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Lecture 7

SMG SI 422 Lecture Notes - Lecture 7: Mckee Foods, Opportunity Cost

Strategy & Innovation
Course Code
SMG SI 422
John Kirks

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Carmen Zheng
Prof. Kirks
Creating Competitive Advantage
1. What are the two core tradeoffs that firms must make in order to achieve competitive advantage?
To achieve competitive advantage, the firm must drive a wide wedge between willingness to pay among
buyers and the costs it incurs. To do that, the firm must be unique and valuable and all their activities
must be in harmony. The tradeoffs are raising custoers’ illigess to pay ut tryig to ot irease
costs or to reduce costs without sacrificing willingness to pay.
2. Why is dual advantage so difficult to achieve?
Dual adatage is diffiult to ahiee eause it is hard to irease ustoer’s illigess to pay while
dereasig ost. Usually, oe has to iur ore ost to irease ustoer’s illigess to pay.
3. In Figure 7 (Relative Cost Analysis), what does the height of each bar represent? What is meant by
The height of the bar represented how much cents each one incurs. Profit is how much is left after they
subtracted all their expenses. Looking at the bar graph, you can see there is very little profit left.
4. Analyze Figure 8. What activities are being pursued by each of the following firms? What
tradeoffs are they making? Is their strategy successful?
a. Collins Kitchen (this is actually Hostess)
Their outbound logistics are their biggest costs with manufacturing being the next one. Instead of
fousig ore o ho to irease ustoer’s illingness to pay, they focused on outbound logistics.
Their strategy is not successful because they are only making a penny for profit.
b. Betsy Baking (this is really Little Debbie)
Their biggest costs are also outbound logistics but their logistics costs were half of that to Collins. By
keepig their osts lo, they are ale to keep prie lo, hih ireases ustoer’s willingness to pay,
while not needing to do much marketing. Their strategy is successful because they grew their share of
the market from 1% to 20% in 5 years.
c. Ontario Baking
Logistics also take a big chunk of out of their costs but by spending more in marketing, they are able to
charge more for their pastries because the customers might be brand loyal or know more about it. Their
strategy is working for them people they are making a profit.
5. How can analysts (like us) understand firm strategy by using activities based analysis to compare
costs and willingness-to-pay across firms?
We can look at the cost drivers of each firm and see what drives costs up in that firm. We can look to see
if those costs are actually helping the firm or just eating up revenue. By using cost drivers, it allows us to
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