Master Student Study Techniques for Competition Demystified

IMPORTANT:

Practice becoming an expert student so you can truly master the material.

The questions below are ones that YOU should ask and then answer without looking at the text again. If you read a page or a segment of the book, stop, then write down or record verbally your answers or explanation of what you just read. Then after you complete the chapter review again what you have learned–give a mini lecture on the chapter in your OWN WORDS. You need to answer in your own words not look up and repeat the text.

These questions for chapters 1-3 are the type you should ask as you read. The questions cover the first 51 pages, but you need to study up to Chapter 5 to complete the WMT Case Study.

Wal-Mart Case Study (in Value Vault, email aldridge56@aol.com)

You need to show in WMT’s financial statements, where is the source of  competitive advantage.  How do you know WMT has a competitive advantage and exactly what is WMT’s competitive advantage? Please show your analysis.

Questions about Competition Demystified
By Bruce Greenwald and Judd Kahn

These questions are intended to help you test your understanding of the book.

Chapter 1: Strategy, Markets and Competition
1. What are the differences between strategy and tactics?
2. What is the most valuable resource in any business?
3. What is the most important feature of the competitive landscape in which a business operates? (hint: one of Porter’s five forces)
4. What are the three sources of competitive advantages?
5. If your success is based on your ability to dominate a local market, how can you grow and still maintain high levels of profitability?

Chapter 2: Competitive Advantages I: Supply and Demand
6. Is product differentiation a means to high profitability?
7. Can product differentiation create strategic opportunity? Why or why not?
8. Is efficiency easier for differentiated products than commodity products?
9. What is the strongest barrier to entry? Why?
10. What is customer captivity and what are the three sources of customer captivity?

Chapter 3: Competitive Advantages II: Economies of Scale and Strategy
11. When we talk about the “size” of economies of scale, what are some of the ways of thinking about this? Explain the interaction of economies of scale and customer captivity: in manufacturing, in advertising & marketing, in distribution.
12. What economic conditions create the potential for economies of scale advantages?
13. If a crucial ingredient for competitive advantage is customer captivity, what are five tactics for intensifying customer captivity?
14. Why is Coca Cola one of the most valuable brands in the world? Why is Mercedes-Benz not?

STUDY HABITS and SKILLS

To learn more about study habits: http://www.garynorth.com/public/department95.cfm

Why does this technique work? Because of this inescapable fact: If you can’t put something in your own words, then you don’t really understand it. Simple, isn’t it? I think most people don’t want to face the fact that they don’t understand things. They don’t want to be reminded. — Gary North.

12 responses to “Master Student Study Techniques for Competition Demystified

  1. Hi john,

    Where is the value vault?

  2. Nelson Christian

    Hello,

    I had a look at the case study. For me the competitive advantage in the financial statement is best exemplified by control of its operating, selling, general & admin expenses for 1984 to arrive at an EBIT margin of 7.8 % not considering the license fees and other income as compared to industry average of 5.9%. Its net margin of 4.2 % as compared to industry average of 2.7% is also vastly superior. These percentage differences might not seem huge, but when you consider the massive revenue on which they are calculated and growing revenue year after year with the same focus on cost control, it adds up to millions.

    The competitive advantage is not that these expenses are controlled in one year or a few years. They are controlled year after year after year. If I had to describe competitive advantage in one word, it would be: execution.

    Professor please let me know your agreement with the above.

    • Great response, but before I reply I will wait until Wed to give an answer/reply so I don’t influence others before thay have had a chance to answer like you did.

      But I have a question for you, “How can WMT SUSTAIN such cost control by excellent management? Why can’t a competitor copy WMT or hire away their management team?
      Is there anything STRUCTURAL that gives WMT an advantage. For example, if this management team ran Coca-Cola for a year, would Coke’s earnings be much lower? http://www.youtube.com/watch?v=FrFJQ0iGzw0

  3. John,

    Thank you for posting these questions, they helped me identify all the things I missed.

    First I would like to answer the 5th question for chapter 1 to make sure I got it right: A business dominating a local geography or market would have to enter geographies close to the ones it already dominates; or if it dominates a certain market, enter markets that are similar to the ones it already dominates or markets that are complimentary to their existing ones.

    I also have a few questions about the 1st chapter.

    The author says that there are 3 genuine moats – supply, demand, and economies of scale. Why is economies of scale its own category if it seems to bring the exact advantages described in supply? Wouldn’t economies of scale be one of the ways for there to be a supply moat?

    Also, the author makes the statement (p.14 soft cover ed), “In the personal computer business, Intel and Microsoft dominate their specific niches, but they compete indirectly against one another for a share of the overall value created in the industry.” How do microsoft and intel compete against each other if they are in completely different industries, software and hardware? Is the author implying that they have to compete for the percentage of total cost a computer’s chip costs vs. the percentage the software costs?

