CHAPTER 9: Strategic Positioning for Competitive Advantage
CHAPTER OUTLINE
1) Introduction
2) Competitive Advantage and Value Creation: Conceptual Foundations
• Competitive Advantage Defined
• Maximum Willingness-to-Pay and Consumer Surplus
• From Maximum Willingness-to-Pay to Consumer Surplus
• Value-Created
• Value Creation and “Win-Win” Business Opportunities
Example 9.1: The Division of the Value-Created in the Sale of Beer at a Baseball Game
• Value Creation and Competitive Advantage
• Analyzing Value Creation
Example 9.2: Kmart versus Wal-Mart
• Value Creation and the Value Chain
• Value Creation, Resources, and Capabilities
Example 9.3: Creating Value at Enterprise Rent-a-Car
Example 9.4: Measuring Capabilities in the Pharmaceutical Industry
3) Strategic Positioning: Cost Advantage and Benefit Advantage
• Generic Strategies
• The Strategic Logic of Cost Leadership
• The Strategic Logic of Benefit Leadership
Example 9.5: “Haute Pot” Cuisine in China
• Extracting Profits from Cost and Benefit Advantage
• Comparing Cost and Benefit Advantages
• “Stuck in the Middle”
Example 9.6: Strategic Positioning in the Airline Industry: Four Decades of Change
4) Diagnosing Cost and Benefit Drivers
• Cost Drivers
• Benefit Drivers
• Methods for Estimating and Characterizing Costs and Perceived Benefits
5) Strategic Positioning: Broad Coverage versus Focus Strategies
• Segmenting an Industry
• Broad Coverage Strategies
• Focus Strategies
6) Chapter Summary
7) Questions
8) Appendix: Methods for Measuring a Firm’s Benefit Position
9) Endnotes
Copyright © 2013 John Wiley & Sons, Inc.
CHAPTER SUMMARY
The purpose of this chapter is to develop a conceptual framework for characterizing and analyzing a firm’s strategic position within an industry. This framework employs simple economic concepts to characterize necessary conditions for a strategic position to create a competitive advantage in the market.
This chapter is organized into the following sections. The first section explores the concept of competitive advantage and argues that a firm can achieve a competitive advantage by creating more value than its rivals create. A firm that creates more total value can simultaneously earn higher profits and deliver higher net benefits than its competitors. The ability to create value depends on both the firm’s cost position and its differentiation position relative to its competitors. Understanding how a firm creates value and how it can continue to do so in the future is a necessary first step in diagnosing a firm’s potential for securing a competitive advantage in the marketplace. Projecting a firm’s prospects for creating value into the future also involves evaluating whether changes in market demand and technology are likely to threaten how the firm (or the entire industry) creates value. This section also clarifies the distinction between redistributing existing value and creating additional value.
The next section discusses the economic and organizational logic of two broad alternative approaches to positioning: cost advantage and benefit advantage. This section compares the two strategies and discusses when a cost advantage strategy is better than a benefit strategy, and vice versa. In general, a position based on a superior cost position is appropriate when:
• Economies of scale and learning are potentially significant, but no firm in the market seems to be exploiting them.
• Opportunities for enhancing the product’s perceived benefit, B, are limited by the nature of the product.
• Consumers are relatively price sensitive and are unwilling to pay much of a premium for enhanced product quality, performance, or image.
• The product is a search good, rather than an experience good.
Building a competitive advantage based on superior benefit is likely to be relatively more attractive when:
• A substantial segment of consumers is willing to pay a significant price premium for attributes that enhance B.
• Economies of scale and learning are significant, and existing firms because of their size or cumulative experience are already exploiting them.
• The product is an experience good, rather than a search good.
The final section covers the concept of broad versus focused strategies. It explores how a firm’s positioning strategy also drives its operating strategies for its functional areas, such as marketing, operations, and engineering. This section covers market segmentation and targeting strategies and how these strategies are tied to a firm’s approach to creating value.
APPROACHES TO TEACHING THIS CHAPTER
Chapter 13 introduces a framework to study a firm’s strategic position within an industry. The following outline provides a useful starting place for lecturing about the chapter.
Competitive Advantage
A firm has a competitive advantage when it outperforms (i.e., earns higher rates of profitability than) competitors who sell in the same market. This chapter defines competitive advantage more precisely than it is defined in traditional strategic management literature. This definition emphasizes that a firm has a competitive advantage if it is able to reap higher profits than other firms in the industry are, whereas other definitions emphasize the ability of a firm to distinguish its products in the eyes of consumers.
