Session 03 - Value Disciplines (Compacto)

Daniel Pandza, M.A. Centro de Innovación CERTIFICADO EN INNOVACIÓN G2 - ENERO-MAYO 2009 INNOVACIÓN DE MODELOS DE NEGOCIOS SESSION 03 VALUE DISCIPLINES FOR COMPETITIVE ADVANTAGE FACULTY TEAM Ing. Jorge Valdes Simancas Ing. Angel Tonatiuh Flores [ atflores@itesm.mx ] [email_address] Tel 01-(33) 3669 3000 ext. 2266 www.gda.itesm.mx/innovar GAP CAP

Competitive Advantage over Time Competitive Advantage Gap Distance from closest competitors New, better features Lower prices Superior customer service Competitive Advantage Period Barriers to entry Market share dominance Blocking patent Switching costs Brand loyalty Moore (2002) Living on the Fault Line. Harper Business Press GAP Time Returns CAP

GAP/CAP Check: Where are Your Offers on this Grid? Toyota Corolla PT Cruiser Porsche Carrera Sustainability Ford Explorer Atos Sedan Differentiation Moore (2002) Living on the Fault Line. Harper Business Press CAP high low GAP low high Chrysler Minivan Audi TT Ford Mustang VW Bug

GAP/CAP matrix Where are Your Offers on this Grid? Sustainability Differentiation 2002) Living on the Fault Line. Harper Business PressMoore ( CAP high low GAP low high

In a Downturn Customers are very CAP sensitive They weed out marginal vendors They consolidate their spending with the winners The key indicators they watch are Market share in category Financial performance over time The fatal mistake in a downturn: Killing the future to make the quarter Selling out CAP to create GAP Moore (2002) Living on the Fault Line. Harper Business Press

Effective strategy answer three key questions How will we Deliver value? How will we capture value? How will we create value? Developing and Managing a Successful Technology & Product Strategy; Rebeca Henderson

Effective strategy answer three key questions How will we create value? How will the technology evolve? How will the market change? How will we deliver value? How do we manage the core business and growth simultaneously? How do we use our strategy to drive real resource allocation? How will we capture value? How should we design the busines model? Where should we compete on the value chain? How should we compete if standards are important? Developing and Managing a Successful Technology & Product Strategy; Rebeca Henderson

Maximizing shareholder value gives you a “workable” target A meaningful maximum that can guide strategy... Price Easy, but wrong target! Correct, but difficult target! Shareholder value! Customer satisfaction ☺

Added Value Appropiated Value Imitation Slack Substitution Holdup The four threats to sustainability Threats to the appropiability of added value; Cinthia Montgomery

Scarcity Value creation zone The dynamic interplay of three fundamental market forces Threats to the appropiability of added value; Cinthia Montgomery What makes a resources valuable? Appropiability Demand

Mutualism can be beneficial, even essential for success,in the business world. But it can potentially create a problem as well: As players cospecialize , their added values begin to overlap. Making it impossible for all participants to appropiate the full amount. Each can therefore be said to face the threat of being held up by the others . “ The extent to which the value appropiated by an organization falls short of the amount potentially available to them ”. Hold up Slack Appropriability of added value Manufacturer Distributor Suppliers Value captured Total value created WTP

Managing Inertia The Core/Context Analysis Framework Mission Critical Process shortfall creates serious and immediate risk Non-Mission-Critical All other processes Supports change Retards change Risk Reward Disengages from a process but still have active control over its outcomes (2003) Living on the Fault Line. Harper Business PressMoore Core Targeted Innovation Vector(s) Context All other Activities Differentiation Risk

Core & Context Context Core (2003) Living on the Fault Line. Harper Business PressMoore

The elements of the Business Model Value Proposition Partner Network Core Capacities Value Configuration Customer Relationship Distribution Channel Customer Segment Cost Structure Revenue Streams Success / Failure

Differentiation Markets Value Chains Technologies Industry advantage Competitive Advantage Drivers Competitive Advantage Effects Types of competitive advantage Each lower layer provides a stronger basis for power in the marketplace (2003) Living on the Fault Line. Harper Business PressMoore Offer advantage Category advantage Customer advantage I n c r e a s i n g I m p a c t GAP CAP Competitive Advantage Hierarchy

