BUS 640 Week 6 Final Assignment

BUS640Chapter12.pdf

Home >Business & Finance homework help >Economics homework help >BUS 640 Week 6 Final Assignment

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 1/21

The Economics of Competitive Strategy

Learning Objectives

A�er reading this chapter, you should be able to:

Describe why the firm needs to follow a specific compe��ve strategy if it is to gain superior and sustained profitability. Explain how the pursuit of sustainable compe��ve advantage is effec�vely the same as pursuing the maximiza�on of the firm's expected net present value (ENPV). Iden�fy why Porter's three generic strategies operate to increase the firm's profitability, and why Porter's five forces operate to reduce the firm's profitability. Describe the "resource-based view" and the importance of the firm gaining control of resources that are valuable, rare, hard to copy, and nonsubs�tutable. Reconcile Porter's five forces with the resource-based view as alterna�ve explana�ons of how the firm can a�ain sustainable compe��ve advantage. Outline strategies to reduce the impact of Porter's five forces, to increase the inimitability of strategic resources, and to reduce business risk to acceptable levels.

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 2/21

Introduction

Strategies are ac�ons undertaken to achieve desired outcomes. Compe��ve strategies are ac�ons undertaken to win a compe��on or a�ain maximal results. We began this book with the assump�on that the business firm will want to maximize profit in the short run, or alterna�vely, to maximize the expected net present value (ENPV) of profits. In the real world, where the firm's �me horizon is usually longer than the short run and it operates in an uncertain business environment, the ENPV criterion is generally appropriate. Thus, we expect the business firm to adopt compe��ve strategies designed to maximize the ENPV of profit.

The preceding chapters of this book have laid the founda�on for the discussion of the firm's compe��ve strategy. In Chapters 1 and 2, we discussed managerial decision making under risk and uncertainty. In Chapter 3, we examined consumer behavior to be�er understand how consumers make choices among compe�ng firms. In Chapter 4, we examined the determinants of the demand func�on to iden�fy the independent variables that drive consumer demand for the firm's product. In Chapter 5, we considered produc�on and cost func�ons to be�er understand how the firm might achieve produc�on and cost efficiencies. In Chapter 6, we considered incremental cost and revenue analysis to be�er es�mate the contribu�on to overhead costs and profit that would follow a decision. In Chapters 7 through 10, we examined the profit-maximizing pricing strategy in a variety of market situa�ons. Finally, Chapter 11 covered nonprice strategies designed to increase the firm's profitability. These 11 chapters cover the basics of managerial economics and provide us with the knowledge and tools we need to now discuss the economics of compe��ve strategy.

In the preceding chapters we considered decisions that maximize profit (or ENPV) on the basis of the resources that the firm currently possesses or controls

in the short run.1 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch12introduc�on#Ch12footNote1) But when the firm's �me horizon is longer than the short run, it will need to consider that profit maximiza�on in the short run (and thus se�ng a rela�vely high price) will induce expansion by rival firms and will also a�ract entry of new firms into the market unless they are prevented by barriers to entry. Thus, the firm that wants to maximize its ENPV must make strategic decisions designed to inhibit the entry of new firms and to insulate its demand from the impact of rival firms' strategies that are designed to steal market share. When the firm is trying to maximize its ENPV, any decision made in the present period must take into account the longer term implica�ons of that decision. This typically means that some part of short-run profit that might have been earned must be sacrificed in favor of a greater long-term profit (i.e., greater ENPV of profit).

Sustainable Competitive Advantage

Michael Porter (1980) introduced the no�on of sustainable compe��ve advantage, by which he meant a con�nuing and superior rate of profitability as compared with other firms in the same industry (Porter, 1980). In earlier chapters, we discussed normal profits and pure profits. Normal profit was defined as the level of profit that is just sufficient to keep the firm in the industry, and thus includes the opportunity cost of the firm's resources. Thus, normal profit is equal to the rate of profit that the firm could earn in its next-best-alterna�ve deployment of the resources that it owns. Pure profit was defined as the excess of profit earned that is over and above normal profit. Porter's sustainable compe��ve advantage means the firm's ability to earn pure profit on a con�nuing basis, meaning that other firms are unable to compete to such a degree that the focal firm's profit falls back to the normal profit level or below.

Porter argued that firms may be able to a�ain sustainable compe��ve advantage by the adop�on of a par�cular compe��ve strategy, which can be defined as a coherent and internally consistent set of decisions designed to achieve the firm's objec�ves. Porter brought to our a�en�on that within any industry, the rival firms can be quite different in their cost structures and product quality and also in their profitability. He emphasized that the differences in the financial performance among firms within the same industry is due to their adop�on of forward-looking compe��ve strategies. Rather than making short- run decisions that are simply a profit-maximizing response to their current demand and cost situa�ons, he argued that firms consider the future impacts of their current ac�ons and make decisions according to their longer term strategy.

Corporate Social Responsibility and the Triple Bottom Line

More recently, two other objec�ves have joined profit as important longer term considera�ons for the business firm. These are the a�ainment of beneficial social outcomes, and the a�ainment of beneficial environmental outcomes. As we noted in Chapter 1, firms are now expected to exhibit corporate social responsibility, which means they cannot simply maximize profits or ENPV without considering the firm's impact on social welfare and the natural environment. The firm's produc�on and sales ac�vi�es will almost certainly impose damaging external effects on other people and on the natural environment; these are external social and environmental costs associated with produc�on that are caused by, but are not paid for by, the firm.

External social costs include the monetary and psychic costs imposed on workers, nearby residents, and customers due to produc�on and consump�on of the firm's product. External environmental costs include the damage done to the physical landscape, vegeta�on, and the quality of air and water due to the produc�on and consump�on of the firm's product. If the firm does not compensate people for these social costs, or repair the natural environment that it has damaged, these costs that remain external to the firm (known as nega�ve externali�es) are not internalized by the firm, and thus the private costs of produc�on (to the firm) are less than the total costs of produc�on to society and the natural environment. When these external costs are brought to the a�en�on of the firm, it has two basic choices: either to change its business methods to eliminate these external costs, or to internalize the costs by making payments to individuals or organiza�ons to compensate injured members of society and to repair the natural environment. Business firms tend to be reluctant to internalize nega�ve externali�es unless forced by legisla�on to do so, although though�ul discrimina�on by investors, suppliers, and consumers against firms that do not display sufficient corporate social responsibility is now causing managers to factor these social and environmental externali�es into their decision making. In effect, instead of judging a firm's performance by its bo�om-line profit, managers, and society more generally, are judging the

https://content.ashford.edu/books/AUBUS640.12.1/sections/ch12introduction#Ch12footNote1

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 3/21

Michael Porter introduced the no�on of sustainable compe��ve advantage, which is a con�nuing and superior rate of profitability compared to other firms in the same industry.

firm's performance by the triple bo�om line of economic, social, and environmental

outcomes.2 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch12introduc�on#Ch12footNote2)

In Chapter 1 we noted that the objec�ve func�on of individuals can be modeled as the maximiza�on of their psychic sa�sfac�on, or u�lity, and that while u�lity is derived (via consump�on of goods and services) from income or profit, it is also derived from good social and environmental outcomes. Conversely, disu�lity is derived from contribu�ng to or experiencing bad social and environmental outcomes. Thus, stakeholders of firms— managers, shareholders, employees, customers—should all be expected to want be�er economic, social, and environmental outcomes for the firm. Given the mobility of financial and human resources in the market system, those consumers, employees, and shareholders that want the triple bo�om line outcome will gravitate toward firms that offer such outcomes and will tolerate reduced financial returns if they are gaining be�er social and environmental outcomes. Meanwhile, legisla�ve restric�ons on social and environmental damage will become increasingly stringent to bring into line firms who are slow to adopt the triple bo�om line philosophy. Increasingly, when poli�cians and others speak of sustainability as a prime objec�ve of a na�on or the world, they are referring to the triple bo�om line objec�ve of profits, social well-being, and environmental protec�on. Note that this usage of the word "sustainability" is different from the usage in "sustainable compe��ve advantage" where sustainability means ongoing profitability (or

pure profit that is sustained over �me).

1. You will recall that the short run is the period during which some of the firm's resources are in fixed supply, such that neither the firm nor its rivals can expand their plant size, nor can new firms enter the industry in the short run, since this requires expanding plant size from zero to some larger size. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch12introduc�on#return1) ]

2. Note that firms may also create posi�ve externali�es as byproducts of their produc�on. These are social and environmental external benefits that accrue to members of society (and to wildlife) and to the quality of the air, water, and physical landscape, for which the firm is not compensated. Such posi�ve externali�es also enter the triple bo�om line reckoning and their provision is o�en seen as an important element of corporate social responsibility. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/ch12introduc�on#return2) ]

https://content.ashford.edu/books/AUBUS640.12.1/sections/ch12introduction#Ch12footNote2

https://content.ashford.edu/books/AUBUS640.12.1/sections/ch12introduction#return1

https://content.ashford.edu/books/AUBUS640.12.1/sections/ch12introduction#return2

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 4/21

Godiva Chocola�er is an example of a focus firm because it aims to be the quality leader in its market segment.

12.1 Porter's Generic Competitive Strategies

Porter (1985) outlined three main compe��ve strategies that are generic in the sense that they can be applied in a wide variety of market situa�ons. Porter stated that the firm should choose either (a) to be the low-cost firm; (b) to differen�ate its product from rival products; or (c) to focus on a niche market within the broader market. Porter argued that firms must adopt one of these compe��ve strategies, or otherwise will lose profits to those rival firms that have adopted a specific compe��ve strategy.

The low-cost firm would strive to minimize its cost of produc�on (for any par�cular output and quality level) and by so doing would increase its contribu�on margin (i.e., P – AVC) by reducing its AVC, and hopefully also would reduce its AFC due to greater volumes sold at the lower price made possible by the lower cost structure. A firm following a low-cost strategy seeks economies in administra�on, produc�on and marke�ng, striving to be as lean as it can be without compromising the level of quality it chooses to produce and be known for. Thus, low-cost firms try to widen the price-cost (or contribu�on) margin primarily by reducing the costs per unit. Such firms try to a�ain greater produc�on and sales volumes in search of learning curve effects, economies of scale, economies of scope, marke�ng economies, and/or pecuniary economies (i.e., buying materials and components in bulk to gain a lower cost per unit of those items).