Consumer Surplus and Value Created In a given transaction:
Value Created = (Buyer’s Perceived Benefit – Price) + (Price – Cost)
= Consumer surplus + Profit
= (B – P) + (P – C)
= B – C
• B reflects the value consumers derive from consuming the product less any costs (other than purchase price) of acquiring, using or maintaining the product. Thus, it is the maximum amount consumers are willing to pay for the product.
• B – P is the net benefit from consumption and is called consumer surplus (synonymous with “delivered value” in marketing texts.) Think of consumers choosing from among firms offering the same product on the basis of consumer surplus.
• B in relation to C determines the magnitude of value-created, but the price P determines how much of the value created is captured by the firm as profit, P – C, and how much is captured by consumers as consumer surplus, B – P.
• Industry structure is a key determinant of P – C, and, thus, is a key determinant of the proportion of total surplus captured by firms.
• In general, the level of B is determined by the attributes of a firm’s products (benefit drivers) and the weight that consumers give to them.
• The level of C is determined by a combination of factors that we refer to as cost drivers (e.g., economies of scale, experience, input prices).
You might want to ask students the following questions: What is an example of an industry where there is lots of surplus created, but not much captured by firms? To achieve competitive advantage, a firm must create more value than competitors (higher B – C). Why? This leads into the next learning point.
Link
between
Competitive Advantage and Value Creation
As the chapter suggests, it is useful to think of competition among firms as an “auction” where firms “bid” for consumers on the basis of consumer surplus. The firm that offers the highest consumer surplus
will get the consumer’s business. If a firm creates more value (higher B – C) than its competitors, this firm will be able to match consumer surplus bids of competitors and end up with higher profit on the sale.
This is best illustrated by a numerical example:
Firm A
Value Created (B – C) = $11
Firm B
Value Created (B – C) = $6
If Firm B offers a price that makes consumer surplus = $4, it gets profit of $2 (Remember, CS + Profit = Value Created, so Profit = Value Created – CS). If Firm A offers a price that makes consumer surplus = $4, it gets profit of $7. For both firms to make sales, we must have consumer surplus parity. When that happens, Firm A earns a higher profit than Firm B.
Diagnosing sources of competitive advantage is then a matter of diagnosing why a firm’s B – C is higher than existing or potential competitors:
• Does firm offer higher B? (Differentiation Strategy)
• Does firm have lower C? (Cost Position)
• Or both? (Stuck in the middle)
Concepts for Thinking about Value Creation
Porter’s Value Chain: As illustrated in Figure 13.10, the value chain depicts the firm as a collection of discrete, value-creating activities (inbound logistics, production operations, outbound logistics, and marketing and sales) and four support activities (firm infrastructure activities, such as finance and accounting, human resources management, technology development, and procurement). The value chain is a useful tool for organizing one’s thinking when considering how different activities within a firm can help create value.
Another way to think about value creation is to identify the activities that a firm performs better than its rivals do. In other words, think about the distinctive resources and capabilities that a firm has. Resources are firm-specific assets that a firm draws upon to help create value. Examples of resources include patents, trademarks, human resources with firm-specific skills, experience, and reputation. Distinctive capabilities are clusters of activities that a firm does particularly well in comparison to other firms (for our purposes, think of these as synonymous with core competencies). Choose a firm and ask students: What does this firm do especially well?
Alternative Approaches to Competitive Positioning: Cost vs. Benefits
Cost Advantage: Create more value than competitors by having lower C for the same B (benefit parity) or not too much lower B (benefit proximity). A firm can exploit its cost advantage by charging a price P that is low enough to offset its B disadvantage (if any) but high enough that the firm can earn higher profits than competitors (see Figure 13.14).
Firms that achieve a competitive advantage by pursuing a low cost strategy can do so in many ways. Potential sources of cost advantage include:
• Cost drivers related to firm size or scope, such as economies of scale; economies of scope, and capacity utilization.
• Cost drivers related to cumulative experience (i.e., learning curve).
• Cost drivers independent of firm size, scope, or cumulative experience: input prices; location; economies of density; process efficiency; government policy.
• Cost drivers related to organization of transactions: organization of the vertical chain, agency efficiency
Examples of firms that have built their competitive position on a cost advantage include DuPont in TiO2, Yamaha in pianos, and Frito Lay in salty snack foods. Ask students to come up with their own examples of firms that follow a cost advantage strategy.
Benefit Advantage: Create more value than competitors by having higher B for same B (cost parity) or not too much higher C (cost proximity). A firm can exploit its differentiation advantage by charging a price premium that is high enough to offset its C disadvantage (if any) but still low enough to maintain consumer surplus parity with competitors, even if they respond with price cuts aimed at improving the attractiveness of their products. (See Figure 13.15.)
