Strategic Management - Quiz 2

Briefly explain the Resource Based View Model (RBV)

A model that considers the resources and capabilities of a firm as its sources of competitive advantage.

True or False: Edith Penrose stated that firms can be viewed as a collection of productive resources

True

Define resources

Productive assets used by a firm to increase it’s competitive advantage.

Briefly explain the two types of resources

• Common resources: Resources that allow a firm to compete in an industry but don’t provide a competitive advantage.

• Strategic resources: Resources that allow a company to outperform its competitors and potentially achieve a sustained competitive advantage

Define capabilities

A firms ability to effectively use and combine it’s resources to create value.

Resources VS Capabilities

Resources are the assets a firm possess while, capabilities are what a firm can do with those resources.

List the four categories of resources and capabilities, classified by FUNCTIONS.

• Financial resources

• Physical resources

• Human resources

• Organizational resources

Briefly explain dynamic capabilities

The firms ability to continuously adapt and improve it’s resources and capabilities as the business environment changes

What are core competencies?

The capabilities that are fundamental to a firm’s strategy and performance

How do core competencies help a firm

They help firms create greater customer value, differentiate itself from competitors, and enter new markets.

Define distinctive competencies

Firm specific resources or capabilities that allow a firm to differentiate and attain a competitive advantage.

Core VS Distinctive Competencies

Core competencies = essential to success
Distinctive competencies = sets the firm apart from competitors

What is the relationship between resources and capabilites?

Without resources, there are no capabilities.

Identify and explain the two key assumptions of the Resource Based View (RBV) Model

• Resource Heterogeneity: Firms possess different resources and capabilities that allow them to have advantages that others do not

• Resource Immobility: Resources are difficult or costly for other firms to imitate, TRANSFER or acquire.

What is the original Resource Attributes Model (VRIN)?

• Valuable: Resources that allow a firm to exploit opportunities and minimize threats

• Rareness: Resources that are not widely available to competitors.

• Imperfect Imitability: Resources that are difficult or costly for competitors to replicate.

• Non-substitutable: Strategic resources that cannot be easily replaced by strategic equivalent alternatives.

What are the two main differences between VRIN and the new VRIO?

• Imitability: VRIO combines duplication and substitution

• Organization: VRIO introduces organization as the fourth component emphasizing that firms must be properly organized to exploit their resources and capabilities.

What factors contribute to Inimitabiltiy?

• History: Resources developed through a firms history that can’t be replicated (NBA vs ABA)

• Tacit knowledge: Knowledge that is difficult to teach, communicate or imitate

• Casual ambiguity: Competitors can’t understand what resource contributes to a firms success

• Social Complexity: Resources based on relationships, culture or interactions that are difficult to replicate

• Network effects: A product or service becomes more valuable as more people use it (Ebay vs Google)

Which factor does NOT lead to Inimitability?

• History

• Social Complexity

• Explicit Knowledge

• Casual Ambiguity

What is Company Diamond and how is it used to assess competitive advantage?

A framework used to assess a company’s strengths and weaknesses that involves asking four questions

• Activities: What does the company do well? What creates customer value?

• Resources and Capabilities: What resources and capabilities support these activities? Do they satisfy VRI?

• Organization: How is the company organized to capture value?

• Priorities and Values: What priorities and values support and sustain its resources and capabilities?

Company Diamond Model VS VRIO

VRIO evaluates individual resources and capabilities, while the Company Diamond examines how a firms activities, resources and capabilities, organization, and priorities work together to sustain a competitive advantage.

What is the concept of value chain?

The value chain views a firm as a collection of activities that transform inputs into outputs customers value, through primary and support activities.

What are the primary activities in the value chain?

Directly contribute to costs of producing, selling and delivering of a product

• Inbound logistics

• Production

• Outbound logistics

• Marketing and Sales

• Customer service

What are the support activities in the value chain?

Help primary activities operate effectively and efficiently

• Company infrastructure

• Human Resource Management

• Technology Development

• Procurement

How does the value chain help companies achieve a competitive advantage?

• Cost advantage: Reduce costs while maintaining customer value

• Differentiation advantage: Increase value, allowing the firm to be able to raise prices

True or False: According to Micheal Porter, low cost and differentiation create a competitive advantage for a company in a given industry

True

How do resources and capabilities contribute to competitive advantage and profitability?

Resources and capabilities create distinctive competencies, which shape function strategies that improve efficiency, quality, innovation and customer responsiveness. This supports lower costs and differentiation, creating value for customers and increasing profitability (Diagram from value creation and comp advantage, slide 3).

