
ability to create relatively more
economic value (Consumer
Surplus and Producer Surplus)
Source: The House of Strategic Management (by Dr. C.C. Tan, School of Management, Mae Fah Luang University, Thailand)
Body: Designing Organization and Business Models:
Head:StrategicThinking:
TheLeadershipTask
* Developing and Influencing Others, and
Revitalizing the Resources, Cradle-to-Cradle
*
Heart: What we believe and the spirit Body: Visible behaviors
Head: What we think
The 7-S Alignment for Effective Business Model
Implementation:

Connections between the firm and its
customers and suppliers are referred
to as vertical market relationships.
Competitive and
cooperative
interactions with
firms in the industry
and with firms that
supply
complementary
products are
referred to as
horizontal
relationships.
* Must Consider Current and Prospective,
Present and Into the Future
*
*

Percentage rice in price Percentage fall in quantity Price elasticity of demand
Initial price $10 Initial quantity sold 200
New price $11 New quantity sold 160
$11 - $10 200 – 160 20
$ 10 200 10
= 10% = 20% = 2
 If the elasticity of demand is greater than one, demand is “elastic.” This means that
customers are very price-responsive. A small change in price leads to a greater response in
demand.
 On the other hand, if elasticity of demand is less than one, demand is “inelastic,” meaning
that customers are not very price-sensitive.

Example of taking advantage of price
sensitivity by Wal-Mart’s Private Labels
 The private-label or store brand products are almost always sold for less than
nationally advertised products. Because private-label products are not advertised,
Wal-Mart substantially lowers its costs. Also, because Wal-Mart buys directly from
the manufacturer and handles its own wholesaling, the company avoids additional
costs of distribution.
 Examples: Wal-Mart’s Mary-Kate and Ashley clothing and cosmetics for preteen and
teenage girls.

Example of taking advantage of price
sensitivity by Wal-Mart’s Private Labels
 Example: Wal-Mart’s Great Value food and beverages.
 Wal-Mart devoted considerable amount of attention to the price differences between its
private-label products and the price of the comparable nationally advertised brand. If the
discount for the private-label product was too small, customers would be likely to favor
the brand-name product. If the discount for the private-label product was too big, Wal-
Mart would forgo revenue. Consider the case of Great Value cookies. Wal-Mart originally
priced the cookies at $1 a bag. The company then cut the price from $1 to 88 cents, a cut
of exactly 12%. The number of bags sold then soared by 54%.
 In this case, the elasticity of demand for Great Value cookies at Wal-Mart is 54/12=4.5.
The price cut caused Wal-Mart’s revenue from Great Value cookies to increase. Although
the company sold each bag for 12 cents less, revenues went up because the company
sold 54% more bags at 88 cents each. The price responsiveness of customers buying
the Great Value brand of cookies demonstrated that for some customers the discount
outweighed any perceived advantages of national brands. The high degree of customer
responsiveness to price showed that managers did well to carefully evaluate the effects
of small price changes on customer demand. Moreover, the revenue boost from the
discounts helped explain why Wal-Mart might discount substantially below the
competing brand-name product.

 Suppliers:
 While customers define the business, the
company’s suppliers are its foundation. No
company is an island; companies rely on others
for financing, services, manufactured inputs,
and technology.
 Thus, the manager’s external analysis should
identify the company’s suppliers with almost as
much care as it gives to understanding its
customers. The quality of the company’s
suppliers often makes the difference between
success and failure in delivering customer
satisfaction.
 By carefully choosing what activities to leave to
its suppliers and what activities to perform
within the organization, the company
concentrates on those activities that are the key
to its value creation and the source of its
profitability.

 Suppliers:
 The military strategist von Clausewitz observed
that when an army begins an operation, whether
attacking, invading, or taking up positions along
its own borders, “it necessarily remains
dependent on its sources of supply and
replenishment and must maintain
communications with them. They constitute the
basis of its existence and survival.”
 Carl von Clausewitz (1976), On War, Princeton:
Princeton University Press, p. 341.
 Suppliers:
 Because companies increasingly
rely on suppliers in alliances and
long-term partnerships, the
trustworthiness of suppliers is
important. Thus, before entering
into such relationships, companies
evaluate the reputation of their
suppliers in the industry, in areas
such as: on-time pricing terms,
quality targets, up-to-date with
technological change, and
ATTITUDESi.e.
suppliers seeking continual
improvements in performance,
suppliers adapting to changing
market requirements.

Market Structure and Analysis:
 Number of competitors, scale of competitors
 What makes an industry attractive to a
company? The practical answer is profitability.
However, it is helpful to remember that it is not
what incumbents are earning that counts – it is
what the company itself will earn after entering
the market. Accordingly, industry
attractiveness is a measurement of opportunity
tempered by an evaluation of the relative
strength of the firm’s competitors.
 Forecasting the firm’s profitability requires
identifying the business model’s economic
forces that impact all of the firms within the
industry.
 Measures of industry growth begin with
analysis of total market demand, which allows
estimates of industry revenues.
 In addition, measures of costs of productive
inputs such as capital, labor services, natural
resources, and manufactured inputs are
important.
Market Structure
Conduct
 Strategies of existing firms
 Strategies of entrants

Barriers to Entry:
Costs advantage
Product Differentiation
advantage
Transactions advantage
Government regulations
Conduct:
Strategies of existing firms
Strategies of entrants
Market Structure:
Number of competitors
Scale of competitors
Entry Barriers:
 A key to understanding how markets evolve
over time is the presence of entry barriers.
Entry barriers result from competitive
advantages of established firms. When entry
barriers are low, companies can cross industry
boundaries with relative ease. Moreover,
entrepreneurial start-ups can establish
beachheads and challenge incumbents.
Markets with low entry barriers tend to be
much more competitive.
 The effect of entry barriers on industry
attractiveness depends on the trade-off
between the cost of overcoming the barrier
and the returns of operating in the market after
the barrier has been surmounted.
 Thus, entry barriers reflect competitive
advantage of incumbents relative to entrants.
There are three mains sources of competitive
advantages: production cost, product
differentiation, and transactions.

