Competitive Strategy

Assume the current price of electricity is 10 cents per kwH and the current price of one unit of aluminum is 8 cents. Now, suppose last year, the plant bought futures of electricity at 5 cents per kWh. What is the profit if you were to produce aluminum? What is your best option overall?

If you were to make aluminum, the accounting profit would be 3 cents. However, from an economic perspective, you'd be better off buying electricity at 5 cents and selling it at the current market price of 10 cents, giving you a profit of 5 cents. Your ECONOMIC profit from continuing to make aluminum remains at -2 cents, because it is calculated as the following: -5 cents of electricity + 8 cents of aluminum -5 cents opportunity cost from NOT seling the electricity = -2 cents

Assume the current price of electricity is 10 cents per kwH and the current price of one unit of aluminum is 8 cents. What is the economic profit on each unit of aluminum?

-2 cents

. In the context of vertical integration, the reason you might want to buy some building or build something in-house rather than buy it, is you don't have to worry about contractual incompleteness, you can have much more coordination between your in-house production team and so on. The trouble is you lose certain economies of scale. So here, it would be a very bad idea, like it would be for Booth to build our own whiteboards.

...

On average, since the 1970s to 2000 which is the span of time covered by the article, when one firm acquires another, on average, the acquiring firm loses value. So the market does not think the merger was a good idea. If this inequality were to hold, we would not expect the share price of A to go down. But typically in mergers, it goes down when A buys B. This is over all the mergers in the U.S. or in the course of 30 years. There's particular kind of mergers where the share price of A drops down even more. It drops down the most when company B is a growth firm. Which is exactly what you'd expect if you thought that this misalignment of CEOs and owners was important. And there's a third and perhaps the most subtle reason why CEOs might want to merge even when shareholders wouldn't - and this is not as important as previous reasons - but CEOS actually don't have an easy way to diversify their personal financial portfolios

...

long as the manufacturer has any market power whatsoever, and this is where the term double marginalization comes from, and we're going to suppose that both the manufacturer and the retailer have some market power, they don't have perfectly elastic demand, what we know is going to happen is w is going to be strictly bigger than cm. Their profits are lower than if they were to merge. The intuition is the retailer, when thinking about raising the price, has a tradeoff .So in particular, if you wanted to merge for this reason, you might not get in trouble with the regulators because you're trying to lower prices.

...

Why would Airborne use contractors?

A bad answer to this question that contractors are cheaper or cheaper and less reliable. The answer is that the contractors and cheaper and less reliable, AND Airborne cares less about reliability and more about keeping costs low.

Define investment externalities

A firm invests in people to explain to customers how something works or what product is best for them, and the customer goes and buys that product elsewhere, say, for a lower price. the trouble is, it's not just that this is bad for a brick and mortar store. It's bad for everyone because if this becomes rampant, then no company offers the investment needed to get good salespeople, and consumers won't necessarily get this benefit.

How do Coke and Pepsi differentiate from each other?

Advertising

______ is something that creates product differentiation.

Advertising

Name Porter's five forces.

Bargaining power of suppliers, competition of firms already in the industry, substitutes and complements, potential entrants, and leverage of buyers

If consumers agree on which product is best, why don't they all buy the best product?

Because there's heterogeneity in willingness to pay for quality. Higher quality goods will be more expensive. People will differ in their willingness to pay for quality.

Name a benefit of chains.

Can spread fixed costs over different establishments. Economies of scale in reputation for quality (no mom-and-pop banks (reputation matters since you are giving them your money) (McDs and infrequent customer interaction with individual stores)), marketing, proprietary business formats, supplier power

Define reputation.

Consumers' belief about the quality or attributes of my goods relative to alternatives based on their and others' experiences.

Define two-part tariffs

Contractual solutions to double marginalization. Let's first think about something called two-part tariffs. Now we'll have a two-part tariff, it's going to be a fixed fee f and a per-unit price w. The idea is that the manufacturer will get some fixed amount of money from the retailer regardless of how many units the retailer buys, plus is going to sell the good at some price.I'll see you things at a lower price per unit, but you have to get me a fixed payment in exchange for my lowering my price. That's a contract. the contract effectively says let's integrate

_________ is the key to profit-making.

Differentiation

Provide the equation for the elasticity of demand.

E = -dD/dP * (P/D) or % change in D divided by % change in P. Alternatively, mark-up (or (P-MC)/P) = 1 / elasticity

What are two reasons why firms should merge?

