Chapter 11 - Sustaining competitive advantage

Question 1

the theory of perfect competition implies that opportunities for earning profit based on favorable market conditions will …

Answer 1

quickly evaporate as new entrants flow into the market, increase supply of output, drive price down to the point where economic profits are zero

Question 2

regression to the mean

Answer 2

when performance goes to extremes due to luck, and then returns to form

Question 3

resource-based theory of the firm

Answer 3

for a sustainable competitive advantage it must be underpinned by resources and capabilities that are scarce and imperfectly mobile

Question 4

imperfectly mobile

Answer 4

the resource cannot “sell itself” to the highes bidder (non-tradable, e.g., know-how)

Question 5

cospecialized

Answer 5

resources that are more valuable when used together than when separated

Question 6

isolating mechanisms

Answer 6

economic forces that limit the extent to which a competitive advantage can be duplicated/neutralized through the resource-creation activities of other firms

• isolating mechanisms are to a firm what entry barriers are to an industry

Question 7

different groups of isolating mechanisms

Answer 7

• impediments to imitation
• early-mover advantages
• shock

Question 8

impediments to imitation

Answer 8

impede existing firms and potential entrants from duplicating the resources and capabilities that form the basis of the firm’s competitive advantage

Question 9

early-mover advantages

Answer 9

increase the economic power of an advantage over time

Question 10

shock

Answer 10

fundamental changes that lead to major shifts of competitive positions in a market

Question 11

4 impediments to imitation

Answer 11

• legal restrictions
• superior access to inputs or customers
• the winner’s curse
• market size and scale economies

Question 12

winner’s curse

Answer 12

the winning bidder ends up worse than the losers

Question 13

intangible barriers to imitation

Answer 13

• causal ambiguity
• dependence on historical circumstances
• social complexity

Question 14

causal ambiguity

Answer 14

situations in which the causes of a firm’s ability to create more value than its competitors are obscure and only imperfectly understood

Question 15

social complex phenomena

Answer 15

include the interpersonal relations of managers in a firm and the relationship between the firm’s managers and those of its suppliers and customers

Question 16

network effects/network externalities

Answer 16

consumers often place higher value on a product if other consumers also use it

Question 17

actual networks

Answer 17

network effect arises because consumers can communicate with other users in the network

Question 18

virtual networks

Answer 18

consumers are not physically linked. network effect arises from the use of complementary goods

Question 19

when two or more firms compete for the market, the winner is often the firm that …

Answer 19

establishes the largest installed base

Question 20

ex ante

Answer 20

before entering

Question 21

ex post

Answer 21

after entering

Question 22

creative destruction

Answer 22

innovation causes most markets to evolve in a characteristic pattern

• periods of comparative quiet
• these are punctuated by fundamental shocks or discontinuities that destroy old sources of advantage and replace them with new ones
• the entrepreneurs who exploit these shocks achieve positive profits during the next period of comparative quiet

Question 23

disruptive technologies

Answer 23

products that offer much higher B - C than their predecessor, but do so not through incremental improvements but with entirely new technologies that drastically lower C

Question 24

patent racing

Answer 24

innovation is a winner-take.all activity rewarded by a patent

Question 25

sunk cost effect

Answer 25

concerns the asymmetry between a firm that has already made a commitment to a particular technology or product concept and one that is planning such a commitment

Question 26

efficiency effect

Answer 26

makes an incumbent monopolist’s incentive to innovate stronger than that of a potential entrant

Question 27

market for ideas

Answer 27

a place in which the firm can sell its ideas for full value

two elements of the commercialization environment that affect it:

• technology is not easily expropriated by others
• specialized assets must be used in conjunction with the innovative product

Question 28

dynamic capabilities

Answer 28

a firm needs to search continuously to improve its routines –> the ability to maintain and adapt capabilities that are the basis of a competitive advantage

Question 29

path dependence

Answer 29

it depends on the path the firm has taken in the past to get where it is now

Question 30

factors conditions

Answer 30

describe a nation’s position with regard to factors of production that are necessary to compete in a particular industry

Question 31

demand conditions

Answer 31

include the size, growth and character of home demand for the firm’s product. Sophisticated home customers or unique local conditions stimulate firms to enhance the quality of their product to innovate

Question 32

VRIO

Answer 32

• valuable
• rare
• inimitable
• organized