Chapter Summary • 327

of product specialization focus rests on the ability of the focuser to exploit economies of scale or learning economies within the service or the product in which the focuser specializes.

A third common basis of a focus strategy is geographic specialization. Here the firm offers a variety of related products within a narrowly defined geographic market. Breweries such as Pittsburgh Brewing Company (brewer of Iron City beer) and Heileman’s (brewer of Chicago favorite Old Style) rely on strong local brands, enhanced through promotional activities linked to local sports teams, to offset the economies of scale of national marketing enjoyed by Anheuser-Busch.

In addition to exploiting economies of scale or better serving underserved or overserved customers, focus strategies have another significant potential advantage: they can insulate the focusing firm from competition. In some segments, customer demand may only be large enough to allow just one or two firms to operate profitably. This implies that a firm may be far more profitable as a focused seller in a low-demand segment than as one of several competitors in high-demand segments. For example, Kubota has dominated the Japanese agricultural machinery market by producing lightweight, compact tractors that are especially well suited to small Japanese farms. Because that market is limited, Kubota faces little competition from U.S. giants such as Deere & Company, Case, and Caterpillar.

CHAPTER SUMMARY

A firm achieves a competitive advantage if it can earn higher rates of profitability than rival firms. A firm’s profitability depends jointly 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. Equivalently, it is equal to the sum of consumer surplus and economic profit.

To achieve a competitive advantage, a firm must create not only positive value, but also 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.

There are three generic strategies: cost leadership, benefit leadership, and focus.

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A firm that follows a strategy of cost leadership seeks to achieve a cost advantage over rival firms by offering a product with a lower C for the same, or perhaps lower, B.

A firm that follows a strategy of benefit leadership seeks to achieve a benefit advantage over rivals by offering products with a higher B for the same, or perhaps higher C.

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 a superior benefit 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” when it pursues elements of a cost leadership strategy and a benefit leadership strategy at the same time, and in the process, fails to achieve either a cost advantage or a benefit advantage.

Under a broad-coverage strategy, a firm offers a full line of related products to most or all customer groups in the market. Under a focus strategy, a firm either offers a narrow set of product varieties or serves a narrow set of customers, or does both.

Focus strategies can often insulate a firm from competition. If the focuser’s industry segment is small, it may face little competition and earn substantial returns.

QUESTIONS

1.A firm can outperform its rivals through cost leadership or benefit leadership, but not through price leadership. Explain.

2.This chapter describes the importance of B 2 C in a competitive industry. Is B 2 C equally important in other market structures?

3.How do economies of scale affect positioning?

4.How can the value chain help a firm identify its strategic position?

5.Two firms, Alpha and Beta, are competing in a market in which consumer preferences are identical. Alpha offers a product whose benefit B is equal to $75 per unit. Alpha’s average cost C is equal to $60 per unit, while Beta’s average cost is equal to $50 per unit.

(a)Which firm’s product provides the greatest value-created?

(b)In an industry equilibrium in which the firms achieve consumer surplus parity, by what dollar amount will the profit margin, P 2 C, of the firm that creates the greatest amount of value exceed the profit margin of the firm that creates the smaller amount of value? Compare this amount to the difference between the value-created of each firm. What explains the relationship between the difference in profit margins and the difference in value-created between the two firms?

Questions • 329

6. The following table summarizes information about U.S. pancake syrup products:

Assume the following apply to the time period relevant for the question:

•Demand remains stable.

•No new firms enter and no new products are introduced.

•No changes in advertising are made.

•Firms have constant returns to scale and input prices are constant.

(a)Given current prices, which brand do you expect to gain share in the next few months?

(b)Which brand can earn the highest profits in the longer run (assuming prices can be changed)?

7.Consider a market in which consumer indifference curves are relatively steep. Firms in the industry are pursuing two positioning strategies: some firms are producing a “basic” product that provides satisfactory performance; others are producing an enhanced product that provides performance superior to that of the basic product. Consumer surplus parity currently exists in the industry. Are the prices of the basic and the enhanced product likely to be significantly different or about the same? Why? How would the answer change if consumer indifference curves were relatively flat?

8.In the value-creation model presented in this chapter, it is implicitly assumed that all consumers get the identical value (e.g., identical B) from a given product. Do the main conclusions in this chapter change if consumer tastes differ, so that some get more value than others?

9.Identify one or more experience goods. Identify one or more search goods. How does the retailing of experience goods differ from the retailing of search goods? Do these differences help consumers?

10. Identify successful firms that offer good but not outstanding products at reasonable but not especially low prices. Do these firms disprove Porter’s ideas about being “stuck in the middle?”

11. Recall from Chapter 2 Adam Smith’s dictum, “The division of labor is limited by the extent of the market.” How does market growth affect the viability of a focus (i.e., niche) strategy?

12. “Niche strategies are generally more profitable than “mass-market” strategies because they usually imply weaker price competition.” Comment.

13.“Firms that seek a cost advantage should adopt a learning curve strategy; firms that seek to differentiate their products should not.” Comment on both of these statements.

14. Suppose that two firms compete in a market where consumers have identical preferences. The benefits and costs of the two firms are B1, C1 and B2, C2, respectively, where B1 2 C1 . B2 2 C2. What price should firm 1 set so that it can capture the entire market and maximize profits?

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15. Consumers often identify brand names with quality. Do you think branded products usually are of higher quality than generic products and therefore justify their higher prices? If so, why don’t all generic product makers invest to establish a brand identity, thereby enabling them to raise price?

APPENDIX: METHODS FOR MEASURING

A FIRM’S BENEFIT POSITION

Four approaches might be used to estimate a firm’s benefit position relative to its competitors and the importance of benefit drivers. These methods require advanced statistical techniques, so we will only provide a brief description of each.

1.Reservation price method

2.Attribute-rating method

3.Hedonic pricing analysis

4.Conjoint analysis

Reservation Price Method

Because a consumer purchases a product if and only if B 2 P . 0, it follows that the perceived benefit B represents a consumer’s reservation price—the maximum monetary price the consumer will pay for a unit of the product or service. One approach to estimating B, then, is simply to ask consumers the highest price they would pay. Marketing survey research that precedes the introduction of new products often includes such a question.

Attribute-Rating Method

Attribute rating is a technique for estimating benefit drivers directly from survey responses and then calculating overall benefits on the basis of attribute scores. Target consumers are asked to rate products in terms of attributes. For example, for each attribute consumers might be given a fixed number of points to allocate among each product. Each attribute is then assigned an “importance weight,” and relative perceived benefits are determined by calculating the weighted average of the product ratings. Weighted scores can be divided by costs to construct “B/C ratios.” Recall that a firm’s strategic position is determined by the amount of B 2 C it generates versus its competitors. As long as products have cost and/or benefit proximity, the ranking of B/C ratios across firms will be similar (though not necessarily equal) to the rankings of B 2 C differences. Thus, products with high B/C ratios will generally enjoy a superior strategic position to their lower B/C rivals.

Hedonic Pricing Analysis

Hedonic pricing uses data about actual consumer purchases to determine the value of particular product attributes. (The term hedonic comes from hedonism and is meant to convey the idea that the pleasure or happiness a consumer derives from a good depends on the attributes that the good embodies.) For example, consumers purchase automobiles according to a variety of attributes, including horsepower, interior room,