The benefit a firm creates depends on product attributes (benefit drivers) and the weights consumers put on them. Benefit drivers must always be viewed from the perspective of the consumer. Potential sources of differentiation advantages include:
• Physical characteristics of product (e.g., performance, quality, features, aesthetics)
• Complementary goods or services (e.g., post-scale services, spare parts)
• Characteristics that shape consumer expectations of performance, quality, or cost in use (e.g., reputation, installed base)
• Subjective image (e.g., driven by advertising messages, packaging)
Examples of firms that have successfully pursued benefit strategies include Honda Accord vs. domestic sedans, and Maytag in washers. Challenge students to come up with their own examples of firms that follow a differentiation strategy.
Michael Porter has argued in his book Competitive Strategy that the pursuit of differentiation (benefit) advantage is incompatible with the pursuit of cost advantage. You might want to pose the following question to the class: Can a firm have both cost and differentiation advantages? What are some examples of this? (e.g., Breyers’ ice cream) Short answer, yes… but tradeoffs do exist (quality is not often free).
DEFINITIONS
Benefit Advantage: One approach to achieving competitive advantage. A firm that pursues a differentiation advantage strategy seeks to offer a higher B, while maintaining a C that is comparable to competitors.
Broad Coverage Strategy: A strategy that is aimed at serving all of the segments in the market by offering a full line of related products.
Competitive Advantage: A firm has a competitive advantage when it outperforms (i.e., earns higher rates of profitability than) competitors who sell in the same market.
Capabilities: Clusters of activities that a firm does especially well in comparison with other firms.
Consumer Surplus: The difference between what a consumer is willing to pay for a good and what she actually pays.
Consumer Purchase Parity: Exists when firms’ price-quality positions line up along the same indifference curve; that is, when firms are offering a consumer the same amount of consumer surplus.
Cost Advantage: One approach to achieving competitive advantage. A firm that pursues a cost advantage strategy seeks to attain a lower C, while maintaining a B that is comparable to competitors.
Cost Driver: Source of cost advantage..
Focus Strategy: A strategy whereby a firm concentrates on either offering a single product or serving a single market segment or both.
Indifference Curve: A curve that illustrates price-quality combinations that yield a constant level of consumer utility. Consumers are indifferent among the different price-quality combinations offered along this curve.
Key Success Factors: Refers to the skills and assets a firm must possess to achieve profitability in a market. Possessing an industry’s key success factors is a necessary condition for achieving competitive advantage, but it is not a sufficient condition.
Perceived Benefit: The highest price a consumer is willing to pay for a good.
Resources: Firm-specific assets, such as patents and trademarks, brand name reputation, installed base, organizational culture, and workers with firm-specific expertise or know-how.
Strategic Groups: Set of firms within an industry that is similar to one another and different from firms outside the group on one of more key dimensions of their strategy.
Value Created: The difference between the value that resides in the finished good and the value that is sacrificed to convert raw inputs into finished products.
SUGGESTED HARVARD CASE STUDIES1
Hudepohl Brewing Company (HBS 9-381-092). Hudepohl is a private company. Presents the problem of how an established regional brewer can survive the onslaught of national breweries, some of which are being cross-subsidized by diversified parent companies. Requires detailed analysis of what operations are profitable and unprofitable for Hudepohl, in addition to industry and competitive analysis. This case can be taught with some combination of the following chapters: 2, 6, 9, 15, and 16. You may want to ask students to think of the following questions in preparation for the case:
1 These descriptions have been adapted from Harvard Business School 1995–1996 Catalog of Teaching Materials.
a) How well is H doing? Is Bob Pohl’s optimism about H’s future justified?
b) How have the fundamental economics of the beer business changed over the 20–30 years prior to the time of the case? Have these changes helped or hurt H?
c) What are the markets that H competes in? Which are H’s strongest markets? Which are its most profitable markets?
d) How efficient are H’s manufacturing and distribution facilities in comparison with other beer companies? Which activities need to be changed or dropped?
e) What are H’s strengths? What resources or assets does H have that its competitors do not have? Does Pohl’s strategy exploit H’s resources, capabilities, and competitive advantages?
f) What alternative strategies might Pohl adapt? More generally, how would you recommend that H position itself in the beer market, given H’s resources and assets and given the strategies of its rivals in the beer industry?
g) Profit Analysis by Segment: Calculate or estimate H’s production costs and profit margins for each of its four “product lines” shown in Table B: (1) draft beer sold to independent distributors, (2) draft beer distributed by H, (3) packaged beer sold to independent distributors, and (4) packaged beer distributed by H.
h) Value Added: Using the above profit calculations, calculate the value added at each stage of H’s vertical chain. Can you explain the differences in the profitability across these product lines?
i) Segment Analysis: To the extent possible, calculate H’s market share in each of its market segments. (What are the criteria you are using to distinguish H’s different market segments?)
