Week 1: Choosing How to Compete

Three Levels of Strategy

**Corporate strategy** (which businesses & markets should we be in? e.g. Ahold Delhaize owning AH, bol, Etos)
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**Business strategy** (how do we compete in this market? e.g. AH vs Jumbo, Dirk, Lidl)
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**Functional strategy** (how does each function support the business strategy? e.g. AH's Bonus card, app, distribution centres)

Sport vs Business competition

Sport competition: about being the BEST competitor; "best" is clearly defined by the rules. ​

Business competition: about being a DIFFERENT competitor; "best" can't even be defined. ​

E.g., AH, Dirk & Ekoplaza compete differently because of different choices about how to compete, not better products or size.

Operational Effectiveness vs Strategy

Operational effectiveness (OE): doing the same things better than rivals; competing to be the best; necessary for competitive performance. (e.g., AH faster checkout)

​Strategy: doing different things, or the same things differently; competing to be unique; aims for (sustainable) competitive advantage. ​(e.g., AH premium positioning vs Dirk discount (strategy)). ​

Prof's point: rivals eventually copy efficient processes, so OE is necessary but NOT enough.

Productivity Frontier (Porter, 1996)

The sum of all existing best practices; the max value a firm can create at a given cost. ​Improving OE moves a firm toward the frontier.The frontier keeps moving outward with new technologies & management approaches. ​

OE competition raises the bar for everyone → absolute improvement, but relative improvement for no one.

2 Reasons OE Is Not Sufficient (Porter, 1996)

**Rapid diffusion of best practices** (rivals quickly imitate techniques, technologies & ways of meeting customer needs)
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**Competitive convergence** (benchmarking & outsourcing to the same third parties make rivals look alike → races down identical paths no one wins)
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Result: zero-sum competition, static or falling prices, pressure on costs.

Definition of (Competitive) Strategy

**Porter**: "the creation of a unique and valuable market position, involving a different set of activities."
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**Valuable**: customers want what you offer.
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**Different activities**: how you deliver that value.
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**Unique market position**: different from rivals.
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**Key point**: strategy isn't just SAYING you're different; it's DOING different activities than competitors.

Why Value Must Stay Different Over Time (Lecture)

**Prof's point**: rivals can copy you by watching, imitating, or hiring your people away.
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**So**: your value must stay different from rivals over time, not just at one moment.
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**The challenge**: create value in a way that can't be imitated away.

Use Value vs Exchange Value

**Use value**: qualities of the product perceived by customers relative to their needs; subjective & personal = willingness to pay (WTP).
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**Exchange value**: the price; monetary amount realized at a single point in time when the exchange takes place.
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**Rule**: exchange value is only realized for the firm if an exchange (sale) actually happens.

Consumer Surplus

**Formula**: WTP – Price ("value for money").
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**Rule**: customers select the product that gives them the greatest consumer surplus.
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**Bargain**: use value far higher than the price → big consumer surplus.
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**Prof's point**: "customer first" really means maximizing the consumer surplus you create.

Consumer Surplus Examples (Oasis & Theme Parks)

**Oasis 2024**: fan WTP £500; advertised £148.50 → price on the day £355.20; the higher price shifts surplus from fan to seller.
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**Theme parks**: price = ticket + travel; Efteling biggest surplus (WTP €100 – €70 = €30).
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**Europa-Park**: €190 > WTP €130 → no purchase.
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**Key point**: surplus is relative; for a student in Paris the answer flips.

Value Capture

**Value captured**: price – firm costs.
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**Rule**: firms create economic returns by creating AND capturing value.
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**Prof's point**: not just about maximizing profit; at minimum a firm (even an NGO) must cover its costs to keep creating value.

Isolating Mechanisms – Definition

**Definition**: mechanisms that protect a firm from imitation and allow it to capture value.
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**Rule**: successful value capture depends on the existence of isolating mechanisms.
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**Prof's point**: they let real firms sit between monopoly (max capture) and perfect competition (zero profit) and price above cost.

3 Types of Isolating Mechanisms

**Barriers to imitation** (patents & IP = legal protection; activity system complexity = integrated value chain systems that are hard to copy)
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**Switching costs** (customer: loyalty programs, habit, learning costs; supplier: relationship-specific investments, contracts)
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**Bargaining relationships** (brand strength & differentiation reduce buyer power; scale & integration reduce supplier power)

AI Boom: Who Captures the Value?