    I’ll try to answer the WMT question as soon as I catch up on the Competition Demystified reading.

    • See page 9 in Comp. Demyst. Supply are strictly cost advantages due to PRIVILEGED access to crucial inputs (like Compass Minerals’ Road Salt). Its sources of supply are located closer to major cities so its cost structure is lower. Southwest Airlines equipment and operational process gives it a lower cost structure than American Airlines at ALL levels of service.

      Economies of Scale have to do with costs declining PER UNIT because fixed costs are a high share of total costs. Boeing does not have privileged access to supply or structurally lower costs but they have the biggest share of the jumbo jet market so they have lower per unit costs (Jumbo Jets) than an entrant because they have a majority of the market share. Or take WDFC which has 90% of the household lubricant market.

      Study minimum efficient scale and economies of scale in Capitalism by Reisman in the Value Vault–then you will become an expert.

  4. Do you agree with the authors that most valuable resource of any business is management attention?

  5. Dear Logan James:

    Good question. I waver, but most businesses do NOT have a competitive advantage. They operate as a army of ants. Look at all the restaurants, dry-cleaners, small businesses around you. So 95% of all businesses have to be extremely focused on becoming efficient in finding, servicing, retaining customers while driving costs lower and benefits higher to survive and thrive.
    For franchises, managements have to manage their competitive advantages carefully and be vigilant on entrants and cooperation.
    I don’t know if management attention is THE most important but I do think it is important.
    Others may have a differnet opinion………..

  6. Nelson Christian

    Hello,
    I must confess that I have not yet read the book. So my answer was only based on what I had read from the case study. Your counter question is intriguing and made me think a lot. Therefore the delay in the reply.

    From my humble experience, the company I used to work for always stressed on systems and processes rather than people. Of course the people were motivated and empowered, but the process was stressed upon as a means to achieve efficiency regardless of the person doing the job. This is not to discount the skills of the employee in question but merely turn the focus on execution.

    In the same vein, top management of WMT can be poached and companies can try to copy their strategy, but I believe it is the systems & processes put in place that enable efficient execution of the strategy. Top management can help sustain the cost advantage by focusing on building such systems and processes and then enabling and empowering employees to leverage these systems and processes and deliver efficiently. Switching to UPC for point of sale, using computer aided design to suggest a merchandise mix for each store are examples of building such systems and processes.

    To add to my previous post, having superior operating and net margins helps in revenue growth.

    When your margins are superior than competitors, it reflects in the prices that you charge the end customer. So if a competitor has lower operating margins, greater debt etc these inefficiencies show up in the prices that are charged by the competitor.

    This gets a little complicated. So I use two fictional companies A and B. Both have revenues of a billion $ in 1984. Company A has operating margin of 8% while B has 5%. Now revenues = price * volume. Bear in mind that prices at company B would be higher by 3% of a billion or 30 million $. So even though the revenue is the same, because the prices charged at B are higher they have a relatively lower volume than A. As revenues grow this amount of 30 million $ keeps getting bigger and bigger. Soon people realize that same products at company B are more expensive than at company A. They dump company B and switch to company A. Company A, already high on volumes gets a further boost. Its fixed cost is spread over greater customers,the sales per square feet increases, there are further improvements in efficiencies and ultimately your revenues grow way faster than Industry average.

    I just revisited the case study and looked at the comparison of selected discounters from 1974 to 1984. Walmart had sales growth of 3 times of the average of its competitors. A staggering number. So its a case of operating efficiency boosting sales which in turn boosts operating efficiency and the loop goes on.

    I will read the book to get a better understanding this weekend.

  7. I agree with Nelson that you can clearly see the moat in the margins. The net income margins for Wal-mart were almost 50% greater than the industry average. At the same time, as stated in the case study, they were undercutting their competitors by 1.3% in competitive areas.
    Their moat probably lies in their massive size and distribution center setup. Their truck fleet saves them 2% of sales, or half of what the industry spends on average. This is probably the hardest thing to replicate because no one else has a setup like WMT.
    Another moat that cannot be replicated lies in the small city stores. Like the moat in the Nebraska Furniture mart, there can be room for only one major store in a small city to be profitable.
    I think most of WMT’s success, however, was because of their ability to adopt new changes quicker than their competitors. The inventory systems were an example of this. They also had strong teamwork as seen by their monthly (or weekly, can’t remember) meetings.

  8. Hi John, in regards to the case, are we looking at WMT as if we’re in 1985? Also, how long of a write-up would you say is sufficient? Thanks.

    • Prepare the case as of 1985. Note the date of the Case Study. One or two paragraphs with supporting numbers is enough or pretend you will present to your Class at Harvard BS. This weekend I will previde the class notes on the discussion of WMT.

      Note what would have happened if you invested in 1986 or 1987 or 1988.

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