PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University When Other Firms Don’t Respond * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CHAPTER 7 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 7.1 Standards of living are represented by the income per person. The standard of living in each nation is shown in this map. Per Capita Income by Country * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ChoicesStrategy Is all about making choicesProduction possibilities curve, PPC Combinations of outputs That can be produced/created When existing resources and technology are fully and efficiently utilized Trade-off curve In order to have more of one item one must give up some of the other item * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ChoicesPoints on the PPC Resources are used fully and efficiently Points inside PPC Resources are used inefficiently Points outside PPC Impossible to attain * © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Figure 7.2 Points B and D are fully and efficiently using available resources. At point A, resources are not being efficiently used. Point C illustra.

1. PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
When Other Firms
Don’t Respond
*
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copied, scanned, or duplicated, in whole or in part, except for
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CHAPTER 7
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
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Figure 7.1
Standards of living are represented by the income per person.
The standard of living in each nation is shown in this map.
Per Capita Income by Country
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2. © 2012 Cengage Learning. All Rights Reserved. May not be
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ChoicesStrategy
Is all about making choicesProduction possibilities curve, PPC
Combinations of outputs
That can be produced/created
When existing resources and technology are fully and
efficiently utilized
Trade-off curve
In order to have more of one item one must give up some of the
other item
*
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ChoicesPoints on the PPC
Resources are used fully and efficiently Points inside PPC
Resources are used inefficiently Points outside PPC
Impossible to attain
*

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Figure 7.2
Points B and D are fully and efficiently using available
resources. At point A, resources are not being efficiently used.
Point C illustrates a combination of output that is currently
impossible to attain.
Production Possibilities Curve
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Short-term, Long-termInternal, and External Strategic
ChoiceShort term strategy
Choice: which point on the PPC to select

4. Using resources fully and efficiently, on the PPC
Using resources inefficiently, inside PPCLong-term strategy
Choice: economic growth
Outward-shifting PPC
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Short-term, Long-termNational strategy
Internal strategy
Bad internal strategy: nation producing inside PPC
Inefficient / corrupt government
External strategy
How to deal with other nations
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5. Short-term, Long-termFirm’s internal strategy
How to allocate resources internally
How to organize
How to structure compensation, and so onFirm’s external
strategy
How to interact with other firms
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Short-term, Long-termThe best practice frontier
The best that can be done with existing resources and
technology
Strategic choice
Where to locate on the best practice frontier
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Figure 7.3
Points inside the curve, such as A, represent inefficiencies.
Resources are not being used where their value is highest. Point
C, is not possible given current technologies, and so on, that
define the best practice frontier.
The Best Practice Frontier is a Production Possibilities Curve
Illustrating the Choices a Firm has
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Business Insight
Best Practice Might Include Contesting
Frivolous LawsuitsFirm
How to allocate its resources2005, Merck
Decision – allocate additional resources
To discovering medications
To defending itself against what it thought were frivolous
lawsuits

7. *
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Business Insight
Best Practice Might Include Contesting
Frivolous Lawsuits2005, Merck
Withdrew painkiller Vioxx
Studies linked it to heart attacks and strokes
Restoring reputation
Prove that the company had not misled investors and patients
Choice between:
Settle the lawsuits, $20 billion
Fight the lawsuits
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Business Insight
Best Practice Might Include Contesting
Frivolous LawsuitsStrategy: fight the lawsuits
Merck began winning those cases
Compensations paid and settlements (2007): $4.85 billion
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Short-term, Long-termComparative advantage, firm
Competitive advantage
Basis
Stock of assets
Structure
Governance, and other elements
One firm does relatively better than others
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Short-term, Long-termOpening a business
“What should my business do?”
Define those things that give the business a competitive
advantage
Defining direction or strategy = defining competitive advantage
Strategy has to be driven by facts
Trade-offs: giving up something in order to get something else
There is no free lunch
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Porter’s Representation of External StrategyIndustrial
organization
The structure of an industry determines the conduct and
performance of firms in that industry