**Nvidia**: 71% gross margin; FY2026 revenue $216 bn.
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**OpenAI**: ≈ $2.5 bn cash burned in H1 2025 on ≈ $4.3 bn revenue.
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**Users**: 800 m+ weekly users; most pay $0.
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**Why Nvidia captures it**: hard to imitate (chips + decades of R&D), switching costs (CUDA software developers know), bargaining power (few alternative suppliers).
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**Prof's point**: customers can easily switch from OpenAI to rivals or open models, so OpenAI's value capture is in doubt.

Value Proposition (Demand Side)

**Definition**: the element of a strategy that looks outward at customers, at the demand side of the business.
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**Which customers?**: end-users, channels.
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**Which needs?**: products, features, services.
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**What relative price?**: premium or discount.
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**Prof's point**: for any business ask "what's the value proposition?" AND "how defensible is it?"

Three Clear Value Propositions (Swapfiets, Too Good To Go, Wikipedia)

**Swapfiets** (students & young city dwellers; a bike that always works, repairs included; subscription ≈ €19–21/month)
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**Too Good To Go** (bargain hunters who hate food waste; good cheap food, less waste; ≈ 1/3 of normal price)
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**Wikipedia** (anyone with internet; free, ad-free knowledge; free, funded by donations)

Value Chain Framework

**Key principle**: every activity either increases customer WTP OR decreases costs; all must create value for the end user.
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**Primary activities**: inbound logistics, operations, outbound logistics, marketing & sales (create the product & bring it to the customer).
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**Support activities**: firm infrastructure, HRM, technology development, procurement (make the primary activities possible).
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**Porter (1996)**: activities are the basic units of competitive advantage.

Two Routes to More Consumer Surplus

**Differentiation**: increase WTP (raise use value) → customers pay a premium.
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**Cost leadership**: lower cost → lower price; surplus rises without raising use value.
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**Key point**: the two routes optimize different parts of the value chain (different activity drivers).

Porter's 4 Generic Strategies

Source of advantage (low cost vs differentiation) × scope (total market vs niche): ​ Cost leadership (low cost, total market) ​ Differentiation (differentiation, total market) ​ Cost focus (low cost, niche) ​ Differentiation focus (differentiation, niche)

Generic Strategies & Activities

**Key point**: generic strategies only work through specific activity configurations that support the position.
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**Prof's point**: generic strategies are "summaries of activity systems"; they drive everyday choices like who you hire and how stores are set up.
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**Porter (1996)**: they characterize positions at the simplest & broadest level.

Dirk vs Albert Heijn vs Ekoplaza

**Dirk** (cost leadership; price-conscious shoppers; basic stores, limited range, private label; trade-off: less choice, basic experience)
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**Albert Heijn** (differentiation; broad mainstream market; prime locations, fresh range, Bonus card; trade-off: higher prices)
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**Ekoplaza** (differentiation focus; health- & sustainability-minded shoppers; organic range, specialised suppliers; trade-off: higher prices, smaller customer base)
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**Note**: Dirk & AH both target the whole market; they differ on source, not scope.

Activities Must Fit Each Other

**Key point**: the competitive value of individual activities cannot be decoupled from the activity system (or the overall strategy).
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**Rule**: activities must fit each other AND their environment.
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**Effect**: fit substantially reduces cost or increases differentiation; it grows out of the entire integrated system.
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**Prof's point**: a world-class HR department that hires the wrong people for the strategy doesn't help at all.

3 Types of Fit

**First-order fit** (simple consistency between each activity and the overall strategy; advantages add up instead of cancelling out)
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**Second-order fit** (activities reinforce each other; one activity raises another's value or lowers its cost)
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**Third-order fit** (beyond reinforcement → "optimization of effort": coordination & info exchange to eliminate redundancy and wasted effort)

Fit and Sustainability (Porter, 1996)

**Key point**: matching a whole system of interlocked activities is far harder than copying one activity.
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**Math**: probabilities compound (.9 × .9 = .81; .9⁴ = .66).
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**Rule**: more second- & third-order fit → more sustainable advantage.
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**Effect**: imitating only some activities gains rivals little; fit makes a chain "as strong as its strongest link."