Barriers to Entry:
Costs advantage
advantage
Conduct:
Market Structure:
Entry Barriers:
 Entry barriers are likely to be temporary
because changes in customer preferences,
manufacturing technology, market
organization, and government regulations can
easily create opportunities for entry.
 Moreover, creative entrants can devise
strategies that counteract entry barriers.
 If the established firm does not operate
efficiently and its management is complacent,
a well-run entrant can overcome possible entry
barriers.
 Example: product differentiation – customer
loyalty, i.e. customer preference for Campbell’s
soup or Oreo cookies.

Barriers to Entry:
Costs advantage
advantage
Conduct:
Market Structure:
Entry Barriers:
 Transaction costs – Established firms may
derive advantages from existing transactions
that create loyal suppliers. Entrants will not be
able to deal easily with suppliers of key
services, manufactured components, and raw
materials who have contractual relationships
with established companies and limited
capacity to supply new customers.
 Alternatively, suppliers who provide
customized parts will incur switching costs to
supply entrants with different parts. The
established firm has already invested time and
effort in its supplier relationships. An entrant
attempting to establish operations faces costs
of procurement, including search and
negotiation, that the incumbent has already
incurred. The manager of potential entrant
should evaluate the transaction costs of entry
in comparison with industry attractiveness.

Proposition, Perspective (i.e. needs of different
stakeholders) and the Patterns we need to create
(Strategy)
Resource Process Position in the market
Cost Revenue
Performance:
Profit
People
Planet
Purpose
Product Leadership
Customer Intimacy
Operational Excellence
Management Expectations
Customer Demands and
Market Conditions
Price Competitive?Cost Competitive?
Process
operations:
 Improve existing
process
 Replace with
new or superior
process
 Outsource them
to someone else
who will
presumably do a
better job, or at
least a comparable
job at the lesser
cost.
Capability
Structure: The
Business
Model
Deliver a customer
value Proposition and

Proposition, Perspective (i.e. needs of different
stakeholders) and the Patterns we need to create
(Strategy)
Resource Process Position in the market
Cost Revenue
Performance:
Profit
People
Planet
Purpose
Product
Leadership
Customer Intimacy
Operational Excellence
Management Expectations
Customer Demands
and Market Conditions
Price Competitive?Cost Competitive?
Voice of Engineers
Voice of
Customers
Quality=Conformance
toCustomer
Expectation
Deliver a customer
value Proposition and

 The 7-S Alignment for Effective Business Model Implementation:
 Waterman, Peters and Phillips (1980) introduced the famous 7-S framework, which put
Culture (Called “superordinate goals”) at the center, around which were arrayed strategy,
structure, systems, style, staff, and skills. According to these authors, all these aspects of
an organization have to come into a harmonious fit if it is to be successful.
 Waterman, R.H., Jr., Peters, T.J. and Phillips, J.R. (1980), “Structure is not organization,”
Business Horizons, 23(3), pp. 14-26.
Culture
(superordinate
goals, values)
Structure Systems Strategy
Style Staff Skills
Hard:
Soft:
Business Model and Organizational Structure

Strategic Apex
Middle Line
Operating Core
 As organizational work
becomes more
complicated, the favored
means of coordination
seems to shift from
mutual adjustment (the
simplest mechanism) to
direct supervision, then to
standardization,
preferably of work
processes or norms.
 But no organization can
reply on a single one of
these mechanisms. All will
typically be found in every
reasonably developed
organization.
To accomplish, six coordinating mechanisms are available:
 Mutual adjustment – achieve coordination of work by the
simple process of informal communication.

Strategic Apex
Middle Line
Operating Core
To accomplish, six
coordinating mechanisms
are available:
 Direct supervision –
in which one person
coordinates by giving
orders to others, tends to
come into play after a
certain number of people

Strategic Apex
Middle Line
Operating Core
 Standardization of work processes – means the
specification – that is, the programming of the content of
the work directly, the procedures to be followed, as in
the case of the assembly instructions.

Strategic Apex
Middle Line
Operating Core
To accomplish, six
coordinating mechanisms
are available:
 Standardization of
outputs – means the
specification not of
what is to be done but
of its results.

Strategic Apex
Middle Line
Operating Core
 Standardization of skills – as well as knowledge, is another.
Here, it is the worker rather than the work or the outputs that is
standardized. He or she is thought a body of knowledge and a set of
skills which are subsequently applied to the work. Such
standardization typically takes place outside the organization – for
example, in a professional school of a university i.e. surgeons.

 Standardization by norms means that workers
share a common set of beliefs and can achieve
coordination based on it.
Strategic Apex
Middle Line
Operating Core

Our Objective in Business Modeling:
 Business model concept can be developed into a useful integrative framework for strategy
formulation and execution.
 The proposed business model framework provides a consistent logical picture of the firm that
helps to guide the myriad choices and actions involved in execution.
 Helps to link the firm’s strategy or theory of how to compete to its activities or execution of the
strategy.
 The business model framework can help to think strategically about the details of the way the
firm does business.
Business ModelStrategy Execution

Our Objective in Business Modeling:
 Using the framework to describe the elements of a firm’s business model gives a clearer
understanding of how the firm’s strategy is embodied in its activities.
Strategies

Products and Services
Fit
Competition
Organization
The Market
Three Strategy Formation Issues:
 Products and Services (The Projectile)
 Market (The Target)
 The Fit (Strategic Positions)

Three Strategy Formation Issues:
 Products and Services (The Projectile)
 Market (The Target)
 The Fit (Strategic Positions)
Production
Design
Product

Low cost or price differentiation strategy (meaning high volume,
commodity-type production):
Image differentiation strategy (e.g. nice packaging):
Support differentiation strategy (e.g. provision of after-sales service):

Quality differentiation strategy (e.g. more durable, more reliable,
higher performance)
Design differentiation strategy (i.e. different in function):

Penetration strategy (targeting the same product more intensely at the
same market, for example, through increased advertising):
Bundling strategy (selling two products together, such as computer
software with hardware):

Market development strategy (targeting the same product at new
markets):
Market 1
Market 2
Market 3

Product development strategy (targeting new products at the same market):
The same market

Diversification strategy (targeting different products at different markets):
Markets:
Present Market penetration Product development
New Market development Diversification
Present New
Products:
Market 1
Market 2
Market 3

The Target (Markets)
Mass Market
(large,
homogeneous)
Fragmented Market
(many small niches)
Segmented
Market (differing
demand
segments)
Show the generic characteristics of markets (the targeted place),
first by size and divisibility, then by location, and finally by the stage
of evolution or change.