Economies of scale and scope.

A key reason why mergers might create value is because of ________.

Economies of scope.

Distinguish the difference between economies of scope and economies of scale.

Ecoomies of scale, you spread the fixed cost across many units, so average cost goes down with production. Economies of scope you spread the fixed cost across many USES.

What is a way to deal with investment externalities?

Exclusive territories and resale price maintenace.

T/F Pepsi should expand into bottled water because the carbonated segment is stagnating.

F. don't really speak at all to the argument of why any firm should engage in these two activities at all rather than having two firms engaging in these activities separately. Another way to say this is suppose that this logic were coherent, that if what you were currently selling is stagnating, and there's something else poised for growth, that you should think about expanding, if that were the case, then by the same logic, the New York Times Company should think about expanding to sale of newspapers into sale of bottled water. You can say, well the sale of print newspapers is stagnating, while the sale of bottled water is growing. That doesn't make any sense, because there's no assets that the New York Times has that links it to this other activity. to ask whether there is some reason why combining these two activities and manufacturing two different kinds of products creates more benefits relative to the costs than what you would get if you engaged in these two activities separately when you have two separate firms

T/F: A car company should integrate with a steel producer to eliminate fluctuation in its input prices.

False. This has nothing to do with a reason to integrate. You're not saying anything about whether a car company and a steel production company should be joined because its profits will be higher. That's nowhere in this argument. Fluctuation in input prices is not some bad thing - it's normal. Even if you didn't have fluctuation in input prices because you somehow owned the steel company, what would be the fluctuations in your own economic cost? You would still be subject to the price of steel.

T/F: As a monopolist, your profits require heterogeneity in consumers' tastes.

False; in fact, you might prefer that people have th same tastes.

What are the general two ways to build human capital as a base of competitive advantage?

First, look for skillsets that can create high value in your firm but have low value elsewhere. This is very important - it's about finding the best people for your firm, not necessarily for others. Once employees are hired, you want to focus on building human capital that's firm-specific.

T/F: Reputation for lower prices is a source of competitive advantage.

Generally, no. If people can easily observe prices (and thus, which are lower), and can costlessly switch, no. If they can't observe prices and it costs something for them to switch, then maybe.

What characterizes high fixed cost / low marginal cost industries?

High barriers to entry, intense price competition. Managing rivalry and/or differentiating products becomes especially important. Main threats come from existing competitors expanding into new segments, not de novo entrants

You can categorize all heterogeneity in consumer tastes into two types: _______ and ________.

Horizontal, vertical

Define vertical differentiation.

If all firms charge the same price, consumers AGREE on which product is best. I.e., there is a natural meaning of quality. This is DIFFERENT from a Hotelling line.

Define horizontal differentiation.

If all firms charge the same price, consumers DISAGREE on which is best. Like vanilla vs. chocolate ice cream. or Coke and Pepsi.

Name the two tests to determine whether an asset is sustainable.

Immobile and difficult to imitate. Or certain assets that are valued more in your firm than in others, or you have a set of assets that are complementary and a firm would need to have all of these assets to compete with you. You need to have all these things come together to have really productive things. And even if each of them is individually mobile, no firm would be willing to transfer them unless they can get all 10 of them, and that might be much harder to get than it otherwise might be if the firm just wanted to get one thing. So, complementarity in a way, serves as protection in the long run.

what is it that Enterprise has that Hertz doesn't have

It's relationships, which are embodied in the people, which stay internal because they want the internal chance of promotion (so they are more likely to stay), their skills are uniquely suited to Enterprise (so they are more valued by Enterprise), and their skills and promotion aren't as valuable at other companies. I structure everything around making these people less mobile.

T/F: GAP should open its own factory to dye fabric in order to ensure a consistency in its colors.

No, because assuming that color is verifiable, there's no reason to integrate because we could contract that. Under the plausible assumption that color is not verifiable, then this might make sense if it's important to GAP.

If effort is observable and verifiable, will a merger increase value in this case?

No, because we'll get effort with and without a merger.

You are one of two firms in some industry, and you make 30% less than the other competitor. Should you re-vamp and do what the competitor does? Explain.

No. The reason why both of you are making some money is because you are doing different things. Example from class: UPS's attempt to copy FedEx

In the case where effort is unobservable, will a merger increase value?

