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

Question 1

What is a firms generic strategy?

Answer 1

describes how it positions itself to compete in the market it serves (Porter)

Question 2

What are the two broad approaches to strategic positioning?

Answer 2

• cost leadership and
• benefit leadership

-> alternative narrow focus strategy

Question 3

When does a firm follow a strategy of cost leadership?

Answer 3

creates more value (i.e., B–Q) than its competitors by offering products that have a lower C than its rivals

cost leader can:

• price its product below the rivals and sell more or
• match rivals’ price and achieve better price-cost margins

Question 4

Cost Leadership

How can a cost leader price its product to create more value?

Answer 4

• The cost leader can price its product below rivals and sell more
• or match rivals’ price and achieve better price-cost margins

Question 5

How can the cost leader create more value than its competitors? (3 approaches)

Answer 5

• by offering the same benefits as the competitors do (benefit parity)
• by offering a slightly lower benefit (benefit proximity), or
• by offering a qualitatively different product

Question 6

Strategic Logic of Cost Leadership

How can the firm F achieve a higher profit margin? (Name the equation?

Situation:
Firm F offer lower quality than the rest (E), and has much lower costs

Answer 6

If the cost leader attains consumer surplus parity with the rest of the firms in the industry
–>it earns a higher profit margin

CE – CF > PE – PF
PF – CF > PE – CE

Question 7

WHen does a firm follow a strategy of benefit leadership?

Answer 7

• when the firm creates more value (i.e., B–Q) than its competitors by offering products that have a higher B than its rivals

Question 8

How can a benefit leader create superior value?

Answer 8

by offering:

• Cost parity
• Cost proximity
• Substantially higher benefit and higher cost

Question 9

Strategic Logic of Benefit Leadership:

How can the firm earn have a higher profit margin? (Name Equation)

Situation:
Firm F offers higher benefit than the rest (E) and a slightly higer cost

Answer 9

If the benefit leader attains consumer surplus parity with the rest of the firms in the industry

PF – PE > CF – CE
PF – CF > PE – CE

Question 10

What allows a leader (benefit leader) to charge a price premium without sacrificing market share? (How is this phenomenon called?)

Answer 10

The leader’s benefit advantage: –>Wiggle room

• gives it the “wiggle room” to charge a price premium relative to its lower-benefit, lower-cost rivals without sacrificing market share

Question 11

What happens when products are not differentiated? (Cost/benefit leader)

Answer 11

• the firm that has a cost (or benefit) advantage over others and can capture the entire market

Question 12

What happens when we have differentiated products? (Market Dynamics)

Answer 12

• many firms can coexist since firms face downward sloping demand curves
• customers do not switch easily when a firm cuts prices

Question 13

What can a firm with a cost (or benefit) advantage over others do when products are not differentiated?

Answer 13

The firm can capture the entire market.

Question 14

How can many firms coexist in a market with product differentiation?

Answer 14

Many firms can coexist because they face downward sloping demand curves.

Question 15

What does it mean when a firm´s product has a high price elasticity?

Answer 15

consumers are price sensitive because eg.g. horizontal differentiation is weak

Question 16

What should a firm do if it has high price elasticity (product differentiation is weak)?

Answer 16

• make modest price cuts that can lead to significant increases in market share

Question 17

What strategy should a firm follow when product differentiation is weak?

Answer 17

follow a market share strategy

Question 18

What should a firm do if it has a cost advantage, and has a high price elasticity of demand?

Answer 18

With a cost advantage, the firm should underprice its rivals

By offering lower prices,

• the firm can attract more customers, gaining market share (exploit advantage) and potentially driving competitors out of the market

Share strategy: underprice competitors to gain share

Question 19

What should a firm do if it has a benefit advantage, and has a high price elasticity of demand?

Answer 19

• With a benefit advantage the firm should maintain price parity
• and let the benefit build the share

–>(keep prices similar) and let the superior benefits of the product attract customers and build market share

Share strategy: Maintain price parity with competitors (let benefit advantage drive share)

Question 20

What does it mean when a firm´s product has a low price elasticity? (Consumer characteristics)

Answer 20

consumers are not very price sensitive because eg.g. horizontal differentiation is strong

Question 21

What should a firm do if it has low price elasticity (product differentiation is strong)?