Local
Regional
Global
Geographic Market (looked at from the
perspective of place)
Emerging Market
(young, not yet clearly
defined)
Thin Market (few,
occasional
buyers, as in
nuclear reactors)

Erupting Market
(Undergoing
destabilizing changes)
Established (Mature)
Market (clearly defined)
Eroding Market

Entry Barrier
Industry
Strategic
Group 1
Strategic
Group 2
Strategic
Group3
Entry Barrier
Mobility
Barriers
 An industry can be defined as a landscape of
associated markets, isolated from others by
blockages in the terrain. In the literature of
economics and strategic positioning, these
are known as barriers to entry – for example,
some kind of special knowhow or close ties
to the customers that keep potential new
competitors out.
 Michael Porter (1980) elaborated on this with
his notion of strategic group, really a kind of
sub-industry, housing companies that pursue
similar strategies (for example, national
news magazines, as opposed to magazines
targeted at specific audiences, such as
amateur photographers). These are
distinguished by barriers to mobility, in other
words, difficulties of shifting into the group
even though it is within the overall industry.
These concepts map easily into our
metaphor, with higher barriers shown for
industries and lower ones for strategic
groups, as shown.

Fit
Competition
Organization
The Market
The Fit (Strategic Positions)
 When products and markets (projectiles and targets)
come together, we reach the central concept of
strategic management, namely, fit, or the strategic
position itself – how the product sits in the market.
 Fit is logically discussed, first in terms of the match
between the breadth of the products offered and
markets served (which Porter calls scope). After this,
we shall turn to the quality of the fit and ways to
improve it.

Commodity strategy a
(perceived) mass
market with a single,
standardized product
Segmentation strategy
targets a (perceived)
segmented market with
a range of products,
geared to each of the
different segments.
Niche strategy targets
a small isolated market
segment with a sharply
delineated product.

Customization strategy (the ultimate in both niching and
segmentation) designs or tailors each specific product
to one particular customer need (such as the
architecturally designed home)

Fit
Competition
Organization
The Market
Natural Fit Force
Fit
Vulnerable
Fit
Misfit

Once fit, or scope, is established, then attention turns to its
strength, namely how secure it is – its durability, or
sustainability.
 Natural fit – where the product and market fit each other
quite naturally, whether it was the product that created the
market or the market that encouraged the development of
the product.
 Natural fit is inherently sustainable (for example, because
there is usually intrinsic customer loyalty, perhaps secured
by high switching costs).
Natural fit: product push
Natural fit: market pull

 Force fit or vulnerable fit – which is weak and easily
dislodged, whether by attack from competitors or loss of
interest from customers.
Force Fit Vulnerable Fit

 When fit is not perfect (as is always
true in an imperfect market), and so
not easily sustainable, attention has
to be given to what can be called
reinforcing mechanisms, to improve
it, or isolating mechanisms, to
protect it.
 Inspired by the metaphor itself, four
types of these are at least available:
 Burrowing strategy
 Packing strategy
 Fortifying strategy
 Learning strategy
Burrowing strategy (driving
into the market deeper, for
example, by using
advertising to strengthen
brand loyalty – but this could
prove costly)
Packing strategy
(tightening the fit by adding
supporting elements, such
as strong after-sales
services, or the use of
supporting brands).

Fortifying strategy (building up
barriers or shelters around the fit,
such as seeking tariff or patent
protection, or creating long-term
contracts with customers – but these
can topple, or else, in fact, blind the
seller to changes occurring
elsewhere).
There can also be a learning
strategy to improve fit through
adaptability, for example, by riding the
experience curve to take advantage
of the steady stream of learning that
comes from producing more and
more of the product, or simply by
coming to know better the needs of
the customers, or by taking
advantage of the complementarities
that come from different parts of a
strategy that reinforce each other,
such as franchising and mass
preparation in fast food retailing.
Learning (time)

Of course, if there can be natural fit and forced fit and
vulnerable fit, then there can also be misfit.
Capacity misfit (what is
offered exceeds what the
market can take)
Competence misfit (the
competences of the
producer do not match the
needs of the market)
Design misfit (the design is
wrong for the market)

Sunk misfit (being stuck in
the market due to exit
barriers, as in sunk costs
such as dedicated
machinery that cannot be
used elsewhere)
Myopic misfit: the producer
cannot see the market
Location misfit (the
producer is in the
wrong place, and
cannot reach the
market – perhaps
because some
barrier is too tall)

Market
Product
Competitor’s
Product
Fit
Rivalry (Competition)
So far, almost all these relationships
have been between a single seller
and one or more target markets. But
sellers no more found alone than are
buyers. There is rivalry in markets,
consisting of competitors – capable
of doing better or doing differently.

Niche
Competition
DuopolyMonopoly
Market leader
(or dominant
firm)
Stable competition
Multipoint competition
(ability to take action in
one market to influence
competitor’s actions in
another)

Unstable competition
(in a mature market)
Unstable competition
(in an emerging market)

Late Entrant
2nd Entrant
1st Mover
Contestability:
 Obviously, markets are contestable. New
competitors can seek to drive themselves in.
First movers seek to position themselves in new markets to
keep rivals out.
 But later entrants (including second movers) come along
and seek a share, if not to displace their rivals,
altogether.
 Strategic window refers to the period of opportunity when
an initial or later moves becomes possible, for example,
because the rival is having trouble, such as a strike in the
factory, or because customers are suddenly vulnerable to
a brand change).