Prochnik: Privatization of a Polish Clothing Manufacturer (HBS 9-394-038). This case examines the challenge of creating value when the environment changes dramatically. Prochnik, a Polish clothing firm, became one of the first five state enterprises to be privatized by the Polish government and to be listed in 1991 on the newly formed Polish stock exchange. Prochnik’s old ways of creating value were no longer effective and the firm had to develop new skills.
Tombow Pencil Co., Ltd. (HBS 9-692-011 and Teaching Note 5-693-027). This case illustrates how another firm (in another country) struggles with a similar make-or-buy problem. While the most prominent issues in the case are the “boundaries of the firm” questions, the case also raises issues related to product market competition and the role of product variety, marketing channels, and organizational issues involving the coordination of marketing, sales, and production inside Tombow. The case also presents the differences between Keiretsu (networks of long-term relationships) and arms-length market contracting. It introduces students to the idea that assignment of ownership rights can solve problems that arise due to physical asset specificity (hold-up, human asset specificity). As with Nucleon (see Chapter 5), it shows that there are strong relationships between production strategy, product market strategy, and the make-or-buy decision. This case can be taught with some combination of the following chapters: 5, 6, 14, 16, and 17. You may want to ask students to think of the following questions in preparation for the case:
a) What is Tombow Pencil’s current financial position? Look at Tombow’s financial statement, and compare their financial ratios to Mitsubishi’s. In particular what would the impact be on Tombow’s profits if they could reduce their inventory/sales ratio to Mitsubishi’s level?
b) Is the Japanese pencil industry profitable? Are there some segments that are more profitable than others?
c) Compare the vertical chains for wooden pencils and the Object EO pencil (which will be our metaphor for mechanical pencils in general). Are the differences in the vertical scope/vertical boundaries in these two chains consistent with the underlying economics of make or buy decisions? Why does Ogawa feel the need to reexamine the production system for the EO pencil, given that Tombow’s vertical relationship have served them well for so long?
d) What recommendations would you make for Tombow? Consider both the market position (product line, quality, price point, etc.) the horizontal and vertical scope, and the organization of the company.
Creating Competitive Advantage (Product Number: 9-798-062, 1/25/98, rev. 2/25/06) A firm such as Schering-Plough that earns superior, long-run financial returns within its industry is said to enjoy a competitive advantage over its rivals. This note examines the logic of how firms create competitive advantage. It emphasizes two themes: First, to create an advantage, a firm must configure itself to do something unique and valuable. The firm must ensure that, were it to disappear, someone in its network of suppliers, customers, and complementors would miss it and no one could replace it perfectly. The first section uses the concept of "added value" to make this point more precisely. Second, competitive advantage usually comes from the full range of a firm's activities from production to finance, from marketing to logistics acting in harmony. The essence of creating advantage is finding an integrated set of choices that distinguishes a firm from its rivals. The second section shows how managers can analyze the full range of activities to understand the sources of added value.
EXTRA READINGS
The sources below provide additional resources concerning the theories and examples of the chapter.
Christensen, K., and L. Fahey, “Building Distinctive Competencies into Competitive Advantage,” Strategic Planning Management, February 1984, pp. 113–123.
Ghemawat, P., Commitment: The Dynamic of Strategy, New York, Free Press, 1991.
Henderson, R. and I. Cockburn, Measuring core Competence? Evidence from the Pharmaceutical Industry, Massachusetts Institute of Technology, Working Paper, January 1994.
Miles, R., and C. Snow, Organizational Strategy, Structure and Process, New York, McGraw-Hill, 1978.
Miller, D., and P. Friesen, Organizations: A Quantum View, Englewood Cliffs, NJ, Prentice-Hall, 1984.
Nelson, R. R., and S. G. Winter, An Evolutionary Theory of Economic Change, Cambridge, MA, Belknap, 1982.
Porter, Michael, Competitive Advantage, New York, Free Press, 1985.
Stalk, G., and T. Hout, Competing against Time: How Time-Based Competition is Reshaping Global Markets, New York, Free Press, 1990.
Stewart, G. B., Quest for Value: A Guide for Senior Managers, New York, Harper Business, 1991.
SUGGESTED ANSWERS TO END-OF-CHAPTER QUESTIONS
1. A firm can outperform its rivals through cost leadership or benefit leadership, but not through price leadership. Explain.
A firm that follows a strategy of cost leadership seeks to achieve a cost advantage over rival firms by offering a lower C for the same, or perhaps lower B, but B – C is still higher than before aligning with this strategy. A firm may also follow a strategy of benefit leadership that seeks to achieve a benefit advantage over rivals by offering products with a higher B for the same, or perhaps higher C, yet still obtaining a higher B – C thsn before. A price leadership position assumes either the firm charges a higher C without any resulting increase in B (thus reducing quantity sold), or a lower C without any reduction in production costs due to economies; both of which result in a lower B –C for the firm.