Represents differentiation embodied in the offer itself . It is the most fundamental of all advantages. Most of the organizations devote most of their resources here In commodity markets where buying power is concentrated in the customer. Offer advantage is about the only advantage that a vendor can really count on. And often it is price that carries the sale. This is the lower level in the power game. There are instead strategies that can end up being profitably. Offer power

None of the underlying sources of power in the competitive advantage hierarchy can actually create value.Until companies ultimately transform them into differentiated offerings This is the domain of price/performance marketing (good better and best). Product is asserting its differentiation and claiming a price reward for so doing The more the Customers heterogeneity and customization of the product to meet different needs, the greater the sustainability of the advantage gained. Trying to differentiate the offerings. Without building foundations in the lower strata of the hierarchy. Are deemed to be short lived and undervalued . They represent the surface of the model The part that actually touches the customer. GAP is created through differentiating from other competing offers of the market. No CAP can be created at this level. Differentiated offerings

Market segments Represent the third strongest form of competitive leverage, after technology leverage and value chain power. Initially the new value chains support a single integrated market defined by the new category of product Over time, this approach of one size fits all approach inevitably compromises the unique interest of specific market segments . Where such compromised interest rebel, vertical markets emerge and create opportunities for companies That did not garner global value-chain power. to get local market share dominance. Victories in one or more market competitions create strong GAPs and highly sustainable CAPs, But only over a limited domain of economic opportunity.

Value Chain competition There are four phases of value chain competition: New chain vs incumbent chain . Determining whether the new technology can gain a foothold for itself in the market. Among emerging value chains each seeking to impose its standards on the marketplace at the expense of the others. This tend to have a winner take all outcome , so prudent companies will try to secure a place in every chain that has a chance to be the winner. The third and fourth occur within value chains where individual companies jockey for power, both among their direct competitors for a specific role in the chain, and Also with the other chain members over how profits are allocated across the chain. In these latter two competitions, the goal is to build power while the chain is still fluid and forming. In technology enabled markets once the chain has formed, it is often too late to effect change in position (high switching cost).

Competitive advantage hierarchy Should be read from the bottom up. For this displacement to occur, the new technology must be integrated into end to end systems that meet existing customer needs. In the new economy, no one company is responsible for this integration, instead it is the end product of a value chain. The highest form of competitive leverage comes from riding the adoption of a new wave of technology , as it displaces and older one. New paradigms rewrite all the rules of competition, Making obsolete all market positions

The Product Complex configurations Hardware Software Peripherals Connectivity Installation Presales services Postsales service & support Based on understanding customer’s problem and its solution What other competitors in category have in common with you What you can show based on commitment to solve problem through a preengineered solution Complementary Products Complementary Services Whole Product Analysis

Sales High-touch sales Complex sales cycle Services Consultative Planned Marketing Whole-product focus Value-chain orientation Engineering Configuration Customization Sales Low-touch sales Single decision-maker Services Transactional Reactive Marketing Feature-benefit focus End-user orientation Engineering Mass-produced Mass-customized Why Morphing Between Groups is Hard Complex Systems Volume Operations

Value disciplines Product economics Product design (Mission critical) Branding and distribution channels Product become subordinated as systems evolve (better whole product) Product share Rivalry (beating the competitor) Competence culture Supply chain efficiency Productivity and price Offer can be commoditized Neutralize product leadership. Context rather than core Neutralizing customer intimacy Outsourcing any type Optimizing efficiency (Process leadership) Repet. situations/objective Quality Focus on timing rhythm /speed Reducing misses not increase hits Value chain reengineering Network positioning Control culture Customer economics Superior matching/Knowledge of the customer domain Core / personal service. Context / Automated personalization Set the bar higher/ Less tolerance Customer relationships Demand chain mgmt Skill vs scale Number of hits Optimizing scope Customer share Buyer and user are the same Collaboration Culture Customer Intimacy Value Network Architect Best Product Process Orientation Degree of Differentiation Through Processes

Product leadership Seek to differentiate from others within the same category through: Superior design and engineering, Leading to superior performance, Warranting a premium price, Is most effective when the offer is used in mission critical applications, Either core or context, As that is when performance characteristics are most highly valued . Emphasizing the criticality of actual offer performance. When the offer is not used in a mission critical application, It is much harder to earn the premium price it needs.