No. Whether you merge or not will be irrelevant, since you can't observe effort and you obviously can't verify it.

Ask what are the assets that allow the firm to serve a particular set of customers well, and why do we think these assets will be hard for other firms to obtain/imitate in the long run.

OK

If two firms are on a line, there is a trade-off. Firms are incentivized to move toward each other to increase demand, but price will fall. There will be an optimal point when both firms earn maximum profits.

OK

Reputation for quality is much more important when you don't have discipline coming from repeated interactions.

OK

So whenever human capital is the main input, we see not corporations but partnerships. This is not true only in design, but also in law firms.

OK

Two gas stations compete in a small town. The town coordinates designed to preserve the beauty of the downtown shopping area currently limits each gas station to a max of three pumps. Demand has grown recently so all the pumps are full and lines sometimes form at both stations. Should the station owners lobby aggressively to have the ordinance repealed?

So if you do not mention the concept of capacity constraints and that capacity constraints soften pricing rivalry, you have answered this question poorly. Discussing how capacity constraints make it less tempting for me to cut my prices which in turn make it less tempting for you to cut your prices, which in turn, makes us both better off, is the key to answering this question.

When is reputation helpful?

So reputation is helpful only if it is either expensive to try something else, or even if you try something else, you don't know which is better. If it doesn't cost anything to try something else and it's easy to distinguish what is better, reputation is not helpful.

What are the prerequisites that make quality a potential source of competitive advantage?

So the first component is that it's hard to judge whether someone else's quality is different from yours, and the second is the cost of experimenting is high. It's very costly for a consumer to sample another product, and if they do sample it, it's hard to judge whether it's better. If those two things are true, then reputation for quality can be a source of sustainable comparative advantage.

T/F If we can write a detilaed enough contract, then there is no reason to integrate.

T

T/F: An employee will always be less motivated than the owner.

T

T/F: The longer time horizon you're looking at, the less sustainable any competitive advantage is.

T.

Define economies of scale.

The cost of producing more goods decreases as a firm produces more. If the cost never increases, the firm is a natural monopoly; however, in many cases the price increases after a given point.

Can a firm sustain its competitive advantage if that advantage comes from technological innovations?

The fact that you're currently ahead might mean that you can stay ahead because by the time people catch up, you will have moved forward from where you were before. So to the extent that there's some sustainability of technologically-based competitive advantage, it's probably driven by the fact that it takes time to catch up

T/F. If resin prices permanently increased, the increase in prices could be passed onto consumers.

Uncertain. The fact that something is a commodity does not actually govern whether producers of plastic containers will be able to pass the price of resin off to consumers. That entirely depends on the elasticity of demand for the plastic products.

What is the difference between horizontal and vertical integration?

Vertical integration is when firms join and one is buying an input from the other. Horizontal integration is like when two firms sell the same type of goods at the same level of the value chain merge.

T/F: IBM should merge with Intel to eliminate Intel's supplier power.

What is not a good answer is that assuming Intel doesn't have supplier power. Suppose for a moment, if I could get widgets for free, I could generate $70mm of profits per year. However, I really need this widget, there's a lot of supplier power, suppose you are a company that owns them, how much would you charge them? You would extract all my surplus because I entirely rely on you. Now suppose I'm really upset about this, and I say I'd like to buy your company. What is the minimum price at which you'll sell? The NPV of those $70mm of annual profits. There's just no reason why profits here would increase. You don't somehow eliminate supplier power.

What is the difference between barriers to entry and barriers to imitation?

When we think about barriers to entry, we're really thinking about how easily a new firm can be formed and enter into the current space. When we think about barriers to imitation, we're more worried about thet existing firms in the industry, and I have my position and they have theirs, well what if they slide over into my space and try to just push me out? e.g., FedEx might worry about Airborne trying to imitate it, but if Airborne did, it would pay straddling costs.

Profits require _______, which requires _______,

firm differentiation; heterogeneity in consumers' tastes

Firm differentiation requires _________.

heterogeneity in consumers' tastes.

Define straddling costs.

imitating my position forces the competitor to compromise its existing position. Trying to run two different businesses with one set of assets creats inefficiencies

If two firms are located at the same place, charge the same price and make the same product, their demands are _________ and their mark-up is

infinitely elastic. Their mark-up is 1/infinity, or virtually zero.

if a firm is engaged in some activity A, we of course know there must be some assets that allow it to do that, better than others. Question is, is there any reason for some firm to be doing activity B instead?

is whether the firm has assets that make doing activity B better than if there were separate firms doing separate activities? Our answer in short will be it depends on whether it has some assets that make engaging in these two activities together more effective than two separate firms that would be engaging in them separately. even if there are some assets that you could perhaps use effectively by spreading them across various activities, do you really need to merge to achieve that, or can you achieve it through contracts?