2. This chapter describes the importance of B – C in competitive industry. Is B – C equally important in other market structures?
Yes. When B – C is positive a firm, any firm regardless of market structure, can profitably purchase inputs from suppliers, convert them into a finished product, and sell it to consumers.
3. How do economies of scale affect positioning?
Economies of scale affect positioning because they are one of the cost drivers in a firm’s production mixture. Firms that realize economies of scale have reduced production costs and therefore can outperform rivals though cost leadership by offering products at a lower C, resulting a higher B – C than its competitors. The realization of economies of scale allow a firm to position itself as a cost leader.
4. How can the value chain help a firm identify its strategic position?
The value chain is a technique for describing the vertical chain of production. The value chain is also a useful device for thinking about how value is created in an organization. The value chain depicts the firm as a collection of value-creating activities, such as production operations, marketing and distribution, and logistics. Each activity in the value chain can potentially add to the benefit (B) that consumers get from the firm’s product and each can add to the cost (C) that the firm incurs in producing and selling the product. A firm creates more value than competitors only by performing some or all of these activities better than they do. We can often categorize strategic positions into two broad categories, either a cost advantage or a differentiation advantage. If a firm outperforms other firms in activities that generate superior B (differentiation) or in activities that generate a lower C (cost), the firm’s strategic position should rely on these activities.
5. Two firms, Alpha and Beta, are competing in a market in which consumer preferences are identical. Alpha offers a product whose benefit B is equal to $100 per unit. Beta offers a product whose benefit B is equal to $75 per unit. Alpha’s average cost C is equal to $60 per unit, while Beta’s average cost C is equal to $50 per unit.
a) Which firm’s product provides the greatest value created?
BA = $100
BB = $75
CA = $60
VA = $40
CB = $50
VB = $25
B = Perceived Benefit, C = Cost, and V = Value Created. Firm Alpha creates more value than Beta.
b) In an industry equilibrium in which the firms achieve consumer surplus parity, by what dollar amount will the profit margin, P – C, of the firm that creates the greatest amount of value exceed the profit margin of the firm that creates the smaller amount of value? Compare this amount to the difference between the value created of each firm. What explains the relationship between the difference in profit margins and the difference in value-created between the two firms?
In an industry equilibrium in which the firms achieve consumer surplus parity, the profit margin (PC) of firm Alpha will exceed the profit margin of firm Beta by $15. Consumers will be willing to pay up to $15 more for firm Alpha’s product. Note that this amount is the same as the difference in valuecreated by the two firms. Firm Alpha can raise its price to the point just below where its unit price equals its unit cost plus the additional benefit it creates relative to firm Beta: PA = CA + (VA VB)
6. The following table summarizes information about U.S. pancake syrup products: Brand
Assume the following apply to the time period relevant for the question:
• Demand remains stable
• No new firms enter and no new products are introduced
• No changes in advertising are made
• Firms have constant returns to scale and input prices are constant
(a) Given current prices, which brand do you expect to gain share in the next few months? Based on the table, Hungry Jack has the highest B – C at 5 cents per ounce. Based on this, consumers will purchase this brand as they realized the greatest gain from the high B – C, and Hungry Jack will increase its market share.
(b) Which brand can earn the highest profits in the longer run (assuming prices can be changed)?
In the longer run, assuming prices can be changes, Log Cabin should earn the highest profits. By raising its price to the average consumer willingness to pay of 28 cents/ounce, it will realize a profit of 8 cents per ounce. This exceeds the potential profit per ounce of all other firms assuming they also raised their prices to the consumer willingness to pay for their product.
7. Consider a market in which consumer indifference curves are relatively steep. Firms in this industry are pursuing two positioning strategies: Some firms are producing a basic product that provides satisfactory performance; others are producing an enhanced product that provides performance that is superior to that of the basic product. Consumer surplus parity currently exists in the industry. Are the prices of the basic and the enhanced product likely to be significantly different or about the same? Why? How would the answer change if the consumer indifference curves were relatively flat?
Indifference curves illustrate price quality combinations that yield the same consumer surplus. The fact that the indifference curve is steep means that consumers are willing to pay significantly more for a good that is of higher quality. Therefore, the prices of the basic and the enhanced product are likely to be significantly different. On the other hand, the prices of the two goods would be about the same if the consumer indifference curves were relatively flat. Flat indifference curves mean that consumers are not willing to pay much more money for a higher benefit.
