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Leung, T. Liang, S. Lovett, S. Luhmann, N. Gambetta, Basil Blackwell, New York. Lui, T. Luo, Y. Malhotra, N. Minichiello, V. Aroni, E. Moorman, C. Morgan, R. Morris, M. Nicholson, C. Pareek, U. Patton, M. Pearce, J. Perry, C. Pye, L.

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Redding, G. Rotter, J. Sako, M. Shemwell, D. Stening, B. Su, C. Svensson, G. Tian, X. Tong, C. Tsui, A. Buy Softcover. FAQ Policy. About this book "Guanxi and Business Strategy" elaborates upon a topic of paramount importance to both academic scholars and managers doing business with China: the impact of personal relationships guanxi on business affairs.

Show all. Table of contents 4 chapters Table of contents 4 chapters Introduction Pages The Guanxi System Pages Technically speaking, there is rivalry in the consumption of network governance so-called 2. The problem of an inefficient surveillance mechanism will be discussed in depth in Section 2. This limitation in size may cause in-groups to also perform tasks that, if division of labor prevailed, out-group individuals could perform better or cheaper. Due to the obvious difficulties of quantification, this discussion shall not go beyond the above determining forces; rather it shall turn to empirics.

Hubei and larger in others e. These two features depend on communication, which in turn mainly hinges upon network connectedness and symmetry. Connectedness simply refers to the total number of links within a given network; the higher connectedness is, the higher efficacy will be. Symmetry describes resource distribution across a network. As shall become evident in Section 2. The third and last issue that shall be addressed here is cost.

On the contrary, network cultivation can be extremely pricey if high-class wining and dining with people of large discretionary power is involved. These expenses represent a potentially very large investment Luo 55f. The study also suggests that expenses grew annually at double-digit rates in the early s Zhong Its emergence has been explained based on the simplifying assumption that actors consider only direct exchange interests.

In general, the longer the tradition of a culture, the more differentiated the set of interdependent norms norm structure. Due to the great complexity and pervasiveness of the norms that Chinese tradition has produced, Fei Xiaotong []: Chapters 4—6 structured social relationships primarily normatively. Analyzing Fei, Hamilton and Wang 25 argue that Chinese society rests on networks of social relationships that The relationship of codified laws and norms shall not be discussed here, but rather in the concluding chapter, which assesses the results of this analysis in terms of ethics; suffice it to say that social norms exist in the absence of a legal system.

These selfdetermined actors consciously create norms because they yield benefits. Note that although they are a socio-structural element resulting from the micro-level, norms are the property of the system, not of the actor. As was mentioned in Section 2.

It is for this reason—i. The necessity of such an approach is disputed. Many scholars do not formally raise the question of the nature of the mechanisms required to start such a system. In his best-known article, Alvin Gouldner elaborates on the norm of reciprocity and its role in social systems. Although reciprocity may be explained with strong Buddhist influences HerrmannPillath 7 , it is actually important in most societies.

Gouldner ff. Yan a has shown to indeed play the primary role. This issue will be summarized in the next section. A rather romantic explanation would argue that rendering support to people without the prospect of reciprocation would be based on the Confucian principle of forgiveness. In traditional China, there is a strong tendency for offspring to reimburse their parents for the expenses incurred in their childhood Hwang This expression must be understood—just as the primary role that male descendants have in Chinese cultural and spiritual traditions Chen JJ , —in the context of the hard physical labor in the fields that is required to ensure the welfare of elderly family members.

At the same time, if the same son seeks a favor from his father, the son is expected to give him something in return, maybe of equivalent value.

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Chen JJ ff. According to Hwang , relationships that place great value on continuation and hence emphasize harmony, cooperation, and solidarity frequently apply the equality rule. This norm prescribes that actors allocate resources irrespective of individual contributions. Chung and Hamilton 9 thus note that exchange partners generally tend to share benefits more or less equally.

Note that Gouldner f. The dynamics of such exchange patterns are visualized in Figure II This suggests another function performed by the requirement of only rough [see above] equivalence of repayment that may be involved in one of the norms of reciprocity. Hwang reports that people could even become enemies. In an exchange system that forces both actors to return more than the interest the exchange partner requires for an isolated exchange transaction, 88 2 The Guanxi System the resulting permanent imbalance prolongs their relationship indefinitely.

