Welcome to RSM 392.

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Today…
1. Value Capture theory and the “Value Stick”

2. Positioning and Performance: differentiation vs

low-cost strategy

3. Walmart’s competitive advantage and

positioning
RSM 392 - Strategic Management
Andreea Ciologariu

[email protected]

Fall 2024
In other words, which of the following is NOT a current
strategically valuable capability?
Seeking Fresh Opportunities for Growth on page 8.
Opposition from unions hinder growth

Imitation by deep discount grocers hinders growth (customer save 20% at Aldi compared to Walmart)
 Shifting consumer preferences hinder growth

Lagging online sales hinders growth

Despite large investments in online ($3.3 billion acquisition of Jet.com), Walmart is lagging way behind
Amazon in online sales (Exhibit 14), making it a significant growth challenge.
Sales cannibalization does not constitute a growth challenge
Strategy …
is NOT (only!) operational effectiveness (i.e., performing the same
activities as your competitors but better)

is the creation of a unique and valuable position, involving a

different set of activities (doing different things, or doing the same
things differently)
— Michael Porter “What is strategy?”

A unique position that … drives a wider wedge between buyers’

willingness to pay and firm’s costs allows it to earn superior profits

— Ghemawat & Rivkin “Creating Competitive Advantage”

 Industry analysis … (Sessions 2 & 3)
Examines the structural features defining an industry’s attractiveness. The Five
Forces consider all market participants, not just the direct competitors in the industry, as drivers of
average profitability in the industry.

How can firms use the industry analysis?

✓ Firms can decide to enter industry segments where the five forces are lower.
✓ When there are unfavorable forces, there can be an opportunity for strategy.
✓ Strategy (typically of big incumbents) can shape industry structure! Firms (if large enough) can try to
affect these forces (think Coca-Cola and Pepsi and their roles in mitigating some forces such as the
threat of entry and substitution by their actions): Industry structure is endogenous to incumbents’
actions.
✓ Firms can consider how industry trends will influence the forces and the challenges ahead. Helpful
when considering new industries
Industry averages can mask large differences in
economic profit within industries.

Economic profit = accounting profit – cost of equity capital

Creating competitive advantage is linked to
industry analysis

- devise strategies that neutralize the unattractive features of the

industry and exploit the attractive features

- some industries are more restrictive (firms have little room to establish
a superior wedge)

- tension between managing industry structure and pursuing an

advantage within that structure (e.g. consider impact of new capacity
on industry supply and demand)
Today’s Focus
Competitive
Advantage and
Value Capture Theory
1. Value Capture theory and the “Value Stick”
2. Positioning and Performance: differentiation vs
low-cost strategy
3. Walmart case: the sources of Walmart’s
competitive advantage.
- Is it sustainable?
- Should Walmart upscale?
 The “value stick”

$
Willingness – To- Pay (WTP)

Willingness To Pay is the

highest price the buyer is Opportunity Cost: the smallest amount
willing to pay (i.e., above which that a market actor will accept for its
they do not purchase) services and/or resources.
Determined by the value of the “next best
option” outside of its current market

• Opportunity Cost (OC)

Willingness-To-Supply (WTS)
 The “value stick”
$

• Willingness – To- Pay (WTP)

Total value created =

A necessary condition for value to
Buyer’s willingness
be created in a market is that the
to pay – Supplier’s
Buyer’s WTP is higher than the
opportunity cost
Supplier’s OC.

• Opportunity Cost (OC)

Willingness-To-Supply (WTS)
 Value is divided by the firm’s cost from suppliers and price to buyers

• Willingness – To- Pay (WTP)

Price is determined by both buyers’ willingness

• Price to pay and relative cost position to competitors.
Total
Value
Created
• Cost

• Opportunity Cost (OC)

Willingness-To-Supply (WTS)
Value is divided by the firm’s cost from suppliers and price to buyers

• Willingness – To- Pay (WTP)

• Price How much value does the firm capture?

The value a firm appropriates (i.e., profits) is the

• Cost price it receives for its goods minus the cost it pays

• Opportunity Cost (OC)

Willingness-To-Supply (WTS)
 The “wedge” and bargaining power

• Willingness – To- Pay (WTP)

Buyer’s Share A firm with a wider wedge
has a competitive
• Price advantage.

Firm’s Share
A firm with competitive
• Cost advantage has added
value and therefore the
Supplier’s Share potential for profit.

• Opportunity Cost (OC)

Willingness-To-Supply (WTS)
 Differentiation vs. Low Cost Strategy

• WTP

Differentiation
strategy: raise WTP Low-cost strategy:
• Price
with only a slight reap large cost
increase in costs savings with only
slight decreases in
• Cost customer WTP

• OC
What is Differentiation?