8. In the value-creation model presented in this chapter, it is implicitly assumed that all consumers get the identical value (e.g., identical B) from a given product. Do the main conclusions in this chapter change if consumer tastes differ, so that some get more value than others?
The main conclusions of this chapter are as relevant if consumer tastes differ as when all consumers get identical value. If every consumer obtained a different B from a particular good, there would still exist meaningful segments that would be profitably served by particular firms rather than each consumer enjoying the same consumer surplus, each would obtain a different surplus. Consumers would purchase as long as their consumer surplus was positive this is true whether consumers have the same valuation or not. The fact that the level of surplus consumers received was different across consumers does not fundamentally change the analysis.
9. Identify one or more experience good. Identify one or more search goods. How does the retailing of experience goods differ from the retailing of search goods? Do these differences help consumers?
An experience good is a product whose quality can be assessed only after the consumer has actually consumed the product. For example, a buyer could not decide if he likes the taste of a particular beverage until the buyer actually consumes the beverage. Sometimes the product has to be used for a while in order to understand fully how satisfying is consumption of the good. For example, a consumer may not be able to evaluate the quality of his automobile until he has driven that automobile for several weeks.
A search good is one whose objective quality attributes the typical buyer can easily access at the time of purchase. For example, a consumer could determine all the important attributes of a diamond at the time of purchase wearing the diamond as an owner of the diamond does not generate any additional information.
With search goods, the potential for differentiation lies largely in enhancing the product’s observable features. When a firm is selling a search good that possesses attributes the seller wants the customer to know about, the customer does not have to take the seller at his word the customer can observe the attributes. The seller must only provide an opportunity for the consumer to fully observe the good. Sellers who do not reveal the attributes of their products at the time of sale will lose sales to sellers who are willing to reveal their products fully to buyers or these sellers would have to heavily discount their prices. The seller’s reputation, however, is not in question the attributes of the good speak for themselves.
When selling an experience good, sellers must often send signals to buyers that the good will not disappointment the buyer post-purchase. Since the buyer does not get to fully appreciate the good until after the good is consumed, the buyer buys under uncertainty. The seller’s reputation for delivering products that perform as promised becomes an important feature of the purchase process.
The selling processes associated with ‘search and experience’ goods help insure that consumers purchase goods closer to their “ideal” good. Both processes reduce the risks of buying under uncertainty the attributes of search goods are revealed at the time of purchase and reputation and other credible signals are used to guide consumers in their purchases of experience goods.
10. Identify firms that offer good but not outstanding products at reasonable but not especially low prices. Do these firms disprove Porter’s ideas about being “stuck in the middle?”
Generally, firms that offer good but not outstanding products at reasonable but not low prices are stuck in the middle and struggle because of unfocused decision making in either the benefit or cost areas. However, some firms can be successful by positioning themselves in the middle, but with a higher B – C than competitors. For example, the retailer Kohls offers a lower quality shopping experience than Nordstroms, yet better than Walmart, at prices higher than Walmart, yet lower than Nordstroms. Kohl’s B and C are lower than Nordtroms, but its B – C is higher. Contrawise, its B and C are higher than Walmart, yet still its B – C is higher.
11. Recall from Chapter 2 Adam Smith’s dictum, “The division of labor is limited by the extent of the market.” How does market growth affect the viability of a focus strategy?
Under a focus strategy, a firm concentrates either on offering a single product or serving a single market segment or both. Four examples of focus strategies are:
1. Product specialization: The firm concentrates on producing a single type of product of a variety of different market segments.
2. Geographic specialization: The firm offers a variety of related products within a narrowly defined geographic market.
3. Customer specialization: The firm offers a variety of related products to a particular class of customers.
4. Niche strategy: A firm produces a single product for a single market segment
The basic economic logic of a focus strategy is that the firm is sometimes able to achieve deep economies of scale by concentrating on a particular segment or a particular product that is would be unable to exploit if it expanded beyond the segment or product it is concentrating on. The growth of
a market can make a focus strategy that at one time was not feasible become a very profitable opportunity. Growth might also increase the benefits of economies of scale for the focuser. If a market grows to the point where a firm’s economies of scale are exhausted, the firm might have to worry about entry.
12. “Niche strategies are generally more profitable than “mass-market” strategies because they usually imply weaker price competition.” Comment.
Niche strategies (focus strategies) often insulate a firm from competition. If the focuser’s industrial segment is small – either because it offers a narrow set of product varieties or serves a narrow set of customers, or does both – it may face little competition and earn substantial returns. Fewer competitors reduces price competition and allows the niche firm be more flexible in its pricing strategy.