Lateral (or indirect or
flanking) attack,
perhaps by:
 Undermining (e.g.
taking away the
least loyal
customers through
lower prices)
Formal attack (by the
concentration of forces,
e.g. cost-cutting)

Lateral (or indirect or flanking)
attack, perhaps by:
 Attacking fortifications,
through a battering strategy
(e.g. lobbying for the
elimination of tariff barriers)
Lateral (or indirect or
flanking) attack,
perhaps by:
 Attacking a
supporting brand (to
dislodge the main
one)

Guerrilla attack (series
of small hit-and-run
attacks, such as
sudden moves of deep
discounting).
Market signaling by
feint (giving the
impression of doing
something, such as
pretending to expand
plant to scare off
potential competitor)
Later entrants may
seek to carve out small
territories through niche
strategies (sometimes
called “picking up the
crumbs”)

Finally, rivals may
reach an accord with
the existing players so
that all settle down to a
collaborative strategy,
perhaps in a cozy price
fixing or market
allocating cartel.
The truly creative strategist, however,
shuns all of these categories, or at least
recombines them in innovative ways, to
develop a novel strategy, for which there
is no diagram, since no one can tell what
it might look like !

Corporate Strategy Components:
Scope,
Mission
and
Strategic
Intent
Corporate
Objectives
 It is important to place a
company’s strategic focus on its
resources – assets, skills, and
capabilities. These resources may
offer the organization the potential
to compete in different markets,
provide significant value to end-
user customers, create barriers to
competitor duplication. These
distinctive capabilities are
important in shaping the
organization’s strategies.
Resources
and
Synergies
Strategy
 Objectives need to be set so
that the performance of the
enterprise can be gauged, e.g.
growth, market-share
expectations, product quality
improvement, employee
training and development, new
product targets, return on
invested capital, earning
growth rate, debt limits,
energy reduction objectives,
pollution standards.
 Matching capabilities to
market opportunities so
capabilities can be
leveraged into different
markets and segments.
Structure,
Systemsand
Processes
Value (Curves i.e. CVPs)
Value-creation activities

Scope,
Mission
and
Strategic
Intent
Corporate
Objectives
 This aspect of strategy considers how the
organization controls and coordinates the
activities of its various business units and
staff functions.
 Structure determines the composition of
the corporation
 Systems are the formal policies and
procedures that enable the organization to
operate
 Processes consider the formal aspects of
the organization’s activities.
 Strategic choices provide the logic for
different structure, systems, and process
configuration.
Resources
and
Synergies
Strategy
capabilities can be
Structure,
Systems
and
Processes

Scope,
Mission
and
Strategic
Intent
Corporate
Objectives
Resources
and
Synergies
Strategy
capabilities can be
Structure,
Systems
and
Processes
A business design (business model) is the totality of how a
company selects its customers, defines and differentiates
its offerings, defines its tasks it will perform itself, and
those it will outsource, configures its resources, goes to
market, creates utility for customers, and captures profits.
 All these are results of strategic choices
 While environmental factors such as market demand,
intensity of competition, government, and social
change influence corporate performance, the strategic
choices made by specific companies also have a
significant impact.

Scope,
Mission
and
Strategic
Intent
Corporate
Objectives
Resources
and
Synergies
Strategy
Structure,
Systemsand
Processes
Marketing Strategy to reach the
Market as expected
Marketing Strategy: Consists of analysis, strategy development, and
implementation of activities in:
 Developing a vision about the market(s) of interest to the
organization
 Selecting market target strategies
 Setting objectives
 Developing, implementing and managing the marketing program
 Positioning strategies designed to meet the value requirement of
the customers
Functional Strategies:
 Business Plans
Business:

Marketing
Strategies
Vision
about the
Market
Value
requirement
of customer
Market
Constantly changing
business
environment
 Strategic marketing is a market-driven process of strategy development, taking into account a
constantly changing business environment and the need top deliver superior customer value.
 Thus, the focus of strategic marketing is on organizational performance rather than a primary
concern about increasing sales.
 Value is determined by the utility combination of price and non-price benefits offered. It is a relative
measure i.e. it is determined by comparison with similar market offers by a target customer group.
 Value and competitive advantage are compatible with each other. A value-based competitive
advantage can be established by identifying those benefits or attributes, which offer vendors an
opportunity to increase the attractiveness of their market offer to their target customers.

Elements of Industry Structure
Intensity of Rivalry
New Entrants
Buyers
Substitutes
Suppliers
The Fundamental Basis of Business Model and its Structure:
 A firm is usually not a prisoner of its industry’s structure. Firms, through their strategies, can influence the five
forces. If a firm can shape structure, it can fundamentally change an industry’s attractiveness for better or for
worse.
 Nevertheless, every industry is unique and has its own unique structure. The five-forces framework allows a
firm to see through the complexity and pinpoint those factors that are critical to competition in its industry, as
well as to identify those strategic innovations that would most improve the industry’s and its own – profitability.

Industry Analysis includes:
 Industry characteristics and trends – such as sales, number
of firms, growth rate.
 Operating practices of the firms in the industry – including
product mix, services provided, barrier to entry, and
geographical scope.
 It is important to examine industry structure beyond
domestic market boundaries, since international industry
developments often affect regional, national, and
international markets.
 It is also necessary to include all relevant industries in the
analysis as their boundaries rapidly overlap; also can note
the large differences in revenue growth.
 The industry identification is based on product similarity,
location at the same level in the value chain (e.g.,
manufacturer, distributor, retailer) and geographical scope.
The industry analysis considers:
 Industry size, growth, composition
 Industry changes that are anticipated (e.g.
consolidation trends)
 Industry strength and weaknesses.
 Strategic alliances and potential mergers and
acquisition among competitors.
Niche
Competition
DuopolyMonopoly
industry
Analyzing the competition within the industry
Study the overlapped boundaries

What is a Business Model?
 Fundamentally, it is simply a description of how a firm does business.
 It is not a complete description of the complex social system of a business that would include all
the actors, relationships and processes. Rather, it is a description of the logic that lies behind
the actual processes.
Strategies
Strategies : Logic the firm operates

What is a Business Model?
 The business model can be seen as the conceptual and architectural implementation of a
business strategy, and as the foundation for the implementation of business process.
Strategies
Strategies : Logic the firm operates
Strategy reflected in the “value curve”:
Blue Ocean / Red Ocean Strategy
Capture value: Profit Formulas
 Revenue streams
 Cost structure

A synopsis of business model components:
Value
Curve
Market
Space
Offering
The
Financial
Model
The
Resource
System
Push/Pull Push/Pull

