Defensible Positions Part - 1

Transcription

1 Defensible Positions Part - 1 We ready to begin? Class Exercise Bloomington Farmer s Market (Every Saturday) $2.00 Per Apple Meet Apple Joe Sole Supplier of Apples at the market Profit Per Apple Total Apples Sold GP Profit for day Net Profit (after travel, booth costs, etc) $ (This is what Joe estimates the market can handle each Saturday) $750 $500 1

2 Class Exercise Bloomington Farmer s Market (Every Saturday) $2.00 Per Apple Local compeftor / $1.75 Per Apple Others see Joe making easy money and they want in on the action Regional CompeFtor $1.25 Per Apple Class Discussion Bloomington Farmer s Market (Every Saturday) If Then Joe is now facing major challenges in his business $2.00 Per Apple Keep price $2.00 Drop price point to $1.25 If Drop price point below competitors Won t sell inventory, product goes bad, lose market GP drops $375, hardly worth it for $125 in net profit. Additionally, still a risk of not selling inventory Will sell out of apples, but margins will shrink further, resulting in a net loss. Maybe hope to run others out of market. (But, Joe could go broke himself in the process..and will consumers accept a price increase when competition leaves?) Class Discussion Bloomington Farmer s Market (Every Saturday)? Class Discussion: If you were in Joe s shoes, and assuming your livelihood is selling apples at the Farmer s market each week, what would you do? 2

3 Class Discussion Bloomington Farmer s Market (Every Saturday)? Each strategy has it s own risk.varying capital requirements with no guarantee of upside. Point 1 of Apple Joe Exercise If you are selling the same thing as everyone else (i.e. a commodity), then be prepared for: Customer acquisition to be expensive (lot s of advertising/ marketing); Lower margins per unit sold; Little or no switch costs for customers (who s cheapest?) Only well capitalized, scaled businesses thrive in this environment (i.e. Walmart, Amazon) Point 2 of Apple Joe Exercise Businesses must continually strive to create points of meaningful differentiation in product sets to gain market share and expand margins and, along with that, find ways to keep competitors at bay. Because (next slide) 3

4 Point 2 of Apple Joe Exercise Competitors will most certainly attempt to mimic your product offerings Competitor product offerings Your product offerings Competitor product offerings What Investors want to know: What s your competitive advantage and what are the barriers to entry? Tell me why Google or Amazon couldn t recreate your value proposition in a week and put you out of business? Put another way..what is your Defensible Position? A strong defensible position will: Help a startup: 1. Take market share at faster rate 2. Create barriers to entry of new and existing competitors; 3. Maintain higher gross margins (It s the source of a firm s pricing power); 4. Harvest at a premium if acquired by a competitor. 4

5 Defensible position strategy: Should be more than a single advantage. A company should be thinking about it from both a market and legal perspective Defensible position strategies: Market-Based Strategies Legal-Based First Mover Predatory Pricing Patents Proprietary Technology Sunk Costs Trademarks High Switch Costs Vertical Integration Trade Secrets Customer Experience Copyrights Core Competencies Exclusive Contracts Strategic Partnerships Exclusive License First Mover Advantage Definition Advantages Disadvantages Being the initial occupant of a market Able to define the market and build relationships with customers in a monopolistic environment - Bears the economic burden of education; - Fast followers can learn from mistakes of first mover; - Fast followers can modify and enhance - Fast followers can take advantage of newer technologies 5

6 First Mover Advantage Pace of Market Evolution Pace of technological evolution Fast Slow Slow Calm Waters Scotch Tape The Technology Leads Digital cameras Fast The Market Leads Sewing machines Rough Waters Personal Computers First Mover Advantage Company situation Short-lived First Mover Advantage Durable FMA First Mover Advantage Calm Waters Unlikely Very likely The Market Leads Likely Likely The technology leads Very unlikely Unlikely Rough Waters Likely Very unlikely First Mover Advantage 6

7 First Mover Advantage Proprietary Technology Definition: Technology a company owns that allows the company to provide similar products or services but at a cost advantage. The idea would be having price advantage over competition without sacrificing profitability. Ex. Amazon Bluefish Wireless / Chuck Norris 1.0 High Switch Costs Definition: One-time inconveniences or expenses a customer incurs in order to switch over from one product to another. The inconvenience or hassle factor creates a disincentive to change even in the face of lower pricing by a competitor Example: Quickbooks vs. Xero Accounting 7

8 Customer Experience Definition: The way your company interacts with customers across multiple touch points. Customer Experience Definition: The way your company interacts with customers across multiple touch points. Core Competencies Definition: Core competencies are what give a company one or more competitive advantages, in creating and delivering value to its customers in its chosen field. 8

9 Core Competencies Definition: A strategic partner is another business with whom you enter into an agreement that aims to help both of you achieve more success. Predatory Pricing Definition: Reducing prices to a point in which your competitors can no longer compete and make money. Once competitors are forced out, then raise prices for margin expansion. Sunk costs Definition: A cost that has already been incurred and cannot be recovered. If the investment is large enough, it s difficult for competitors to raise the capital to replicate the infrastructure. i.e. Airlines, Car Manufacturers, Amazon 9

10 Vertical Integration Definition: The merger of companies at different stages of productions and/or distribution in the same industry. End of Lecture We ll tackle Intellectual Property during next class. 10