Lecture 5 - Competitive Advantage

Question 1

What are the two possible sources of competitive advantage?

Answer 1

Cost and differentiation

Question 2

What are Porter’s 4 generic positions for firms?

Answer 2

Broad or Narrow
Cost Leadership or Differentiation
(All combinations)

Question 3

What is differentiation?

Answer 3

Uniqueness in the product in some dimension that is appealing to the customer, not just anything.

Question 4

When considering differentiation, what should be considered about the customer and other firms?

Answer 4

The needs of the customer
The abilities of competitors

Question 5

What are the 3 ways to differentiate?

Answer 5

Product Qualities
Customer Relationships
Complements

Question 6

What are three differentiating product qualities?

Answer 6

Brand
Quality
Limited edition
Country of origin
Sustainability

Question 7

What are two differentiating customer relationship elements?

Answer 7

Convenience
Customer services and support
Customisation

Question 8

What are utilitarian and hedonistic needs?

Answer 8

Utilitarian is a psychological need e.g. need to eat
Hedonistic is not, e.g. because it’s cool

Question 9

Why are utilitarian and hedonistic needs important?

Answer 9

When considering how to augment products or services, it is important to consider what type of need you are meeting for the customer, so that the importance of the augmentation can be assessed.

Question 10

How does competitive advantage get eroded?

Answer 10

Spending too much trying to gain the differentiation factor such that the price is too high for customers due to the cap on what they’re willing to pay.
Attempting to differentiate in irrelevant areas that don’t actually benefit the mainstream/main body of your targeted customers (e.g. Google docs vs Word)

Question 11

What are 5 ways to achieve cost leadership?

Answer 11

Low input costs
Economies of scale
Experience
Product design
Process design

Question 12

What is cost leadership?

Answer 12

A business strategy where a firm has lower than average costs that can be used to gain an increased profit margin compared to competitors. A firm aims for cost leadership in both its fixed and variable costs.

Question 13

What is the minimum efficient plant size?

Answer 13

The point at which most scale economies are exhausted

Question 14

Define learning effects.

Answer 14

Getting cheaper over time from technology advancement and experience. More production results in greater learning effects.

Question 15

How can product and process design contribute to a cost leadership strategy?

Answer 15

More modular or efficient manufacturing can be faster or cheaper because specialisation can come later. Faster economies of scale and learning effects from potentially greater production. Training is simpler for employees. Simpler design means less components and potentially greater economies of scale on the few that are in the design.

Question 16

What are the 7 drivers of cost advantage?

Answer 16

Capacity utilisation
Economies of scale
Learning effects
Production techniques
Product design
Input costs
Residual efficiency

Question 17

What is residual efficiency?

Answer 17

Organisational slack, motivational culture and managerial efficiency are parts of residual efficiency

Question 18

What factors make up capacity utilisation?

Answer 18

Ratio of fixed:variable costs
Speed of capacity adjustment

Question 19

How can a cost leadership strategy go wrong?

Answer 19

Get caught in a race to the bottom with competitors where it is harder and harder to go lower.
Customers are likely to be mobile to switch to the lowest, so if someone else outdoes you, you’re out.

Question 20

Cost leaders MUST be ____.

Answer 20

Big!

Question 21

What do cost leaders mostly focus on in terms of redesign? Product or process?

Answer 21

Processes. E.g. making manufacturing cheaper by making it simpler and more efficient

Question 22

What do differentiators mostly focus on in terms of redesign? Product or process?

Answer 22

Product. They want to keep it as distinctive as possible. E.g. reworking a recipe to make it appeal more to mainstream tastes or adding new flavours.

Question 23

What is dual advantage and what is an example of a firm with dual advantage?

Answer 23

Dual advantage is the idea of having both cost and differentiation aspects. Ikea is an example.

Question 24

When differentiating, what is important about how you redesign in terms of customers?

Answer 24

Choosing which customers you would like to cater for, and then also how you cater to them (needs and types of needs)

Question 25

What is blue ocean strategy?

Answer 25

The idea of trying to compete in an uncontested market space.

Question 26

How do you try and execute a blue ocean strategy?

Answer 26

The 4 actions framework:
Raise above industry standard
Eliminate superfluous elements that are being competed on (e.g. microwaves’ 1000 unused features)
Reduce some factors well below industry standard
Create new features never offered before

Question 27

What is the 4 actions framework?

Answer 27

“Kernel of blue ocean strategy.”

Raise above industry standard
Eliminate superfluous elements that are being competed on (e.g. microwaves’ 1000 unused features)
Reduce some factors well below industry standard
Create new features never offered before

Question 28

What is the price elasticity of demand?

Answer 28

The relationship between price changes and demand changes in a market.

Question 29

What is an example of an input cost?

Answer 29

Having lower square footage in your store

Question 30

What is red ocean strategy?

Answer 30

Competing in an existing market space and beating the competition in it