Mergers only provide value in the case where effort is .......

observable but NOT verifiable. In this case, there's effort ONLY with a merger.

Name advantages to being the first mover.

prime location, sunk costs, learning curves, consumers' switching costs

Describe the difference between brand and reputation.

suppose that what a firm has is not a brand they can consume directly, but they have a brand that you like only because it's associated with high quality, and all you care about is quality. You don't care about the brand. So, if in fact there was another product which you knew was as high quality and was five cents cheaper, you'd switch.

the key thing of economies of scope is going to come from an asset that can be used for multiple activities, and using it for multiple activities does not harm your primary position

synergies of cost reduction, I'm still waiting. What am I waiting for - I'm waiting for you to name some asset or capability which in fact the company will pay for once but will get to use twice.

For a firm to be profitable in the short or long run, it must create something _____ and _______. Which of the two is harder to sustain in the long run?

unique, valuable; unique

Name a benefit for independence -- i.e., locally owned shops.

when there's strong incentives for individual owner-managers. Now, sometimes incentivizing employees is not so important. For example, suppose the employee's job is to - he works at an airport - he needs to take your driver's license and input it and give you a key. You don't need a lot of incentives for that. It's such a well-defined job and your effort is so easy to monitor.

Name advantages to being the second mover.

you can learn from the first mover's mistakes, since it can be unclear to determine what the best way of operating in an industry is. also it could be that the first mover has to incur costs that benefit the whole industry

the power plant buys the coal mine or the coal mine buys the power plant. And this is the only thing you can do here to eliminate what's known as the hold-up problem. The hold-up problem is once you make a sunk-cost investment that's relationship-specific, any contractual relationship puts you in a very bad spot, because I can then extract all of your sunk costs. Now notice that this could be very inefficient - the fact that the power plant buys the coal mine. The power plant could be very bad at managing the coal mine. It could be they have no skill in managing the coal mine. It could be that they don't know how to run them, or the original person could have done it better. But that cost of inefficient conduction of the coal mine might be dwarfed by the inefficiency to put the power plant somewhere exactly in between two coal mines so no one can extract the power plant excess. So this is, by far, the single most important reason for vertical integration. This depends entirely on contractual incompleteness. If there WERE no contractual incompleteness, there WOULD be no hold-up problem. If we could REALLY think of all the contingencies that come up and specify what we could do, what could happen, we could possibly remain separate companies. The special thing with the hold-up problem is that there's some relationship-specific investment. This is about trying to convince someone to spend a lot of money irreversibly on something that is only helpful in the context of our relationship. just an example, since these things are so expensive to build and coal mines can't move. There are lots of examples that are less stark that relate to relationship-specific investments and a hold-up problem. Be aware, if you're going to spend some sunk cost that will be useless outside of this relationship, you have to be aware that that exposes you to a very bad negotiating position vis-à-vis that relationship.

...

Name several barriers to imitation.

1) Can't get the resource due to literal scarcity or legal restrictions 2) Casual ambiguity -- hard to figure out with so many pieces to imitate and hard to test, e.g. WalMart may answer that definition 3) Economies of scale and sunk costs -- e.g., Comcast, its marginal costs become small after installing the wires in the ground. Competitors don't have the same incentives to make a similar investment 4) Strategic barriers -- can imitate but expect harsh retaliation 5) Imitation takes time 6) Learning curve -- marginal cost decrease in the number of products made int he past, e.g., Boeing makes airplanes that cost less and less to manufacture 7) Brand equity and reputation - tied to cost of experimentation 8) Relationships

What are reasons often used for merging, that are WRONG?

1) Go to another sector because your sector is no longer profitable (e.g., NY Times and carbonated drinks) 2) Go to another sector because another product has a very big demand, and profits can be made there. Neither of these arguments explains why we should have one firm doing BOTH activities.

What three kinds of traits make assets less mobile?