Presuming that both actors derive benefits from exchanges, neither of them has an incentive to terminate the relationship. Although there certainly are genuinely generous people, it would be wrong to ignore the utilitarian aspect here. If performed anti-cyclically in a longterm relationship, i. By deliberately incurring obligations when they do not cost much effort—preferably when the gift or favor is of great importance for the recipient—rational actors pile up a reserve of resources that can be brought out in times of need. In their comparative macroeconomic analysis, Lovett et al.

It has been implied in this section that, for a norm to constrain a specific action, control over a resource bundle needs to be held not by the owner but by other actors that exert authority by virtue of consensus. In order to answer the questions of when there will be consensus within the social sub- system and why norms may not emerge despite a majority of individuals in a group having an interest in it, Coleman drew up a three-level typology, which revolves around who claims the norm and the person to whose action it is directed.

First, norms fall into two categories, namely proscriptive norms and prescriptive norms.


The former forbid focal action, i. From the indicative structure e. However, whenever an actor has the choice between only two alternatives, the distinction between proscriptive and prescriptive norms is redundant: proscribing one focal action reciprocity implicitly prescribes its alternative non-reciprocity.

Second, Coleman distinguishes between disjunctive norms and conjunctive norms. If the interests of target actors—i. Beneficiaries have an interest in all actors abiding by the norm, while target actors aim at performing their action regardless of the norm. If the sets of target actors and beneficiaries coincide, norms are termed conjunctive.

Finally, conventional norms can be set apart from essential norms. Conventional norms are selected randomly by actors, but after the norm has 90 2 The Guanxi System been fixed it is in their interest to follow it e. On the contrary, the content of essential norms coincides, at least partially, with the interests of the beneficiaries, which persist regardless of whether other actors are following the norm.

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Although need is indeed a requirement for a norm to emerge, it seems that the situation is less trivial than that. As developed by Coleman, several conditions must be met for a norm to emerge. For the sake of simplicity, these conditions will be condensed to the need for a norm and effective sanctioning. The need for a norm, however, amounts to an insufficient condition for its emergence. Norms will come into existence only if the beneficiaries of the socially defined right of control over an action have the capacity to enforce it.

As communication is more crucial in the context of punishing non-compliance, this issue will be addressed in the context of sanctioning Section 2. More importantly, it is the abstract meaning behind both terms that is of interest here. While all these expressions appear in written Chinese, some of them are rarely used in everyday language. These three characteristics will now be discussed in detail. As psychologists have long recognized, individuals in Chinese society have a strong interest in keeping their face intact because it is a major source of intrinsic satisfaction Yang MH ; Ma Y Like the Western concept of prestige Coleman ff.

It is the worth that people claim for themselves by virtue of their position within the social network. The Chinese press Wang Z 44 reports a case that revolves around a dispute between a butcher and a tax collector in rural Anhui province: a tax collector visiting a butcher shop asks the owner how many pigs he had slaughtered that day. The two men get into a huge row. Luo 10ff. When rational actors are uncertain about what conduct to anticipate in an upcoming exchange, they attempt to extrapolate from previous activities.

Along with paying attention to personal image e. As explained in Section 2. But if newcomers have no information on the past conduct of network members, it is possible that actors who have cheated will continue exchanging with said newcomers. In order to prevent this from happening, the network is interested in sharing with newcomers all information available on the earlier conduct of network members; eventually newcomers and established members have the same knowledge.

It Effective sanctioning has been mentioned as a condition of norm emergence and will be further addressed in the next section. Decision-making depends on the value that an actor assigns to these resources. Most of the time, there is a combination of the above three dimensions. Section 2. The three-resources setting will become relevant again during the systems integration in Chapter 3.

More specifically, the punishment must be equal to the amount that an actor would gain from cheating plus an at least infinitesimally small unit İ; cheating then yields the actor a negative return valued at İ. This paragraph will present the two standard means by which networks may modify the incentives of their members, namely norm internalization and external sanctions.

This analysis will exclusively address sanctions for non-reciprocation, for reciprocity is the most important norm and the logic is identical for other norms. In the wider process of socialization, the network teaches the individual how to distinguish between right and wrong, and it imparts to the individual an internal surveillance system consciousness, Marini Once the network has assigned the individual new incentives that entail increased cost of non-compliance, it becomes inactive because supervision is not necessary. Anticipation of the negative intrinsic effects may keep a network member from cheating.

The efficiency of internalization as a means of ensuring normcompliance depends on two factors Coleman First, the cost of the lengthy socialization process may exceed the sum of discounted future profits from internal sanctions. The second limitation of the efficiency of norm internalization is of a practical nature: internalization cannot be directly Analogously, they may provide themselves with intrinsic rewards for norm compliance.