• WTP When we say that a firm has differentiated, we

mean that it has boosted the willingness of
customers to pay for its output – that it can
command a price premium.
• Price

• Cost

• OC
 Dual competitive advantage

• WTP
Easily copied? (operational
differences)
E.g. reducing defect
• Price
rates (Japanese Replace trade-offs with trade-ons
manufacturers), build to (e.g. Cirque du Soleil)
order computers (Dell)
• Cost ➔Analyze a firm activity by activity
(differences in activities)

• OC
Integrated cost leadership & differentiation strategy

A firm that successfully uses an integrated cost leadership & differentiation

strategy should be in a better position to adapt quickly to environmental
changes.

BUT, tension between cost and WTP makes this rare.

X In many industries, low-cost and differentiation are inconsistent with one
another, making this a hard strategy to pursue
X A firm pursuing a dual competitive advantage risks becoming stuck in the
middle
Scenario 1: Firm 2, lower price

Firm 1 Firm 2

• WTP • WTP A second firm enters at lower price point

(assuming identical cost and no output
constraint)
• Price
• Price

• Cost • Cost

• WTS • WTS
 Scenario 1: downward pressure on price

Firm 1 Firm 2

• WTP • WTP
Buyers can play off the
two firms to push the
• Price price down to cost.
• Price

Price • Cost Price • Cost

• WTS • WTS
 Scenario 1: profits are eliminated

Firm 1 Firm 2

• WTP • WTP

Buyer’s Share

Buyer share of value is

maximized and firm
Price • Cost Price • Cost Firm’s Share profits are eliminated.

• WTS • WTS
 Scenario 1: firm 1 lowers costs

Firm 1 Firm 2
Firm 1 succeeds in lowering its costs
• WTP • WTP just below the competitor (with no
output constraint).

Price Price • Cost

• Cost

• WTS • WTS
 Scenario 1: firm 1 lowers costs

Firm 1 Firm 2

• WTP
• WTP

Buyers switch, and profits are

captured through Low-cost
Strategy
Price
Price • Cost
• Cost
• WTS • WTS
 Scenario 2: Firm 2, higher WTP

Firm 1 Firm 2
Assume the second firm that enters
• WTP has higher WTP, but higher cost (and
• WTP no output constraint).

• Price • Price

• Cost
• Cost
• WTS • WTS
 Scenario 2: Buyers segment based on WTP

Firm 1 Firm 2

• WTP
• WTP Buyers choose firms where their
surplus is maximized and some
profits can be appropriated by each
• Price firm (provided first firm lowers
• Price price to reflect lower WTP).

• Cost
• Cost
• WTS • WTS
 The purpose of business-level strategy is to create differences
between the firm’s position relative to those of its rivals.

Cost-based positioning (I) Differentiation-based positioning (II)

Achieve lower overall costs than rivals Differentiate the firm’s product or service and
by… command a premium (because of higher WTP)
Performing activities differently (cheaper) Performing different (valuable) activities

Cost Leadership Benefit Leadership

Source: Michael E. Porter, Competitive Strategy (NY: Free Press, 1980) and Competitive Advantage (NY: Free Press, 1985)
 I. Business-Level Strategy: Cost-based positioning

• Average WTP
• Low Cost WTP

An integrated set of activities taken

to produce goods or services
offered at the lowest cost (relative
to that of competitors) with features • Average Cost
that are acceptable to customers.

• Low Cost

Source: Michael E. Porter, Competitive Strategy (NY: Free Press, 1980) and Competitive Advantage (NY: Free Press, 1985)
How can firms
generate a cost What are some
advantage? examples?
 1. Economies of Scale – as output goes
up, costs per unit go down

2. Learning and experience

How can firms 3. Proprietary knowledge can lower cost

generate a cost especially for complex
products/services
advantage?
4. Lower Input Costs – lower suppliers
opportunity costs, source from low-cost
locations

5. Use a different business model – e.g.,

physical stores vs. online only
Generating Cost Advantage

Rule 1: Economies of Scale (as output goes up,

costs per unit go down)

▪ Spreading fixed costs over large volume

(e.g. Microsoft: upfront R&D for Windows OS)
Generating Cost Advantage

Rule 2: Learning and Experience

▪ “Practice makes perfect”

(e.g. Aircraft manufacturing)
Generating Cost Advantage

Rule 3: Proprietary Knowledge

▪ Unlike the above two, the source of proprietary

knowledge is independent of scale or output.
(e.g. Toyota's Just-In-Time (JIT) manufacturing system
optimizes inventory management, reducing waste and
storage costs)
Generating Cost Advantage

