MS&E 473
Spring 2001
 

Homework #1: Conceptual Strategy


Work on this assignment as a group, and turn in one write-up per group.  Type-written write-ups are preferred.  Due in class Monday April 16.


1.  Market Structure and Positioning

Porter claims that there are two bases for models of competitive advantage: (a) Porter’s 5 forces is a tool for analyzing the general profitability of an industry (industry structure).  Briefly describe each of the five forces and how each could reduce or eliminate industry profits.

(b) When a firm outperforms its industry average, it achieves a competitive advantage.  In order to do so, it must have some unique strategic position.  Briefly describe in your own words how superiority in either cost or differentiation could lead to competitive advantage.

(c) For each item below, specify whether the conditions favor a cost or differentiation position in a given market.  Explain briefly.
1. economies of scale exist that are not yet exploited by competitors
2. economies of scale exist but are already exploited by competitor
3. homogenous product with limited opportunities for enhancing benefit
4. some consumers are willing to pay a price premium for certain attributes
 

2.  Competitive Advantage and Value Creation

Industry structure and positioning are useful as a first step to understanding how a firm competes.  But these do not provide a full explanation of how a firm can create or sustain value and competitive advantage.

(a) Describe how Porter’s value chain can help us think about where and how value is created.

(b) In the Porter framework, the focus is on exploiting or forcing change in the market (external to the company).  What sorts of discontinuities or changes in industry structure allow a firm to create competitive advantage in the first place?  Does this help explain why some internet stocks are so highly valued by Wall Street, even though many have yet to show profits?  Explain.

(c) In the resource-based view of the firm (RBV), explain the necessary market (3) and resource (5) conditions for a resource to provide competitive advantage.  What does this imply about how resources should be managed (sustaining competitive advantage)?

(d) The idea that competitive advantage requires that a firm create value to outperform the competitors contrasts sharply with much of the corporate diversification activity of the 1970s and 1980s.  Those strategies implicitly assumed that a firm could succeed solely through its skills in bargaining with suppliers and buyers or outguessing the market in targeting undervalued firms for acquisition.  These skills have more to do with redistributing existing value than in creating new value.  How does RBV help us understand why the track record for corporate diversification has been so poor?

3.  Comparing Porter and RBV Frameworks

(a) Porter uses the value chain as a model for how value is created by an organization, and describes linkages between value drivers as an important source of competitive advantage.  Interpret the concept of linkages in the context of RBV.  What impact would linkages have on the value of a resource?

(b) Explain how the Porter and RBV frameworks could contribute to your understanding of the following situations.  Describe any limitations or weaknesses you see in either the Poter or RBV framework in each case.
1. You are the VP of business development trying to understand which new markets to target.
2. You are manager of a business unit trying to understand how to sustain competitive advantage in your existing product line.

(c) Small companies are often better than large companies in innovation, even though large companies seem to have more resources available.  For example, Cisco Systems exploits this with its business development strategy of acquiring and investing in start-ups rather than doing much of its own research in networking technology.  What explanations can you offer for the observation that small companies are often better innovators than large companies, based on (1) Porter's framework and (2) RBV?