320 • Chapter 9 • Strategic Positioning for Competitive Advantage

a given geographic territory is utilized more intensively (e.g., when an airline’s unit costs decline as more passengers are flown over a given route). They also arise when a geographically smaller territory generates the same volume of business as a geographically larger territory (e.g., when a beer distributor that operates in a densely populated urban area has lower unit costs than a distributor selling the same amount of beer in more sparsely populated suburbs). In both cases, the cost savings are due to an increase in density (e.g., passengers per mile, customers per square mile) rather than an increase in scope (e.g., number of routes served) or scale (e.g., volume of beer sold).

One firm may achieve lower average costs than its competitors because its production environment is less complex or more focused. A firm that uses the same factory to produce many different products may incur large costs associated with changing over machines and production lines to produce batches of the different products. It may also incur high administrative costs to track different work orders.

A firm may have lower average costs than its rivals because it has been able to realize production process efficiencies that its rivals have not achieved; that is, the firm uses fewer inputs than its competitors to produce a given amount of output, or its production technology uses lower-priced inputs than those utilized by rivals. This effect is often difficult to disentangle from the learning curve because the achievement of process efficiencies through learning-by-doing is at the heart of the learning curve.

One firm may also have lower average costs than its competitors because it avoids expenses that its rivals are incurring, such as advertising and sales expenses. These savings may translate into fewer customers, however.

Finally, a firm may have lower average costs than those of its rivals because of the effects of government policies. For obvious reasons, this factor affects international markets. For example, Japanese truck producers have long been at a disadvantage in selling trucks in the United States because of the steep import duty the U.S. government levies on foreign trucks.

Cost Drivers Related to Organization of the Transactions

Chapters 3 and 4 discussed how the vertical chain can influence production costs. Vertically integrated firms often have agency costs relative to firms that organize exchange through the market. An integrated firm’s internal administrative systems, organizational structure, or compensation system may affect agency costs. For transactions in which the threat of holdup is significant, in which private information can be leaked, or coordination is complicated, a market firm may have higher administrative and production expenses than an integrated firm.

Agency costs often increase as the firm expands and gains more activities to coordinate internally or grows more diverse and thus creates greater conflicts in achieving coordination. The firm’s agency efficiency relative to that of other firms can also deteriorate as its competitors adopt new and innovative internal organizations that solve the same coordination problems at lower cost.

Benefit Drivers

A firm creates a benefit advantage by offering a product that delivers larger perceived benefits to prospective buyers than competitors’ products, that is, by offering a higher B. The perceived benefit, in turn, depends on the attributes that consumers value, as well as on those that lower the user and the transactions costs of the product. These attributes, or what we call benefit drivers, form the basis on which a firm can differentiate itself. Benefit drivers can include many things, and analyzing them in any