Firms gain competitive advantage when they can deliver the same product or service benefits as their competitors but at a lower cost

Firms gain competitive advantage when they can deliver superior product or service benefits at a higher cost.

Firms with competitive advantage can earn positive economic costs.

Strategy to gain sustainable competitive advantage means about how to increase the size of the profit, as such strategy is all about raising price or reducing cost.

Any firm which can't manage both over a long period of time shows a sustainable competitive advantage and are successful

Five schools of thought offer different views to achieve sustainable competitive advantage

The industrial organization (IO) economics perspective – locates the source of problem at the industry level.

 The resource-based view (RBV) – locates the source of problem at the industry level.

According to Michael Porter, "firm’s performance in the market place depends critically on the characteristics of the industry environment in which it competes.”

According to Michael Porter, "firm’s performance in the market place depends critically on the problem of the industry environment in which it competes.”

Certain industries because of its structural characteristics are more attractive than the others, as such companies in those industries possess market power which allows them to keep prices above the competitive level to earn economic profit.

Industrial organization determines firm conduct and such conduct determines performance.

Industry structure includes factors such as barriers to entry, product differentiation among firms, and number and size distribution of firms.

Industries with low barriers to entry are attractive since it is more difficult to enter the industry and that it prevents profit to go down to competitive levels.

Industry with firms having differentiated products have less elastic demand which means lower profit, and industries with a small number of firms of different sizes are less likely to compete vigorously.

Since industry structure is an important determinant of short-run profitability then it is best to choose the right industry to generate economic profit.

Organization means a group of firms producing products that are close substitutes to each other.

Product-by-product analysis may be needed for a multi-product company.

Industry means a group of firms producing products that are close substitutes to each other.

The best industries, according to ______’s Five Forces model, are characterized by:

High barriers to industry – economic profits tend to attracts new entrants and those will erode the cost of an industry unless barriers of entry are in place.

Example of ______ are government protection (patents, licensing and other similar regulations) proprietary products, strong brands, high capital requirements for entry, and lower cost because of economies of scale.

economic profits tend to attracts new entrants and those will erode the profit of an industry unless barriers of entry are in place.

buyers that are concentrated or if it is easy for buyers to switch from firm to firm, buyer power tends to be higher, and with more power, buyers can easily capture value away from the firm.

supplier power tends to be higher when the inputs they provide are critical inputs or highly differentiated.

Concentration among suppliers contributes to supplier power because of few bargaining options for the firm.

High barriers to industry – economic profits tend to attracts new entrants and those will erode the cost of an industry unless barriers of entry are in place.

low supplier power - If suppliers are numerous, supplier power can still be high if there are significant costs in switching to different suppliers.

Low threat from substitutes – substitutes products can still erode a firm’s ability to capture value or decrease profit even if there is a high barrier to entry.

Low threat from substitutes – If close substitutes to products are available and buyers find it inexpensive to switch to them, it will be hard for a firm to build and maintain profits.

Low levels of rivalry between existing firms – rivalry is high if large number of similarly situated firms compete in an industry with high fixed profit and fast industry growth.

Rivalry is also high when products are not very well differentiated and buyers find it easy to switch back and forth.

The RBV view suggests that to earn economic profits is to choose an attractive industry and then develop the resources necessary compete advantageously in the industry.

The IO view suggests that to earn economic profits is to choose an attractive industry and then develop the resources necessary compete advantageously in the industry.

RBV =

The RBV says that individual firms may exhibit sustained performance advantages due to their superior resources which are the tangible and intangible assets firms use to conceive of and implement their strategies.

The RBV says that individual firms may exhibit sustained performance advantages due to their inferior resources which are the tangible and intangible assets firms use to converse of and implement their strategies.

Intangible resources consist of equipment, real estate, and financial capital, and tangible resources, on the other hand, are brand, knowledge, and organizational structure.

Resource immobility – RBV provides guidance on when resources may lead to superior performance which is defined as the firm’s ability to earn above-average profit.

Resource heterogeneity - RBV views firms as possessing different bundles of resources that are immobile (resist transfer or copying), such immobile resources

If resource is valuable and rare, it can generate temporary competitive advantage.

Resource is considered rare if it is not simultaneously available to a large number of competitors, while valuable resource allows firm to conceive of and implement strategies that improve its efficiency or effectiveness.

Resources that generate temporary competitive advantage do not necessarily lead to a sustainable competitive advantage, to do so, the resources must be difficult to substitute for or imitate.

Imitation and substitution erode firm profit.

In substitution, competitor duplicates the resource exactly, while in imitation, competitor matches resources by deploying a different but strategically equivalent resource.

List of few conditions that make resource hard to imitate: (choose all the answer/s that applies)

Firm has five basic strategies to follow to be ahead of competition and to earn economic profit:

Cost reduction – reducing the level of competition within an industry and keep new competitors from entering will slow down the erosion of profitability (government regulation can reduce rivalry in the industry by way of barriers of entry).

Low-cost strategies are found mostly in industries where products are not differentiated and price competition is fierce.

However, profit reductions are profitable if it could not be duplicated otherwise it will not give the firm a sustainable competitive advantage.

the reduction in the elasticity of demand of the product leads to an increase in price because the optimal margin of price over marginal cost is relative to the elasticity of demand.

The more unique your product relative to other products, the less elastic is your demand and the higher is the margin of price over the marginal cost

reducing the level of competition within an industry and keep new competitors from entering will slow down the erosion of profitability (government regulation can reduce rivalry in the industry by way of barriers of entry).

Reduction in competitive industry – reducing the level of competition within an industry and keep new competitors from entering will slow down the erosion of profitability (government regulation can increase rivalry in the industry by way of barriers of entry).

Cost reduction – Low-cost strategies are found mostly in industries where products are not differentiated and price competition is fixed.

Product differentiation – the reduction in the elasticity of demand of the product leads to an increase in price because the optimal margin of price over marginal cost is relative to the elasticity of supply.

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