1) Literal immobility -- e.g., land/location 2) Less valued outside of the firm -- asset not as productive elsewhere, e.g. operator gets very skilled to operate a certain set of machines unique to a firm. If operator moves outside the firm, he will not be as valuable because his skills developed do not apply to other machines. 3) Complementarities -- e.g., there are 10 assets that fit perfectly together and produce a lot. Taking a subset of these assets will not be as productive. Even if each of these assets is individually mobile, no firm will be willing to transfer just one of them. e.g., Booth is known for its faculty and engaging students. Relocating the school to a warmer city in the winter will be difficult because it requires all students and professors to move as well.

What are two cases when the inequality Piab > Pia + Pb might hold?

1) Merging to capture value. If A and B are substitutes, this happens. However, this is ILLEGAL! 2) Merging to create value through either of the following two ways: a) Economies of scale: the average cost declines as the quantity produced increases b) Economies of scope: allows you to decrease costs by spreading fixed costs over multiple products: e.g., using Gleacher for conference during the day. But not for night clubs after classes. Assets that might be able to be spread: technology, relationships, reputation/brand equity (an asset can be used in the sale of another product or activity when the product or activity is similar enough so that the reputation extends to the new good -- e.g., Coke doesn't brand its water as Coke water). Also, internal capital markets: combining an asset/technology-rich and idea-poor with an asset-poor and idea-rich to enable new, profitable projects.

What are two reasons for incomplete contracts (and therefore, reasons to merge)?

1) Observable but not verifiable traits. So cheerfulness could be something that's observable but not verifiable. So there could be lots of examples of variables that you can see but you can't write contracts about. And if you can't write contracts about them, it might be that you really need to merge. 2) Unforeseen contingencies

There is a road with 2 gas stations. The gas stations have the same marginal cost, same product and set their prices simultaneously. In this case, profits = 0. Describe three ways you can change the model to generate profit.

1) Product differentiation - use advertising/branding, literally separate the road, increase switching costs 2) Capacity constraints - say 100 cars go through the road, but we can only serve 70 3) Dynamics and collusion

Why might Piab be greater than Pia + Pib?

1) When two firms that produce substitutes merge, Piab will always > Pia + Pib. Because the merged firm will raise prices above marginal cost. Now, suppose you wanted to do this today, what would stand in your way? Government. It's illegal to merge for this reason. So, even if you want to merge for this reason, you're going to need another excuse. You're going to need to tell some story basically that you're merging to create value.

When can reputation be a source of sustainable competitive advantage?

1) if it can be observed and 2) if it can be sampled inexpensively.

What factors make tacit collusion easier?

1) players care about the future 2) there are a small number of firms 3) prices are transparent 4) demand is stable 5) multi-market contact (makes it possible for me to punish you if you deviate) 6) symmetric firms (e.g., if there were a big and a small firm, this means the firms are NOT symmetric. The small firm may have an easier time deviating.)

Should transportation trucks be owned by the driver or by a larger company that owns trucks?

One factor which pushes toward driver-owner which is there will be better incentives to take care of the truck. There will be some losses probably, as well, due to worse economies of scale - e.g., repairing, managing fleet costs, so there might be a trade-off. Also, how easy is it to monitor whether the driver will do a good job? If it's easy to monitor, then we expect to have corporations own trucks. If it's very hard to monitor people doing a good job, and doing a good job is very important, then the incentives of the driver might swamp the increased economies of scale associated with a corporation owning the trucks. For example, if you can put a computer chip in the truck, as soon as that came out, all of those owner-operators got replaced by large corporations because the effort could be observed.

Define ordered cases.

Ordered cases is a special type of horizontal differentiation. In the case where, if I live closest to ice cream store A, then B, then C, and either they are the same other than their distance or I don't care about their other differences, I prefer A to B to C. This is probably not true, however, for some things like colors. Ordered cases can also be depicted via a HOTELLING LINE.

Name a benefit of a locally-owned establishment.

Owner-employee alignment. Key when profit is driven by: effort which is hard to monitor, customization to local needs, and human capital of local managers

What argument do you always have to prove if you want to say that firm A should engage in activity B in addition to activity A?

PIab has to be strictly bigger than PIa + PIb. And this inequality always has to be satisfied if you wanna tell me why this firm should engage in some other industry. Whether its industry is somewhat stagnating or whether it wants to expand into something that's growing, is totally besides the point. The profit inequality is going to be the ONLY inequality we care about. We're not going to care about smoothing risk, we're going to care about maximizing profits

What are two things firms can do to make barriers to entry high in their industry?