Define consumer surplus

The difference between what the customer is willing to pay for a product / service and the price they actually pay. The extra value a customer receives beyond what they pay.

How does consumer surplus arise?

• Competition: Since the company is competing for the customer’s business, they must charge lower prices to attract customers which creates a gap between price and WTP.

• Different valuations: Customers value products differently, and firms cannot charge each customer their exact willingness to pay (WTP).

What is a reservation price?

The maximum amount a buyer is willing to pay for a product or service.

What does the Value-Price-Cost framework explain? (Diagram from value creation and comp advantage, slide 9)

The total value created by a product / service is divided between consumer surplus (value captured by the buyer) and profit (value captured by the firm)

What are the three formulas in the Value-Price-Cost framework?

• Consumer surplus (buyer): WTP - Price

• Firms profit (firm): Price - Cost

• Total Value Created: WTP - Cost

True or false: A company can typically pursue differentiation and cost leadership to achieve a competitive advantage.

False: Differentiation involves higher costs to offer unique products that customers are willing to pay a premium for while cost leadership focuses on minimizing costs.

What are porters four generic (business level) strategies

• Differentiation: Unique products for a broad market (Ex. Coca Cola)

• Cost leadership: Low prices for a broad market (Ex. Walmart)

• FOCUSED Differentiation: Unique products for a SPECIFIC segment (Ex. Nordstrom)

• FOCUSED Cost leadership: Low costs for a SPECIFIC segment (Ex. Costco)

Why are product differentiation and market segmentation high under a differentiation strategy?

Firms offer unique products tailored to the needs of MULTIPLE customers segments allowing them to differentiate and charge premium prices.

What are the main sources of cost leadership

Experience-based:

• Economies of scale / scope

• Learning effect

• Improved product design

• Process innovation

Independent of Experience effects:

• Input costs

• capacity utilization

• residual differences in operating efficiency

How does economies of scale reduce costs?

As volume of production increases the cost per unit decreases due to specialization or spreading fixed costs across more units

Explain the learning effect

As workers gain more experience, they become more efficient which reduces the cost per unit at the same production volume.

Explain the relationship between customer loyalty and profit

The longer a customer stays with a company for, the greater the profit per customer.

True or False: A broad differentiator competes in one mass market

False: A broad differentiator is firm that divides it market segments into niche segments and competes in all.

Differentiation VS segmentation

Differentiation is concerned with HOW the firm competes through offering uniqueness to its customers, while segmentation is concerned with WHERE the firm competes in terms of scope.

What are the three main sources of differentiation?

• Attributes of products or services

• Relationships between a firm and its customers

• Linkages within or between firms

True or False: Cost structure is influenced by internal strategic decisions and external market conditions

True

Although Porter claims cost leadership and differentiation are usually inconsistent, what are two breaches worth noting.

• Some companies have found ways to utilize both strategies to achieve a competitive advantage

• Differentiation can improve efficiency, helping a company lower costs

List examples of companies that utilize both generic strategies

• McDonald’s: Through quality of ingredients and cleanliness

• Intel: With it’s super processing speed and branding

• Apple: Their superior iPod feature led to larger production volumes and lower cost / unit

• Google Maps: Has special features like real-time traffic updates and route optimization while spreading costs across users

What does a firm’s position relative to the efficient frontier indicate?

Firms ON the efficient frontier achieve the best available combination of differentiation and low cost, while, firms below it are less efficient and may face a competitive disadvantage.

Define a combination strategy

Enables a firm to combine value associated with differentiation and low cost.

When does Miller suggest mixed strategies (differentiation and cost leadership) desirable?

Mixed strategies are desirable when customers value multiple product features, competitors can easily imitate a single strategy, cost leadership and differentiation can complement each other. A firm must be able to successfully balance lower costs and differentiation without sacrificing it’s competitive advantage.

Briefly explain the rationale behind combining strategies

Differentiation leads to an increased volume of sales which can lead to economies of scale and learning curve effects to reduce costs.

How can combining strategies be used successfully to achieve a competitive advantage?

• Advances in manufacturing technologies: Technologies such as CAD allow firms to manufacture customized products at lower costs (mass customization)

• Use of data analytics: Analyzing customer buying preferences helps firms tailor products, improve efficiency, and reduce costs.

• Profit pool concept: Firms identify and focus on the most profitable activities within an industry’s value chain.

True of false: To achieve a sustained competitive advantage, a firm must satisfy all VRIO components

True