The differen�a�ng firm strives to gain superior profits by producing a product or service that is different from those supplied by rivals. The differen�a�ng firm seeks to have its product recognized as being of higher quality, and, thus, be�er serving the target customer's needs and preferences. Thus, a differen�a�on strategy means trying to make a product or service that is of higher quality in the eyes of the target customer, such that the customer is willing to pay a higher price for it. But higher quality almost invariably costs more to produce than lower quality, so the differen�a�ng firm strives to widen the price-cost margin by increasing its selling price by a higher propor�on than the increase in its produc�on costs that are due to higher quality. Thus, the differen�a�ng firm would spend more on product quality (raising AVC and possibly also AFC) to allow its product to be differen�ated from those of rivals and thus to achieve a higher price point. Its profits will be increased if it is able to raise price by more than it has raised unit costs. Note that many firms in the same market can be differen�ators when the preferences of customers differ—each firm may differen�ate its product to produce the best product or service for a par�cular customer or a par�cular group

of customers (i.e., for its niche market).3

(h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.1#Ch12footNote3)

The focusing firm, rather than seeing the market as a whole, will focus on a subset of the market. It may choose to focus on either (a) a geographic market area or (b) a niche market for a par�cular variant of the product. In its par�cular geographic area or niche market, the firm will then try to be either a low- cost firm or a differen�a�ng firm. For example, a prin�ng firm might focus on the "business cards" segment of the na�onal market and either try to sell business cards at the lowest price, or, alterna�vely, offer high-quality business cards. Alterna�vely, the prin�ng firm might focus its marke�ng efforts geographically to, say, the western suburbs of the city, and offer a wider range of printed products (including local newspapers, leaflets, wedding invita�ons, and business cards) and strive to give the best prin�ng quality and service to customers in that geographic region.

The Relationship Between Information Cost and Strategy Choice

In Chapter 11, we noted that products can be categorized according to the magnitude of the search cost necessary to ascertain product quality. The types of product we refer to are search, experience, and credence goods. To review briefly, poten�al buyers are exposed to quality risk un�l they verify that the quality is as claimed by the seller. This process of informa�on discovery and quality verifica�on will cost the customer �me and money. Alterna�vely, the seller can provide the informa�on and sample products free or in small package sizes to induce trial and subsequent purchase. For some products, this search process is quick and inexpensive, such as looking over the cut and quality of a jacket. For other products, such as a restaurant meal, one really has to experience (and thus pay for) the meal in order to know or verify the quality a�ributes. Thus, search goods are goods with quality a�ributes for which the customer can quickly and inexpensively determine the quality level, while experience goods are those that must be experienced before one can know the quality. With experience goods the consumer must rely on informa�on from others who have previously consumed the product, including online reviews, or take advantage of "taste tests" offered by the seller. For "pure experience goods" the quality informa�on gained is reliable for future purchases as well, due to the consistency of the product's quality over �me, such as Coca-Cola's beverages or McDonald's hamburgers. Credence goods, on the other hand, are experience goods for which previously gained informa�on is not likely to be reliable, due to the seller's inability (or unwillingness) to completely control produc�on or delivery quality. Thus, a meal in a restaurant, and the performance of a rock band, are two examples of credence goods. The quality the next �me you purchase one of these products may be quite different from the quality experienced the previous �me. In effect, you have to "pay your money and take your chances" that the quality will turn out to be as expected (or as promised by the supplier). In the next sec�on, we will see that there is a logical connec�on between the type of product according to its informa�on search costs and the generic strategy that might best be applied to the product.

Search Goods and the Cost-Leadership Strategy

A search product may have a unique feature that allows differen�a�on on the basis of that unique feature, but if not, or if these features are easily imitated, a cost leadership strategy is indicated since customers can easily ascertain the rela�ve quali�es of the rival products available. If a search product is

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.1#Ch12footNote3

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 5/21

Loyal Colgate toothpaste users are unlikely to respond to a price reduc�on for a rival brand of toothpaste if they are unfamiliar with the quality of the rival product.

clearly superior in quality, it can sustain a price premium, but if all products are more or less of similar quality then the forum for inter-firm rivalry will shi� to price, and price compe��on will tend to force price levels downward. Accordingly, the firm with the lowest cost structure will be in the best posi�on to survive and make superior profits.

With search goods it is also easy for rivals to see what makes your product superior, and this may make it easy for them to copy those features. Thus, a search product with dis�nc�ve features may soon face compe��on from other firms that have matched those features, forcing it to reduce any price premium it may have enjoyed. If product innova�ons are easily copied, differen�a�on is possible only for short periods un�l rivals copy the innova�ons, and then the strategy must revert to cost-leadership (unless the firm can innovate relentlessly). In markets where quality is similar across all brands, the firms will tend to focus on price compe��on with occasional nonprice strategic ini�a�ves that will soon be copied or countered by rival firms' nonprice ini�a�ves. For example, economy-class passenger air transporta�on is essen�ally a search good. The prospec�ve customers can easily find out the main quality aspects that enter their decision to buy or not buy the product (such as �mes of departure and arrival, rou�ng, number of stops en route, aircra� type and model, and seat selec�on). You will no�ce that airlines tend to adver�se their discounted prices of their economy air travel service, rather than the comfort of their

seats or other qualita�ve aspects.4 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.1#Ch12footNote4)

Experience Goods and the Differen�a�on Strategy

With experience goods, qualita�ve differences may be claimed that may be true or may be false since the customer cannot verify the quality claims un�l a�er purchase (or at least sampling) of the product or service. Note that fraud is possible in this situa�on, par�cularly where prepurchase samples are not given and where guarantees are unenforceable for some reason. Thus, word-of-mouth informa�on from other customers and celebrity endorsements carry greater weight than the (probably biased and possibly fraudulent) quality claims of the seller. In the olden days, "snake oil" salesmen would sell po�ons claiming to fix all medical problems, and would ride over the horizon before their quality claims could be disproved. These days, baldness and wrinkle treatments might seem to be the modern counterpart of snake oil, although laws against fraud and misrepresenta�on limit the claims made by sellers.

Note that the price elas�city of demand (i.e., customer willingness to switch products when there is a small price reduc�on) for experience goods will be significantly less than for search goods, because customers will be unsure whether the cheaper product represents be�er value (because quality is less transparent). Thus, the incen�ve to reduce prices is reduced or even eliminated and rivalry will take place in terms of product features and claimed benefits. The firm with a differen�ated product should focus on nonprice strategic ini�a�ves, u�lizing occasional price compe��on to reflect cost reduc�ons or to reduce excess inventories. For example, automobile companies introduce periodic model changes with new product features (product design strategy), adver�se their differen�ated product features heavily (promo�on strategy), and maintain a network of dealerships offering convenient sales and service loca�ons (place of sale strategy). Between these periodic bursts of nonprice compe��on, these companies offer discounts and low-interest loans (price strategy).

For pure experience goods (i.e., those for which prior consump�on experience provides reliable informa�on about future product quality), regular customers already know the level of quality, so they will know that a price reduc�on for their preferred brand offers them be�er value, but conversely, a price reduc�on for a rival's product will not likely induce them to switch if they are unfamiliar with the quality of the rival product. Thus, most Coke drinkers are unlikely to switch away from Coke when Brand X cola drops its price by 50 cents. Coca-Cola does be�er by keeping its price rela�vely high and adver�sing the claimed "unique taste" of Coke.

The implica�ons of this for compe��ve strategy are that if the firm's product has some unique feature that gives it a qualita�ve advantage, the firm will be best served by a differen�a�on strategy that will capitalize on that qualita�ve advantage, as long as this advantage lasts. If the advantage is durable, for example due to intellectual property protec�on or possession of a superior reputa�on and brand name, then the firm can con�nue to follow a differen�a�on strategy. If this advantage is likely to disappear, because rivals can soon copy the product a�ributes, the firm must expect to revert to a

cost-leadership strategy.5 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.1#Ch12footNote5) Table 12.1 summarizes the rela�onship between the degree of product differen�a�on, the cost of informa�on, and the generic compe��ve strategy that is most likely to be appropriate.

Table 12.1: Rela�onship between informa�on cost and compe��ve strategy Product Differen�a�on

Informa�on cost LOW HIGH

LOW (Search goods)

Low-cost leadership Differen�a�on strategy, or low-cost leadership**

HIGH (Experience goods)

Low-cost leadership, or differen�a�on strategy*

Differen�a�on strategy

The single asterisk (*) in Table 12.1 is to draw a�en�on to the fact that even if informa�on cost is high, when product differen�a�on is low, firms may fraudulently claim their product to be more differen�ated than it really is, un�l the correct informa�on flows to customers either from personal experience

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.1#Ch12footNote4

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.1#Ch12footNote5

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 6/21

or by "word-of-mouth" informa�on from trusted people either directly or via the Internet and social media. This will be par�cularly so if the experience good is a credence good—where prior experience cannot be relied upon for future consump�on decisions. Using Internet search engines, the wary consumer can seek current informa�on from recent consumers of the product or service and gain current informa�on about product quality, albeit that some of this informa�on might be biased repor�ng—either posi�ve bias by "friends of the firm" or nega�ve bias by disaffected former patrons.

The double asterisk (**) in Table 12.1 is to draw a�en�on to the case where, even when product differen�a�on is high, if search costs are low, rivals may be able to iden�fy the basis for differen�a�on and subsequently copy it, such that the product category moves le� into the low differen�a�on category, and a low-cost strategy becomes more appropriate. Alterna�vely, for pure experience goods, where the differences can be seen but cannot easily be copied (for example, due to their strong brand names, such as branded hamburger chains or major beverage companies), the lower-quality firms will need to set lower prices in order to offer a compe��ve value proposi�on.

