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Modern Competitive Strategy 4th Edition Walker Madsen 1259181200 9781259181207 Solution Manual
Modern Competitive Strategy 4th Edition Walker Madsen 1259181200 9781259181207 Solution Manual
Learning Objectives
LO 02-01. Identify and describe the Value-Price-Cost Framework and its relationship to
positioning a firm in a market.
LO 02-02. Explain the relationships between a firm’s resources and capabilities and the
firm’s value and cost drivers.
LO 02-03. Apply the VPC framework.
LO 02-04. Explain the relationship between the generic strategies and the VPC framework.
LO 02-05. Articulate the relationships between isolating mechanisms and a firm’s ability
to sustain a superior market position over time.
LO 02-06. Analyze the strength of a firm’s isolating mechanisms.
This chapter is very easy to teach and can be either the first or second class in the course. We
prefer to teach this material in the first session, even though that goes somewhat against the
grain of current practice in strategy teaching. Our rationale is that students should understand
first that industry structure is a function of strategic behavior and second appreciate that
structure can constrain behavior. Using the value-price-cost (VPC) framework to show this
interaction is extremely useful, and it is logical to introduce this framework in the context of
competitive advantage. However, there is no reason the framework could not be introduced
through separate slides or discussion when industry analysis is taught in a first class.
Obviously, VPC applies only to price maker industries, not commodities.
The VPC framework is now perhaps the most accepted way to teach the resource-based view
of competitive advantage, as argued by Hoopes, Madsen and Walker in SMJ and Peteraf and
Barney in MDE. The framework is not new, as the references in the text indicate, and is used in
other strategy books. Our goal in this text has been to use VPC to tie together almost the
complete range of strategy topics so that students have an integrated and robust perspective
that is consistent with the economics of sustainable performance differences. VPC also
subsumes generic strategies, so that this concept can be taught without distortion. Further, we
have found that the framework works extremely well as a foundation for teaching almost any
case, single or multibusiness. Finally, VPC is highly intuitive and easy to teach, either as
background to the challenges in a case or in straight lecture/discussion format.
We then introduce the list of generic value and cost drivers. Regarding the value drivers, one
could decompose many of them into subcategories; quality, for example, has elements of
durability and aesthetics. We emphasize that firms need to articulate effectively what
determines demand for their products. The generic value drivers may be helpful in this task,
but they should not be forced upon the firm’s analysis of its customers’ preferences.
Cost drivers are harder to decompose into elements. As a group they can be divided,
importantly, into those that are dependent on high volume or scale (scale economies, scope
economies and the learning curve) and those that are not (practices, low input costs). We call
the former scale-driven cost drivers. Vertical integration is included since theoretically in-house
transactions are more efficient for customized activities. The difference between scale and
non-scale driven cost drivers comes up again in the Strategy Over Time chapter.
Defining value is very important. Students should understand that value is not price; rather, it is
what a customer would be willing to pay in the absence of alternative products and given
budget constraints. We, and others who teach this framework, use the phrase, “willingness to
pay.” Examples of the difference between value and price abound, such as gasoline, cell phone
service, air transportation, a latte. In most cases there are clear substitutes with a lower V-P
than the product, but in other cases there is no fundamental need for the product, and budget
constraints become more salient. Once students understand what determines their purchases
(V minus P) and can see that businesses make the same kinds of purchasing decisions, and also
see that price in most cases does not equal cost because of differences in firm resources and
capabilities, then almost everything else in the session is relatively clear. In the chapter, we
briefly lay out the ways WTP has been estimated in the business-to-consumer context and the
business-to-business context. We find that this content is critical to students’ understanding of
the differences between price and willingness-to-pay. The methods also allow instructor make
links to content students have covered in prior course work (analytics, stats, marketing). In this
edition, we introduce the results of the conjoint analysis used by Apple in its legal battle with
Samsung over patents used for smartphones and tablets. Table 2.1 identifies differences in a
customer’s willingness to pay for particular product features.
In sum, starting with this very simple idea therefore makes teaching competitive advantage,
and in fact strategy in general, quite straightforward. The course is different from marketing
since the focus is on the business unit not the product. And the course differs from finance
because the primary emphasis is not on valuation but on what drives the cash flows.
Once the overall framework has been presented, we like to move to the concept of tradeoffs
between value and cost. Tradeoffs are central to strategy since they reflect the impact of
resource constraints on the strategic choices firms make. The standard tradeoff between value
and cost implies that higher value requires more investment and therefore higher cost, and less
investment produces lower value. It is straightforward then to use tradeoffs to present Porter’s
concepts of generic strategy, viz. differentiation and cost leadership. Differentiation maps onto
value or a value advantage. Cost leadership is associated with low cost or a cost advantage.
Note that generic strategies are presented in terms of market position in the chapter rather
than in terms of defending against the five forces. (The five forces are dealt with in the Industry
analysis chapter and their relationship to value, price and cost is detailed there.) There are
several advantages to framing generic strategies in terms of market position. First, it focuses
the student on the customer and building demand; second, it shows how the pejorative term,
stuck-in-the-middle, is not useful. There are many cases where firms in the middle do better
than extreme differentiators or cost leaders. The extended example given in the chapter is
Target Corporation.
How can stuck in the middle be successful? The key is to understand that superior positioning is
better explained in terms of value over cost or value minus cost, rather than in terms of
occupying one end or the other of the value-cost spectrum. Even firms competing in discount
retailing are concerned about Value and not only Cost. In this way the VPC framework can be
used to teach any business strategy case, no matter what market position the firm has
achieved.
At the end of the session the students should have a clear idea of why some firms perform
consistently better than others. Almost any single business case, from HTC or Hulu to Walmart or
Southwest Airlines, works very well within this framework. In our experience, the framework does
a better job in explaining sustainable advantage than generic strategies, primarily because it
captures a wider range of phenomena and embeds generic strategies as a special case.
2. Recommended Cases (all materials available via HBS Online for Educators)
For additional cases, see the Case Chart that maps chapters and topics to cases and simulations.
3. Teaching Tips
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