13. “Firms that seek a cost advantage should adopt a learning curve strategy; firms that seek to differentiate their products should not.” Comment on both of these statements. A learning curve strategy is one in which a firm seeks to reduce costs by learning. This is but one of many ways in which a firm can achieve a cost advantage. Other cost drivers include economies of scale, economies of scope, capacity utilization, economies of density, process efficiency, government policy, and a firm’s location.
Learning curves can also confer quality advantages. If there is a first mover advantage in establishing a particular quality position (say the goods are experience goods), then it may pay to push aggressively down the learning curve to gain that quality advantage. Therefore, pursuing a learning curve strategy could be advantageous to both firms that seek a cost advantage and firms that seek to differentiate their products.
14. Suppose that two firms compete in a market where consumers have identical preferences. The benefits and costs of the two firms are B1, C1 and B2, C2 respectively, where B1 – C1 > B2 – C2. What price should firm 1 set so that it can capture the entire market and maximize profits. With firm 1 already having a better (higher) B – C, its product price should be set below that of firm 2. Since consumers have equal preference for both products, with firm 1 already having a B – C advantage, setting its price below that of firm 2 will increase consumer surplus for its product and ultimately capture the entire market.
15. Consumers often identify brand names with quality. Do you think branded products usually are of higher quality than generic products and therefore justify their higher prices? If so, why don’t all generic product makers invest to establish a brand identity, thereby enabling them to raise prices?
There are two possible outcomes when comparing barns products to generics. In the first, assume consumers view the brand product of higher quality than the generic. In this case, the B is higher and so is the C. However, B – C may be a lower result than achieved by the lower B and lower C generic product. This result leads the generic producer to continue its strategy and not invest in brand identity. In the second case, assume consumers view the brand product and generic as having the same quality. In this case the brand product will recognize a lower B – C since its C is higher, while
the lower C product recognizes a higher B – C. Again there is no reason for the generic producer to invest in building a brand identity.
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vaarin kulkevan, peitti ne lehdillä, ja vaariparka pisti käpälänsä rautoihin ja sairasti siitä monta päivää. Päästyään jaloilleen, vahti vaari tilaisuutta kostaakseen naapurin isäntämirrille. Tapasikin tämän kerran ongella. Näki naapurin köyttäneen itsensä ongen vapaan siltä varalta, että jos sattuisi iso kala tarttumaan onkeen, ja hän sattuisi nukkumaan, niin ei kala veisi onkea mukanaan. Naapurin mirri nukkuikin ja Mirrilän vaari sitoi nuoran ongen vapaan ja kiskaisi isäntämirrin veteen.
Tietää sen, mikä mökä tästä syntyi, ja arvaa senkin, että entisestään huonot välit vain huononivat.
Satuttiin kerran yhteiselle kalapaikalle samalla kertaa. Mirriläiset aikoivat onkia, mutta naukuniemeläiset virittivät verkkonsa ihan naapurien nenän eteen. Mirriläiset heittivät onkensa verkkoihin ja vetivät ne maalle. Siitäkös tappelu syntyi.
— Kyllä me tässä teidät opetamme kiusaa tekemään, sähisivät Naukuniemen mirrit ja katselivat aseikseen seipäitä.
— Ja me teidät toisten pyyntipaikoille tulemaan, murisi Mirrilän vaari ja kopisteli uhittelevasti piippuaan. — Ottakaapas, pojat, vähän näreistä käteen, niin näytetään noille. Naisväki ottakoon aseikseen kiviä.
Kohtapa hosuttiin vastakkain ja päitä puhkeili ja häntiä katkeili mirrilöiltä molemmin puolin ja ökä kävi semmoinen, että kuului kylille asti. Katkottiin siinä nujakassa mirriläisten onget ja naukuniemeläisten verkot menivät kappaleiksi.
Eikä muuta kuin toinen toisensa haastattivat käräjiin. Hukka Hujulainen toi haasteet molemmin puolin ja Mikko Repolainen
määrättiin tuomariksi.
Käräjät pidettiin Hujulaisen mökillä ja Repolainen tulla veistätteli käräjäpaikalle miettien, miten juksauttaisi taas mirrejä, jotka olivat hänen mielestään niin joutavanpäiväisiä.
Käpälät ja hännät kääreissä istuivat mirrit Hujulaisen tuvassa, kun Mikki astui sisään.
Repolainen istui pöydän päähän ja rykäisi arvonsa mukaisesti muutamaan kertaan, ennen kuin virkkoi mitään.
Niistäpä palkoista sitä taas piti ensiksi kovistella mirrejä.
Teetättivät hänellä aina näitä virkatöitä, mutta olivat kovin huonoja palkan maksajia.
— Tuota… sitä pitäisi saada tämmöisestä puuhasta kappa ohria jokaista mirriä osaksi, sanoi. — Tässä pitää minun sihteerikin itselleni palkata ja muutenkin… on niin kovaa työtä tämä oikeuden istuminen… tässä päätään tyhjästä vaivaamaan.