The Value-Maximizing Strategy

Pursuit of a superior value proposi�on can be achieved either by increasing quality or by reducing price, or by a combina�on of the two. That is, if the firm tries to make its product both less expensive and qualita�vely be�er than rival offerings it should expect to carve out a healthy market share in an exis�ng market. An example of a value-maximizing strategy is seen in the laptop computer market, where laptops are sold at increasingly lower prices but with increasingly be�er performance features and other user benefits. Thus, new customers are a�racted both by the lower prices and by the addi�onal qualita�ve features incorporated into successive laptop models. Thus, while a cost-leadership strategy (offering the same or similar quality at a lower price) offers be�er value to the customer, and a differen�a�on strategy (offering be�er quality at a higher price) will also offer be�er value (if quality is raised by more than price is raised, and compared to the best-value exis�ng product), the combina�on of the two is likely to be even more potent.

3. Note that quality is as perceived by the consumer. The highest quality for Mr. X is the product that best suits his par�cular tastes and preferences, that is, it provides the a�ributes that Mr. X seeks. But remember that the purchase decision is made on the basis of value (which equals quality over price), so the consumer may not choose the highest quality product if it is not seen as the best value proposi�on—for example, I really like Ferraris, but do not own one. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.1#return3) ]

4. Business- and first-class services, on the other hand, are typically promoted by their qualita�ve features, with price usually not men�oned, since the person flying is either quite wealthy or the airfare is being paid by a firm or organiza�on (which is less sensi�ve to the affordability of the airfare). [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.1#return4) ]

5. Note that in monopolis�c compe��on, where there are no barriers to entry and firms ul�mately make only normal profits because rivals copy their product differences, firms must strive to have the lowest-possible costs in order to survive in the long run. Similarly, firms in pure compe��on must follow a low-cost strategy to allow them to earn normal profits—if not they must exit to avoid taking losses. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.1#return5) ]

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.1#return3

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.1#return4

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.1#return5

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 7/21

A common risk-reducing strategy is to lock the buyer into a longer-term agreement to avoid being forced to accept a lower price at short no�ce when a product may be at risk of deteriora�on or obsolescence if not sold.

12.2 Porter's Five Forces

In his 1980 book, Porter argued that in any industry there are five forces that might operate to reduce the firm's profitability, and he advocated strategies to mi�gate these five forces. The five forces that might operate to capture part of the firm's profitability relate to the number of buyers, the number of suppliers, the height of barriers to entry, the availability of subs�tutes, and the extent of inter-firm rivalry, which we shall consider in turn.

Star�ng with buyers, if there is only one buyer (i.e., a monopsony), the supplier firm is at risk of having its price forced downwards because the single buyer can adopt a "take it or leave it" nego�a�ng stance. Even if there are a few buyers (i.e., an oligopsony), their fewness facilitates their ability to act in conscious parallelism or collusively to fix price at a lower level than would occur if they were to compete to purchase the firm's product. Conversely, when there are many poten�al buyers, any single buyer cannot induce a lower price by refusing to buy at the seller's price—the seller simply looks for other

buyers who are willing to pay the asking price.6 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.2#Ch12footNote6)

Second, if there is one or only a few suppliers of necessary inputs (i.e., a monopoly or an oligopoly in the resource markets), the new venture is at risk of increased input prices due to the ability of the monopoly supplier to refuse to sell at a lower price or the ability of the oligopoly firms to act in conscious parallelism (or perhaps to collude) to keep prices at a rela�vely high level. If there were many suppliers, the buyer could seek alterna�ve sources of supply at lower prices.

Third, if the barriers to entry are low, the firm is subject to the entry of new firms that would compete for market share and poten�ally drive prices downward and thus drive the firm's profit down to the normal profit level or below. The poten�al for entry of new firms in the long run may mean that the focal firm cannot set the profit-maximizing price in the short run, since that higher price level would a�ract the entry of new firms and cause lower profitability in subsequent �me periods.

Fourth, if the threat of subs�tutes is high, the firm's profits could be reduced in future periods by the advent of new ways to sa�sfy the customer's needs. For example, plasma-screen TVs were subject to the threat that TVs with liquid crystal display (LCD) screens would be developed, and later the LCD screens were replaced by light-emi�ng diode (LED) screens. Similarly, three-dimensional (3D) televisions threaten to replace two-dimensional (2D) televisions. In each case, the threat of the new (subs�tute) technology operated as a force to keep prices down and thus limit the profit that might have been earned by the firms if those subs�tute technologies had not been foreseen. By keeping prices rela�vely low, the TV manufacturers manage to sell more of the older

technology TVs rather than induce the customer to switch earlier to the higher-priced newer-technology TVs.7

(h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.2#Ch12footNote7)

Fi�h, if the poten�al for rivalry is rela�vely high, the firm may have its profit margins beaten down by rival firms, each desperately compe�ng to maintain market share and profitability. We know that rivalry, in the form of price compe��on, will be higher if the firm's products or services are rela�vely undifferen�ated compared to its rivals' products or services. Thus, the threat of rivalry is related to the firm's difficulty of maintaining the differen�a�on of its products. In the extreme case, a monopoly has li�le threat of rivalry since there are no close subs�tute technologies. However, a monopoly may fear the entry of new rivals (with the same technology) or the advent of subs�tute technologies, and the threat of rivalry would arise subsequently. For oligopolists and monopolis�c compe�tors, rivalry comes with the territory and is reduced by the firm's ability to maintain its differen�a�on. We noted in Chapter 11 that this differen�a�on might not be resident in the physical product per se (e.g., similar pizzas offered by different firms) but instead be due to the loca�on of the seller (convenience a�ribute) or the strength of the brand name (quality assurance a�ribute), for example.

Porter's five forces interact to determine industry a�rac�veness, which refers to the poten�al profitability in the industry, and this a�rac�veness will be nega�vely related to the strength of the five factors; that is, the stronger are the five forces the lower will be the typical firm's profitability (and the less a�rac�ve will that industry be for the profit-seeking firm). The five forces simultaneously iden�fy five main areas of poten�al threat to the survival of the business firm—if an industry is highly una�rac�ve these five forces could interact to pose a higher risk of bankruptcy for the firm. For example, the restaurant industry is notable for its rela�vely high incidence of bankruptcy.

Let's look at the five forces as they apply to restaurants. First, there are many buyers, so that is not a problem unless the firm specializes in a type of food that is not sufficiently popular in the firm's local area. Second, while there are usually many suppliers of meat, vegetables, and other raw materials, there may be oligopoly suppliers of restaurant-style kitchen appliances and utensils, and possibly a monopoly supplier of restaurant labor (if the employees are members of a strong labor union). Third, there are virtually no barriers to entry to this industry. Almost anyone can set up and operate as a restaurant with very li�le formality and licensing requirements, and subsequently compete on a price or quality basis. Fourth, there are several viable subs�tutes for (eat-in) restaurants, including fast-food suppliers, home-delivery of cooked food, and do-it-yourself (home) cooking. Finally there is likely to be substan�al rivalry among restaurants of a given genre (e.g., among pizza brands) and across genres (e.g., Indian versus Thai food). For firms in the restaurant industry, the most risk is likely to arise due to new entrants (i.e., lack of barriers to entry), the availability of alterna�ve sources of food (i.e., subs�tutes), and the difficulty of building and maintaining differen�a�on (i.e., rivalry). In the next sec�on we shall examine the strategies the firm might employ to mi�gate the threat to its profitability represented by each of these five forces.

Strategies to Combat Buyer Power

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.2#Ch12footNote6

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.2#Ch12footNote7

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 8/21

Concentrated buying power, as would happen with a single buyer (i.e., a monopsony) or a few buyers (i.e., an oligopsony), will allow buyers to serve their own profit objec�ves by forcing the seller to accept a lower price. In effect, the buyer(s) would be able to capture some of the poten�al contribu�on to overheads and profit. The most obvious strategy to reduce buyer power is to ac�vely seek new buyers for the firm's product—this may mean entering export markets to gain access to a greater number of buyers in other countries. A second strategy is to enter into a long-term agreement with the buyer regarding price, quan�ty, and quality to avoid being forced to accept a lower price at short no�ce some�me in the future. This agreement with the buyer might take the form of a strategic alliance, or a joint venture, or a simple sales agreement. A third strategy would be to diversify into other product lines that are saleable to different markets, and, preferably, for markets in which there are many buyers. An example of this is the decision to develop the Hummer version of the Humvee military vehicle, and thus move from a situa�on of a single buyer (the military) to a market with many buyers. A fourth risk- reducing strategy is to ver�cally integrate into the (downstream) business operated by the buyer, such that you become a compe�tor for that business and hopefully sell into a market with many buyers. An example of this might be a land owner who sells logs to the (local monopoly) sawmill. That land owner might decide to set up a saw-milling opera�on and subsequently sell lumber to the (more numerous) lumberyards. A final strategy (which is really an exit strategy) might be to posi�on your business for takeover by the buyer. This might be a more profitable outcome than being squeezed back to zero profits by a powerful buyer.

Strategies to Combat Supplier Power

Concentrated supplier power poses a threat similar to concentrated buyer power. Monopoly or oligopoly suppliers of raw materials, components, or labor might force upwards the price of their product or service and, thus, capture part of the focal firm's surplus that would otherwise fall to the bo�om line as profits. The suppliers of labor might be a union represen�ng the employees or simply one or more people with highly specialized skills that are in extremely short supply. Considering labor suppliers first, one risk-reducing strategy is to invite the employees to join in the management or ownership team, to be�er align their incen�ves with that of the business. Incen�ve remunera�on schemes, such as bonuses, profit sharing, and the issue of stock op�ons, will reduce the individual's incen�ve to take self-serving ac�ons that reduce the profitability of the firm. Ac�vely seeking and developing alternate sources of supply is a necessary strategy to reduce the risk associated with supplier power. Addi�onal sources of supply might be found interna�onally (i.e., imports) if there are none locally. Similarly, recrui�ng or training people in the areas where skills are scarce also serve to reduce the bargaining power of the individuals with the rela�vely scarce skills. Medium- to long-term supply agreements might also be used to reduce the risk of an unexpected increase in wages or materials prices. For materials and component suppliers these agreements might include strategic alliances or joint ventures, as well as simple supply/purchase agreements. Another risk-reduc�on strategy is to threaten to (or actually) integrate backwards into the supply of those raw materials and components, to become a compe�tor for the upstream supplier in its own industry, and thus exert a countervailing force on the supplier. Finally, taking over or merging with the monopoly supplier is also a risk-reducing strategy that the focal firm might resort to if the threat of exploita�on by the supplier seems intolerably high.

