Chapter 7

Question 1

What is the definition of competitive advantage?

Answer 1

Competitive advantage refers to a firm’s ability to outperform its rivals. It can be defined broadly in terms of a firm’s superiority in creating value for its stakeholders, or more narrowly in terms of profitability.

Question 2

How is Competitive Advantage Established?

Answer 2

External Sources of Competitive Advantage: External changes that have differential effects on companies due to their different resources and capabilities or strategic positioning.
Internal Sources of Competitive Advantage: Internal changes that create competitive advantage through innovation, such as business model innovation and blue ocean strategy.

Question 3

What are some external sources of competitive advantage?

Answer 3

Changing customer demand:
Shifts in consumer preferences or needs
Changing prices of inputs:
Changes in the cost of raw materials or labor
Technological change:
Advances in technology that create new opportunities or challenges

Question 4

What are some internal sources of competitive advantage?

Answer 4

Anticipation: The ability to anticipate and respond to changes in the market or industry. (Example: IBM’s ability to renew its competitive advantage through anticipating shifts in the IT sector)

Agility: The ability to quickly respond to changes in the market or industry. (Example: Zara’s vertically integrated supply chain that cuts the time between design and retail delivery)

Business Model Innovation: The introduction of novel approaches to creating and/or capturing value within an industry. (Example: McKinsey & Co.’s distinction between same game strategies and new game strategies)

Blue Ocean Strategy: The creation of a new market space that makes the competition irrelevant. (Example: Cirque du Soleil’s creation of a new market space in the entertainment industry

Question 5

What are the key takeaways from competitive advantage?

Answer 5

Competitive advantage is a disequilibrium phenomenon, created by change and eroded by competition.

External sources of competitive advantage include changing customer demand, changing prices of inputs, and technological change.

Internal sources of competitive advantage include anticipation, agility, business model innovation, and blue ocean strategy.

Business model innovation can be a powerful source of competitive advantage, but it requires a deep understanding of the market and industry.

Question 6

What are the three types of Business Model Innovations ?

Answer 6

New Industry Models: Configurations of the conventional industry value chain, such as Dell’s direct sales model for PCs or Zara’s vertically integrated fast-fashion model.

New Revenue Models: Changing the value proposition, the target audience, or pricing strategy. Examples include: Rolls Royce’s “Power by the Hour” model, where airlines pay usage-based fees for engines, maintenance, and spares.
Sulake’s free video games with micro-transactions for in-game accessories.

New Enterprise Models: Reconfiguring enterprise boundaries and partner relationships. Examples include: Apple’s iPhone, with outsourced manufacture and third-party applications distributed through its online store.

Question 7

What is Blue Ocean Strategy?

Answer 7

Blue ocean strategy involves creating new market space by breaking the existing value/cost trade-off. This can be achieved by:
Raising factors that are currently below the industry standard.
Eliminating factors that the industry has long competed on.
Reducing factors that are currently above the industry standard.
Creating new factors that the industry has never offered.

Question 8

What is a Strategy Canvas?

Answer 8

The strategy canvas is a tool for visualizing and creating new market space. It consists of two axes:
Horizontal Axis: Different product characteristics along which firms in the industry compete.
Vertical Axis: The amount of each characteristic a firm offers its customers.

Question 9

How do you Sustain a Competitive Advantage?

Answer 9

Competitive advantage is eroded by competition, but can be sustained through:
Isolating Mechanisms: Barriers that prevent the erosion of a business’s superior profitability.
Obscuring Superior Performance: Masking high performance to prevent rivals from seeing success.
Deterrence: Signaling aggressive intentions to potential competitors.
Preemption: Occupying existing and potential strategic niches to reduce investment opportunities.

Question 10

What are some Preemption strategies?

Answer 10

Proliferating product varieties: Introducing many new products to leave few niches for competitors to occupy. For example, between 1950 and 1972, the six leading suppliers of breakfast cereals introduced 80 new brands into the US market.
Investing in underutilized production capacity: Investing in production capacity to discourage rivals and potential entrants.
Patent proliferation: Filing many patents to restrict competitors’ innovation opportunities. For example, Xerox filed over 2000 patents to protect its dominance of plain-paper copiers.

