Using Data to Determine Strategy, GCSE Coursework Example

Overview

Scenario: Suppose that two firms, A and B, compete. They can choose different strategies – a combination of low price or high quality. The accompanying table show the best practice frontiers for each firm.

Action Item

Determine the following items based on the information in the overview.

• What is the cost to A of 1 unit of high quality?

The cost to A of 1 unit of high quality is .25. That is, as the price moves from 0 to 1 the quality falls 4 units. Thus, a 1 unit increase in price is equal to 4 quality units or 1 quality unit is equal to .25.

• What is the cost to B of 1 unit of high quality?

The cost to B of 1 unit of high quality is 1. That is, as the price moves from 0 to 2 the quality falls 2 units. Thus, a 1 unit increase in price is equal to 1 quality units or 1 quality unit is equal to 1.

• What is the cost to A of 1 unit of price?

The cost to a of 1 unit of price is 4 units of quality. That is, as the price moves from 0 to 1, the quality falls 4 units. Thus, a 1 unit increase in price is equal to 4 quality units.

• What is the cost to B of 1 unit of price?

The cost to B of 1 unit of price is 1 quality unit.

• Which firm should focus on high quality? Explain your answer from an economic perspective.

Firm A should focus on high quality. This is because quality is relatively cheaper to Firm A compared to Firm B: Firm A pays .25 in price for a unit of quality; Firm B pays 1 unit in price for a unit of quality. Thus, Firm A can provide higher quality goods than Firm B.

• Which firm should focus on low price? Explain your answer from an economic perspective.

Firm B should focus on lower price. This is because price is relatively cheaper to Firm B compared to Firm A: Firm B essentially pays 1 unit of price of quality and thus can offer a lower price than Firm A.

Write a one-page business brief to your professor that contains the information you were to have determined. Note: You are not just to answer the questions asked but create a business brief that informs the reader based on your answers.

This brief looks at the competitive advantages of two firms: Firm A and Firm B. These two firms are producing products based on two qualities: quality and price. Thus, each firm experiences a trade-off between those two qualitie

For Firm A, it is able to better focus on quality. This is because of the tradeoff between a unit of price for a unit of quality. That is, for a one unit increase in price, firm A only pays .25 units in quality. Thus, it is able to produce high quality items for a relatively low price: This advantage is evident in the fact that is able to provide an item that is priced at 1 unit and has 8 quality units. By the time the product price hits 3, however, Firm A is already producing an item without any quality. Thus, Firm A’s relative competitive advantage is best served through providing items with high quality.

Firm B, on the other hand, pays a much larger price for quality. Indeed, for each unit of price it pays a unit of quality. This means that a higher quality strategy probably is not the best one for Firm B. Rather, Firm B would be better to compete on price in that it has more options for price than Firm A, albeit at a lower quality than Firm A could produce. Thus, Firm B would likely maximize its price advantage over Firm A For example, Firm B has more product offerings at different price points than Firm A: while Firm A only offer products up to 3 price units (with a quality offered of 0), Firm B offers products up to 6 price units with varying levels of quality.

Overall, each firm has a different competitive advantage that should be explored in the pricing and offering of their goods.