Chapter Summary

^ A firm achieves a competitive advantage if it can earn higher rates of profitability than rival firms. A firm's profitability depends joindy on industry conditions and the amount of value the firm can create relative to its rivals.

^ Consumer surplus is the difference between the perceived benefit B of a product and its monetary price P. A consumer will purchase a product only if its consumer surplus is positive. A consumer will purchase the product from a particular seller only if that seller offers a higher consumer surplus than rival sellers offer.

# A value map illustrates the competitive implications of consumer surplus. An indifference curve shows the price-quality combinations that yield the same level of consumer surplus.

# Value-created is the difference between the perceived benefit B and the unit cost C of the product. Equivalendy, it is equal to the sum of consumer surplus and economic profit,

♦ To achieve a competitive advantage, a firm must not only create positive value, it must also create more value than rival firms. If it does so, it can outcompete other firms by offering a higher consumer surplus than rivals.

^ The bases of competitive advantage are superior resources and organizational capabilities. Resources are firm-specific assets that other firms cannot easily acquire. Organizational capabilities refer to clusters of activities that the firm does especially well compared to rivals.

^ Industry structure is critical in determining the share of value-created that firms capture as profit.

♦ There are two broad routes to achieving competitive advantage. The first is for the firm to achieve a cost advantage over its rivals by offering a product with a lower C for the same, or perhaps lower, B.

The second is to achieve a benefit advantage over rivals by offering products with a higher B for the same, or perhaps higher C.

When firms are horizontally differentiated, the price elasticity of demand strongly affects how a firm profits from a cost advantage. With a low price elasticity of demand, the firm best profits from its cost advantage through higher margins, rather than through higher market share (a margin strategy). With a high price elasticity of demand, it will underprice its competitors and will profit through higher volume (a share strategy).

Questions ® 431

^ The price elasticity of demand determines also the profitability of a benefit advantage. With a low price elasticity of demand, the firm should charge a significant price premium relative to competitors (a margin strategy). With a high price elasticity of demand, the firm should maintain price parity with competitors and use its advantage to gain a higher market share (a share strategy).

# Building a competitive advantage based on superior cost position is likely to be attractive when: there are unexploited opportunities for achieving scale, scope, or learning economies; the product's nature limits opportunities for enhancing its perceived benefit; consumers are relatively price sensitive and are unwilling to pay a premium for enhanced quality or performance; and the product is a search good rather than an experience good.

Building a competitive advantage based on differentiation position is likely to be attractive when: the typical consumer is willing to pay a significant price premium for attributes that enhance B\ existing firms are already exploiting significant economies of scale or learning; and the product is an experience good rather than a search good.

♦ A firm is "stuck in the middle" if it pursues both a cost advantage and a benefit advantage, but achieves neither.

^ Targeting is selecting the market segments the firm will serve and developing a product line strategy to appeal to those segments. Targeting strategies are divided into two categories: focus strategies, in which a firm concentrates on offering a single product, serving a single market segment, or both, and broad-coverage strategies, in which a firm offers a full line of related products to most or all segments of the market.

<> When selecting a market segment to serve, the firm should consider the potential for competition. If the segment is small, the firm may face little competition and earn substantial returns.

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