Question 11

What is Causal Ambiguity and Uncertain Imitability?

Answer 11

Causal ambiguity refers to the difficulty of understanding the basis of a competitor’s success. When a firm’s competitive advantage is multidimensional and based on a complex bundle of resources and capabilities, it is difficult for rivals to diagnose the sources of success.

Uncertain imitability refers to the uncertainty of successfully imitating a competitor’s strategy. If the causes of a firm’s success cannot be known for sure, successful imitation is uncertain.

Question 12

What are the Challenges of Strategy Imitation?

Answer 12

Complementarity among activities: The performance of an organization is critically dependent on the fit among management practices. When activities are tightly linked, complexity theory predicts that a number of fitness peaks will appear, each associated with a unique combination of strategic variables.

Contextuality of management practices: Management practices are both distinctive and contextual, meaning they only work in combination with other management practices.

Question 13

What are the Types of Competitive Advantage?

Answer 13

Cost advantage: A firm can achieve a higher rate of profit over a rival by supplying an identical product or service at a lower cost.
Differentiation advantage: A firm can achieve a higher rate of profit over a rival by supplying a product or service that is differentiated such that the customer is willing to pay a price premium that exceeds the cost of the differentiation.

Question 14

What are Michael Porter’s definition of the three generic strategies?

Answer 14

Cost Leadership:
Become the cost leader in an industry or industry segment by finding and exploiting all sources of cost advantage.

Differentiation:
Provide something unique that is valuable to buyers beyond simply offering a low price.

Focus:
Focus on a narrow market segment and tailor products or services to meet the specific needs of that segment.

Question 15

What are the seven Sources of Cost Advantage?

Answer 15

Economies of scale:
The cost savings that come from producing large quantities of a product.

Economies of scope:
The cost savings that come from producing multiple products or services.

Experience curve:
The cost savings that come from learning and experience.

Location:
The cost savings that come from locating production in a low-cost area.

Technology:
The cost savings that come from using advanced technology.

Organizational structure:
The cost savings that come from having a efficient organizational structure.

Human resources:
The cost savings that come from having a skilled and efficient workforce.

Question 16

What is The Experience Curve?

Answer 16

The experience curve is a concept that describes how a firm’s unit costs decline as its cumulative output increases. The experience curve is based on the idea that as a firm produces more units of a product, it gains experience and becomes more efficient, leading to lower costs.

Question 17

What is Economies of Learning?

Answer 17

Economies of learning arise from the experience and knowledge gained by a firm as it produces more units of a product. This can lead to cost savings through:
Improved organizational routines
Process innovation
Increased individual skills

Question 18

What is Business Process Re-engineering?

Answer 18

Business process re-engineering (BPR) is an approach to redesigning operational processes to achieve dramatic improvements in performance. BPR involves:
Fundamental rethinking and radical redesign of business processes
Starting with a clean sheet of paper and asking: “If we were starting afresh, how would we design this process?”

Question 19

How can you reduce Input Costs?

Answer 19

Locational differences in input prices: taking advantage of lower input prices in different locations.
Ownership of low-cost sources of supply: owning or controlling sources of supply that have lower costs.
Nonunion labor: using nonunion labor to reduce labor costs.
Bargaining power: using bargaining power to negotiate lower prices with suppliers.

Question 20

What is Residual Efficiency?

Answer 20

Residual efficiency refers to the unexplained differences in costs between firms that cannot be attributed to differences in scale, technology, product and process design, input costs, and capacity utilization.

Question 21

How can you use the Value Chain to Analyze Costs?

Answer 21

The value chain is a framework for analyzing the sequence of activities that a firm performs to create value for its customers. By analyzing the value chain, firms can identify opportunities for cost reduction and improvement.

1. Disaggregate the firm into separate activities: identify the separate activities that the firm performs.
2. Estimate the cost that each activity contributes to total costs: estimate the cost of each activity.
3. Identify cost drivers: identify the factors that determine the cost of each activity.
4. Identify linkages: identify the relationships between activities and how they affect costs.
5. Identify opportunities for reducing costs: identify opportunities for cost reduction and improvement.

Question 22

What is Differentiation ?