Product leadership Better, faster, easier and cheaper. Works better when the buyer is an engineer and Understand and values the performance attributes achieved. As systems evolve products inevitably become subordinated to overall system performance issues. This strategy begins to suffer from this subordination. Thus an established competitor with stronger customer intimacy, can often overcome an unfavorable comparison at the point product level, By asserting superior overall performance at the system level,

Product leadership Diluting the impact of any one product across a whole value chain of product and services. As the competitors match the performance attributes achieved the offer becomes commoditized and Product leadership either need to move to the next generation or cede the field to operational excellence. Works best in competence cultures where outperfroming the competition is a core focus. It is more commonly found in design and engineering organizations. When the focus is beating the competitor as opposed to serving the customer. The goal is to reassert the priority of product as the primary source of value delivery.

Consumer Value Perception Enabling Technology Aggressive High Competitive Strength but High Risk Vulnerable Easily imitated product or service Reactive Low Risk but Low Competitive Strength Reckless High Risk Low Business Gains Radical Next Generation Incremental Base New Core Product Product New Benefit Product Improvement Product Variant No Change Developing and Managing a Successful Technology & Product Strategy; Rebeca Henderson Unilever’s Managing Risk in Innovation

Operational excellence Seeks to differentiate from others in category through superior execution Measured by productivity and ultimately by price. It is most succesful when the offer can be commoditized Neutralizing the power of product leadership. Works better when it is context rather than core. Thereby neutralizing the power of customer intimacy. Outsourcing of virtually any type is a natural ground for differentiating through operational excellence. Mass production represents another. The key is a focus on process. Value chain reengineering.

Operational excellence Identify the minimum set of attributes required by the customer. It seeks to root out any subactivity that does not explicity add value. Some tools like JIT, advanced and collaborative supply chain, vendor managed inventory, are attempts to make uses of funds for inventory more productive. Focusing on process implies a focus on timing. Attend to rhythm first and speed second. Process focus works best in situations that are repetitive where output quality can be measured objectively. Success is measured by reducing the number of misses rather than increasing the number of hits.

Operational excellence Handling the context work for customers and not helping them with their core. Most aligned with control cultures. The goal is to minimize variability and maximize predictability.

Value network arquitects/ Operational efficiency

Customer Intimacy Seeks to differentiate from others in category through superior matching of customer expectation with order fulfillment. Justifies a pricing premium based on greater perceived and received value. When the offer is core to the customer. Personal service and tailoring are key. Requires superior domain expertise in a consultative sales and service relationship, Leading to tailored offers that solve the customer´s problem end to end.

Customer Intimacy When the offer is context to a customer takes the monkey off the customer's back. Automated personalization based on prior history works well. The result is a hassle reducing outcome that customers appreciate. The focus is on customer experience. Includes all or parts of the customer activity chain (consumption chain). Works best when the offer is relatively commoditized, Reducing the impact of product leadership and Where discretionary funds are available to pay the premium. Thereby warranting the differentiation from pure price driven operational excellence.

Customer Intimacy The key is a superior knowledge of the customer domain and Personal expectations and values, Combined with the ability to customize the offer to capitalize on this knowledge. Focus on response time. Calibrated by the interval between: The customer's becoming aware of a need or an opportunity and The vendor being able to present the offering that matches. The more context the offer, the shorter the interval that the customers will tolerate.

Customer Intimacy Customers are willing to grant significant more time when the offer is core, But they also set the bar higher for making the match. Scale companies embrace mass customisation to meet these demands. In which they can premake the offer and Stage it for final configuration and customization at the point of purchase. This is in itself a form of operational excelllence, focused on earning a premium as opposed to increasing a discount. Customer inimacy works best when the buyer and the user are the same. Like in most consumer purchases.

