4 - Nature & sources of competitive advantage

Question 1

competitive advantage meaning

Answer 1

one firm possesses a competitive advantage over its rivals when it earns a persistently higher rate of profit

Question 2

the changes that generate competitive advantage can be

Answer 2

external or internal

Question 3

external causes of competitive advantage can be

Answer 3

changing customer demand
changing prices
technological change

Question 4

internal causes of competitive advantage can be

Answer 4

some firms have a greater creative & innovative capability

Question 5

for an external change to create competitive advantage,

Answer 5

the change must have differential effects on companies

Question 6

The extent to which external change creates competitive advantage and disadvantage depends on

Answer 6

the magnitude of the change and the extent of the firms’ strategic differences

Question 7

The competitive advantage that arises from external change also depends on

Answer 7

firms’ ability to respond to change

Question 8

As markets become more turbulent and unpredictable,

Answer 8

the speed of response through greater flexibility becomes increasingly important as a source of competitive advantage.

Question 9

requirements for quick response capability:

Answer 9

1. information: companies rely increasingly on ‘early-warning systems’ through direct relationships with customers, suppliers and even competitors
2. short cycle times that allow information on emerging market developments to be acted upon speedily

Question 10

Competitive advantage may also be generated internally through

Answer 10

innovation

Question 11

Although innovation is typically thought of as new products or processes that embody new technology, a key source of competitive advantage is

Answer 11

strategic innovation: new approaches to doing business including new business models

Question 12

Strategic innovation typically involves

Answer 12

creating value for customers from novel products, experiences or modes of product delivery

Question 13

The speed with which competitive advantage is undermined depends on

Answer 13

the ability of competitors to challenge either by imitation or by innovation

Question 14

what are isolating mechanisms

Answer 14

they are meant to protect a firm’s profits by being driven down by the competitive process

Question 15

For one firm successfully to imitate the strategy of another, it must meet four conditions:

Answer 15

1. Identification: The firm must be able to identify that a rival possesses a competitive advantage.
2. Incentive: The firm must believe that by investing in imitation it too can earn superior returns.
3. Diagnosis: The firm must be able to diagnose the features of its rival’s strategy that give rise to the competitive advantage.
4. Resource acquisition: The firm must be able to acquire through transfer or replication the resources and capabilities necessary for imitating the strategy of the advantaged firm.

Question 16

What is the isolating mechanism for identification?

Answer 16

obscure superior performance

Question 17

What is the isolating mechanism for incentive?

Answer 17

• deterrence: signal aggressive intentions to imitators

- pre-emption: exploit all available investment opportunities

Question 18

What is the isolating mechanism for diagnosis?

Answer 18

rely on multiple sources of competitive advantage to create causal ambiguity

Question 19

What is the isolating mechanism for resource acquisition?

Answer 19

base competitive advantage on resources and capabilities that are immobile and difficult to replicate

Question 20

what is causal ambiguity?

Answer 20

The more multidimensional a firm’s competitive advantage and the more it is based on complex bundles of organizational capabilities, the more difficult it is for a competitor to diagnose the determinants of success

Question 21

The outcome of causal ambiguity is

Answer 21

uncertain imitability: where there is ambiguity associated with the causes of a competitor’s success, any attempt to imitate that strategy is subject to uncertain success

Question 22

The period over which a competitive advantage can be sustained depends critically on

Answer 22

the time it takes to acquire and mobilize the resources and capabilities needed to mount a competitive advantage

Question 23

types of competitive advantage

Answer 23

1. cost advantage: supply an identical product or service at a lower cost
2. differentiation advantage: when a firm provides something unique that is valuable to buyers beyond simply offering a low price

Question 24

By examining a firm’s different cost drivers, we can analyse a firm’s

Answer 24

cost position

Question 25

cost leadership key strategy elements

Answer 25

1. Scale‐efficient plants
2. Design for manufacture
3. Control of overheads and R&D
4. Process innovation
5. Outsourcing (especially overseas)

Question 26

differentiation key strategy elements

Answer 26

Emphasis on branding, advertising, design, service, quality and new product development

Question 27

drivers of cost advantage

Answer 27

1. economies of scale
2. economies of learning
3. production techniques
4. product design
5. input costs
6. capacity utilization
7. residual efficiency

Question 28

A value chain analysis of a firm’s cost position comprises the following six stages:

Answer 28

1. Break down the firm into separate activities.
2. Establish the relative importance of different activities in the total cost of the product. Our analysis needs to focus on the activities that are the major sources of cost.
3. Compare costs by activity.
4. Identify cost drivers. For each activity, what factors determine the level of cost relative
   to other firms?
5. Identify linkages. The costs of one activity may be determined, in part, by the way
   in which other activities are performed.
6. Identify opportunities for reducing costs. For example:
   - If scale economies are a key cost driver, can volume be increased?
   - Where wage costs are the issue, can wages be reduced either directly or by relocating production?
   - If a certain activity cannot be performed efficiently within the firm, can it be outsourced?

Question 29

Differentiation advantage occurs when

Answer 29

a firm is able to obtain from its differentiation a price premium in the market that exceeds the cost of providing the differentiation.

Question 30

differentiation is not simply about offering different product features;

Answer 30

it is about understanding every possible interaction between the firm and its customers, and asking how these interactions can be enhanced or changed in order to deliver additional value to the customer.

Question 31

PRINCIPAL STAGES OF VALUE CHAIN ANALYSIS FOR DIFFERENTIATION ADVANTAGE

Answer 31

1. Construct a value chain for the firm and the customer
2. Identify the drivers of uniqueness in each activity
3. Select the most promising differentiation variables for the firm
4. Locate linkages between the value chain of the firm and that of the buyer

Question 32

Michael Porter has defined three generic strategies:

Answer 32

cost leadership, differentiation and focus