Please read chapter10 and 11 then answer the questions: 

Chapter 10. Creating and Capturing Value in the Value Chain

Cooperation between firms

Explain how cooperation between firms can help in creating value. Give examples and comment on examples given by your class members.


Chapter 11. Strategic Management in a Changing Environment

Competence traps

Explain why success at exploitation often causes companies to become inwardly focused and rigid and to fall into “competence traps.”  Give examples and comment on examples given by your class members.  If you give a little thought you might find that almost every business falls into this trap by thinking, “if it is not broken, don’t fix it.”

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Chapter 10: Creating and Capturing Value in the Value Chain Chapter 10 Creating and Capturing Value in the Value Chain 10.1 Introduction The focus has been on how competition among incumbent firms and the advantages they might have over potential entrants have an impact on profitability of incumbent firms. This chapter extends the analysis to the value chain in which the industry is embedded. 10.2 Value Creation, Value Capture, and Buyer or Supply Power In keeping with the framework for industry analysis, we are interested in how the characteristics of segments in the value chain and the links among them affect the division of value (PIE). We want to identify what determines the value that the manufacturing segment, the retailing segment, and the final consumers in this chain each capture. The value extraction problem faced by the incumbents is to maximize the share they are able to capture by reducing the share captured by other segments in the chain. Broadening our perspective to include other segments of the chain also enables us to think about value creation. By including the entire chain, we can think about the factors that affect how much value is created. In particular, we will consider how relationships between firms in different segments of a chain can create value. Although it is convenient to think about value capture and value creation separately, they are related activities. For example, if a firm has market power in its segment, the value its chain creates and the share it captures are typically higher when all other industries in the chain are fragmented. Often, however, pursuing capture has an adverse effect on value creation. Because firms pursue both value capture and value creation, companies within a chain can both compete and cooperate with each other. Value capture tends to be adversarial; holding total value constant, we see that one segment’s gain is another segment’s loss. Value creation, however, is often cooperative. 10.3 Capturing Value Traditionally, a value chain is said to have suppliers “upstream” and buyers “downstream.” This perspective is particularly appropriate for considering pricing because the party charging a price is logically upstream to the one paying it. However, some industries participants have a more complicated relationship. Fortunately, even when one might argue about which segment is the supplier and which is the buyer, the way these are assigned doesn’t affect how much value is generated or how it is distributed among the segments. Furthermore, we usually don’t need to think about the issues in relationships among buyers and suppliers separately because they are opposite sides of the same coin. In any given relationship, what matters for value capture, for example, is the relative ability of the firms to affect the transaction price. “Value” means the value of the product to its final consumers minus the opportunity cost of the resources required to produce it. This restates the definition of Potential Industry 1 Strategic Management Earnings (PIE), and the terms “PIE” and “value created” are used interchangeably. In particular, although every segment in the chain typically adds something to PIE, a segment that adds more value does not always capture more value. “Supplier power” is the ability to capture PIE by demanding a payment in excess of opportunity cost. “Buyer power” is the ability to capture value by demanding to pay less than the price one is willing to pay. The key characteristic of buyer or supplier power is the ability to affect the terms at which the parties exchange goods. Firms producing a commodity product take the market price and other transaction terms as given. If there is some cost asymmetry among these firms, however, the lower cost firms will be more profitable. Competition implies that the market price will be equal to the marginal cost of production. When there are cost differences among firms, the higher marginal cost will determine price. To focus on buyer and supplier power, cost differences are set aside by assuming that all firms in a segment have the same costs. 10.4 Creating Value Competition limits buyer or supplier power. “Supplier power” is another term for “market power in output markets.” “Buyer power” is another term for “market power in input markets.” Because the competition within each segment of the chain affects buyer and supplier power, the nature of competition in all segments of the value chain affects value capture. When there are multiple supplying industries, the analysis must be performed for each of them. There may be spillovers from one buying industry to another. Unless the supplying firm can prevent resale, selling to one industry in which the purchasing firms have buying power can depress the price the firm can charge to all industries. To simplify the analysis, assume that each layer of the value chain contains only one industry. Value Capture

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