Value-Based Business Strategy
MGCR 423: Strategic Management
The slide set is adapted from a more detailed version of it that was originally made by
Benjamin Soucy & Sayeed Yousuf Ahmed
Table of Contents
Value-Based Business Strategy
I. Defining “Value Creation”
II. Value Appropriation
III. Value Creation With Many Players
IV. Value Appropriation With Many Players
V. Value-Based Strategies
1
Value-Based Business Strategy
MGCR 423: Strategic Management
Defining “Value Creation”
Section I
Defining “Value Creation”
Simple Vertical Chain of Activities and Key Definitions
Willingness to Pay
Buyers “The amount of money at which equivalence arises is the
buyer’s willingness to pay for the quantity of product in
Products / Services
question.”
Opportunity Cost
Firms “The amount of money that leads the supplier to gauge the
new situation as equivalent to the original status quo
defines the supplier’s opportunity cost.”
Resources
Suppliers
Value Creation Equation
Value Creation zz to Pay
Willingness Opportunity Cost
Value Creation is defined as the difference between a buyer’s “willingness to pay” and a supplier’s “opportunity cost”
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
3
Defining “Value Creation”
Simple Vertical Chain of Activities and Key Definitions
Willingness to Pay
Buyers “The amount of money at which equivalence arises is the
buyer’s willingness to pay for the quantity of product in
Products / Services
question.”
Firms
Resources
Suppliers
Value Creation Equation
Value Creation Willingness to Pay Opportunity Cost
Value Creation is defined as the difference between a buyer’s “willingness to pay” and a supplier’s “opportunity cost”
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
4
Defining “Value Creation”
Simple Vertical Chain of Activities and Key Definitions
Willingness to Pay
Buyers “The amount of money at which equivalence arises is the
buyer’s willingness to pay for the quantity of product in
Products / Services
question.”
Opportunity Cost
Firms “The amount of money that leads the supplier to gauge the
new situation as equivalent to the original status quo
defines the supplier’s opportunity cost.”
Resources
Suppliers
Value Creation Equation
Value Creation Willingness to Pay Opportunity Cost
Value Creation is defined as the difference between a buyer’s “willingness to pay” and a supplier’s “opportunity cost”
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
5
Defining “Value Creation”
Simple Vertical Chain of Activities and Key Definitions
Willingness to Pay
Buyers “The amount of money at which equivalence arises is the
buyer’s willingness to pay for the quantity of product in
Products / Services
question.”
Opportunity Cost
Firms “The amount of money that leads the supplier to gauge the
new situation as equivalent to the original status quo
defines the supplier’s opportunity cost.”
Resources
Suppliers
Value Creation Equation
Value Creation Willingness to Pay Opportunity Cost
Value Creation is defined as the difference between a buyer’s “willingness to pay” and a supplier’s “opportunity cost”
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
6
Value-Based Business Strategy
MGCR 423: Strategic Management
Value Appropriation
Section II
Value Appropriation
Appropriation of value along the vertical chain
Question: What determines how much value each player will appropriate?
Exact division of value between the 3 players will depend on how a tough a bargainer each player is
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
8
Value Appropriation
Appropriation of value along the vertical chain
Question: What determines how much value each player will appropriate?
Answer: Bargaining between the players determines the division of value
Exact division of value between the 3 players will depend on how a tough a bargainer each player is
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
9
Value Appropriation
Appropriation of value along the vertical chain
Question: What determines how much value each player will appropriate?
Answer: Bargaining between the players determines the division of value
Willingness to Pay
Value Created
Price
Cost
Opportunity Cost
Exact division of value between the 3 players will depend on how a tough a bargainer each player is
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
10
Value Appropriation
Appropriation of value along the vertical chain
Question: What determines how much value each player will appropriate?
Answer: Bargaining between the players determines the division of value
Willingness to Pay
Buyer’s Share
Value Created
Price
Firm’s Share
Cost
Supplier’s Share
Opportunity Cost
Exact division of value between the 3 players will depend on how a tough a bargainer each player is
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
11
Value Appropriation
Appropriation of value along the vertical chain
Question: What determines how much value each player will appropriate?