10. The SCM or structure–conduct–performance model
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Porter’s Representation of External StrategyMichael Porter
Reworked the SCM into the five forces model
The ability to earn positive economic profit over long periods of
time
Is related to industry structure
Whether the industry has “market power” with respect to
customers and suppliers
Whether there are barriers to entry that keep the economic
profits from being competed away
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11. Porter’s Representation of External StrategyFive forces model
Competition
Supplier Power
Buyer Power
Threat of Substitutes
Threat of Entry
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Figure 7.4
Strategy is seen as consisting of five elements: competition
among rivals, the relationship of the firm with its suppliers, the
threat of entry by new rivals, the threat that other firms will
develop substitutes, and the relationship of the firm with its
customers.
Porter’s Five Forces
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Porter’s Representation of External StrategyCompetition
How competition occurs
Number of rivalsSupplier Power
Ability of a firm to pass along cost increases to the
suppliersBuyer Power
Firm’s ability to pass cost increases along to the customers
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Porter’s Representation of External StrategyThreat of
Substitutes
Possibilities that substitutes to your firm’s products might be
introducedThreat of Entry
Whether a positive economic profit will attract competitors
How difficult it would be for them to open up a business
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Porter’s Representation of External StrategyMarket Structures
Selling environment in which a firm produces and sells its
product
Number of firms
Ease of entry and exit
Degree to which products are differentiated
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Table 7.1
Characteristics of Market Structures
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Porter’s Representation of External StrategyPerfect Competition
A very large number of firms
Whatever any one firm does has no effect on the market
Firms that produce an identical product
Perfect substitutes
Easy entry
Consumers – perfectly elastic demand
A firm’s demand curve: horizontal line
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Porter’s Representation of External StrategyMonopoly
There is just one firm
Entry by other firms is not possible

15. There are no close substitutes
Faces the market demand
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Porter’s Representation of External StrategyMonopolistic
Competition
A large number of firms
Easy entry
Differentiated products
A firm’s demand curve: downward sloping
The greater the differentiation among products
The less price-elastic the demand
*
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16. Porter’s Representation of External StrategyOligopoly
There are few firms
Each firm alone can affect the market
Product can be either differentiated or identical
Entry is difficult, but it can occur
Firms are interdependent
Downward-sloping demand curve
Shape of the curve - behavior of competitors
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Figure 7.5
The demand curve for an individual firm in perfect competition
is a horizontal line as shown in Figure 7.5(a). Figure 7.5(b)
shows the market demand, which is the demand curve faced by a
monopoly firm. The firm is the only supplier and thus faces the
entire market demand. Figure 7.5(c) shows the downward-
sloping demand curve faced by a firm in monopolistic
competition. The curve slopes downward because of the
differentiated nature of the products in the industry.
The Demand Curve Facing an Individual Firm
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Resource-Based ModelResource-based model
The fit between the external market context in which a company
operates and its internal capabilities
Firm’s internal environment
More critical to the determination of strategic action than is its
external environment
Basis of strategy: firm’s unique resources and capabilities
Not the industry
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Resource-Based ModelCore competencies
Firm’s competitive advantageSustainable competitive advantage

18. Core competency yields a long-term advantage to the
companyStrategy
Create sustainable competitive advantage
Earn positive economic profit
For a significant period of time
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Resource-Based ModelDistinctive capabilities
Characteristics that cannot be replicated by competitors
Or can only be replicated with great difficulty
Patents, exclusive licenses
Strong brands, effective leadership
Teamwork, knowledge
Employees
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Resource-Based ModelReproducible capabilities
Can be bought or created by competitors
Cannot be a source of competitive advantage by
themselvesResource-based view
Firms can earn positive economic profits
If and only if they have superior resources
And those resources provide distinctive capabilities
Resources: VRIN framework
*
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Resource-Based ModelVRIN framework
Positive economic profits can be earned from resources
Only if they are valuable, rare, imperfectly imitable, and non-
substitutableVRIO framework
Valuable, rare, imperfectly imitable, and organization
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Restricting EntryBarriers to entry
Anything that deters competitors from entering the market
Internal capabilities, government regulations, intellectual
property rights, economic and market conditions, difficulties
related to new product development, high start-up costs, the
firm’s culture, market share, strategic alliances market
leadership, consumer loyalty, branded products, large
expenditures on research and development
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Brand NameBrand Name
To increase consumer loyalty
To reduce the likelihood that customers will purchase a
different product
If price increasesPrice elasticity of demand