Strategies to Discourage Substitutes

One strategy to deter the development of subs�tutes, or the acceptance of subs�tutes by your customers, is to keep innova�ng in product design such that the quality of your product con�nually improves. Another is to ac�vely seek cost efficiencies so you can avoid price increases that might suddenly make the subs�tutes economically feasible (i.e., become a be�er value proposi�on). A third is to develop awareness and knowledge of possible subs�tutes and to conduct research and development (R&D) on likely subs�tutes, so that if the subs�tute threat becomes real you will have the necessary founda�on to begin produc�on of that product as well. A fourth strategy is to expand into the produc�on of the subs�tute product to learn all the nuances of produc�on and management such that your firm is ready to engage in that new industry when the subs�tute has improved its quality and reduced its price enough to become an a�rac�ve value proposi�on for your customers.

Strategies to Deter Entry of New Rivals

Incumbent firms can implement strategies that effec�vely erect barriers to entry and thus deter the entry of new firms. One such strategy is to ac�vely build brand name recogni�on and your firm's reputa�on for quality products, management integrity, environmental conserva�on, and so on. New entrants would need to spend addi�onal sums on promo�onal efforts to offset the beneficial impact of these assets, and thus they act as a barrier to entry. Another strategy is to gain patent protec�on for the intellectual property that is embodied in your product, preven�ng poten�al rivals from u�lizing that technology. Similarly, building a strong brand name will make your offer to the market harder to copy by poten�al entrants. Entering emerging market niches, before they are large enough to support more than one firm, can serve to pre-empt the entry of rival firms into that niche market since they would foresee taking losses if your firm is already opera�ng in that market. Similarly, building excess capacity to facilitate �mely supply to the market as it grows, and public statements of intent to retain market share at all costs (e.g., "we will match any lower prices"), are strategies or tac�cs designed to deter the entry of new rivals.

Strategies to Avoid Competitive Rivalry

Compe��ve rivalry can be debilita�ng, especially if it manifests in price compe��on and drives profit margins down to rock-bo�om levels. Strategies to avoid price compe��on include confining price discounts to infrequent and short-term sales rather than compe�ng on price on a daily basis. Formal or informal agreements to fix prices (or to refrain from price compe��on) are illegal, so should not even be considered. Nonetheless, simply not being aggressive on the price front may encourage rivals to be similarly passive, and thus avoid a price war that could cause the firm to incur significant losses. Another strategy is to compete on the basis of product quality, that is, par�cular product a�ributes. The new firm should probably follow Porter's generic compe��ve strategy of differen�a�on rather than a cost-leadership strategy. As argued earlier, a differen�a�on strategy is generally more effec�ve in markets for experience and credence goods rather than in markets for search goods. This occurs because rivals may not be able to ascertain exactly what it is about your product (par�cularly if it is a service) that makes some customers prefer it, and thus they are likely to have problems copying it. With search

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&clie… 9/21

goods, rivals find it easier to copy the features of the most successful products, and such markets o�en degenerate into price compe��on. If your product is a search good, you may follow a differen�a�on strategy if your product has significant quality advantages, but you must con�nually introduce product upgrades (i.e., incorporate new features into your product), since rivals will be con�nually catching up by emula�ng your previous innova�ons. Another strategy may be to consider the market as a series of segments and try to achieve a dominant posi�on in some of these segments and allow rivals to dominate other segments. In this way your products and the products of rivals are differen�ated and less prone to the outbreak of price compe��on. For example, a so�-drink manufacturer might decide to stop making colas and lemon-based sodas and instead focus on making ginger beer or sarsaparilla drinks, hopefully, developing a brand that is recognized as the highest-quality product in those niche markets.

6. You may argue that in farmer's markets, where various suppliers sell fresh vegetables, or in tourist-oriented street markets, where various ar�sans sell their handmade wares, the individual buyer can indeed bargain the price down from the seller's ini�al asking price. In such markets, the a�en�on of the individual buyer is captured by a par�cular seller and they enter a bilateral monopoly (i.e., single buyer vs. single seller) situa�on where the final price is somewhere between the seller's ini�al asking price and the buyer's ini�al offer. Even here, if the seller is unwilling to reduce price, the buyer will refuse to buy and will look elsewhere. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.2#return6) ]

7. We have seen the prices of each genera�on of new-technology TVs start at a rela�vely high level and then fall rapidly as �me passes. This is due to three main causes. First, the produc�on costs of the new-technology TVs are ini�ally very high and then slide down a learning curve (see Chapter 5). Second, other manufacturers enter the market with compe�ng brands also using the new technology but offering lower prices. Third, the prospect of a newer (be�er) technology on the horizon causes the firms to set their prices (on older technology products) lower to delay the point where the newer technology becomes the be�er value proposi�on for the consumer. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.2#return7) ]

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.2#return6

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.2#return7

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 10/21

Patents, licenses, trademarks, registered designs, and copyrights are examples of technical resources, which are agreements made to protect intellectual property rights.

12.3 The Resource-Based View of SCA

Contrary to Michael Porter's industry-based view, other economists such as Joan Robinson (1933), Edith Penrose (1959), Birger Wernerfelt (1984), and Jay Barney (1991) developed the "resource-based view" of sustainable compe��ve advantage. They pointed out that a firm could only sustain a higher rate of profit than its rivals over �me if it had control of resources that rivals could neither copy nor subs�tute to achieve the same outcomes. They argued that a low-cost firm could only remain a low-cost firm if rivals were unable to imitate that firm's low-cost produc�on methods, and that the inimitability of these low-cost produc�on methods must be based on the low-cost firm's possession and control of a strategic resource, which they defined as a resource that is valuable, rare, hard to copy, and nonsubs�tutable. For example, a strategic resource might be a patent on a new technology, a loca�on that is superior to all others, or a brand name that connotes high-quality (e.g., Mercedes-Benz). It is the firm's possession of a strategic resource that allows that firm to maintain its superior profitability—the rivals' inability to imitate the focal firm's differen�ated product must be based on the fact that the rivals do not possess or control one or more strategic resources that are necessary for the produc�on or marke�ng of that product. Thus, the resource-based view says that sustainable compe��ve advantage for the firm derives from that firm's ownership or control of resources that are valuable, rare, and inimitable and where the firm has the organiza�onal capability to effec�vely u�lize its resource advantage. These prerequisites of a strategic resource give rise to the VRIO acronym, standing for valuable, rare, inimitable, and organiza�on. Note that inimitable means not only that the resource is hard to copy but also that it cannot be subs�tuted with an alterna�ve resource or technology that will achieve the same outcomes for the consumer.

Prior to the resource-based view (RBV) the firm's resources were thought of as tangible assets that appeared on the firm's balance sheet, but the RBV defines resources more broadly to include a variety of intangible assets such as organiza�onal capability, reputa�on, and intellectual resources. Dollinger (2003) iden�fies six categories of resources that the firm uses to compete in its market, these being physical, reputa�onal, organiza�onal, financial, intellectual, and technical. No�ce that the order of these resource categories is arranged so the first le�er of each resource type spells out the acronym PROFIT (which helps us remember them, rather than indicates an order of importance) (Dollinger, 2003).

Physical resources include buildings; plant; technical equipment, such as R&D labs; tes�ng facili�es; vehicles; and furniture. The firm's loca�on, and the ameni�es and services available at that loca�on, is also considered a physical resource. Reputa�onal resources include the firm's corporate image and reputa�on for corporate social responsibility; the firm's product quality; and the firm's financial soundness—these can be extremely valuable resources and can be reflected in customers' brand loyalty and repeat purchase inten�ons. Organiza�onal resources include the firm's organiza�onal capability to produce products at consistently low-cost levels and consistent quality levels. Whether a firm can do this depends on its organiza�onal structure, its established work rou�nes, and on its informa�on-genera�ng, decision-making, and planning systems—these in turn are cri�cally dependent on the quality of management. Financial resources include cash and other liquid assets available, the amount of free cash flow that can be generated internally by opera�ons, and the firm's ability to raise new capital rela�vely quickly and cheaply. Intellectual and human resources include the knowledge, training, and experience of the entrepreneur, of the other members of the top management team, and of employees. This category of resources therefore includes the a�tudes and abili�es of managers and workers, as well as the mo�va�on of all employees to work effec�vely as a team, and thus contributes to the quality of the firm's organiza�onal capabili�es. Finally, technical resources are agreements, or legal contracts, including the big six of intellectual property protec�on (patents, licenses, trademarks, registered designs, copyrights, and trade secrets). Contractual agreements with important buyers, suppliers, and opinion leaders are valuable technical resources for some firms (for example, "Engine by Honda," "Shoes Endorsed by Usain Bolt" or "Official Supplier to the White House").

The resource-based theory says that a firm will have sustainable compe��ve advantage if and only if at least one of the resources that it controls is valuable, rare, and inimitable (i.e., both hard to copy and nonsubs�tutable). A resource is valuable if it contributes significantly to the firm's ability to make profit (or achieve the desired social objec�ves). A resource is not valuable if it is just lying around contribu�ng nothing, such as an old truck or an empty warehouse. Resources that are not valuable should be leased out or sold so that the funds can be used more effec�vely to buy other resources that do contribute significantly to the a�ainment of the entrepreneur's

objec�ves.8 (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.3#Ch12footNote8) Many resources, including paperclips, while valuable because they are needed for produc�on, are not rare. Such resources are available to all rivals on roughly equal terms, and we call them "common resources" in this context. By rare resources we mean "rela�vely rare," as rarity is rela�ve to the size of the market. In large markets, a par�cular resource might be available to a few firms only, and thus allow those firms to form a profitable oligopoly. If a par�cular resource is indeed rare, such as a patented technology or an ideal loca�on, a�en�on must then shi� to whether or not it is hard to copy. We do not mean impossible to copy, instead we mean that it will take a lot of money or a lot of �me to replicate the resource in ques�on. Thus, the firm that owns or controls that resource has a compe��ve advantage for as long as it takes others to copy it (meanwhile, the firm should be working on its next product innova�on or other nonprice strategic ini�a�ve).