Answer: Bargaining between the players determines the division of value
Willingness to Pay
Buyer’s Share
Value Created
Price
Bargaining between
the firm and buyer
Firm’s Share determines the price
buyer pays for the
Cost firm’s product / the
price the firm receives
Supplier’s Share for selling it’s product
Opportunity Cost
Exact division of value between the 3 players will depend on how a tough a bargainer each player is
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
12
Value Appropriation
Appropriation of value along the vertical chain
Question: What determines how much value each player will appropriate?
Answer: Bargaining between the players determines the division of value
Willingness to Pay
Buyer’s Share
Value Created
Price Bargaining between
the supplier and the
Firm’s Share firm determines the
price supplier receives
for providing
Cost
resources to the firm /
cost to the firm of
Supplier’s Share acquiring those
resources
Opportunity Cost
Exact division of value between the 3 players will depend on how a tough a bargainer each player is
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
13
Value-Based Business Strategy
MGCR 423: Strategic Management
Value Creation With Many Players
Section III
Value Creation With Many Players
A worked example
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer $150 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Calculate value created using willingness-to-pay figure that leads to the largest pie
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
15
Value Creation With Many Players
A worked example
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer $150 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Value Creation Equation
Value Creation Willingness to Pay Opportunity Cost
$150 vs $100
Calculate value created using willingness-to-pay figure that leads to the largest pie
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
16
Value Creation With Many Players
A worked example
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer $150 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Value Creation Equation
Value Creation Willingness to Pay Opportunity Cost
$150 vs $100
“Value creation in games with many players is to be calculated using willingness-to-pay and opportunity cost numbers just as
before, but using numbers that lead to the largest answer”
Calculate value created using willingness-to-pay figure that leads to the largest pie
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
17
Value Creation With Many Players
A worked example
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer $150 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Value Creation Equation
Value Creation Willingness to Pay Opportunity Cost
$140 $150 $10
Calculate value created using willingness-to-pay figure that leads to the largest pie
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
18
Value-Based Business Strategy
MGCR 423: Strategic Management
Value Appropriation With Many Players
Section IV
Value Appropriation With Many Players
Each player captures an amount of value no greater than that players added value
Value Created by All
Value Created by All
Added Value of a Player Other Players Except
Players
the Player in Question
Added value places an upper bound on the amount of value a player can appropriate
Why? Because of “Unrestricted Bargaining” – suppliers, firms, and buyers actively seek out any and all profitable opportunities
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer $150 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Let’s calculate ADDED VALUE of each player in this value chain…
Value Created by All
$140 $150 $10
Players
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
20
Value Appropriation With Many Players
Each player captures an amount of value no greater than that players added value
Value Created by All
Value Created by All
Added Value of a Player Other Players Except
Players
the Player in Question
Added value places an upper bound on the amount of value a player can appropriate
Why? Because of “Unrestricted Bargaining” – suppliers, firms, and buyers actively seek out any and all profitable opportunities
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer $150 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Let’s calculate ADDED VALUE of each player in this value chain…
Value Created by All
$140 $150 $10
Players
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
21
Value Appropriation With Many Players
Each player captures an amount of value no greater than that players added value
Value Created by All
Value Created by All
Added Value of a Player Other Players Except
Players
the Player in Question
Added value places an upper bound on the amount of value a player can appropriate
Why? Because of “Unrestricted Bargaining” – suppliers, firms, and buyers actively seek out any and all profitable opportunities
Worked Example Facts and Figures
2 Suppliers 2 Firms 1 Buyer
$0 - $50 Value Captured
$90 - $140 Value Captured
$0 Value Captured
$0 Value Captured
If this were not the case and the second firm captured a value of $55, then the remaining players
Why? would be capturing $85 worth of value, whereas they could capture $90 by working among
themselves (i.e. Fossil sells a watch and generates $100 - $10 = $90 worth of value)
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
22
Value-Based Business Strategy
MGCR 423: Strategic Management
Value-Based Strategies
Section V
Value-Based Strategies
How can a firm capture value?
