Lecture Unit 8: Strategic positioning for Competitive advantage (1/2)

Question 1

In what ways can firms within the same market differentiate themselves`?

Answer 1

• Firms within the same market can position themselves in different ways ->Benefit or cost position

Question 2

Do all market positions ensure equal profitability and survival chances for firms?

Answer 2

No, not all market positions will be equally profitable or lead to the same odds of survival.

Question 3

On what does a firm’s ability to create value and having a competitive advantage over competitiors depend upon?

Answer 3

depends on how it positions itself within its market

Question 4

When does a firm have a competitive advantage?

Answer 4

• if a firms earns a higher rate of economic profit compared to the average firm in the industry
• only if it can create more economic value than its competitors

Question 5

What does the economic profit earned by a firm depend upon?

Answer 5

depends on the

• economic attractiveness of its market as well as
• the economic value created by the firm

Question 6

On what does a firm’s ability to create value depend?

Answer 6

depends on its

• cost position as well as
• its benefit position relative to its competitors

Question 7

Framework for comeptitive advantage:

What are the two primary positions that determine a firm’s value relative to competitors?

Answer 7

• Benefit position relative to competitors and
• cost position relative to competitors.

Question 8

Framework for competitive advantage:

What two factors contribute to a firm’s economic profitability according to the framework for competitive advantage?

Answer 8

• Market economics (economic attractiveness of its market)
• value created relative to competitors.

Question 9

What is the maximum willingness to pay?

Answer 9

= is the price at which the consumer is indifferent between buying the product and not buying

Question 10

What is the consumer surpluus?

Answer 10

• is the difference between the maximum the consumer is willing to pay (monetary value of the perceived benefit) and the prevailing market price

Question 11

Why is consumer surplus important for a purchase to occur?

Answer 11

–>(Max WTP - P)

• the consumer surplus needs to be positive for the purchase to occur
• Consumer will choose the product with the largest consumer surplus

Question 12

What must firms do to compete successfully?

Answer 12

To compete successfully, firms need to deliver consumer surplus.

Question 13

How can a firm increase consumer surplus?

Answer 13

• by increasing the perceived benefit
• by lowering the price

Question 14

Price-quality continuum:

How are competing firms viewed when products differ in quality?

Answer 14

• competing firms can be viewed as submitting consumer surplus bids with their quality-price combinations.

Question 15

What happens when a firm fails to offer as much consumer surplus as its rivals?

Answer 15

when a firms fails to offer as much consumer surplus as its rivals, its sales will decline

Question 16

Value Map:
What do the points on the indifference curve represent?

Answer 16

represent price-quality combinations with the same consumer surplus

Question 17

Value map: What does the steepness of the indifference curve reflect?

What does a steep indifference curve mean?

Answer 17

reflects the tradeoff between price and quality that consumers are willing to make

Steep indifference curves:
consumers are willing to pay much more for a good that is of higher quality

Question 18

What does consumer surplius parity mean?

Answer 18

is achieved when:

• firms’ price-quality positions line up along the same indifference curve
• when firms are offering a consumer the same amount of consumer surplus

Question 19

What does it mean when firms’ price-quality positions line up along the** same indifference curve?**

Answer 19

When firms’ price-quality positions line up along the same indifference curve, it means the firms have achieved consumer surplus parity.

Question 20

What happens when a firm moves from a CS parity or CS advantage to a position in which its CS is less than that os its competitors?

Answer 20

–>Its sales will slip and its market share will fall

Question 21

When is economic value createcd? (Description process)

Answer 21

• when a producer combines inputs such as labor, capital, raw materials and purchased components to make a product whose perceived benefit B (maximum willingness to pay) exceeds the cost C incurred in making the product

Question 22

What is the formula for Economic value created?

Answer 22

V = (B - P) [Consumer surplus] + (P - C) [Producer surplus]
V = B - C

Question 23

What happen when
B - C is negative
B - C is positive?

Answer 23

• If B - C (the economic value created) is not positive, the product will not be viable.
• If B – C is positive, all parties are better off because the product was made and sold

Question 24

How does value creation occur? With respect to?

Answer 24

• Value creation occurs with respect to particular customers

Question 25

What is necessary for a product to be viable?

Answer 25

No product can be viable without creating positive economic value.

Question 26

Can a firm be successful in creating positive B - C in one segment while another firm does the same in another segment?

Answer 26

• Yes, a firm may be successful in creating positive B - C in one segment while it takes another firm to do the same in another segment

Question 27

Is it enough for a firm to simply sell a product, meaning the product is economic viable (B - C) ?

Answer 27

• No, Although a positive B - C is necessary for a product to be economically viable
• just because a firm sells a product whose B - C is positive is no guarantee that it will make a positive profit

Question 28

How can a firm achieve a competitive advantage?

Answer 28

• a firm must produce more value than its rivals
• Consumers will demand the same consumer surplus from the firm as from its rivals

Question 29

What is the situation when a firm has a superior value creation?

Answer 29

• the firm can offer as much consumer surplus as the rivals and still make an economic profit

Question 30

What does consonance analysis evaluate in a firm?

Answer 30

looks at a firm’s prospects for continuing to create value

Question 31

Consonance analysis:
What factors affect a firm’s ability to create value according to consonance analysis?

Answer 31

• changes in market demand
• changes in technology and
• threats from other firms in the industry and from other industries

Question 32

What is the value chain/vertical chain? What does it include?

Answer 32

= is the representation of the firm as a set of value creating activities

Include primary activities and support activities

Question 33

What are the primary and support activities included in the value chain?

Answer 33

• primary activities: like production and marketing, logistics
• support activities such as human resource management. R&D, infrastructure

Question 34

Value chain
What do all activities contribute to?

Answer 34

• Each activity in the value chain can potentially add to perceived benefits
• Each activity also adds to costs.

Question 35

Why is it difficult to isolate the incremental perceived benefit and cost of each activity in the value chain?

Answer 35

In practice, it is difficult to isolate

• the incremental perceived benefit
• and the incremental cost of each activity.

Question 36

What is value added analysis?

Answer 36

= is a tool to identify where the value creation occurs along the value chain

Question 37

What do we need to estimating the incremental value for the parts of the value chain?

Answer 37

we need market prices of semi-finished and finished goods to estimate the incremental value for the parts of the value chain.

Question 38

Value chain

How can firms create more economic value than their compeitors?

Answer 38

• by either configuring its value chain differently from competitors
• by performing marketing activities more effectively than the rivals

Question 39

What do firms need to perform activities more effectively than rivals?

Answer 39

• To perform activities more effectively than the rivals firms need resources and capabilities that rivals do not have

Question 40

What are resources?

Answer 40

= are specialized assets (patents, established brand name, installed base, etc.).

Question 41

What are capabilities?

Answer 41

are activities a firm can perform better than its rivals do

Question 42

What are the characteristics of capabilities?

Answer 42

• They are typically valuable across multiple markets and products
• They are embedded in organizational routines that survive when individuals are replaced
• They represent tacit knowledge in the organization

Question 43

Can a product be viable without creating positive economic value ?

Answer 43

• No product can be viable without creating positive economic value