Predatory pricing and product proliferation

Name strategic ways to deter entry.

Producing excess capacity, proliferation (e.g., Starbucks locations), predatory pricing. So it's really important in all of these examples that your actions be irreversible, otherwise, they can never have strategic consequences. Therefore, I might price lower than I would so as to signal to the world that my costs are low so do not come in. I'm broadcasting this. In general, it's my judgment that this is much less common as a way to successfully deter entry compared to things like proliferation. Proliferation is really common and not just in terms of location but also in product space.

Define minimum efficient scale.

The smallest output a plant (or firm) can produce such that its long-run average costs are minimized.

So one thing firms sometimes say and do is we're going to combine these two firms so as to diversify this risk away

There's no need for such drastic, expensive changes, like integrating firms, to combine two streams of cash flows. There's a very simple way, if someone prefers this cash flow to either of these two, which is firm A issues share A, firm B issues share B, and if you prefer this cash flow, well please have a balanced portfolio and keep one share of firm A and one share of firm B.

If there are two firms, and they have to choose where to locate, where would they locate?

They would locate on the diameter, as far away from each other as possible.

Describe the issue online advertising agencies would have in competing with Google.

To get data on users, you have to have users, and you have to have them use your engine instead of Google. It's a bootstrapping problem, where you can't have the data unless you have users, and it's hard to draw users unless you maybe have the data. So this is an example of kind of a pair of assets which are highly complementary and sort of feed on each other over time

T/F Intra-industry profits vary more than inter-industry profits.

True.

T/F: In analyzing a company from a competitive strategy standpoint, you assume that company is as operationally efficient as it can be.

True.

T/F: In the same market, there could be both vertical and horizontal integration

True.

T/F Managers can be incentivized to merge other than for reasons of profit maximization.

True. There's a lot of evidence that suggests that managers like running big companies. The probability a company will survive is bigger when there is a merger. Companies that are merger targets tend to be particularly appeal to CEOs are growing companies - companies where B is actually in an expanding market that could be appealing to the CEOs. The CEOs might also like being on the covers of magazines, diversify personal financial risks, ensure firms' survival

T/F: The lower the mark-up of the firm, the higher the elasticity of demand.

True. This holds regardless of the assumptions we may want to make about the market and the number of players.

T/F: Coke should own a can company so the can company will locate close to Coke's major bottling plant.

When you pour soda into a can, that happens at a place called a bottling plant. A bottling plant puts soda into bottles and cans. A good answer to this question would certainly mention the power plant/coal mine example because it's a similar type of situation. And then it would discuss what are some of the features of this that were crucial and discuss whether they are likely to be here. For example, we need that the cans are expensive to move. So suppose that it's costly to ship cans. If it's costly to ship cans, then there's great efficiencies in locating close, but if the major bottling plant is far from other bottling plants, then this investment of building the can company right there is a relationship-specific investment and might lead to the hold-up problem because of the incompleteness of contracts. Link to this example and point out the features of the example that would make it apply to this case. Under the assumption that it's a sunk investment (which is obvious) and assuming that cans are expensive to ship, which I think is right, and assuming bottling plants are far away from each other, and assuming there's contractual incompleteness, then the answer is yes. Because of contractual incompleteness, buying the company might make sense because it will eliminate the hold-up problem. The key thing is to get at what truly matters.

T/F: A medical equipment manufacturer employs a number of highly-skilled engineers. Their skills allow the manufacturer to produce higher quality machines and lower cost than it could without them. These employees are likely to be a source of sustainable competitive advantage.

You should think about under what circumstances would allow you to say this is s sustainable competitive advantage. So before we even get to whether there's a source of competitive advantage, we have to discuss whether these are engineers that others can't have. That's the first part. Second, can it be part of sustainable competitive advantage? That depends on barriers to imitation and whether these assets are transferable. So you might think there are barriers to imitation - for some reason, it may be difficult to employ the same type of workers. And then, obviously the key part is to talk about transferability. It really matters of whether these employees can be hired away from another company. That is likely to depend on whether they have firm-specific human capital. As I mentioned you want to make links to other cases.

Differentiation should be based on ___________.

consumers' tastes

how do you approach the question of whether a firm is profitable in the long run?

create a list of assets that might be hard for others to generate. So if you have a hard time coming up with this kind of list for a company, you might question its viability in the long run.