Finally, if a par�cular resource is rare and hard to copy, a�en�on must then focus on whether it is nonsubs�tutable. Are there any other technologies that may make the firm's resource obsolete or unnecessary? For example, the Internet is making a physical "shop" unnecessary for many businesses, such as travel agents. Similarly, perhaps new plas�cs could replace metals that are presently hard to copy. If so, rival firms will arise, not by copying the firm's technology or resources, but by using an alterna�ve resource to achieve the same result. Again, the �me and money it would take to develop a subs�tute technology are per�nent here. Eventually subs�tutes will probably arise if your resource is rela�vely expensive and your firm is making extraordinary profits for an extended period. Nothing lasts forever—the manager's task is to ensure that the firm is ready with the next genera�on of resources (such as new technology) that rejuvenates the firm's compe��ve advantage.

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.3#Ch12footNote8

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 11/21

Which Resources Are Most Likely to Generate Sustainable Competitive Advantage?

The RBV asks us to scru�nize the firm's resources to determine whether any of its resources are valuable, rare, hard to copy, and nonsubs�tutable (VRHN). If one or more resources are VRHN, then the firm can expect to gain sustainable compe��ve advantage (SCA) if it has the necessary organiza�onal capability. If no resources are VRHN, and no resources can be developed to be VRHN (such as building a strong reputa�on), the firm's products may be imitated easily and rival firms will compete the focal firm's profits back to normal profits, or below. In Table 12.2, we consider each of the six categories of resources and whether they are likely to be valuable, rare, hard to copy, and nonsubs�tutable. We show all resources used by the firm as being valuable, since we are assuming the firm wants to maximize ENPV, and if an owned resource was not valuable to the firm, it should be sold and the cash should be used to buy inputs that are valuable.

Table 12.2: The VRHN test for sustainable compe��ve advantage Resource Valuable? Rare? Hard to copy? Nonsubs�tutable?

Physical Yes, or should be leased

or sold

Ini�ally they may be rare, since it takes �me and money to assemble

these

Usually not, since similar resources can eventually be

purchased

Usually, although Internet sales are subs�tu�ng in some cases for stores

Reputa�onal Yes, or should be built or

repaired to become valuable

Yes, a very strong reputa�on is rare Yes, it takes �me and

focussed effort to build a strong reputa�on

Yes, customers rely on reputa�on in order to offset

quality risk

Organiza�onal Yes, or should be

restructured or improved to be made valuable

Yes, if a very efficient organiza�on Yes, it takes �me and effort

to build an efficient organiza�on

Yes, efficient organiza�ons keep costs low and quality

high

Financial Yes, financial resources

have an opportunity cost

Ini�ally maybe, but not once the idea is proven to be a good

investment

No, global capital markets will flow to firms promising

high returns

Yes, funds will always be required

Intellectual Yes, or should be trained or replaced with people

who are "valuable"

Yes, at least ini�ally before others build similar top management teams

and employees

Yes, ini�ally, but informa�on leakage makes it easier to

imitate as �me passes

Yes, at this point we are not be�ng on robots or cyborgs

to replace humans

Technical Yes, or if not these

agreements should be sold off or discarded

Ini�ally, un�l the technology is known by others, or rivals "invent around" the technical resources

Yes for patents, trademarks, designs, copyright, and long-

term contracts

No, patents can be invented around; rivals can create

subs�tute agreements

Source: Adapted from Dollinger (2003).

The shaded rows indicate the resources that are more likely to score a "Yes" across all four VRHN columns. No�ce that these three resources, reputa�onal, organiza�onal, and intellectual, are largely intangible and are not items that the firm can simply buy off-the-shelf. They need to be developed and

maintained by the firm's managers and this involves a cost that is effec�vely a cost of differen�a�ng the firm's product.9

(h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.3#Ch12footNote9) Reputa�on can be built by managers paying special a�en�on to the quality of products and associated services; to the fairness of their dealing with customers and suppliers; by displaying moral integrity and corporate social responsibility, and so on. A good reputa�on is indeed hard to copy; it will take �me and money to replicate and meanwhile the firm can con�nue to strengthen its reputa�on further. Even when two firms' products are physically iden�cal, a superior reputa�on will allow the firm to set higher prices or sell more volume and thus earn higher profit. Similarly, managers must pay par�cular a�en�on to building an efficient organiza�on that facilitates cost efficiencies, reliable quality, and idea genera�on for nonprice strategic ini�a�ves that rivals will find that hard to copy. Regarding intellectual and human resources, if the firm can employ highly talented and commi�ed individuals who can efficiently manufacture and market the firm's products or services, this will be hard to copy for rival firms. It will also be nonsubs�tutable, since it seems unlikely that robots or some other nonhuman thing will soon replace these resources.

The intangible resources (reputa�onal, organiza�onal, and intellectual) form the acronym ROI, which makes you think of "return on investment," doesn't it? Indeed, building these resources to be VRHN will require an investment in the firm's people, that is, in its human stakeholders who include customers, employees, and suppliers. Reputa�on resides in the hearts and minds of customers, suppliers, and employees. Organiza�on is made possible by employees and their rela�onships with suppliers and customers. And intellectual resources are obviously resident within and amongst the employees of the firm. Accordingly, the firm must invest in building rela�onships and trust with its employees, suppliers, and customers if it hopes to build VRHN resources and achieve SCA.

So, the firm seeking sustainable compe��ve advantage must either already control resources that are VRHN in a tangible area (such as a patented technology, or an exclusive agreement with an important buyer or supplier) or build VRHN resources in the intangible areas, such as reputa�on, organiza�onal efficiency, or intellectual and human resources.

Reconciliation With Porter's Five Forces

The resource-based view is commonly seen as a replacement for Porter's industry-based view in explaining why some firms make more profit than do others, but in fact the two views can be reconciled, as follows. Two of the five

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.3#Ch12footNote9

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 12/21

Because highly skilled and commi�ed employees are hard to copy by rival firms and are nonsubs�tutable, it seems unlikely that robots will soon replace these resources.

forces, namely barriers to entry and threat of subs�tutes, correlate directly with the two elements of the RBV's inimitability requirement, namely that resources be hard to copy and nonsubs�tutable, respec�vely. The other three forces—few buyers, few sellers, and rivalry, are covered in the RBV by the requirement that the firm has the organiza�onal capability, par�cularly management capability, to deal with the industry forces that might otherwise reduce its profitability. Whereas Porter was able to explain the differen�al performance of firms in terms of their effec�ve use of strategies to reduce the impact of these five forces on the firm's profitability, the RBV explains the differen�al performance of firms on the basis of their possession (or not) of resources that are VRHN and which subsequently give the firm a product or service that is inimitable because the underlying resources are both hard to copy and nonsubs�tutable.

8. Idle equipment may have value as a "spare" to be u�lized if there is an equipment breakage or failure—availability of this spare equipment would avoid the loss of produc�on while a replacement piece of equipment is being sourced and delivered. If so, the opportunity cost of the idle equipment is not zero. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.3#return8) ]

9. In Chapter 11 we examined the nonprice compe��on, and saw that the profit-maximizing rule was to increase quality, or build reputa�on or brand, or adjust any other nonprice strategic variable, to the point where the incremental cost of doing so is just equal to the incremental revenue from doing so. [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.3#return9) ]

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.3#return8

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.3#return9

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 13/21

Frequent-flyer programs reward repeat customers for their cumula�ve purchases. Offering free flights and upgrades is a well- tested means of ensuring customer loyalty.

12.4 Strategies to Ensure Inimitability

The RBV argues that if the firm is to avoid rivals compe�ng away the above-normal profitability associated with its product(s), it must maintain the inimitability of at least one of its strategic resources. Thus, firms must implement strategies to, first, ensure that its strategic resources remain hard to copy and, second, to ensure that those hard to copy resources remain nonsubs�tutable. We shall consider these in turn.

Strategies to Ensure Hard to Copy

If a resource is hard to copy and ownership of this resource forms the basis of the firm's sustainable compe��ve advantage the firm must implement strategies to ensure that the resource remains hard to copy. A first strategy is to lock in ownership or control of the resource so that the resource cannot move to a compe�ng firm. If the resource is physical, such as land, buildings, or equipment, then this is a rela�vely simple ma�er of owning the deed—by purchasing it from the current owner if it is not already owned by the firm. If this is impossible, an alterna�ve strategy would be to gain a long-term lease (e.g., five or more years, poten�ally renewable) and thereby lock in control of the resource for at least that long, giving the firm �me to build other VRHN resources such as reputa�on and organiza�onal efficiency.

If the resource is a technical one, such as a supply arrangement with the supplier of an indispensable (i.e., VRHN) raw material, the firm should similarly try to gain a longer-term supply agreement, preferably on an exclusive basis such that rivals cannot also gain access to that indispensable raw material. For important suppliers, a long-term supply agreement will serve to lock in an ongoing supply of cri�cal raw materials or component parts. Note that such agreements also serve to reduce the cost uncertainty associated with future purchases of these materials and components and avoid the risk of sudden or large increases in the prices of those materials and components. Suppliers will usually be happy to sign into longer-term supply agreements at a price that is either less than or equal to the current purchase price because such agreements give them stability and predictability in their business.

Par�cular employees may be cri�cally important to the firm's compe��ve advantage due to their unique contribu�on to the corporate culture, to organiza�onal efficiency, or to the produc�on or selling efficiency of the firm. Examples might include Richard Branson, head of the Virgin Group of companies; par�cular programmers and idea generators within Google; and individual workers in any manufacturing or service firm. To avoid losing these employees, the firm must try to secure their services for the longer term, in some way. Paying them a good salary is a good start, but rivals can afford to pay them more than the market rate because they would bring with them valuable knowledge (and their departure might also cripple the focal firm). We know that employees gain both monetary income and (nonmonetary) job sa�sfac�on from the workplace, so making the firm a "good place to work" should be high on management's strategic agenda. In addi�on, giving employees an ownership share in the business (albeit small, and perhaps as annual bonuses) will serve to lock in those employees by shi�ing their mindset from simple employee to employee-owner of the firm and thereby inducing them to take

ac�ons that are in the best interest of the firm as well as in their own best interests (Douglas, 1989; Jensen & Meckling, 1976).10

(h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.4#Ch12footNote10)

Concerning customers, some customers are iconic, meaning they are seen by others as the most desirable customers to have, and accordingly their preference for the firm's product influences other customers to also buy from that firm. Associa�on with iconic customers (e.g., official supplier to the New York Yankees) is important for building the firm's reputa�on—managers should turn the current customer agreement into an exclusive longer term contract if at all possible. But the firm should also try hard to keep its ordinary customers, since they are likely to re-purchase again and again, and also serve to promote the firm's product by word-of-mouth adver�sing. Building a brand should be a prime objec�ve of the firm's managers—a brand can be viewed as a stock of knowledge about the firm and its products, and is especially important for experience and credence goods where informa�on about product quality is rela�vely expensive.