Activity-System Maps (Porter, 1996)

Maps showing how a firm's strategic position is contained in a set of tailored activities. ​
higher-order strategic themes implemented through clusters of tightly linked activities. ​

Use: check consistency, strengthen reinforcement, and find activities that could eliminate others.

Market Positioning (Strategic Landscape)

**Strategic position**: different peaks = performance (value captured) of different activities.
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**Choice**: choose among market positions and their associated activities.
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**Best strategy**: valuable for customers AND uniquely differentiates you from competitors.
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**Prof's point**: not the highest peak at one moment, but a high peak you can hold long; no single best strategy.

AI Labs: Same Technology, Different Positions

**Axes**: model access (closed pay-to-use vs open weights) × main customers (consumers vs businesses).
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**Closed**: OpenAI = mass-market assistant; Gemini = built into Search & Android; Anthropic = business & coding.
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**Open**: Meta = free AI in WhatsApp & Instagram; DeepSeek = low-cost & open; Mistral = European & open.
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**Key point**: different peaks, different ways to win.

Stuck in the Middle

Pursuing cost leadership AND differentiation at once often → inferior performance, unless the activities still fit, different strategies need different activity configurations; can't optimize for both; organizational confusion about priorities. ​

Prof's point: a low-cost activity system can hardly fund the R&D & innovation differentiation needs. ​

Competitive Advantage

**Definition**: performing better than rivals in the same industry/segment; lower cost, premium price, or both for the same product.
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**Source**: doing unique things or similar things in a unique way; if everyone does the same, prices & costs end up the same.
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**Challenge**: how to sustain it over time.
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**Prof's point**: the ability to provide value over time without getting imitated.

2 Paths to Competitive Advantage

**Cost advantage** (unique activity system & value chain creating the SAME value at lower cost/price)
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**Differentiation advantage** (unique activity system & value chain creating SUPERIOR value customers will pay for)

Five Tests for a Robust Strategy

**Distinctive value proposition** (serve customers or needs differently from rivals?)
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**Tailored value chain** (activities set up differently from rivals'?)
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**Trade-offs** (what do you deliberately not do?)
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**Fit across the value chain** (do activities reinforce each other?)
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**Continuity over time** (do you hold the position long enough to build it?)

Trade-offs

**Definition**: more of one thing necessitates less of another; occur when activities are incompatible.
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**Slides**: a unique position requires trade-offs = deciding what NOT to do; without them a firm ends up stuck in the middle.
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**Porter (1996)**: trade-offs create the need for choice and protect against repositioners & straddlers.

3 Reasons Trade-offs Arise (Porter, 1996)

**Image or reputation inconsistencies** (delivering two inconsistent kinds of value confuses customers & hurts credibility)
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**The activities themselves** (different positions need different products, equipment, skills & systems; value destroyed if activities are over- or under-designed)
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**Limits on internal coordination & control** (trying to be all things to all customers confuses employees)

Repositioning vs Straddling (Porter, 1996)

**Repositioning**: a rival changes its position to match the superior performer.
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**Straddling**: a rival keeps its existing position while grafting on features of a successful one; far more common.
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**Risk**: straddling fails when trade-offs exist between the two positions.

False Trade-offs (Porter, 1996)

Apparent cost-vs-quality trade-offs caused by poor OE (wasted effort, poor control, weak coordination). ​Improving cost AND differentiation at once is only possible far behind the productivity frontier or when it shifts outward. ​

Porter's 3-Part Answer to "What Is Strategy?" (Porter, 1996)

**Position**: creating a unique & valuable position involving a different set of activities.
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**Trade-offs**: making trade-offs in competing; choosing what not to do.
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**Fit**: creating fit among a company's activities.

3 Sources of Strategic Positions (Porter, 1996)

Variety-based (producing a subset of an industry's products/services with distinctive activities) ​

Needs-based (serving most or all needs of a particular customer group) ​

Access-based (segmenting customers reachable in different ways, e.g. geography or scale) ​ Positioning always needs a tailored set of activities (supply-side differences); the sources often overlap.

Focused vs Broadly Targeted Competitors (Porter, 1996)

**Focused**: targets the special needs of a subset of customers; thrives on customers over-served (overpriced) or under-served (underpriced) by broad rivals.
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**Broadly targeted**: serves a wide array of customers by meeting their common needs.
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**Key point**: positioning isn't only about a niche; any position can be broad or narrow.