Resources Production Values Marketing and Distribution Market
Business Model:
Costs RevenueAssets
Provide:
 Reliability – how well you are performing to meet the customers’ needs.
 Responsiveness – Your lead time and capabilities to meet changes.
 Flexibility – How rapidly you can scale up or down based on demand / product change
 Costs – How well you are operating within your margin goals
 Assets – How will you are generating the ROIC (Return on Invested Capital) from your
business model

Define value – value curves,
CVPs, target markets
Deliver and Generate value –
channel market, customer
services
Create value – key
resources, partnering,
and activities
 Revenue streams
 Cost structure
Marketing Mix: Ps
(Place, Promotion,
Positioning)
(Product and
Services)
(Process and
People)
(Price)
Any firm can be thought of a set of
limited resources that makes use of
activities to provide value that
enables the firm to earn a margin.
Margin is created when created
value exceeds costs.
(Total value)
According to Peter Drucker, the marketing concept
should be focused on the creation of value for
customers (Uslay, Morgan & Sheth, 2008).
Uslay, C., Morgan, R.E., and Sheth, J.N. (2008),
Peter Drucker on Marketing: An Exploration of Five
Tenets, Journal of the Academy of Marketing
Science, 37, pp. 47-60.

Competitive advantage typology
(Operating) Cost advantage
 Variable cost
 Marketing expenses
 Operating expenses
Differentiation advantage
(Value Curves, CVP)
 Product differentiation
 Service quality
 Brand reputation
Marketing advantage
 Distribution
 Sales effort
 Brand awareness
Source:
Best, R.J. (2004), Market-based management, strategies for growing customer value
profitability, 3rd edition, Prentice-Hall, New Jersey.
 Differentiation advantage – arises when the business is able to generate economic value by
giving a product offering that customers prefer over competitors’ product offerings.
 A differentiation advantage is possible on practically any basis as long as it can meet some
customer needs better than those of competitors.

Demand Performance Demand Fulfilment Demand Creation
Price
Value
Promotion
Plan
Sell
Innovate
Product
Place
Source, Make, Deliver, Return deliver
Create, Innovate  Market  Sell, Service
Invest (Capital)  Measure  Value (ROIC)
Source  Make  Deliver

Resources Production Values Marketing and Distribution Market
Generate competitive advantage:
 Results because the firm is able to undertake
these activities more effectively or at a lower cost
than competitors, or creatively different from the
competitors (new industry) [ Red and Blue
Oceans]
The Business Model:
 As a useful framework that describes how the firm
undertakes certain activities that are able to create
Total Value (uphold a particular competitive
advantage)

Value Proposition:
 What the firm will deliver to its customers?
 Why they will be willing to pay for it – the reasons a customer will value a firm’s (proposed)
offering.
 The firm’s basic approach to competitive advantage:
 The offering
 The target customers
 The positioning – The strength of the firm’s value proposition rests on its strategic
positioning. A firm that plans to offer the same product to the same market that is well
served by many existing firms does not have a strong value proposition.
 The basic strategy to win customers and gain competitive advantage
Value-Curves: Strategy
is reflected in the
offering
 Segmentation
 Targeting
 Positioning

Brand integrity
Brand
DifferentiationPositioning
3i
The 3i Model  Kotler proposes a triangle of Positioning (Strategy,
Explore, Mind Share), Differentiation (Tactics,
Engage, Market Share), and Branding (Value,
Execute, Heart Share) as the core of Marketing.
Mind-Share Market-Share
Heart-Share

Brand: Brand Meaning (Identity) and Image, and its Integrity
IKEA Make stylish furniture affordable
Virgin Bring excitement to boring industries
The Walt Disney Create magical world for families
Southwest Airlines Make flying possible for many people
The Body Shop Embed social activism in business
Microsoft Realize ubiquitous computing
Apple Transform how people enjoy technology
Amazon.com Provide the biggest selection of knowledge delivered conveniently
eBay Create user-governed market space
Google Make the world’s information organized and accessible
Original Brand Mission

Value Proposition:
 Focus – Every great strategy has focus and value curve should clearly show it.
 Divergence – When a company’s strategy is formed reactively as it tries to keep us with the
competition, it loses its uniqueness. By applying the four actions of eliminating, reducing,
raising, and creating, they differentiate their profiles from the industry’s average profile, and
 Compelling Tag Message – A good strategy has a clear-cut and compelling tagline – “The speed
of a plane at the price of a car – whenever you need it.”
 It raises the question of the firm’s reason for existence beyond what the firm will offer and to
whom:
 Why the market is not already well served by other firm?
 How is the firm going to do something better?
 Will be able to attract customers?
 How is it going to compete?

 A value strategy involves identifying, producing and
delivering the combination of price and non-price related
benefits the customer is seeking.
 It follows that a value proposition is a statement of how
the firm proposes to deliver superior value to customers.
The value proposition is important both internally and
externally. Internally it focuses everyone’s attention on
customer requirements. Externally it is the means by
which the firm can position itself in the minds of
customers.
 The value proposition should be the firm’s single most
important organizing principle.
Internal External
Value Proposition

High
Low
Low
High
Non-Pricebuyervaluedelivered
Relative Cost Position
Michael Porter’s
Productivity Frontier:
 The maximum value
that a company
delivering a
particular product or
service can create
at a given cost
Customized
value strategies
Differentiated
value strategies
“stuck in the
middle”?
Price-led value
differentiation
strategies
Commodity
value strategies
Non-price value-
led differentiation
strategies
Zero value
commodity
strategy
Walters, D. (1999), “Marketing and Operations Management: An
Integrated Approach to New Ways of Delivering Value,” Management
Decision, 37(3), pp. 248-258.

High
Low
Low
High
Non-Pricebuyervaluedelivered
Relative Cost Position
Michael Porter’s
Productivity
Frontier:
 The maximum
value that a
company
delivering a
particular
product or
service can
create at a given
cost
Customized value strategies
Customized product/service
segments
Differentiated value strategies /
Specialist Segments
“stuck in the
middle”?
Price-led value
differentiation
strategies
Commodity value strategies
Non-price value-
led differentiation
strategies
Zero value
commodity
strategy
 Line
 Continuous Process
 Batch
 Flexible Manufacturing
 Intelligent Automation
 Mass customization
Productivity Frontier-Production Process Type Relationship:
Marketing/operations interface:
Price sensitive product responses
Selective exclusivity (managed
differentiation) at competitive prices
Walters, D. (1999), “Marketing and
Operations Management: An
Integrated Approach to New Ways
of Delivering Value,” Management
Decision, 37(3), pp. 248-258.