This problem can be explained with the incongruence of target actors and beneficiaries of norms see above. External Sanctions If an actor has violated a norm—by performing not performing a proscribed prescribed focal action—and if, for the above reasons, no internalization has taken place, the network must punish him; this act is termed an external sanction Coleman f. External norm enforcement may be divided into heroic sanctions and incremental sanctions Coleman ff. If the task of sanctioning is indivisible, the sanction can only be carried out by a single sanctioner, who often incurs a personal loss; in this case, the term heroic sanction applies.

The difficulty of organizing heroic sanctions may be overcome by socialization, in the process of which the obligation to sanction is internalized, or by applying second-order external sanctions. In general, a wide range of arrangements is conceivable: dice may be thrown or, if network members are not deemed equal, other rules may be applied to determine the heroic sanctioner. Incremental sanctions are a substitute for heroic sanctions—or their alternative if a social system has the choice. Being the standard form of norm enforcement, incremental sanctions rely on the contributions made by several or all of the members, distributing the cost among several or all of these actors.

Typically, delinquents will be shut out or scorned by network members; this involves low individual costs, or more specifically, costs that are lower than the revenue share from the sanction. Performing this task, which significantly increases safety in the mouse community, entails the risk of being eaten by the cat. Sanctions may be further differentiated based on whether they are performed by a network member or by an outsider.

Consider this not at all unrealistic scenario: the cheater stores the resource bundle that he owes at his home, which can only be accessed by network members. Thus the sanctioners recovering the bundle owed would have to be network members. It is not clear whether, generally speaking, using a network member is more efficient than outsourcing: on the one hand, network members perform the sanction at a marginal cost, but, on the other hand, members may suffer heavy losses when sanctioning an old friend.

Sometimes, however, no network member fits the bill and an outsider is required e. Harmony, after all, is an important theme in China, and a particularly sensitive issue in dispute settlement Zhou Y 19; Zhong 53f. They indicate whether people wish to avoid or encourage conflict, suppress it, or resolve it amicably.

Ultimately, the most basic values of society are revealed in its dispute settlement procedures. In spite of its preference for harmony, the network may need to resort to external sanctions. The consequences may be so far-reaching that the members of the extended family can no longer function in society. Also, the cheater squanders the opportunity for future exchanges within the network. Therefore, his consideration of whether to cheat must acknowledge the gains that he could have derived from the network.

Note that the case of temporary suspension from the network shall be neglected because a survey of the literature did not yield any evidence of this type of sanction. By doing so, the network is capable of ensuring that liability holds even over time. Often the threat of network ostracism is sufficient to attenuate the probability that a network member will act opportunistically.


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Yet, there is a problem associated with external sanctions, namely that actors may not be interested in contributing. If an actor leaves the job of sanctioning to others, his likelihood of being cheated at a later point in time is mitigated to zero cost. This externalization of sanctions leads to what is termed the second-order problem of free-riding Coleman f. In the same way that the network externally enforces a norm, however, it may also enforce a sanction by applying a so-called second-order sanction.

Note that the second-order problem of sanctioning always comprises one actor less than the norm problem. Although people will often feel bad when others are talking behind their back, gossip is a separate step from sanctioning. Gossip, which actually precedes sanctions, diffuses information about the wrong-doing and facilitates the emergence of a consensus on the moral judgment and an appropriate punishment Coleman f. External sanctions work best in close-knit, homogeneous networks where information about wrongdoings travels fast Coleman The costs of gossip are lowest and motivation to engage in it is at its highest when gossip is a by-product of relationships that have been established and that are maintained for some other purpose.

As exchange requires communication, any communication network contains at least as many relationships as the corresponding exchange network. Two configurations of interests in and control over resources, however, may limit the effectiveness of external sanctions, namely power and mobility. Power expresses the total intra-system value of the resources controlled by an actor Coleman f.

The value of a resource depends on the interest of powerful actors in it. This explains why exchanges of resources change the loci and magnitude of power. Power equips some actors with more cheating options than others Coleman f. For instance, if members expel a powerful actor from the network, they members lose a great deal of resources in which they are interested. If a sanction yields individuals a negative net profit, even though the cost of its increments are distributed among all network members, a powerful actor is in fact immune to sanctions, particularly to ostracism.

Also, power may affect the emergence of norms or give rise to a norm conflict if external effects are distributed asymmetrically across a social system. A group of powerful people may prescribe a focal action that has positive external effects, although another group of less powerful people feels negative external effects. Today criminologists refer to the crimes of the powerful and privileged as white collar crime Coleman Such criminal behavior can be seen 2.