Promo�onal expenditures that serve to build knowledge or reinforce the opinion of buyers will serve to make the customer more likely to re-purchase the firm's product because the value proposi�on is rela�vely clear to the informed buyer compared to rival firms with less-developed brands that leave the customer unclear about the value proposi�on offered by those firms. A frequent-buyer plan, whereby the cumula�ve

purchases of a repeat customer en�tle the customer to a reward of some kind, such as free products or services, or a discount on future purchases, was first introduced by American Airlines and is now a well-tested means of ensuring customer loyalty. Frequent-buyer plans are usually offered as a deferred discount scheme where the discount on later purchases may be as high as 100% (e.g., a�er 10 haircuts at my barber, I will get the 11th one free). Indeed, frequent-buyer plans are ubiquitous now, the author having noted recently that one funeral company was offering discounts for prearranged funerals for the second and subsequent members of the same family who sign up at the same �me.

Strategies to Ensure Nonsubstitutability

First, concerning the firm's technologies, and to insure against a rival firm coming up with a disrup�ve innova�on that would allow that rival to offer a be�er value proposi�on to customers, the firm should implement strategies to find ongoing technological improvements in its current technological pla�orm. This may require a formal research and development (R&D) program, or at least a system of incen�ves and rewards to encourage employees to

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.4#Ch12footNote10

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 14/21

develop and implement process and product improvements. By con�nually improving its technological pla�orm, the firm makes itself "harder to catch up with" by rivals that have developed poten�ally disrup�ve technologies that are not yet of high enough quality or low enough price to become a superior value proposi�on for the firm's customers. For example, con�nuing improvements to the reciproca�ng mo�on automobile engine have allowed it to hold its place as the superior value proposi�on for the mainstream automobile market despite the advent of rotary engines and myriad other innova�ve engine designs. More recently, the development of electric cars and hydrogen-cell motors is proceeding apace, but con�nuing improvements to the power output, fuel efficiency, and pollu�on emissions, has served to keep the reciproca�ng mo�on engine as the industry standard. We should expect to see the value proposi�on of the electric and hydrogen motors to con�nually improve, of course, as their quality con�nues to rise (due to con�nuing R&D), their prices con�nue to fall (due to learning curve effects and economies of scale in produc�on), and as fossil fuels become more expensive for the conven�onal engine.

Because the value proposi�on of subs�tute technologies is likely to con�nue to rise over �me, the firm using an older technology should watch out for the advent of poten�ally disrup�ve new technologies and carefully monitor the development of these technologies. Strategically, the firm has several op�ons. First, it could wait and see, and then a�empt to take over one of the firms with the new technology if and when the new technology offers a compe��ve value proposi�on. Second, it could conduct its own R&D to learn all it can about the new technology to prepare to switch to that technology if and when it becomes the be�er value proposi�on. Third, it might set up a new division that focuses on developing the new technology and gaining real produc�on and marke�ng experience in the same market as the parent firm that con�nues to supply its product based on the older technology. In effect the firm is "hedging its bets." At some point, when the new technology is ready to dominate, the parent firm will shi� over to the newer produc�on process and decrease its involvement with the older technology. As an example, an electricity company that has historically generated electricity from coal-burning power plants has set up separate divisions to develop solar power genera�on, windmill farms, and �dal power genera�on. It is developing the capacity to shi� its resources into whichever of these alterna�ves replace coal-burning power sta�ons as the most efficient source of electrical power.

Finally, the firm might undertake R&D to discover for itself a disrup�ve innova�on that would poten�ally replace the technology that it currently u�lizes. This allows the firm to be there at the start of the development process and move down the learning curve ahead of its rivals and, thus, be the technology leader with consequent reputa�onal and organiza�onal benefits. At some point, the firm's sales of the product deriving from the new technology will eat into its sales of the product deriving from the old technology, a process known as cannibalizing its sales. It is be�er that the focal firm cannibalizes its own sales and thereby retains its exis�ng customers (for future sales as well) rather than to lose them to another firm that will introduce the new product if the focal firm does not. Managers must realize that if there is a superior technology emerging they must get involved with the new technology and cannibalize their own sales or someone else will do it for them. Table 12.3 shows a variety of strategic ini�a�ves the firm's managers might undertake to ensure that they gain and maintain inimitability of their strategic resources.

Table 12.3: Maintaining the inimitability of the firm's strategic resources Resource A selec�on of strategies designed to build or maintain resource inimitability

Physical Own assets rather than rent or lease them—if unable to buy, secure long-term leases Arrange an op�on to purchase land or buildings that may be required to maintain inimitability

Reputa�onal Build trust and respect among customers, employees, and suppliers so that they prefer to deal with your firm Con�nually ini�ate nonprice strategic ini�a�ves that serve to build the percep�on of quality in the firm's products Develop brand equity via high-quality products, financial strength, and the prac�ce of corporate social responsibility

Organiza�onal Through effec�ve leadership, build a corporate culture and workplace environment that gives high u�lity to employees Develop and maintain produc�on and selling methods and rou�nes that are highly efficient and effec�ve

Financial Amass sufficient internal cash reserves to ensure against business shocks Set up access to overdra� (debt) funding at low rates, in case it is needed Be ready to trigger new bond (debt) or stock (equity) issues for addi�onal funding

Intellectual Hire well-educated and well-trained employees and offer ongoing training programs Encourage and reward employees who contribute excep�onal performance Offer share parcels to VRHN managers and employees

Technical

Seek exclusive supply agreements or licences for cri�cal inputs Gain intellectual property protec�on (u�lity patents, design patents, brand names, copyrights) Conduct R&D to find sustaining technological improvements or disrup�ve innova�ons that can gain intellectual property protec�on

Strategies to Reduce Resource-Based Risk

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 15/21

Managers of a firm must make conscious strategic decisions regarding surveillance of technologies, research and development, rival firm strategies, customer behavior, and macroeconomic condi�ons.

From the beginning of this book, we have emphasized that the firm's managers must make decisions in the context of risk and uncertainty. Risk and uncertainty mean that projected revenues might overstate actual revenues, or that projected costs might understate actual costs. If managers can reduce risk they will be able to improve their decision making, since the es�mates of future revenues and costs will tend to fall within a narrower band of outcomes the more risk can be reduced. Thus, strategies to reduce risks should be considered by the firm's managers. In an earlier sec�on, we have already considered Porter's strategies to deal with risks associated with Porter's five forces of the business environment that operate to reduce the firm's profitability. In the remainder of this chapter, we will focus on strategies to reduce risk associated with the inimitability of the firm's resources.

First, there is a risk that firms may lose the VRHN status of a resource that they own or control. The firm may believe that it gains sustainable compe��ve advantage based on the ownership or control of a VRHN resource, but the risk exists that the resource will in fact be copied or subs�tuted for by a rival firm. For example, a lawnmower manufacturer that has an exclusive agreement with Briggs & Stra�on to provide its highly reliable small engines, may feel that it has a VRHN technical resource based on that agreement. But, suppose a rival lawnmower manufacturer develops its own engine over many years to the point that compara�ve tes�ng by the Consumer Reports organiza�on reports that the rival motor is as powerful, economical, and quiet as the Briggs & Stra�on engine. Alterna�vely, suppose another lawnmower manufacturer strikes a deal with the Honda Motor Company for the exclusive use of Honda small engines to propel its lawnmowers. Again, a rival has come up with an effec�ve subs�tute for the Briggs & Stra�on engine and can compete on a roughly equal basis for lawnmower sales, with each firm claiming to have a very efficient small engine driving their lawnmower.

Similarly, the firm may have a VRHN loca�on that allows it to earn superior profits but over �me a rival may be able to purchase or lease space in an adjacent building and thus copy the firm's loca�onal advantage. Alterna�vely, that part of the city may decline while a new suburb rises in commercial prominence; in this case, the firm's loca�on loses its convenience for customers who now prefer to shop in another loca�on.

Even intellectual property protec�on is not immune to this risk of replacement by an alterna�ve. A firm may have a patent on its VRHN technology but then see a rival firm offering a product that does the same thing for customers using a different technological pla�orm. For example, while Segway reportedly has 32 patents on the technology involved in its ba�eries, gyroscopes, and computer code, rival personal transporta�on vehicles (PTVs) exist that seem to violate none of those patents, having "invented around" them. For example, adding a third or fourth wheel to the PTV avoids the need for a gyroscope to stabilize the vehicle, and alterna�ve control mechanisms can be used to make the PTV go forward, backward, or turn corners.

Another category of resource-based risks are those VRHN resources that are expected but never materialize, such as reputa�on or organiza�onal efficiency that was expected to follow the firm's best efforts to build these into VRHN resources. The firm's plans to expand produc�on (on the basis of lower costs and increased demand due to an enhanced reputa�on) may come unstuck if these resources are not developed into VRHN resources.

Thus, managers of the firm must be forever vigilant and keep themselves aware of new technology and resource developments. This may require conscious strategic decisions to be made regarding surveillance of technologies, research and development, rival firm strategies, customer behavior, macroeconomic condi�ons, and so on. The firm's strategy to a�ain its objec�ves must include much more than simply maximizing its profit in the short run: It must ini�ate both price and nonprice strategies designed to maximize its ENPV over the �me horizon envisioned by the managers of the firm and its shareholders.

