Competitive Advantage - Cost Leadership

Question 1

What is a competitive advantage

Answer 1

“When two or more firms compete in the same market,
one firm possesses a competitive advantage over its
rivals when it earns (or has the potential to earn) a
persistently higher rate of profit.”

• Goal of strategic thinking (holy grail)
• Focus of entrepreneurial action
• Motivation for top management’s vision for firm’s future
• Focus on economic fundamentals and performance

Question 2

How does competitive advantage emerge?

Answer 2

Internal and External sources of change

Question 3

Example of external sources of change include:

Answer 3

• Changing consumer demand
• Changing Prices
• Technological Change

Question 4

Examples of internal sources of change

Answer 4

• innovative capability (creating whole new markets - e.g. tablets)
• creating new customer segments
• creating new sources of competitive advantage

Question 5

Five business level strategies

Answer 5

• Cost Leadership = Broad/Cost (e.g. wal-mart, old navy, vizio)
• Focused Cost Leadership = Cost/narrow(e.g. ikea, forever 21)
• Differentiation - Broad/Unique (e.g. apple, nike, taylormade, chipotle)
• Focused differentiation - Unique/Narrow (e.g. Ferrari, LV, whole foods)
• Integrated cost leadership and differentiation - Kia, H&M

Question 6

When does low cost strategy work best?

Answer 6

• Price competition is vigorous.
• The product is standardized or readily available from
  many suppliers.
• There are few ways to achieve differentiation that
  have value.
• Most buyers use the product in the same ways.
• Consumers incur low switching costs.

Question 7

what are the 2 types of competitive advantage

Answer 7

Cost Leadership & differentiation

Question 8

What are the 7 cost drivers?

Answer 8

1) Economies of Scale - cost advantages that enterprises obtain due to size, output, or scale of operation
2) Economies of learning - learning how to do something more efficiently. Examples include:

employees learn to do their job more efficiently
less wastes and defects on products
better coordination of the different functions
faster production process

3) production techniques - process innovation; reengineering of business processes (model T and assembly line)
4) product design - standardization of designs and components; design for manufacture. (designing products to use the same parts)
5) input costs - location advantages; non union labor; bargaining power
6) capacity utilization - fast and flexible capacity adjustment; ratio of fixed to variable costs
7) residual efficiency - organizational slack, managerial effectiveness