In short, powerful people have much to lose, but they can prevent this from happening. The second feature that qualifies effective sanctioning, and hence impairs the emergence of a norm, is mobility. Mobility refers to the ability of a target actor to escape sanctioning—physically or de facto. Norm compliance is less likely for boundary spanners see Section 2. Boundary spanners are more difficult to punish because of lower opportunity costs—i. For the same reason, Granovetter speculates that high-status individuals tend to have a large amount of bridges, which makes them mobile.

From this perspective, it is a wise decision by Hong Kong billionaire Ying-tung Fok not to reveal his outside connections Doebele Depending on the specifics of the setting see above , however, this risk may not be excluded: If norm conformance relies on a sound socialization process, there is a residual risk because the success of internalization and the sanction itself are not observable. In these cases, which will be presented in detail in the next section, it is trust that makes actors accept the uncertainty associated with a promised resource bundle.

In China, smuggling and other crooked business deals, for instance, typically rely on as a result of the coincidence of appropriate motivation and opportunity Coleman For arguments on why mobility is also high for people with very great status, see Coleman The best way is if nobody but the two partners knows. Thus, as will be discussed next, actors accept uncertain promises because they have trust in each other. As the structural introduction of a legal system into analysis requires wide-ranging considerations, this issue will be taken up in Section 4.

Actually, in this RCT there never is a necessity to trust. When an actor has no choice other than to exchange, the term trust cannot be applied. Other scholars e. Rousseau et al. A frequently used definition from Rousseau et al. The understanding of trust as a state of mind allows for the case that the prospective trustee rejects resource bundles that are offered by the prospective truster.

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As was addressed in Sections 2. Therefore, two parties must be distinguished: truster and trustee. The former decides to grant or withhold trust, which the latter then justifies by reciprocating or disappoints by not For the intrinsic value of trust, see Nooteboom 4. This is because Coleman, who did not seem particularly interested in the concept of trust, did not sufficiently distinguish his sources.

The result of this assessment is then integrated into the decision-making process by what game theory calls backwards induction. Because the basis of trustworthiness was discussed in the preceding paragraphs, this argument will focus on trust. Building on the above understanding that trust is the deliberate acceptance of vulnerability before another person, whose actions one cannot control, on the assumption that this person will not cheat, this assessment of rational trust revolves around two elements: vulnerability and expectation.

Although such a restrictive definition would not harm this argument, there is no need to exclude L Instead of a trustee, the object of trust may also be an institution. This socalled systemic trust or confidence Luhmann in the institution may be the basis for trust in its individual members. Backwards induction is defined as the anticipation by which one player includes in his calculation the optimum response of another player to his action Gibbons Game theory is the study of multi-person decision-making problems Gibbons xi.

This is troublesome, for rational trusters need to weigh potential gains G and potential losses L against their respective probabilities, p and 1-p. Embracing G, L and p—which Coleman 99f. As implied in the earlier definition, expectations are directed at the competence and intentions of a person, hence the distinction of competence trust and intentional trust Nooteboom Family businesses, for instance, often employ relatives in spite of miserable capabilities because they believe they face a high degree of uncertainty from disloyal conduct.

What are the determinants of expectation? Probability depends on information, and if there is a gap between total information and available information, two kinds of probability need to be distinguished. From the information available to him a truster infers subjective probability. Additional information will move subjective probability towards the actual objective probability, and hence make it more likely that the actor makes the right decision Coleman However, Lovett et al. It shall be noted that this lack, in fact, is rather fortunate, for benevolence is included in integrity, and it does not constitute a separate form of trust.

Recall that the earlier statement that family members are recruited from a small circle see Section 2. Actors, however, do not necessarily strive to close the gap between subjective and objective probability. Rather they gather information only until the cost of an additional piece of information is equal to its benefits. As the impact of p on decision-making largely depends on G and L, actors gather more information if their values are high. What is ambiguously expressed here is that the lack of information represents a risk, and that also the information itself may entail a risk.

Obviously, trust implies an information paradox. Because information contains both risk and risk limitation, it follows that the notion of trust as subjective probability is dropped and the information paradox maintained, or vice versa Nooteboom Rather, expectation should be conceptualized in terms of probability and the degree of information. In order to avoid confusion in the following treatment, probability p shall refer to subjective probability, while the ratio of total information to information available to the truster, i.