Mirrilän vaari kynsi korvallistaan ja paljoksui Mikin vaatimuksia.
— Menee ihan koko vuositulot näistä tuomarin palkoista. Ja se on kaikki naukulaisten syytä. Mutta kuulehan, herra tuomari Repolainen, eikös se olekin niin, että se joka jutussa häviää, saa maksaa oikeuskulut?
— Niin tietysti, myönsi Repolainen. — Joka tässä havaitaan syylliseksi, saa maksaa ohrat minulle. No, kutsukaapa todistajat sisään, kuulustellaan niitä ensin.
Mirriläisillä oli todistajina sammakkolaisia ja nämä kömpivät sisään.
— Nämä sammakkolaiset ovat suuria valehtelijoita, murisi
Naukulan isäntä. — Ei näistä ole todistajiksi. Tulkaapa meidän todistajat, niin saadaan kuulla totuutta.
Naukulaisten todistajina oli muutamia vasikoita, jotka olivat sattuneet paikalle ja tyhmän näköisinä kolisivat sisään.
— No mitä nämä vasikat tietävät tähän mirrien tappelujuttuun? kysyi Mikki.
No eihän nämä mitä, ynisivät vain ja tuuppivat toisiaan. Joku astui Mirrilän muorin varpaille ja tämä veti kynnellään tyhmyriä silmään.
— Nämä mirriläiset näkyivät aloittavan tappelun, mölähti viimein yksi.
— Pidä sinä turpasi kiinni, kivahti mirrivaari. — Kuullaanpa, mitä sammakkovaari sanoo.
Niin siinä jauhettiin ja jutustettiin kokonainen päivä, eikä valmista tahtonut tulla jutusta mitenkään. Mikko pyyhki hikeä otsaltaan, mutta jopa vihdoinkin teki tuomion.
Kun kerran kävi selville, että mirriläiset olivat ensiksi heittäneet onkensa verkkoihin, saivat he maksaa kaksikymmentä kappaa ohria tuomarille. Oli näet näitä nakattajoita kokonaista kaksikymmentä kappaletta. Naukulaiset olivat kuitenkin jääneet tappelussa vähemmille kuhmuille eikä heidän mirreiltään ollut häntiäkään katkeillut kuin yhdeltä, jota vastoin mirriläisiltä oli mennyt kuusi häntää poikki, niin Mikko katsoi olevan syytä tuomita lisäselkäsauna naukulaisille ja se oli pantava toimeksi viipymättä.
Jopa. Naukulan vaari murisi uhkaavasti tämän tuomion kuullessaan ja Mirrilän muori ihan huutamalla nakatti:
— Vai kaksikymmentä kappaa ohria! Nyt ei saa enää rieskan palaa tänä vuonna Mirrilässä. Semmoinen siinä olikin tuomari!
— No, maksetaan ohrat, mutta annetaan myöskin kukakäskiä naukulaisille, sanoi Mirrilän isäntä.
Repolainen hieroi käpäliään tyytyväisyydestä ja myhähteli. Vetelipä se taaskin, kun sai talvekseen ohria ja vielä nauttia kaupan päällisiksi mirrien tappelunäytelmästä.
Repolainen määräsi aseiksi hierimiä, kauhoja, sateenvarjoja ja muita sellaisia, ja suhisten ja syljeksien varustautuivat naukulaiset tappeluun. Selkiään siinä köyristelivät mirriläisetkin ja joku oli ottanut salaa aseekseen Hujulaisen puntarin, jolla aikoi puhkoa päitä naukulaisilta.
Jopa kohta kävi huiske, kun mirriläiset suuremmalla miesvoimalla pehmittivät naapurejaan. Mikko nauroi ja piteli mahaansa, eikä Hujulainenkaan malttanut pysyä totisena. Kukko Kiekujainen oli ollut sihteerinä Repolaisella, ja hän ei tahtonut työstään muuta palkkaa, kun sai kerran katsoa näin huvittavaa näytelmää.
Tietää sen, että naukulaisten vuoro oli nyt jäädä häviölle. Naukulan isännältä revittiin ihan uudet sarkahousut ja emännältä puhkesi silmä ja kahdelta pojalta katkesi häntä.
Mutta nytpä päätettiinkin, että oltaisiin aina sulassa sovinnossa, eikä riideltäisi kalapaikkojen ja hiirestysmaitten takia, kun kävi näin
riitainen elämä kovin huvaksi ohrille ja muutenkin tuli ruumiinvammoja ja vahingoita.
Saa sitten nähdä, pitävätkö nakattajat lupauksensa.
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