10. Giving share parcels to employees may more effec�vely prevent their departure if there is a period that must elapse before the shares are "vested" in the employee—e.g., if the ves�ng period is two years, employees who leave the firm would forfeit all shares that were condi�onally issued to them within the past two years. Note that sharing ownership of the firm with employees also serves to reduce the "principal-agent problem" whereby workers (the agents) take ac�ons that are personally rewarding (such as loafing) but are not in the best interests of the firm (the principal). [return (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/sec12.4#return10) ]

https://content.ashford.edu/books/AUBUS640.12.1/sections/sec12.4#return10

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 16/21

Summary

In this chapter, we have been concerned with strategic decision making by the firm's managers. Looking out beyond the present period to their �me horizon, managers must make pricing and nonprice decisions that maximize the expected net present value (ENPV) of the firm over that �me horizon, which will usually mean sacrificing immediate profit in favor of later profits. They must also sacrifice monetary profit in favor of nonmonetary rewards rela�ng to societal welfare and environmental protec�on, to the extent that their shareholders, customers, and employees demand, or the government obligates, that the firm must focus on the triple bo�om line outcomes rela�ng to economic, social, and environmental variables.

Accordingly, we defined sustainable compe��ve advantage (SCA) in terms of the triple bo�om line outcomes that are preferred by the firm's shareholders. Shareholders have a major influence on the extent to which profit is sacrificed to gain beneficial social and environmental outcomes, since they can sell stock in companies that are insufficiently concerned with social and environmental outcomes (thus pushing stock prices down) and buy into other firms that pay more a�en�on to the triple bo�om line. We noted that Porter (1985) suggested that firms need to follow a defini�ve strategy if they are to gain SCA and he introduced three main compe��ve stances that the firm might adopt, namely the low-cost firm, the differen�a�ng firm, or the focus firm. Later Porter (1985) suggested five industry forces that operate to reduce the profit (or EPVC) of the firm. These five forces are (a) limited number of buyers; (b) limited number of suppliers; (c) low barriers to the entry of new firms; (d) high incidence of subs�tute products; and (e) high poten�al for rivalry. Strategies to reduce each of these risks to the firm's future profitability were listed and it was suggested that managers of the firm must think ahead and take decisive ac�on if they are to a�ain SCA in the longer term.

Next, we considered the resource-based view (RBV) that shi�ed the focus from industrywide condi�ons to the resources that are internal to the firm. These include physical, reputa�onal, organiza�onal, financial, intellectual, and technical resources used by the firm. Resources that are valuable, rare, hard to copy, and nonsubs�tutable (VRHN) are called strategic resources and are the basis for the firm's SCA if and only if the firm also possesses the organiza�onal and management capability to properly exploit and manage the strategic resources. We found that the intangible resources, namely reputa�on, organiza�on, and intellectual resources, have the greatest poten�al for being VRHN in the medium to longer term, by which �me the firm's ini�al compe��ve advantages due to physical, financial, and technical resources were likely to have been copied or invented around by rivals.

We reconciled the RBV with Porter's industry-based view by no�ng that two of Porter's five forces (barriers to entry and subs�tutes) were covered by the hard to copy and the nonsubs�tutable condi�ons of the RBV, while the other three forces (few buyers, few sellers, and rivalry) were subsumed under the RBVs requirement that the firm must possess the organiza�onal capability to properly manage the situa�ons it will face in the marketplace (i.e., the O in VRIO).

Acknowledging that the essence of the problem of gaining and maintaining SCA is to ensure that the firm gains and maintains VRHN resources, we concluded the chapter with a discussion of selected strategies that a firm might use to make its resources hard to copy and nonsubs�tutable. Finally, we considered risk-reducing strategies suggested by the resource-based view of the firm.

Ques�ons for Review and Discussion

Click on each ques�on to reveal the answer.

1. Explain the rela�onship between sustainable compe��ve advantage and the profit-maximiza�on objec�ve of the firm. (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

Sustainable compe��ve advantage (SCA) means ongoing and superior profitability and is akin to maximiza�on of the expected net present value (ENPV) of profits, assuming that the firm seeking SCA also seeks to maximize the present value of the firm (to avoid take-over a�empts, for example). ENPV of profit will be maximized by paying a�en�on to profit that can be earned in subsequent periods rather than trying to maximize short run profits and poten�ally a�rac�ng new entrants in the long run.

2. What is the rela�onship between the triple bo�om line and sustainable compe��ve advantage? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

The triple bo�om line (TBL) approach seeks a combina�on of three outcomes (economic, social, and environmental) rather than just profit outcomes. SCA is unlikely if the firm neglects the social and environmental outcomes because managers, shareholders, consumers, and governments will bring pressure to bear on firms to pay a�en�on to the TBL, and, if the firm does not comply, will implement measures that will reduce the firm's profitability.

3. Under what circumstances is a low-cost strategy likely to be the best strategy to a�ain sustainable compe��ve advantage? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

A differen�a�on strategy is likely to be superior for experience and credence goods and where the firm has a strategic (VRHN) resource that allows strong product differen�a�on. In effect the VRHN resource operates as a barrier to entry to the firm's market since it prevents other firms from exactly copying the focal firm's product. The strategic resource might be found in any one of the PROFIT resource categories.

4. Under what circumstance is a differen�a�on strategy likely to be the best strategy for the pursuit of sustainable compe��ve advantage? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

(a) A low-cost strategy is best accompanied by a penetra�on price strategy (or a price-leadership strategy) that ensures that price is set using rela�vely low mark-ups. In the case of oligopolies, this will require other firms to set their prices at rela�vely low levels or alterna�vely adopt a differen�a�on strategy. (b) A differen�a�on strategy is best accompanied by a rela�vely high (skimming) price strategy in the short run, but this may need to be modified somewhat if there are not insurmountable barriers to entry.

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 17/21

5. What pricing strategies are likely to best complement (a) a low-cost strategy; and (b) a differen�a�on strategy? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

6. What adver�sing and promo�onal strategies are likely to best complement (a) a low-cost strategy; and (b) a differen�a�on strategy? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

(a) A low-cost strategy is best complemented by adver�sing and promo�on efforts that emphasize the produc�on and marke�ng efficiency of the focal firm, its lower prices, and its willingness to match any lower price you might find on the same products. (b) A differen�a�on strategy is best complemented by adver�sing and promo�onal efforts that stress the product's differen�a�ng a�ributes, the firm's brand and reputa�on for quality, and the quality of the service that will accompany a transac�on with the consumer.

7. How might product design changes be consistent with (a) a low-cost strategy; or (b) a differen�a�on strategy? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

(a) Product design changes consistent with a low-cost strategy should aim to simplify manufacturing procedures, reduce the number of components, reduce the weight of the product, and any other changes that will reduce the cost of the product. (b) For differen�ated products, design changes should incorporate new a�ributes or increase the quantum of a�ributes that are highly valued by consumers such that the firm can maintain or increase its contribu�on from that product.

8. Recall as many strategies as you can that might be used to reduce the threat to profitability posed by Porter's Five Forces. (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

The short answer to this would be a rela�vely long list, so instead I invite you to go back and reread sec�on 12.1: Porter's Five Forces in order to iden�fy the strategies for each force.

9. Outline the "resource-based-view" and state how it may be reconciled with the five forces approach. (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

This is more of an essay ques�on, so I invite you to write bullet point answers to iden�fy the points you would want to cover in an essay on this topic and then reread subsec�on Reconcilia�on with Porter's Five Forces in sec�on 12.3 of this text to see if you have recalled all the most important elements.

10. How might the firm ensure that its strategic resources remain, or become, valuable, rare, and inimitable? (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/boo

Essen�ally, the firm must "lock-in" the strategic (VRHN) variables that it already has (such as physical and technical resources) and build other resources to become VRHN (such as reputa�on, intellectual and human resources, and organiza�onal capability). In some cases this is best done contractually, and in other cases (par�cularly where people are VRHN stakeholders) it is best done emo�onally or at least supplemented with a�empts to build job sa�sfac�on of employees, user sa�sfac�on with consumers, and trust with all stakeholders.

Decision Problems

1. Dixieland Ice Cream's profit rate has been declining over the past three years and is below average in the ice cream industry. Management has asked you to advise them how profitability might be increased. Your inves�ga�ons reveal that although the employees work hard, their produc�vity is low because of inefficient older equipment. Product quality also tends to vary between batches as a result of the older equipment. Market research shows that consumers tend to regard Dixieland as "just another ice cream" without any dis�nc�ve quali�es. Dixieland's ice cream is marketed in all major supermarkets and is priced in the middle of the range of ice cream prices in those supermarkets. Dixieland's rela�vely low adver�sing budget is largely spent on joint promo�ons with supermarket chains when Dixieland's product is placed on sale by the supermarkets.

Dixieland's rivals include several firms like itself, compe�ng only in the southeastern states, and other larger firms who compete na�onally. Some firms specialize in higher quality ice creams, with creamier taste, chunks of real fruit, and so on. These premium ice creams are sold in ice-cream parlors as well as in supermarkets and a�ract a higher price. An ice cream parlor typically uses a single brand of ice cream and will insist on a brand that is of consistent quality, although not necessarily the highest quality.

a. Discuss the changes to its produc�on facili�es that Dixieland would need to make to pursue (a) a low-cost strategy; or (b) a differen�a�on strategy. b. What price and quality strategies do you suggest that would allow Dixieland to offer a be�er value proposi�on to consumers? c. What adver�sing and promo�onal strategies would you recommend Dixieland should implement as part of a differen�a�on strategy? d. What sugges�ons do you have for its distribu�on strategy?

2. The Kia Motor Company builds passenger cars in Korea and at other loca�ons globally. In the past decade it has enjoyed increasing market success with its range of passenger cars that include micro, mini, small, mid-size, and large cars. In many ways these cars are quite similar to several other brands of Korean and Japanese cars. Recently Kia has become concerned about the invasion of the passenger car market by new Asian brands coming out of Malaysia, India, and China, in par�cular. Kia predicts that price compe��on will intensify in Asian markets, but also in North American and European markets for small fuel- efficient cars that are fun to drive. It is also concerned that the lower cost of labor in these emerging Asian economies will give these new brands a cost advantage and will allow them to reduce prices to levels that Kia would find unprofitable. As a result of these concerns, Kia is considering moving up market to the high-quality and luxury end of the market, and wants to be recognized as the "Mercedes Benz of Asia."

a. In what ways might Kia differen�ate itself from the other Asian cars that are already available and that will become available during the next decade?