Decision is not choice amongst the delimited and prescribed moves in a game with fixed rules and known list of possible outcomes of any move or sequence of moves. There is no assurance that anyone can in advance say what set of hypotheses a decision-maker will entertain concerning any specified act available to him. Decision is thought and not merely determinate response. Note in this context that the notion that Westerners attach great value to systems trust, while the Chinese are assumed to rely on personal trust Luo 17 , which per definitionem bypasses the external body, must be questioned.

The above assumption that actors know both the total amount of information required for an optimal trust decision and the residual uncertainty is questionable. To allow for a non-calculative basis of trust, such as routinized behavior, naivety [sic! The following passage provides a brief explanation of how rational actors alleviate the problem of imperfect information by resorting to psychological measures. However, as Richter 8 , a downto-earth economist and founding father of NSE see above , notes, average regularities in human behavior may be reduced to underlying principles like neurobiological laws.

As a result of advances in recent years, mainly in terms of high technological approaches to brain physiology, the neural sciences allow for a deeper understanding of the biological basis for behavior. The central tenet that constitutes the current thinking of modern biologists about the relationship of mind to brain is that all mental processes—even the most complex psychological ones—derive from operations of the brain.

As Kandel states: 2. This principle stands as the basic assumption underlying neural science, an assumption for which there is enormous scientific support. It has been shown that perceptions run along sub-cortical nerve tracks before they reach those parts of the brain in which emotional reactions are produced.

Incidents, such as those of shared experiences, cause people to trust even if they do not know why. While for Freudian scholars the existence of unconscious processes was just the starting point for the development of a mentalist theory, this is exactly as far as this analysis needs to go in order to justify the compatibility of psychological trust with RCT. As there is no need to extensively discuss the relationship between trust and these psychological causes and phenomena, the only element that shall be mentioned here is heuristics, i.

A survey by Yeung and Tung 54ff. Unfortunately, the authors did not provide an elaborate definition of the kind of trust their survey covered. In terms of probability and predictability, Herrmann-Pillath 18 found that Chinese actors often assume subjective probability much larger than the objective probability actually is; this phenomenon is called over-confidence. Social capital, however, is a problematic concept, and its definition is disputed. Coleman ff. In fact, Coleman 86 implicitly rejects definitions of social capital that are not based on the macro-level see above.

The idea of enforcing obligations via codified law, which basically emerged from the English Common Law tradition, stands in sharp contrast to traditional China Wang H It was only after that a version of Western-inspired contract law came into being. Apart from inconsequential amendments in , another 17 years passed before the NPC passed a standardized contract law in October There is, however, wide agreement that property rights are still haphazardly enforced.

This is because from a theoretical perspective, the assumption that both governance mechanisms coexist without interfering is wrong. In the case that both systems are operating simultaneously, an actor whose connections extend all the way to court may influence the judge in order to be relieved of his obligation. Similarly, officials of the AntiCorruption Bureau who judge the appropriateness of gifts ask for bags of money or cars Clissold Also consider the interesting phenomenon of retired judges, who are not permitted under PRC law to become attorneys, but who open legal services firms.

Employing inexperienced law school graduates to send to court, these firms are successful in winning civil suits. Yet research still lacks a clear understanding of exactly how its elements identified in Chapter 2 are embedded in the theory behind business strategy. Focusing on oligopolies, i. These deviations from the assumptions of perfect competition are interpreted as monopolistic elements. Allowing for heterogeneous products, monopolistic competition was established as a third economic system, located on a continuum between the extremes of pure monopoly and perfect competition.

More precisely, this analysis draws on managerial economics and industrial organization, i. Although both managerial economics and industrial organization are offshoots of the theory of monopolist competition, their objectives are diametrically opposed. Originally used by governments for anti-trust policy, industrial organization strives for workable competition in order to increase social wealth. On the contrary, firms applied managerial economics in attempts to deactivate competition, thereby achieving increased profitability.

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The point of departure for this analysis is the structure-conductperformance paradigm SCP , which assumes that market structure and market conduct determine market performance Bain ff. Among the so-called expectation parameters of market structure, there are the number of buyers and sellers, product homogeneity, market transparency, barriers to market entry, product life cycle, market size, and growth. Market conduct is expressed through variables that actors influence within the structural framework.

Sections 3. In antiquity, what was adopted by the military to achieve victory was its strategy. In a present-day business context, strategy continues to bear a notion of victory. As the means of confronting enemies in the battle for market shares This book deliberately neglects collective market conduct e. In order to assess market performance in absolute terms, the specifics of the market structure see above would have to be taken into account. Several notions of strategy have evolved in the business area, some of which are conflicting Besanko et al.