Rule 4: Lower Input Costs

▪ Work cooperatively with suppliers

(e.g. Toyota)

▪ Source inputs from the lowest-cost location

(e.g. Nike, H&M)
Generating Cost Advantage

Rule 5: Use a Different Business Model

▪ E.g., physical stores vs. online only

Cost-leadership Strategy

Objective: Deliver a product of acceptable quality at the lowest possible

cost

✓ Invest in assets to lower expenses

✓ Achieve above-average profitability with relatively low prices
✓ Open a significant cost gap over competitors

Challenges:
X Maintain proximity in quality with competitors
X Often involves trade-offs in terms of product differentiation (relatively
standardized products/services)
 II. Business-Level Strategy: Differentiation-based positioning

• Differentiation WTP
An integrated set of activities taken
to produce goods or services
(offered at an acceptable price)
that customers perceive as being • Average WTP
different in ways that are important
to them.
• Differentiation Cost
• Average Cost

Source: Michael E. Porter, Competitive Strategy (NY: Free Press, 1980) and Competitive Advantage (NY: Free Press, 1985)
 What are some
How can firms examples?
generate a WTP
advantage?
 1. Product/service features valued
by buyers
Generating a WTP
2. Branding (i.e., social and
advantage emotional dimensions rather
than functional dimension)

3. Customization of features or
service
 Generating Differentiation Advantage

Rule 1: Product/Service Features

▪ Offer products that have superior features

(e.g. Dyson Vacuum)

▪ Offer products that have more functional features

(e.g. iPhone)

▪ Provide unique product features

(e.g. LinkedIn)
 Generating Differentiation Advantage

Rule 2: Brand Perceived value!

▪ Companies attempt to associate their products with positive

image in the mind of customers.

▪ This emphasizes the social and emotional dimensions rather

than the functional dimension of the product
Generating Differentiation Advantage

Rule 3: Customization

▪ Product features
(E.g. Customized sneakers at Nike.com
BMW’s customized vehicles)

▪ Customer service (white glove)

 Differentiation Strategy
Objective: Deliver a valuable product at the highest acceptable cost

✓ Invest in assets to maximize the generation of value for buyers

✓ Offer products acknowledged as superior on at least one dimension
(ex: durability, bundled services, easier to use, greater variety, etc.)
✓ There may be multiple dimensions of differentiation in an industry
(functional versus emotional/social)
✓ Selectively incur costs necessary to create differentiation

Challenges:
X Differentiation only leads to above-average profitability if the firm
maintains proximity in cost to their competitors
 How much is the buyer
willing to pay for the
product or service?

What about the

competition?
Firm’s share
of value

How much does it cost

A firm’s share of value arises from the
the firm to offer the
difference between:
product or service?
Buyer’s “willingness to pay” (WTP), and
the cost to the firm...
… relative to competitors!
 Defining Competitive Scope: In what segments does
the firm compete?

Broad Scope Narrow Scope

The firm competes in all or most customer The firm selects a segment or a few segments in
segments the industry and tailors its strategy to serving
them at the exclusion of others
Focus Strategies: the advantage lies in the limited scope

• Select narrow target segments with distinct needs. E.g.:

▪ Different buyer group (e.g. children or senior citizens)
▪ Different segment of a product line (e.g. professional craftsmen versus do-it-yourselfers)
▪ Different geographic markets (e.g. East Coast versus West Coast)

• Configure the organization to serve only targeted segments.

X Trade off: sacrifice incremental business

Why would firms
choose a focus
strategy?
 ✓ Large firms may overlook small
niches

✓ Ability to serve a narrow market

segment more effectively than
Why would firms larger competitors

choose a focus ✓ Focusing allows the firm to build

strategy? competitive advantage through
specific activities

✓ Lack of resources needed to

compete in the broader market
 Competitive Advantage
General ways of
getting a Cost Benefits
competitive
advantage Cost Leadership Differentiation
Broad
Integrated Cost
& Benefit
Competitive Scope
Focused Cost Focused
Narrow Leadership Differentiation
Walmart: In
search of
renewed growth
Walmart has been far
more profitable than
the average
competitor in the
discount retailing
industry.

What are the sources

of Walmart's
competitive
advantage?
Is Sam Walton giving away his strategy?

Here is the simple lesson we learned...say I bought

an item for 80 cents. I found that by pricing it at
$1.00, I could sell three times more of it than by
pricing it at $1.20. I might make only half the profit
per item, but because I was selling three times as
many, the overall profit was much greater. Simple
enough. But this is really the essence of
“discounting” – you can lower your markup but
earn more because of the increased volume.
Competitors are unlikely to sit idle.