Answer 21

• Even deep price cuts will NOT increase the firm’s market share muchh
• the firm should follow a profit margin strategy –>Focus on maintaining higher prices to maximize profits

Question 22

What strategy should a firm follow when product differentiation is strong?

Answer 22

• when produc differentiation is strong, firms should follow a proft margin strategy
• Focus on maintaining higher prices to maximize profits

Question 23

What should a firm do if it has a cost advantage, and has a low price elasticity of demand?

Answer 23

• with cost advantage, the firm should maintain price parity with its rivals

Margin strategy: maintain price pairity with compeittors while let lower costs drive higher margins

(benefiting from lower production costs, leading to higher profit margins

Question 24

What should a firm do if it has a benefit advantage, and has a low price elasticity of demand?

Answer 24

• with benefit advantage, the firm should charge a price premium over the competitors

–>setting higher prices to reflect the superior value or benefits provided by the product

Margin strategy: Charge price premium relative to competitors

Question 25

What do cost drivers do?

Answer 25

Cost drivers explain why average costs vary across firms

Question 26

What are the different classes of cost drivers?

Answer 26

• Cost drivers related to firm size, scope, and cumulative experience
• Cost drivers independent of firm size, scope, or cumulative experience
• Cost drivers related to organization of transaction

Question 27

What are the 5 dimensions of benefit drivers?

Answer 27

• Physical characteristics of the product itself
• The quantity and characteristics of the service or complementary goods the firm or its dealers offer for sale
• Characteristics associated with the sale or delivery of the good
• Characteristics that shape consumers’ perceptions or expectations of the product’s performance
• The subjective image of the product

Question 28

Whare are the conditions when a firm should seek a cost advantage?

Answer 28

• when the nature of the product does not allow benefit enhancement,
• when consumers are relatively price sensitive, and
• when the product is a search good rather than an experience good

Question 29

Whare are the conditions when a firm should seek a benefit advantage?

Answer 29

• when consumers are willing to pay a premium for benefit enhancements,
• when economies of scale and learning have been already exploited
• and differentiation is the best route to value creation, and
• when the product is an experience good

Question 30

What does the argument “Stuck in the Middle” suggest about firms pursuing cost and benefit advantages?

Answer 30

• Firms should either pursue a cost advantage or a benefit advantage, but not both
• Firms that pursue both could get stuck in the middle and have neither advantage

Question 31

What is a potential downside of trying to achieve both cost and benefit advantages?

Answer 31

• It can lead to unfocused decision-making
• May result in uninspired imitation of “best practices.”

Question 32

Do successful firms typically have one or both types of advantages? (reality)

Answer 32

Successful firms often appear to have both cost and benefit advantages

Question 33

How do firms that offer high-quality products gain cost advantages (have both types of advantages)?

Answer 33

• Firms that offer high quality products expand market share and enjoy cost advantages due to economies of scale and learning

Question 34

Why might learning economies be more important for high-quality production?

Answer 34

Because it helps in expanding market share and achieving cost advantages.

Question 35

What is a potential benefit of high-quality producers in terms of efficiency?

Answer 35

High-quality producers may also be more efficient producers.

Question 36

What are the 2 questions important for strategic positoning?

Answer 36

1.How will the firm create value? [Benefit, cost]

2.Where will the firm do it? [Broad or narrow segments

Question 37

What are the two dimensions of an industry?

Answer 37

An industry can be represented in two dimensions

• Product varieties
• Customer group

Question 38

What is a potential segment?

Answer 38

is the intersection of a particular product group with a particular customer group

–>Market segmentation matrix

Question 39

What are the reasons for variation in structural attractiveness of segments?

Answer 39

• Customer economics
• Supply conditions
• Segment size

Buyers in each class have similar tastes, needs and marketing responses

Question 40

What is the broad coverage strategiess? Where do economies of scope arise from?

Answer 40

=Offer a full line of products to serve a range of customer groups;

economies of scope can arise from
- Production
- Distribution
- Marketing

Question 41

What is the Focus strategiess?

Answer 41

= Focus strategies can insulate the focusing firm from competition

Question 42

What are the different focus strategies?

Answer 42

• Customer specialization: a wide range of products to a narrow customer group
• Product specialization: limited product variety for a wide range of customers
• Geographic specialization: exploit the unique conditions of the region