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** s**ize, scope,** or cumulative **experience** - Cost drivers **related** to or**ganization of transaction**

Question 27

What are the **5 dimensions of benefit drivers**?

Answer 27

- **Physical characteristic**s 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 cos**t 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