Value for buyers = (Benefit – Cost) resulting from the purchase and
use of products
= Value is perceived by the buyers.
 Superior value occurs when there are positive net benefits.
 A company needs to pursue value opportunities that match its
distinctive capabilities.
 A market-oriented company uses its market-sensing processes,
shared diagnosis, and cross-functional decision-making to identify and
take advantage of superior value opportunities.
 Management must determine ‘where’ (targeted segments) and ‘how’ it
can offer super value, directing their capabilities to customer groups
(market segments) that result in a favorable competency / value
match.
External: value Internal: CompetencyMatch

Creating Value for
Customers:
 Buyers form value
expectations and decide to
purchase goods and
services based on their
perception of products’
benefits less the total costs
incurred.
 Customer satisfaction
indicates how well the
product’s use experience
compares to the buyers’
value expectation.
Superior customer value
results from a very
favorable use experience
compared to expectations
and the value offering of
competitors.
Value
Level
Competitor’s Offer
Company’s Offer
Customer Expectation
Customer’s Experience
The organization’s
distinctive capabilities are
used to deliver value by
differentiating the product
offer, offering lower prices
relative to competing brands,
or a combination of lower
cost and differentiation.

Different product
strategies to satisfy
the similar need
Similar
Need
Different ways to satisfy need
Different product-
types e.g. fast-food
operators versus
microwave dinner.
Different
technologies, e.g.
kitchen appliances.
 Generic Product
 Product Type
 Product-Variants

Fast Food
Supermarket
Microwave
Ovens
Traditional
Restaurant
Convenience
Store
Competitive
Space:
Product-
Market
Structure to
meet people’s
needs for
food:
 A fast-food restaurant chain
such as McDonald’s should
consider more than its regular
customers and direct
competitors in its market
opportunity analysis. The
consumption need being
satisfied is fast and convenient
preparation of food.
 The buyer has several ways of
meeting the need such as
purchasing fast foods, preparing
food in the microwave at home,
patronizing supermarket delis,
buying prepared foods in
convenience stores, and
ordering take outs from
traditional restaurants.
 The relevant competitive
space includes all of these fast-
food sources. It is essential to
analyze market behavior and
trends in the product-markets.

The Value Creation and Delivery System:
 How the firm will create and deliver that value to its customers and the source of its competitive
advantage?
Define value – value curves, CVPs
Deliver value – channel
market, customer
services, Target Market,
Positioning
and activities
 Revenue streams
 Cost structure
Business Model – Values centric:
 Parity
 Difference
 Resonating

Resources
Tangible Resources:
 Financial
 Physical
 Technological
 Organizational
Intangible Resources:
 Human
 Innovation and creativity
 Reputation
Resources could also be categorized as:
 Transformed: Materials, Information, Customers (Airlines, mass rapid transport systems transform the
location of their customers; while hospital transform their physiological state; hairdressers or cosmetic
surgeons transform the physical properties of the customers)
 Transforming: Facilities (the buildings, equipment, plant, and process technology of the operation),
Staff (the people who operate, maintain, plan and manage the operation)

Examining the Resources for
competitive advantage:
 The VRIO framework (Barney,
2002) is helping in understanding
the bases for sustained competitive
advantage.
 Applying the VRIO test to the
various resources and capability in
the value network, the firm can
identify its sources of competitive
advantage.
 The design of the firm (the
allocation of activities) should give
it some measure of control, if not
ownership of these “resources and
capabilities”.
Valuable:
 Does a resource enable a firm to exploit and
environmental opportunity and/or neutralize
environmental threat? – SWOT
Rare:
 Is a resource currently controlled by only a small
number of competing firm? Are the resources used
to make the products / services or the products /
services themselves rare?
Difficult to imitate:
 Do firms without a resource face a cost
disadvantage in obtaining or developing it? Is what
a firm is doing difficult to imitate?
Supported by organization?
 Are firm’s other policies and procedures organized
to support the exploitation of its valuable, rare, and
costly-to-imitate resources?

 Prahalad and Hamel believe that “competitive advantage” derives from the deeply
rooted abilities which lie behind the products that a firm produces. They allow the firm
to diversify into new markets by reapplying and reconfiguring
what it does best. Moreover, because these competencies are “hidden” (like the
root of a tree), they cannot easily be imitated. That is, the secret to success lies not with
great products but with a unique set of abilities that allow a firm to create great products.
 Thus, managers are encouraged to look at their businesses as a portfolio of
resources and capabilities which can be combined in various ways, not as a
collection of products or business divisions.
 These authors see “core competency” as the “consequence of the
collective learning of the organization”, especially how to coordinate diverse
production skills and integrate multiple streams of technology (1990, p. 82).

 Prahalad and Hamel’s 3 most popular
concepts:
 Core competency
 Strategic intent. Strategic intent
envisions a desired leadership
position and establishes the
criterion the organization will use
to chart its progress. Komatsu
set out to “encircle Caterpillar.”
Canon sought to “beat Xerox.”
Honda strove to become a
second Ford—an automotive
pioneer. All are expressions of
strategic intent.
 Stretch and leverage
 The strategic intent sets stretch
targets that deserves personal
effort and commitment, also
forces companies to compete in
innovative ways.
 For Prahalad and Hamel, the “roots”
of competitive advantage can be
found in the “core competencies” of
the firm.
Hidden
The root system provides nourishment, sustenance and stability is the core competence
Trunk and major
limbs are core
products
End products
Explicitly known
Competency Tree:
P&H, 1990, p. 82.

3 tests which can be applied to identify core competencies in a
company:
 They provide “potential access to a wide
variety of markets”.
 They should make a significant contribution to the
perceived customer benefits of the end-product.
 They should be difficult for competitors to
imitate. A rival might acquire some of the technologies
that comprise the core competencies, but will find it more
difficult to duplicate the more or less comprehensive
pattern of internal coordination and learning.
 Strategic Intent:
 The concept also encompasses an active
management process that includes: focusing the
organization’s attention on the essence of
winning, motivating people by communicating the
value of the target, sustaining enthusiasm by providing
new operational definitions as circumstances change, and
using intent consistently to guide resource
allocation.
Strategic intent provides
consistency to short-
term action, while leaving
room for reinterpretation as
new opportunities
emerge. At Komatsu, encircling
Caterpillar encompassed a
succession of medium-term
programs aimed at exploiting
specific weaknesses in
Caterpillar or building particular
competitive advantages. When
Caterpillar threatened Komatsu in
Japan, for example, Komatsu
responded by first improving
quality, then driving down costs,
then cultivating export markets,
and then underwriting new
product development.