Step 1: Many Identical
0 Added Value
Benchmark Situation Competitors
Intuition: The firm captures 0 value
Worked Example Facts and Figures
4 Suppliers 3 Firms 2 Buyers $100 willingness-to-pay for
$100 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Let’s calculate ADDED VALUE of each player in this value chain…
Value Created by All
$180 $90 2
Players
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
24
Value-Based Strategies
How can a firm capture value?
Step 1: Many Identical
0 Added Value
Benchmark Situation Competitors
Intuition: The firm captures 0 value
Worked Example Facts and Figures
4 Suppliers 3 Firms 2 Buyers $100 willingness-to-pay for
$100 willingness-to-pay for
$100 willingness-to-pay for
$10 Opportunity Cost
Let’s calculate ADDED VALUE of each player in this value chain…
Value Created by All
$180 $90 2
Players
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
25
Value-Based Strategies
How can a firm capture value?
Step 1: Many Identical
0 Added Value
Benchmark Situation Competitors
Intuition: The firm captures 0 value
Worked Example Facts and Figures
4 Suppliers 3 Firms 2 Buyers
$0 Value Created $90 Value Created Each
$0 Value Created
Given the benchmark, it is evident that for a firm to have a positive added value it must be different
Why?
from its competitors
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
26
Value-Based Strategies
How can a firm capture value?
Solution:
Favourable Asymmetry Between the Firm and its Competitors
Result: The firm has a positive added value
Worked Example Facts and Figures
4 Suppliers 3 Firms 2 Buyers $100 willingness-to-pay for
$100 willingness-to-pay for
$150 willingness-to-pay for
$10 Opportunity Cost
Let’s calculate ADDED VALUE of each player in this value chain…
Value Created by All
$230 $140 $90
Players
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
27
Value-Based Strategies
How can a firm capture value?
Solution:
Favourable Asymmetry Between the Firm and its Competitors
Result: The firm has a positive added value
Worked Example Facts and Figures
4 Suppliers 3 Firms 2 Buyers $100 willingness-to-pay for
$100 willingness-to-pay for
$150 willingness-to-pay for
$10 Opportunity Cost
Let’s calculate ADDED VALUE of each player in this value chain…
Value Created by All
$230 $140 $90
Players
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
28
Value-Based Strategies
How can a firm capture value?
Solution:
Favourable Asymmetry Between the Firm and its Competitors
Result: The firm has a positive added value
Worked Example Facts and Figures
4 Suppliers 3 Firms 2 Buyers
$90 Value Created Each
$50 Value Created
$0 Value Created
Why? Videotron is able to capture value by virtue of the asymmetry between it and its competitors
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
29
Value-Based Strategies
The four value-based business strategies
Firm Competitors
1 2
Willingness-to-pay
Opportunity Cost
3 4
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
30
Value-Based Strategies
The four value-based business strategies
1
Raise the willingness-to-pay of your buyers
Classic Differentiation Strategy:
Finding ways to meet the need of
2 buyers better than do other firms
Lower the willingness-to-pay for other firms’
products
3
Lower the opportunity cost of your suppliers
4
Raise the opportunity cost to suppliers
providing to other firms
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
31
Value-Based Strategies
The four value-based business strategies
1
Raise the willingness-to-pay of your buyers Create switching costs for your
buyers
2
Lower the willingness-to-pay for other firms’ Negative advertising
products
3
Lower the opportunity cost of your suppliers
vs.
4
Raise the opportunity cost to suppliers
providing to other firms
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
32
Value-Based Strategies
The four value-based business strategies
1
Raise the willingness-to-pay of your buyers
2
Lower the willingness-to-pay for other firms’
products
3
Reduce a supplier’s costs of doing
Lower the opportunity cost of your suppliers business with the firm (more efficient
use of resources; value-managed
partnerships)
4
Human resource management
Raise the opportunity cost to suppliers (employee non-salary benefits)
providing to other firms
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
33
Value-Based Strategies
The four value-based business strategies
1
Raise the willingness-to-pay of your buyers
2
Lower the willingness-to-pay for other firms’
products
3
Lower the opportunity cost of your suppliers
4
Raise the opportunity cost to suppliers Switching costs for your suppliers
providing to other firms
Source: Value-Based Strategy by Adam M. Brandenburger and Harborne W. Stuart, Jr.
34