UGM June 2019 Q1
0. A firm’s competitive advantage over its competitor is best described by the:
- A
Difference between buyers’ willingness to pay (WTP) and suppliers’ willingness to sell (WT S) is greater than the competitor’s difference between the WTP and WTS
- B
The combined valuation of businesses more than the individual sum of businesses
- C
Winner businesses win more than the losers lose
- D
The superiority of the corporate strategy over its business strategy
- Option : A
- Explanation : The goal of business strategy is to maximize the net present value (NPV) of a business, i.e., its future cash flows appropriately discounted for their timing and riskiness. At the most basic level, this is achieved by ensuring that your buyers are willing to pay more for the outputs of a business than what your suppliers are willing to sell the input to you for. Willingness-to-pay (WTP) is the most that buyers will pay for a firm’s product. The actual price (i.e., what the buyers pay the firm) will be equal to or less than the WTP, or a firm will sell nothing. Willingness-to sells (WTS) is the least price for which suppliers will provide all inputs for a firm’s product, including raw materials, capital, and labor. You have a competitive advantage over a competitor when your difference between buyers’ WTP and suppliers’ WTS sell is greater than your competitor’s difference (between their buyers’ WTP and than your competitor’s difference (between their buyers’ WTP and their suppliers’ WTS).
Different types of competitive advantage There are thus two ways of increasing competitive advantage (see fig. 2) by raising the price the customers are willing to pay you (pursuing a differentiation advantage)and/or by lowering the price suppliers are willing to sell to you for (pursuing a cost advantage). If follows that which one you should pursue will depend on the alternatives available to your customers and suppliers (i.e., their bargaining power with you).