It is worth considering how three leading contributors to this area define the concept of strategy. Strategy, once set, is not easy to reverse; however, it should not be concluded from this fact that strategy must be long-term oriented. Notwithstanding these shared properties, there are different kinds of strategies.

It is common to classify managerial strategies according to organizational levels, for which Backhaus ff. The formulation of corporate strategy is usually too broad to effectively improve the competitive position. Therefore, firms devise business strategies that are concerned with the relationship between the company and its environment. This type of strategy describes how a firm plans to respond to competitors, governmental authorities, suppliers, and customers in the market. As can be inferred from the title of this book, the following analysis will focus on these external relationships.

Internal processes that may also affect competitiveness fall into the category of functional area strategies Besanko et al. Due to its fundamental contribution to corporate success Besanko et al. While this assumption has been corroborated by empirical tests e. Powell f. As this analysis does not aim at measuring the efficacy of strategies, the success of a firm shall simply be understood as the economic value created by a company. Over the years, the business strategy literature has attributed success to many kinds of 3. Strategic action shall be approached in a more scientific fashion in this thesis; it is assumed that the success of any business strategy depends on its ability to create a sustainable competitive advantage SCA, Hoffmann 1 or sustained competitive advantage Barney 99f.

Since the body of literature on this matter contains no unified definition of SCA, this concept shall be approached by analyzing its two constituent parts: competitive advantage and sustainability. Competitive Advantage The basic tenets of competitive advantage were hinted at as early as , when Alderson made the sensational assertion that the fundamental aspect of business is to meet variations in buyer demand.

Inspired by Alderson, other scholars e. Implicit in the term advantage is that only one firm may have it Kay 17 , although this company may not be a monopolist if there is simply a lack of competitors with whom it could be compared. What is possible, however, is that firms enjoy a competitive advantage in one market segment while they are at a competitive disadvantage in another. Consumers perceive a product or service, defined as a bundle of characteristics, to have a particular benefit Besanko et al.

This benefit B , which may be monetarily expressed, denotes the maximum amount the consumer is willing to pay for one unit. In the process of creating this benefit, firms sacrifice inputs.

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The value sacrificed when raw material is converted into components and when these 3 Guanxi-Based Business Strategies components are assembled into finished good and services is represented by costs C. Components of value-created adapted from Besanko et al. Two strategies emerge from this duality of value creation: consumer benefit advantage through effective positioning in the market, and price advantage through cost-efficient resource allocation Hungenberg 2; Geruson 62ff.

This simple dichotomy—depicted in the central and right-hand columns of Figure III-1 respectively—offers a good starting 3. The economic logic of benefit advantage Besanko et al. In heterogeneous oligopolies where firms compete on aspects other than price, a variety of product attributes e. In order to simplify this discussion, it shall be assumed, in keeping with Besanko et al.

Consider a firm E that provides a moderately priced product with quality qE and unit production cost CE , and a firm F that offers a product with significantly higher quality qF that costs only a little extra to produce. If firm F sets a unit price PF that is slightly below the solid indifference curve on which the pricequality position is located, it is able to increase its market share at the expense of firm E Besanko et al.

In a market context, positioning is effective when the actual product characteristics meet the requirements of all consumers. The economic logic of cost advantage Besanko et al. The firm that operates at lower costs creates more value than its competitors c. Consider an existing producer firm E that offers a product with quality qE , and unit cost CE , and a new supplier firm F that manufactures a product at a substantially lower cost CF with only a small sacrifice in quality qF.

Creating more value than firm E, firm F can share some of the additional value-created by setting a unit price PF below the solid indifference curve. These academic prescriptions result from the unrealistic assumption that consumers have identical preferences and that an infinitesimally small decrease in price or increase in benefit leads to a large shift in market share. The relationship between changes in demand and price is represented by the price elasticity of demand or, analogously, quality elasticity of demand, Besanko et al. Since the strategic effects of price and quality on demand have been sufficiently covered, the analysis shall proceed with the dynamics of competitive advantages.

Sustainability Notwithstanding the fact that corporate success is usually not attained through copycat business strategies, the practice is warranted over time only if the source of the competitive advantage is sustainable Hoffmann 6. Sustainability neither refers to a particular period of time nor does it imply that advantages persist indefinitely; rather it is describing the extent to which it is possible for competitors to duplicate this strategy.

Hence, Besanko et al.