Appendix B

The Microeconomic Foundations of Strategy and the Two Ways to Win

It may seem hard to believe that there are only two possible ways to win—low cost or differentiation. Why only those two, people often wonder, and what drives this dynamic?

This outcome is driven by the fundamental microeconomic foundations of strategy. A firm can face only two fundamental economic conditions, one of which gives rise to low-cost strategies, and another that gives rise to differentiation strategies. In microeconomics, the two central structures are demand and supply, and where they cross, the price is determined.

Structure of Demand

Demand is a measure of consumer willingness to purchase a given product or service. Each individual buyer has his or her ...

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