Explain why you agree or disagree with each of the following statements:

Answer 1

a . It's better to be a differentiator than a cost leader, since you can then charge premium prices.
Disagree. While it is true that differentiators can charge higher prices compared to cost leaders, both strategies can be equally profitable. Differentiation is expensive to develop and maintain. It often requires significant company investment in research and development, engineering, training, and marketing. Consequently, it is more expensive for companies to provide goods and services under a differentiated strategy. Thus, profitability of a firm using the differentiated strategy depends on being able to produce differentiated products or services at a cost lower than the premium price. On the other hand, the cost leadership strategy can be very profitable for companies. A cost leader will often be able to maintain larger margins and higher turnover than its nearest competitors. If a company's competitors have higher costs but match the cost leader's prices, the competitors will be forced to have lower margins. Competitors that choose to keep prices higher and maintain margins will lose market share. Hence, being a cost leader can be just as profitable as being a differentiator.
b. It's more profitable to be in a high-technology industry than a low- technology one.
Disagree. There are highly profitable firms in both high technology and low technology industries. The argument presumes that high technology always creates barriers to entry. However, high technology is not always an effective entry barrier and can be associated with high levels of competition among existing firms, high threat of new entrants, substitute products, and high bargaining power of buyers and/or sellers. For example, the personal computer industry is a high-technology business, yet is highly competitive. There are very low costs of entering the industry, little product differentiation in terms of quality, and two very powerful suppliers (Microsoft and Intel). Consequently, firms in the PC business typically struggle to earn a normal return on their capital. In contrast, Wal-Mart is a cost leader in a very low-tech industry, and is one of the most profitable companies in the U.S.
c. The reason why industries with large investments have high barriers to entry is because it is costly to raise capital.
Disagree. The cost of raising capital is generally related to risk of the project rather than the size of the project. As long as the risks of the project are understood, the costs of raising the necessary capital will be fairly priced. However, large investments can act as high entry barriers in several other ways. First, where large investments are necessary to achieve scale economies, if additional capacity will not be fully used, it may make it unprofitable for entrants to invest in new plant. Second, a new firm may be at an initial cost disadvantage as it begins to learn how to use the new assets in the most efficient manner. Third, existing firms may have excess capacity in reserve that they could use to flood the market if potential competitors attempt to enter the market.