Customer Intimacy The major challenge is that the domain expertise is scarce. Customer sensitive representants even scarcer and Both are hard to scale. Is measured by the number of hits. Works best on collaborative cultures. Where the customer's problem or need become the focusing element of the collaborative effort. The goal is to optimizing the offerings on relation to customer's experience as opposed to optimizing the means of production wich is the goal of Operational excellence, Or optimizing the competitive performance of the offer itself wich is the goal of product leadership.

Core Commodities Internal Supply chain. Product innovation Solutions innovation. Demand side of Supply networks. Systems integration Experience Networks. Personalized Experiences The progression of economic value from core commodities to optimum experiences (adapted from The Experience Economy by Pine and Gilmore). High Relevance CUSTOMER NEEDS Low Relevance Low Differentiation POSITIONED COMPETITIVELY High Differentiation Cost Driven Premium PRICING STRATEGY

Strategy Space business model framework Product Innovator “ Dominate the Eco-System” “ Creative Destruction” “ Work Backwards from the Customer” Process Orientation Many worlds Relationship Owner Value Network Architect Degree of Differentiation Through Processes

Associated core value drivers Core Value Drivers Product development Branding Distribution channels Core Value Drivers Network positioning Process leadership Optimizing efficiency Core Value Drivers Customer relationships Demand chain mgmt Optimizing scope Relationship Owner Value Network Architect Product Innovator Process Orientation Degree of Differentiation Through Processes Many worlds

Example business model paths over time Relationship Owner Value Network Architect Product Innovator Many worlds 2000 2000 or here . . . 2000 1985 and sometimes move here . . . businesses start here . . . 1990 1962 1990 1996

Example competitive migration paths Amazon vs Wal mart Degree of differentiation through process Process Orientation Relationship Owner Value Network Architect Product Innovator Many worlds Core Value Drivers Customer relationships Demand chain mgmt Optimizing scope Stalemate! Core Value Drivers Network positioning Process leadership Optimizing efficiency

Innovation Economy Business Model Options The Economics of the Three Basic Positions Product Innovation Customer Solutions Infrastructure Economies Of Scope Economies Of Scale Dis economies Of Scale Winner-take-all Positions Many worlds

Competitive Advantage Grid Sorcerers eBay, Yahoo, Nintendo, Polaroid. Disrupters Amazon, AOL, Time Warner, Qualcomm, Enron. Enchanters Home, Shopping, Tivo, Intuit, Pleasant Company Flashers Priceline, eTrade, Netscape, Napster. Disruptive Innovation Innovators Ipod, Iphone, Sharper Image. Excluders Cisco, Microsoft, Mercedes, Nokia, Toyota Excellers REI, Adobe, Ferrari, Lawson, Reiek Reassures Duracell, Sony, Tumi, Dyson. Product Leadership Niche-carvers Silicon Vailey Bank. Pleasant Company. Market- Makers Merril Lynch, N.Y. Yankees, Disney, IBM. Includers McKinsey, Martha Stewart, Saturn, Starbucks. Delighters Nordstrom’s, Nike, Crystal Geyser, Hold Everything. Customer Intimacy Reinventors McDonalds, Fed Ex, Jiffy-Lube, Charles Schwab, Colora Genomics. Dominators Walmart, Dell, Visa, Exxon. Satisfiers Kinko’s, IKEA Southwest Airlines Economizers BIC, Motel 6, Costco Operational Excellence Category Advantage Industry Advantage Customer Advantage Offer Advantage (2003) Living on the Fault Line. Harper Business PressMoore

CONTACT: Daniel Pandza | Innovation Center Tecnológico de Monterrey | Campus Guadalajara Tel: 0052 (33) 3669 3000 ext. 2266 E-Mail: [email_address] URL: http://www.gda.itesm.mx/innovar Center Blog: http://paradygnamics.wordpress.com CENTRO DE INNOVACIÓN TECNOLÓGICO DE MONTERREY SERVICES Innovation Certificate for Undergraduate Students Innovation Consulting for the Business Community International Seminars and Executive Training NUEVAS PERSPECTIVAS PARA EL ÉXITO EMPRESARIAL http://paradygnamics.wordpress.com

Session 03 - Value Disciplines (Compacto)

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Session 03 - Value Disciplines (Compacto)