Competitors can match Sam’s price, and eventually push the

price down to cost where profits are eliminated.
 What is Sam leaving out?
Walmart’s competitive positioning as a cost-leader!

Firm 1

• WTP
• WTP

Price
Price • Cost
• Cost
• WTS • WTS
1. How does Walmart
achieve low-costs?
 • Economies of scale (=average cost per
unit of output falls as the volume of
output increases). E.g. Bulk buy from
suppliers and bargain down the costs.

• Economies of scope (= increase in

savings as variety increases). E.g. One-
How does Walmart stop Supercenter store
achieve low-costs?
• Economies of density (=long-term
average cost declines due to greater
geographical density) E.g. hub-and-
spoke model
 The Diffusion of Walmart and Economies of Density
(wholly-owned network of distribution centres)

Each new centre supports approx. 50 stores within 1 day drive of a distribution centre
Economies of density – unit costs are lower in relation to a populatio’s density. The higher the population density, the
lower the infrastructure costs to provide a service
https://www.youtube.com/watch?v=EGzHBtoVvpc
Low-cost leadership is achieved through a distinct set of activities
HR
Logistics
✓“Associates” vs employees
✓EDLP = Every Day Low Prices
✓Anti-union/discrimination = lots of
✓EDI/Retail Link
turnover
✓Monopoly in rural locations
✓No healthcare benefits
✓Inventory Management Experts
Walmart’s
Procurement / suppliers Merchandising and Sales
source of
✓Price pressure but no “nickel ✓Decentralized price control – in
and dime” tactics
Strength store *
✓One stop shop
✓Match local preferences Management
✓Bulk buys ✓Fast moving, competitive culture
✓Fast restock ✓Frugal
Store Operations ✓Matches customers’ culture –
✓Big sales space/small inventory space working class, rural roots
✓Not fancy
*Empower local store managers, who can tailor their store merchandise to match local consumer preferences and quickly
modify prices to challenge competitors (often forcing local stores out of business within months of their arrival in the area)
 61

Firm • Competitive & frugal culture (sharing • No regional offices • Saturday meetings
Infrastructure hotel rooms, calling collect) • Lots of management visits • Fun working environment

Human • Associates, not employees • Manager compensation tied • Promotion from within
Resource • Not unionized to store • Associate compensation tied
Support Management • Store manager autonomy • Stock ownership plan to company
• Decentralized training in DC • Shrink incentive plan
Activities
Technology POS • Store performance tracking • Real-time market research
Development Satellite system • UPC M
• Hard-nosed negotiating • No-frills meeting rooms • EFT, electronic invoicing
Procurement a
• Centralized buying • Partnerships with some vendors • Planning packets
r
• Frequent • Big stores in small towns • Traiting: tailoring • Easy returns g
replenishment => local monopolies, low merchandise to i
• Automated DCs, rental costs locale
cross docking, • Pricing that reflects local • EDLP n
pick-to-light monopoly • Low prices
• EDI • Concentric expansion • Store manager
• Hub and spoke • Brand-name merchandise latitude on pricing
system • Private labels • Little advertising
• Little space for inventory • Merchandise
• Suggestion program meeting
• Store within a store

Inbound Operations Outbound Merch. After-Sales

Logistics Logistics Marketing Service
& Sales
Primary / Core Activities
 The Opportunity Cost of Suppliers (WTS)

Walmart offers multiple other • WTP

advantage (e.g. market WTP
research, inventory
management), so that the
opportunity cost to suppliers
of working with a competitor
will be higher than the cost of Price
working with Walmart. Price • Cost
Cost

• WTS
WTS
 Walmart’s downward pressure on costs

• WTP There may be a point where the

WTP price is too low for a supplier to work
with Walmart.

When the cost is so low that it hits

Price the Opportunity Cost, the supplier
Price • Cost would turn to their best alternative
Cost (e.g. selling to Target)

• WTS
WTS
 Is Walmart’s strategy a
sustainable competitive What makes it hard for
advantage? competitors to imitate it?
 • First-mover advantage by settling
into rural location. Hard to imitate
because of the lack of population
density.

• The lowering cost has been in the

Why is Walmart’s DNA of the company since its
strategy hard to inception (culture and all
imitate? functions)

• Highly integrated activities that

fit between each other.
Walmart: Fit between activities (from Session 1!)