Answer 22

Differentiation is the process of creating a unique product or service that meets the needs of customers in a way that is different from competitors.

“Differentiation is not simply about offering different product features; it is about identifying and 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 23

How can you Create a Differentiation Advantage?

Answer 23

Identifying opportunities for uniqueness: identifying opportunities to create unique products or services.
Understanding customer needs and preferences: understanding what customers want and how they choose.
Creating value for customers: creating value for customers through unique products or services.

Question 24

What are the Types of Differentiation?

Answer 24

Tangible Differentiation: concerned with the observable characteristics of a product or service that are relevant to customers’ preferences and choice processes. Examples: size, shape, color, weight, design, material, and performance attributes such as reliability, consistency, taste, speed, durability, and safety.

Intangible Differentiation: arises because the value that customers perceive in a product is seldom determined solely by observable product features or objective performance criteria. Examples: social, emotional, psychological, and esthetic criteria that guide customer choices.

Question 25

Differentiation or Segmentation?

Answer 25

“Differentiation is concerned with how a firm competes, the ways in which it can offer uniqueness to customers. Segmentation is concerned with where a firm competes in terms of customer groups, localities, and product types.”

Question 26

What are some Techniques for Analyzing Demand?

Answer 26

A/B Testing: experiments to test consumer preferences between two versions (A and B) of the same product.
Conjoint Analysis: a multivariate alternative to A/B-testing that uses data on customer preferences for different product configurations to estimate the preferences for individual attributes.
Multidimensional Scaling (MDS): compares competing products in terms of key product attributes.
Hedonic Price Analysis: views products as bundles of underlying attributes and uses regression analysis to estimate the implicit market price for each attribute.

Question 27

What is The Role of Social and Psychological Factors?

Answer 27

Analyzing product differentiation in terms of measurable performance attributes fails to take account of customers’ underlying motivations. Few goods or services only satisfy physical needs: most buying is influenced by social and psychological motivations, such as the desire to find community with others and to reinforce one’s own identity.

Maslow’s Hierarchy of Human Needs
Basic Survival Needs
Security Needs
Belonging Needs
Esteem Needs
Self-Actualization

Question 28

What is Differentiation through Bundling?

Answer 28

Differentiation can also occur through bundling - combining complementary products and services in a single offering. This can be especially important in business-to-business transactions through providing customer solutions - combinations of goods and services that are tailored to the needs of each client.

Question 29

What is the meaning of Signaling and Reputation?

Answer 29

Differentiation is only effective if it is communicated to customers. But information about the qualities and characteristics of products is not always readily available to potential customers.

“The economics literature distinguishes between search goods, whose qualities and characteristics can be ascertained by inspection, and experience goods, whose qualities and characteristics are only recognized after consumption.”

Question 30

What is the importance of Brands ?

Answer 30

Brands fulfill multiple roles. At the most basic level, a brand provides an implicit guarantee of quality simply by identifying the producer of a product, thereby ensuring the producer is legally accountable for its products.

Question 31

Firms can identify the drivers of uniqueness in each activity of their value chain by analyzing What sources of differentiation?

Answer 31

Inbound Logistics: Unique product features, fast response customer service, and efficient order processing
Operations: High-quality products, defect-free components, and efficient manufacturing processes
Outbound Logistics: Fast delivery, wide variety of products, and efficient order fulfillment
Marketing and Sales: Unique brand image, high-quality customer service, and effective advertising
Service: Fast and proficient technical support, and efficient repair and maintenance services

Question 32

How can you link the value chain of the firm with that of the buyer?

Answer 32

Supply Chain Integration: Integrating the firm’s value chain with that of the buyer to reduce costs and enhance differentiation potential
Joint Product Development: Collaborating with the buyer to develop new products or services that meet their specific needs
Co-Marketing: Collaborating with the buyer to promote each other’s products or services

Question 33

Give some Examples of Business Model Innovation.

Answer 33

Product-service systems: the integration of products and services to provide a comprehensive solution to customers.

Platform-based business models: the use of platforms to connect buyers and sellers and facilitate transactions.

Subscription-based business models: the use of subscription-based pricing to provide customers with access to products or services.