Threats to Strategy from Within (Porter, 1996)

**Key point**: the greater threat to strategy often comes from inside, not outside.
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**Causes**: a misguided view of competition, organizational failures, and especially the desire to grow.
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**Why firms avoid choosing**: trade-offs feel frightening; herd behavior; mistaking "customer focus" for serving every need.

The Growth Trap (Porter, 1996)

**Definition**: the desire to grow pushes managers to broaden a position (more products, features, customers), blurring it.
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**Effect**: compromises erode advantage → profits fall → more broadening.
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**Fix**: deepen the strategic position rather than broaden & compromise it.

4 Profitable Growth Methods (Porter, 1996)

Deepen: make activities more distinctive, strengthen fit, communicate strategy better. ​

Extend: offer features rivals find costly to match because of your existing activity system. ​

Globalization: can grow a focused strategy consistently.

​Broadening: if needed, use stand-alone units with their own brand & tailored activities.

Role of Leadership (Porter, 1996)

**Core of general management**: defining & communicating the unique position, making trade-offs, forging fit.
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**Leader's job**: provide discipline, teach others about strategy, and say no.

Operational vs Strategic Agenda (Porter, 1996)

**Operational agenda**: continual improvement wherever there are no trade-offs; constant change, flexibility, best practice.
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**Strategic agenda**: unique position, clear trade-offs, tightening fit; demands discipline & continuity.
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**Enemies of strategy**: distraction and compromise.
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**Horizon**: strategic positions should last a decade or more, not one planning cycle.

Hierarchy of Company Statements

**Mission** (why we exist)
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**Values** (what we believe in & how we behave)
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**Vision** (what we want to become)
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**Strategy** (what we will do to win)
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Statements get more concrete, practical & unique going down; most firms have a mission & values, few can state their strategy (Collis & Rukstad, 2008).

Statement Hierarchy: Slides vs Article (Trap!)

Slides: 4 levels; mission, values, vision, strategy. ​

Article: adds a 5th level, the balanced scorecard (how we monitor & implement the plan).

Strategy Statement – 3 Parts

**Objective** (the ends: one specific, measurable, time-bound goal)
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**Scope** (the domain: which customers & offering, which locations, how much of the value chain)
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**Advantage** (the means: why customers choose you; the value proposition & the activities that deliver it)
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Rule of thumb: about 35 words every employee can repeat (Collis & Rukstad, 2008).

Defining the Objective (Collis & Rukstad, 2008)

**Rule**: a single precise goal that drives the business over the next ~5 years.
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**Not**: the mission, values or vision; firms in the same business often share those, but rarely an objective.
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**Values**: govern how to behave ("doing things right"), not what the firm should do.
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**Key point**: must choose, e.g. growth OR profitability.

Defining the Scope (Collis & Rukstad, 2008)

3 dimensions: customer or offering, geographic location, vertical integration. ​

You should state where the firm will NOT go, within the bounds it still encourages experimentation & initiative.

Defining the Advantage (Collis & Rukstad, 2008)

Importance: the most critical part of the statement, since sustainable competitive advantage is the essence of strategy. ​

External part: customer value proposition (why customers should buy from you). ​
Internal part: the unique activities or combination of activities that let only your firm deliver it.

Why a Strategy Statement Matters (Collis & Rukstad, 2008)

**Iron filings**: employees point in every direction until a "magnet" (a clear statement) lines them up.
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**Effect**: aligns behavior so individual choices reinforce each other.
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**Benefits**: formulation gets easier; implementation simpler since the strategy is easily communicated & internalized.

Strategic Sweet Spot (Collis & Rukstad, 2008)

**Definition**: where a firm meets customers' needs in a way rivals can't, given the context.
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**Elements**: customers' needs, competitors' offerings, company's capabilities, and context (technology, industry demographics, regulation).

Developing a Strategy Statement (Collis & Rukstad, 2008)

**Options**: develop 2–3 plausible but very different strategic options.
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**Involve**: employees at all levels; debate the wording word by word.
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**Attach**: annotations, the value proposition chart & activity-system map; cascade it level by level.

The Strategy Chain (6 Links)

**Links**: 1 environment → 2 position & value proposition → 3 activities → 4 resources & capabilities → 5 protection → 6 renewal.
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**Rule**: a strategy works when every link hol