1. Consistency: the activities are coherent with Walmart’s

low-cost positioning

2. Reinforcing: complementarity between activities so that

increasing one activity makes the other more attractive

3. Optimization of effort: optimization of activity system by

exploiting substitution effects between activities

2 and 3 are important in guarding against imitation!

 3. Do you think
upscaling is the Let’s start with a poll
answer for Walmart? (show of hands)
Walmart: To Upscale or Not to Upscale?

NO

This strategy has failed in the past. Expensive to experiment with upscale
positioning. Costs will go up too much! Changes the whole strategy.
Brand and culture are too closely tied to “Every Day Low Prices”. Upscaling
is inconsistent with brand: it will alienate current customers (confusing
message)
Walmart lacks expertise in this area: too steep learning curve
Requires a different type of service (inconsistent with low wages, high
turnover)
Better alternatives! (e.g. pharmacy, automotive suppliers), new markets
(Africa?), improve customer experience to drive loyalty and frequency
Walmart: To Upscale or Not to Upscale?

YES

Since international expansion has been uncertain source of growth

(Walmart successfully launched in Mexico, but lost money and closed its
German and South Korean operations), an upscale strategy may be the
only way to grow
▪ Launch or acquire a new segment of stores under a different brand
name, but supported by Walmart infrastructure -> leverage existing
logistics expertise (similar to Superstore move)
▪ Urban areas offer growth tap into new customer segments
Upscaling = pursuing a differentiation strategy

• WTP What matters:

Will the WTP and Price go up MORE than

the Cost goes up?
• Price
If so, do it – If not, don’t!

• Cost

• OC
Key Concepts from Session 4 and the Walmart case

1. Good strategies deploy activities consistent with positioning and the

more tightly integrated, the more sustainable (all else equal)

➢Achieving cost leadership involves performing activities differently

(cheaper) to lower costs (relative to competition)

➢Achieving benefit leadership involves performing different (valuable)

activities to increase WTP (and price)

1. Growth opportunities ideally leverage the existing activity system.

 Strategic Assignment: Coke vs Pepsi 5 Forces
1. A few students did not realize that they need to use the Five Forces framework for this
Strategic Assignment.. But I gave them a debrief of the general Strategic Assignment
requirements in my feedback.

2. It seems that students are still learning the Five Forces concepts, as almost all students are
arguing based on Coca-Cola and Pepsi as two specific CPs, instead of from an industry
perspective. I mentioned to a few students who do this a lot that discussing specific firms is
about strategic positioning analysis, but using firms as examples to support your Five Forces
arguments is fine. However, I did not deduct any point because of this.

3. Another common mistake, though less usual, is that some students did not realize bottlers as
the major buyers of CPs.

4. The most common mistake is that students only talk about diversification while discussing the
substitute force. If they do this, I deduce 0.5-1 point based on the overall quality of their
arguments.
Next Class. Natura

Readings:
• Reading: Natura: Global Beauty Made in Brazil
• Strategic Analysis Assignment #2: What is Natura’s positioning (i.e., how does it create
value)? What are the distinctive activities that support Natura's strategy?

Discussion questions:
● In what ways is the current structure of the Brazilian cosmetics industry attractive or
unattractive?
● What is the main source of Natura’s competitive advantage?
● Define Natura’s strategic positioning and how its activities system aligns with its strategy.
● What is the impact of differences in activities on Natura’s costs and willingness to pay
relative to competitors?
● Should Natura expand internationally? If so, how?
Second opportunity for Strategic Analysis Assignment
▪ Must complete 1 OR 2 out of 4 possible choices over the semester; I’ll consider the highest
grade
▪ Individual assignments (i.e., don’t consult peers)
▪ The case and other class readings/discussion is all you need (no need to do extra research)
▪ Clearly state your answer and supporting arguments/evidence
▪ like closing argument in a legal case … you have evidence from the case, now
connect the dots to convince me of your answer!
▪ Do draw on relevant theories from prior classes
▪ Do write in full sentences & paragraphs and consider topic sentences to orient me on the flow
of logic/evidence
▪ Don’t rehash case facts unrelated to your argument
▪ Don’t cite or quote the case text
▪ Don’t research outside the case
 Andreea Ciologariu

[email protected]

Thank you
 Further readings for the very interested:

Brandenburger, A. M., & Stuart, H. W. 1996. Value-based business strategy. Journal of

Economics and Management Strategy, 5(1): 5-24.

Brandenburger, A. M., & Stuart, H. W. 2007. Biform Games. Management Science, 53(April):
537-549.

MacDonald, G., & Ryall, M. D. 2004. How Do Value Creation and Competition Determine
Whether a Firm Appropriates Value? Management Science, 50(10): 1319.