Creating Economic Value

Economic value = Perceived value of good or service - Cost of providing good or service.

If a customer pays less than what they perceive the value to be then they receive some of the economic value too. In this case the economic value is split between the customer who bought the object and the company that provided it.

Any money made that is greater than the cost of producing a product or service is profit, and a company’s goal is to make more economc value than the competition.

Fundamental Strategy Choices

Three basic advantages:

  • low cost
  • differentiate
  • dual

A company can be a niche competitor or a broad competitor.

A niche competitor fouses on a narrow range of products and/or a small customer base. Think along the lines of a bearing shops that focuses on bearings.

Where as a broad competitor focuses on a wife range of products or services and a wide market. Think along the lines of a general hardware store.

Competitive advantage

We focus on the average competitor in an industry and look at the willingness to pay for their products and the cost to deliver it. Ideally you want to make a larger gap than your competition.

For example, Mercedes wants their perceived value to be higher then Chevrolet, but they want their cost to deliver goods to be only slightly higher. By doing this they can make a bigger gap for themsevles.

A low-cost player will drive its prices down, and in doing so sacrifice a bit of a customer’s willingness to pay higher.

A dual strategy is quite hard. If you are trying to be have a low-cost item while still trying t odifferentiate your product it will be difficult. TO build a good name brand a company needs to do marketing, research and much more to make their perceived value quite high. It can be extremely hard to do this if you don’t have the high cost of your products to fund your activities.

We can look at a firm’s financials and see what kind of strategy they are going for.

Competitive Strategies

You can mix and match an advantage with a type of competition. For instance:

  • Broad differentiated: Starbucks is this. They have a broad area to cover, and they differentiate their product by being seen as higher standard.
  • Focus differentiated: Ducati motorcycles is a high quality brand that focuses on a very niche market.
  • Broad low cost: These are your companies like Big W and Target.
  • Focused low cost: Ryanair is such a company. They offer cheap flights in a small, well-defined geography.

It’s important to know that none of these are “the best”.