Strategic Intent
Resources
and
Capabilities
A misfit between
a firm’s resources
and its aspiration
(H&P, 1993, p. 78)
Hamel, G. and Prahalad, C.K. (1993), “Strategy as Stretch and Leverage,” Harvard Business Review, 71(2), pp.
75-84.
There are firms that
have meager
resources but are
driven by very high
ambition – That is,
by an abundance of
stretch in
aspirations.
There are many
firms that are well
endowed with
resources but lack
sufficient “stretch”
in their aspirations
– often a
complacency
associated with
being “number
one.”
Strategic intent implies a sizable stretch for an organization. Current capabilities and resources will not suffice.
This forces the organization to be more inventive, to make the most of limited resources. Whereas the traditional
view of strategy focuses on the degree of fit between existing resources and current opportunities, strategic
intent creates an extreme misfit between resources and ambitions. Top management
then challenges the organization to close the gap by systematically building new advantages. For
Canon, this meant first understanding Xerox’s patents, then licensing technology to create a product that would
yield early market experience, then gearing up internal R&D efforts, then licensing its own technology to other
manufacturers to fund further R&D, then entering market segments in Japan and Europe where Xerox was
weak, and so on.
Develop
To achieve strategic intent

 To put “stretch” and “strategic intent” into the most
effective uses, firms also need to learn how to “leverage” a
limited Resource base”
 Concentration resources – Concentrating
resources more effectively around a strategic
focus point.
 Accumulating resource – Accumulating
resources more efficiently, by extracting
knowledge from experience plus borrowing the
resources of other companies, such as securing
links with critical suppliers to exploit their
innovations.
 Complementing resource – Complementing one
kind of resource with another to create higher
value, by blending them, balancing product
development, product or service production,
widespread delivery, marketing and service
infrastructure.
 Conserving resource – Conserving resources
wherever possible, by recycling.
 Recovery resource – Recovering resource from
the marketplace in the shortest possible time.
Strategic Intent
Resources
and
Capabilities
A misfit between
a firm’s resources
and its aspiration
(H&P, 1993, p. 78) Develop
To achieve strategic intent

 In some recent writing (1996, 1997), Hamel has argued for “strategy as revolution”.
Companies can no longer simply play by the rules of the game; instead they
must radically change “the basis of competition in their industries” (1997:
72). – overturning the industry order (1996: 70).
 Hamel, G. (1996), “Strategy as revolution,” Harvard business review, July-August, pp. 69-82.
 Hamel, G. (1997), “Killer Strategies that make shareholders rich,” Fortune, June 23, pp. 70-88.
 Chaos Theory:
 Order can produce chaos. Chaos can lead to new order (Stacey, 1992; p. 98-99). Chaos
theory can implant a new mindset to help organizations win – i.e. be a
learning organization.
 Stacey, R. (1992), Managing chaos: Dynamic business strategies in an unpredictable world,
London: Kogan Page.
 Chaos theory suggests that almost anything can happen, but irregularity is a fundamental property
of the organization, in which “small, chaos disturbances” can have large effects.
 Thus, managers cannot rely on structures, systems, rules and procedures, but must
instead be prepared to adapt continually in novel ways (1992: pp.
99-100).

Value Capture:
 The revenue model describes the sources of revenue or different ways that the firm receives
money in exchange for its services, i.e., subscription, sales, advertising, partnering, renting, etc.
 The economic model covers the costs, margins, and the various financial aspects of the firm.
 These 2 elements, the Revenue Model and the Economic Model, combined to explain how
the firm will make money. They describe the various revenue streams, the cash flow, and the
margins.
 A creative and thoughtful approach to value capture is an essential component of building a
successful business model. The firm’s value creation and delivery system must be designed with both
the value proposition and value capture in mind.
Define value – value curves, CVPs
Deliver value – channel
market, customer
services, Target Market,
Positioning
and activities
 Revenue streams
 Cost structure
 Parity
 Difference
 Resonating

Example: Walmart’s Value Proposition:
 To provide a wide variety of brand name or recognized quality merchandize at a lower price than competitors.
 Additional features of their value proposition are consistently having items in stock and providing a
satisfactory level of customer service.
 Though they targeted small towns and rural customers in their early years, they are now very broadly
positioned in suburban and urban markets as well.
 Their basic strategy is to maintain the lowest costs in the discount retailing industry in order to offer the lowest
prices and be comparatively profitable.
Aligned with Mission, Goal and Vision, and Marketing Strategies

There are 8 key dimensions where
Walmart use to differentiate their value
to consumers and value propositions.
 To thrive with consumers, a retailer must standout on at
least two of these dimensions. In the case of Walmart, they
have made their brand and fortune synonymous with
breadth of assortment and low price. Walmart's
low prices come through mastery of supply chain and
being able to drive out costs, while maintaining shelf stock
on a massive assortment in store. The result is that while
Walmart might not "always" have the absolute lowest prices,
consumers trust that they will have one stop
shopping with everything they need at very good prices.
 Walmart’s profitability is highly dependent upon one key
metric: GMROII - Gross Margin Return on Inventory
Investment. To optimize gross margin dollars requires
having the right SKUs on the shelf that the consumer
wants to purchase. This requires a lot of category
management to ensure the right mix of SKUs with the
right margin, as well as other items that consumers will
purchase to increase the gross margin of the overall market
basket. To maximize GMROII also requires aggressively
managing inventory to reduce operating costs. Walmart
typically achieves 8 or more inventory turns a year on
hundreds of thousands of SKUs, spread across over 4,000
US stores.