21. Customer’s response to a price change
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Brand NameValue of reputation
Likelihood of repeat purchase
Long run - providing high quality
Takes a long time to establish
Rent an established reputation in one market to use in a new
market
Endorsement by famous personalities
Use their established reputation in one market to enter a new
market
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22. Brand NameBrand names
Costly to create
Take a long time to establishIncumbent firms
Reluctant to alter products or enter new markets
For fear of damaging their brand name
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Warranties and GuaranteesWarranties and Guarantees
Barriers to entry
Guarantees - difficult to fake
The higher the quality of the product, the better the guarantee
offered by the firm
Warranty policy – better
Other firms – follow or admit having a lower-quality product
New entrants – better warranty
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Economies of ScaleEconomies of scale
Barriers to entry
Firm’s cost per unit of output declines as the size of the firm
grows
Larger firm can produce a product at a lower per-unit cost than
can a smaller firm
New entrant - enter as a large firm
*
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Sunk CostsSunk Costs
Barriers to entry
Expenditure on an asset that has no liquidation value
Advertising
New entrant – has to spend similar amounts on sunk
expenditures
*
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24. copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Business Insight
Sunk Costs and Ancient SocietiesCollapse of ancient
societies
The Mesa Verde-region pre-Hispanic Pueblos
Puzzled generations of scientistsExplanations
Social, political, and economic to climatic factors
*
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Business Insight
Sunk Costs and Ancient SocietiesSunk cost effect

25. Ancient societies - tendency to hold on to previous investments
Even if this was a rationally bad choice
Not abandon settlements once they had invested time and
resources to establishing them
Even if resources become scarce
*
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Unique ResourcesUnique Resources
Barrier to entry
Advantage over competitors
Strategy for earning economic profit for one firm with unique
resources
Not available for other firms
Established distribution channel
Product that is not easily imitated
Limiting supply
*
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be

26. copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Pricing to Deter EntryLimit price
Price that discourages or prevents entry
Keeps potential entrants from entering
Allows incumbent firm some profits
Could be very costly
Revenue lost - never recouped
Low price – become standard
Threatens to lower price – effective if credible
*
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
Predatory PricingPredatory pricing
Setting a very low price
Below average variable cost
In order to drive competitors out of business
Then increasing price to recoup the lost revenue
*
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27. copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be
copied, scanned, or duplicated, in whole or in part, except for
use as permitted in a license distributed with a certain product
or service or otherwise on a password-protected website for
classroom use.
The Hamilton Park Community
Located ten miles north of downtown Dallas, the
African American community of Hamilton Park began as the
White Rock farming settlement. In the 1940s and 1950s, racial
violence in the south Dallas community of Queen City and the
discriminatory displacement of African American residents for
the new Love Field municipal airport resulted in the need for
many of these families to move outside of the downtown area.
In response, Jerome Crossman, a local oilman, compelled the
Dallas Citizen’s Interracial Association (DCIA) to locate land
in north Dallas for the project as well as consulted
philanthropist Karl S.J. Hoblitzelle for funding. On February
13, 1953, the Hoblitzelle Foundation lent DCIA funds to
purchase acreage to address the housing shortage for African
Americans.
Named for Dr. Richard Theodore Hamilton, an
influential voice in the African American equality movement in
Dallas, the Hamilton Park community was the first African
American suburban development in Dallas. Intentionally
planned in two phases with the segregated twelve-grade school
at the center and each street named for prominent African
American individuals and institutions, the community officially
opened in 1954. By 1958, many homes built near the school
were complete and middle class families began to move in with
the community complete by 1961 with 741 single-family homes.
In addition to the school, the community included three

28. churches, a shopping center, and park, complete with a
swimming pool, tennis court, basketball court, pavilion and
playground. Since the 1950s, the Hamilton Park Civic League
has served the community residents, connecting them with City
of Dallas resources, encouraging voter registration and turnout,
and planning community events. This sense of community and
pride among residents helps preserve the heritage and legacy of
the original homeowners.