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 18/21

b. Suggest a differen�a�on strategy for Kia that would allow it to achieve its "Mercedes" objec�ve, paying a�en�on to each of the four Ps. c. Is it feasible that Kia might follow a low-cost firm strategy even though its labor costs per hour are higher than those in India and China? Please explain

your answer.

3. Richard Koster and Associates is a law firm in Silicon Valley that is involved in all kinds of civil and criminal law prosecu�ons and defenses. Currently, Richard feels that he and his partners are spread too thinly over too many areas of law because they spend too much �me reading across diverse areas of law to adequately prepare their cases. As a result, his law firm is not very profitable, and he would like to earn more money. Richard has asked you to advise him on a compe��ve strategy that would allow greater profitability. In discussions with Richard, you find out that he is strongly opposed to "ambulance chasing;" he does not like dealing with criminals; and finds divorces extremely unse�ling. On the other hand, he enjoys property transac�ons, an�trust proceedings, and dealing with immigrants who are seeking permanent resident status. In the la�er area, he has an advantage over many other a�orneys in that before he finished his law degree, he worked inside the federal department responsible for immigra�on, permanent residence, and visas, and s�ll has many contacts there. In Silicon Valley, there are many high-tech firms, as well as the many universi�es and colleges, who seek Richard's assistance in gaining visas for foreign na�onals with special technical knowledge and exper�se.

a. Which of the generic compe��ve strategies should Richard and his partners adopt, and why, in your opinion? b. Advise Richard on the price, quality, promo�on, and distribu�on strategies that he should adopt to complement his choice of generic compe��ve

strategy. c. What strategic resources does Richard currently have, or could he subsequently build, that would ensure that his law services will be hard to copy and

nonsubs�tutable?

4. Fisher Tools has developed a new product and has asked your advice as to the appropriate compe��ve strategy it should follow to earn a high profit from this product over a prolonged period. The new product is a paint applicator that con�nuously feeds paint under pressure through a tube from the paint container to the roller, allowing pain�ng jobs to be completed more quickly and with less drips and spills. The paint container could be pressurized by an inexpensive hand pump or by a more expensive system involving a bo�le of compressed air. At present, the compe��on for the new product consists of conven�onal paint brushes, rollers, and spray guns and a few other con�nuous feed roller systems that are not well developed and are messy to use.

a. Discuss the type of product and its implica�on for the choice of compe��ve strategy. b. What strategic resources does Fisher currently control, or could control, that would allow it to gain sustainable compe��ve advantage? c. Suggest a compe��ve strategy that should provide compe��ve advantage for Fisher Tools, and explain your reasoning.

5. Getaway Island Tours (GIT) operates a vaca�on planning and travel booking agency and is finding this business less and less profitable in recent years due to the advent of the Internet and the consequent availability of online booking for vaca�ons and travel. It has been specializing in winter vaca�ons in the Caribbean islands and Mexican resorts. Its personnel have visited almost every hotel and resort in these areas and have built very good rela�onships with the hotel and restaurant providers. Most customers seem to want the cheapest vaca�on they can get, however, with only the discerning few willing to pay for customized advice to find a vaca�on package that best suits their needs and preferences. A recent market survey indicates that special interest groups, such as golfers, sailors, and scuba divers tend to be among the la�er category of vaca�oner and tend to show more willingness to spend money to reduce the risk of a bad experience while on vaca�on.

a. Discuss the various ways that GIT could differen�ate its vaca�on and travel packages. b. How can GIT compete with Internet providers of vaca�on and travel advice? Should it get into that business? c. What generic compe��ve strategy should GIT adopt, and what price, quality, promo�on, and distribu�on strategies would facilitate pursuit of that

strategy? d. How do you suggest that GIT build up and maintain strategic resources that will allow it to gain sustainable compe��ve advantage?

Key Terms

Click on each key term to see the defini�on.

building a brand (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A product differen�a�on strategy that strives to build customer preference for the firm's product by associa�ng the firm's brand with high-quality products, management integrity, financial soundness, and corporate social responsibility. The brand is effec�vely a stock of knowledge and beliefs held by the consumer about the firm and its products.

buyers (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The consumers or customers that purchase a par�cular good or service at a given price.

compe��ve strategy (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

An internally consistent set of decisions designed to achieve the firm's objec�ves.

corporate social responsibility (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 19/21

The responsibility held by managers of the firm to ensure that their decisions take into account not only profitability but also the impact of their decisions on social welfare and the natural environment.

differen�a�ng firm (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A firm that strives to gain compe��ve advantage by producing a product that is different from those supplied by rivals. The differen�a�ng firm seeks to have its product recognized as be�er serving the target customer's preferences.

differen�a�on strategy (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A strategy that seeks to produce goods or services that are seen as being of higher quality by target customers, so that these customer will be willing to pay a higher price for it.

external effects (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The external social and environmental impacts associated with the firm's produc�on that are caused by the firm, where the firm does not take responsibility for these impacts.

financial resources (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The fiscal resources, including cash and other liquid assets, held by the firm, and the firm's ability to generate cash flow internally from opera�ons and to raise new capital rela�vely quickly and cheaply.

five forces (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The five forces, iden�fied by Michael Porter, that poten�ally restrain the firm's profitability in a given market, these being fewness of sellers, fewness of buyers, low barriers to entry, availability of subs�tutes, and compe�tor rivalry.

focusing firm (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A firm that, rather than seeing the market as a whole, chooses to focus on a segment of the market, such as a geographic area or a niche market for a par�cular variant of the product.

frequent-buyer plan (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

An agreement between the seller and the customer that repeat purchases of a product will accumulate to en�tle the customer to a reward of some kind, such as free goods or services, or discounts on future purchases.

hard to copy (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

In the resource-based view, a resource is hard to copy if it cannot be replicated by rivals with rela�vely li�le delay and with rela�vely low cost.

iconic customers (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

Customers that are well-known and respected in the market such that their purchase of your product sends a posi�ve signal of endorsement to other customers.

longer-term supply agreement (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

An agreement between a supplier and a buyer made for the long-term supply of a given resource or product, which serves to reduce the uncertainty that would otherwise surround availability and price of that resource or product.

low-cost firm (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A firm that has rela�vely low costs of produc�on compared to other firms in the industry, for any par�cular output and quality level.

low-cost strategy (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A business approach that seeks to minimize its costs of administra�on, produc�on and marke�ng, striving to be as lean as it can be without compromising the level of quality it chooses to produce and be known for.

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 20/21

monopsony (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A market structure that only has one buyer for a given good or service, such the Co-opera�ve Marke�ng Board for agricultural products in some areas that require farmers supply all their produc�on to a central marke�ng agency.

nonsubs�tutable (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

In the resource-based view, a resource is nonsubs�tutable if it cannot be replaced by a technologically different resource that serves the same produc�on purpose. An example of subs�tutability is steel replacing wood as a construc�on material.

oligopsony (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A market structure with rela�vely few buyers, which facilitates their collusion or conscious parallelism, and may thereby allow them to set a higher price for their product.

organiza�onal resources (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The people, systems, and procedures that a firm has in place to allow the firm to organize the produc�on and sale of its product, causing costs to be reduced (for a given quality) or quality to be increased (for a given cost).

physical resources (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The plant, place of business, factory equipment, vehicles, and other tangible resources that a company has that enable it to run its business.

PROFIT (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

An acronym that stands for physical, reputa�onal, organiza�onal, financial, intellectual, and technical and represents the various types of resources that companies use.

rare (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

In the resource-based view, resources are rare if they are in such limited supply that they cannot be u�lized by compe�ng firms. The unavailability of a resource to others causes it to be a barrier to the entry of new firms into the market.

reputa�onal resources (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

In the resource-based view, these are an intangible resource rela�ng to the company's prior fair dealing, product quality, management integrity, corporate social responsibility, and financial strength that are encapsulated in the firm's brand name(s).

resource-based view (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A theory that argues that sustainable compe��ve advantage for the firm derives from its control of resources that are valuable, rare, hard to copy, and nonsubs�tutable and where the firm has the organiza�onal capability to effec�vely u�lize its resource advantage.

rivalry (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

The extent to which compe�ng firms pay a�en�on to each other's strategic variables (e.g., the four Ps) and adjust these rela�ve to those of their rivals. Rivalry arises due to recogni�on of mutual dependence in oligopoly markets.

strategic resource (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A resource that is valuable, rare, hard to copy, and nonsubs�tutable. For example, a strategic resource might be a patent on a new technology, a loca�on that is superior to all others, or a brand name that connotes high quality (e.g., Mercedes-Benz).

suppliers (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

Individuals or firms that supply goods or services to a given product market, or that supply resources (labor or materials) to a resource market.

sustainability (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

10/14/2019 Print

https://content.ashford.edu/print/AUBUS640.12.1?sections=ch12,ch12introduction,sec12.1,sec12.2,sec12.3,sec12.4,ch12summary&content=all&cli… 21/21

The ongoing ability of firms and industries to achieve triple bo�om line outcomes that are acceptable to society.

sustainable compe��ve advantage (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A compe��ve edge that one firm has over the others in its market, due to control of inimitable strategic resources that allows the firm to con�nue to achieve extraordinary triple bo�om line outcomes.

technical resources (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A company's resources of a technical or intellectual nature that include various types of agreements and legal contracts, such as intellectual property protec�on (patents, licenses, trademarks, registered designs, copyrights, and trade secrets) and other supply or endorsement arrangements.

valuable (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

A feature of a resource that ensures it contributes significantly to the firm's ability to make profits and to achieve desired social and environmental objec�ves.

VRIO (h�p://content.thuzelearning.com/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AUBUS640.12.1/sec�ons/fm/books/AU

An acronym that signifies that a resource is valuable, rare, and inimitable, and that the firm has the necessary organiza�onal competency to take advantage of these resources.

Postscript

And so we come to the end of the book, and your course in Managerial Economics. I hope you have found it interes�ng and instruc�ve and that you will find it useful both in your career as a manager and in making personal decisions in your life. Best wishes for the future!