Wal-Mart’s value creation and delivery systems:
 Walmart is positioned at the end of the value network, selling goods produced by other firms to the
final customers, but clearly has its parity, differentiation and resonating points.
 Walmart’s value chain is straightforward:
 They purchase and bring in goods from suppliers and offer them for sale at their stores.
 Though most of the goods are purchased from suppliers with brand names, Walmart does have
some store brands, primarily in soft goods that are produced for Walmart by contract
manufacturers.
 Walmart leverages data with suppliers to help them manage lean.

Wal-Mart’s value creation and delivery systems:
 Efficiency and low cost of course drive the design and management of their store
network and distribution system, but maintaining stock is of paramount
importance.
 Walmart has developed their inbound logistics to the point where it gives them a
competitive advantage, i.e., it has VRIO.
 They still maintained internal warehousing and delivery system they devised
before.
 HRM activities have kept costs low but also motivated employees to maintain satisfactory
service levels.
 Marketing activities are also maintained and designed to keep costs low – e.g., simple
message, everyday low prices.
 Extend its delivery channels online.

Wal-Mart’s value capture:
 Revenue model – They received payment for goods purchased by customers at their stores.
 Economic model:
 Keeping costs low is key to realizing margin at discount prices, and Walmart works hard to keep
costs of operation low.
 They also focus on another cost driver – volume. Volume reduces the impact of fixed costs
and gives them purchasing power with suppliers. To increase volume, Walmart uses market
saturation, good locations, adequate sizing of stores, and excellence
merchandising and stock maintenance. Since its early days, Walmart has led the
discount retailing industry in volume sales per square foot.

In short:
Business model is a structural template of how a focal firm transacts
with customers, partners, and vendors. It captures the pattern of the firm’s boundary spanning
connections with factor and product markets.
 Business model is the very DNA of business, a company’s logic of earning
money and making a difference to the societies.

In short: Testing of business model:
 Goal consistency test – All elements of the business
model must be reinforcing, sharing consistent
characteristics.
 Facilitate communication, more informed, and hence better, decisions
making.
Will show you an
example of using
business model in
designing SCM and
Logistics, and
Operations Management.

Vision
Business
Strategy External analysisInternal analysis
CVP/VCProduction/Operations
Resources
Partnership
CRM
Market Distribution
Target Segment
Adapt
Alignment: coordination and collaboration, aligned with business strategy, customers’
needs, and power position (CVP/VC; brand-led, channel-led, supply-led)
Asset NetworksLean and Agile: Flexible and Responsive
Cost Revenue Streams
Benefits to the organization
Change:
 Change
 Frequency of
change
Profitable GrowthCost efficiency
Organizational learning*
* Organizational learning characteristics to SCM:
 Control and improvement (stability and systems behavior comprehension orientation)
 Collaboration (teams orientation)
 Focus, target (goals orientation)
 Systems (systems orientation)
 Knowledge repertoire
(SCM Performance)

Resources
Partnership
CRM
Market Distribution
Logistics systems
Target Segment
SCM Vision and Mission, and Strategies
SCM Performance Objectives:
 Delivery: on-time delivery, fill
rate, lead time, I = TXR
(Little’s Law)
 Quality
 Flexibility
 Time (Speed):Time to market,
time to volume, on time, time
to cash
 Cost
Extended
supply chain
partners and
customers
Fill Rate
On-time
Lead time
Flexibility
Cash-to-cash cycle time = days
in inventory + days in accounts
receivable – days in accounts
payable.

Vision
Business
Strategy External analysisInternal analysis
Resources
Partnership
CRM
Market Distribution
Target Segment
Adapt
Asset Networks
Change:
 Change
 Frequency of
change
Mergers and acquisitions
DMAIC
Stay vigilant, keep continuous improvement
Asset networks (supply chain capabilities): System of activities make it difficult
to duplicate and thus improve competitive advantage.

CVP/VC
Production
Operations
Resources
Partnership
CRM
Market
Distribution Target Segment
An
example of
alignment:
Freshness
Quality
Premium products
Express mail
Arrive faster and
fresher (quality)
Press to order
Organic product
supply
Ethical product
supply
Traceability
Consistency, reliability
Corporate social responsibility

CVP/VC
Production
Operations
Resources
Partnership
CRM
Market
Inventory:
Raw
materials
WIP
FG
Producer’s lead time
in refiling inventory
Customer’s variance
in demand
Logistics lead time in
shipping the products
to the customers
Supplier’s lead
time
Safety stock
needed to
handle variance
in lead time and
demand 𝜎 𝑑∙𝐿𝑇
Variation in
demand
WIP inventory is the most
controllable component of
inventory and is a function of the
company’s throughput time to
convert raw materials into
finished goods: I = TXR

CVP/VC
Production
Operations
Resources
Partnership
Target Segment
Benefits
matching
operations
strategy:
Low
manufacturing
costs
Meeting
customer
demands
quickly
Customization Improved service
levels
Reduced
inventory
MTS:
Standardized
products,
High volume
CTO: Variety
of products
MTO:
Customized
products,
infrequent
demand
Low
inventory
Wide range of
product options
Simplified
planning
(transforming
resources)
ETO: Complex
products to
meet unique
customer
needs
Responsive to
specific
customer
requirements

CVP/VC
Production
Operations
Resources
Partnership
CRM
Market
Channel
Mix
Operations
Structure:
Accounts volume
Profitability
Lower account turnover
 Retention
Build loyalty
Repeat sales
Three network
models:
 Global
 Regional
 Country
Customer service
strategy – Value-
added service
Tailor offerings to
customers’ specific
needs
CRM
Product
Life Cycle
RBV
Better
understand
customers
 Better
able to
segment
customers.
IT Systems – Order
capture, Order
fulfilment, and
invoicing must be
fast, consistent,
and trouble-free.
Real-time
monitoring
ABC / cost to serve

CVP/VC
Production
Operations
Resources
Partnership
CRM
Market
Category
Killers
Price
premium
Innovation
NPD
 Time for NPD
Design chain
partnership
Co-participation
Unparalleled
Marketing
New Services
Gain First-move
advantage:
 Speed
 Volume
(Meet the
demand
created by
NPD)
Operations
Structure:

Business Model Systems Thinking in Creating Sustainable Competitive Advantageous Strategies

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Business Model Systems Thinking in Creating Sustainable Competitive Advantageous Strategies