Exam 1: Competitive Advantage

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Use Customer Perceptions of Value Approach as described on pages 25-26.

Correct Answer:

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To prevent the erosion of competitive advantage by substitutes and competing products in an industry, a firm can raise switching costs. There are 3 types of switching costs:
- Search costs: the more a buyer must search for an alternative product, the higher his search costs;
search costs are determined by the inherent characteristics of a product or service.
- Transition costs: the more extensive and complex the process of switching from one product to another, the higher the transition costs.
- Learning costs: the more new information and skills the buyer must learn in adopting a new product, the greater the learning costs.
Example: Many value drivers are directly related to switching costs:
Customization locks in buyers by providing a firm with deep knowledge of a customer's business.
This knowledge reduces communication costs in the supply relationship. The customer's transition costs increase when it shifts to a new product since it must replace the existing customized protocols.