CBA 469 CHAPTER 6

Appendix 2 Exhibit 6.1 Industry and Firm Effects Jointly Determine Competitive Advantage

Both industry and firm effects go through a process that leads to competitive advantage. Exhibit 6.1 shows the interdependence of industry and firm effects. The process map begins with Industry Effects and Firm Effects, which are both linked with a two-direction arrow. Industry effects points to another box titled "Industry Attractiveness" (Five Forces Model, and Complements), which points to a box titled "Within Industry" (Strategic Groups). Firm Effects points to two boxes, one titled "Value Position" (relative to competitors) and the other is titled "Cost Position" (relative to competitors). Both of these boxes point to a box titled "Business Strategy" (Cost Leadership, Differentiation, Value Innovation). Both the "Within Industry" box from the Industry Effects side and the "Business Strategy" box from the Firm Effects side point to a final box titled "Competitive Advantage."

Strategic Trade-Offs

Choices between a cost OR value position Tension between: •Value creation and •Pressure to keep cost in check Purpose to maximize the firm's: •Economic value creation •Profit margin

Cost Drivers That Keep Costs Low

Cost of input factors •Raw materials, capital, labor, and IT services Economies of scale •Decreases in cost per unit as output increases Learning-curve effects •Less time to produce output with experience Experience-curve effects •Improvements to technology and production processes

Generic Business Strategies

Differentiation •Seeks to create higher value vs. competitors •Offers unique features •Charges higher prices Cost Leadership •Seeks to create similar value vs. competitors •Charges lower prices

What Is Blue Ocean Strategy?

Differentiation and cost-leadership activities Uses value innovation to reconcile trade-offs Blue oceans represent: •Untapped market space •Creation of additional demand •Opportunities for highly profitable growth

Economies of Scale and Scope

Economies of Scale •Decreases in cost per unit •Achieved as output increases Economies of Scope •Producing two outputs at less cost •Shares resources or technology

Economies and Diseconomies of Scale

Economies of Scale: •Spreads fixed costs over a larger output •Employs specialized systems and equipment •Takes advantage of certain physical properties Diseconomies of Scale: •Firms too big •Complexities of too much coordination •Inflexible and slow

Cost Leadership Strategies: Summary

Focus on: •Offering lower costs than competitors •Maintaining acceptable quality Appeals to the bargain-conscious buyer •Attracts an increased sales Can be profitable over a long period of time

Differentiation Strategies: Summary

Focused on adding value •Unique features •Customer service •Effective marketing Can increase costs •R&D / innovation needed Customers willing to pay a premium

What Is Business Level Strategy?

Goal-directed actions: •To achieve competitive advantage •In a single product market "How should we compete?" •Who: which customer segments? •What: customer needs will we satisfy? •Why: do we want to satisfy them? •How: will we satisfy our customers' needs?

Cost Leadership Strategy

Goal: •Reduce cost below competitors •Offer adequate value •Reduce prices for customers •Optimize the value chain for low cost

The Strategy Canvas

Graphical depiction of a company's performance •Relative to its competitors •Shows focus or divergence Viewed across the industry's key success factors Provides insights into strategy

Appendix 7 Exhibit 6.7 Gaining Competitive Advantage Through Learning Curve and Experience Curve Effects

In a 90 percent learning curve, per-unit cost drops 10 percent every time output is doubled. The steeper 80 percent learning curve indicates a 20 percent drop every time output is doubled. There is an increase in learning that occurs as a result of changes in technology and process innovation. It is important to note that the learning-curve effect is driven by increasing cumulative output within the existing technology over time. That implies that the only difference between two points on the same learning curve is the size of the cumulative output. The underlying technology remains the same. The speed of learning determines the slope of the learning curve, or how steep the learning curve is (e.g., 80 percent is steeper than a 90 percent learning curve, because costs decrease by 20 percent versus a mere 10 percent each time output doubles).

Appendix 6 Exhibit 6.5 Economies of Scale

In the Economies of Scale phase, cost per unit falls as output increases up to a certain point. A firm whose output is closer to this point has a cost advantage over other firms with less output. In this sense, bigger is better. The second part of the curve is the Minimum Efficient Scale phase. In this phase, returns are constant and are flat, as further economies of scale cannot be achieved. In the third phase of the graph, towards the right side, diseconomies of scale are realized as additional output results in per unit cost increases.

Successful Business Strategy

Leverages the firm strengths Mitigates firm weaknesses Helps the firm: •Exploit external opportunities •Avoid external threats

To Achieve Successful Value Innovation

Lower costs •Eliminate: Which of the factors should be eliminated? •Reduce: Which of the factors should be reduced? Increase perceived consumer benefits •Raise: Which of the factors should be raised? •Create: Which factors should be created?

Focused Business Strategies

Narrower competitive scope Focused Differentiation •Ex: Mont Blanc: exquisite pens at several hundred dollars Focused Cost Leadership •Ex: BIC: disposable pens and lighters at low cost

Appendix 10 Exhibit 6.11 Jet Blue's Strategy Canvas

On the X axis are the key industry metrics of price, seating class, in-flight amenities, meals, connections (via hub), lounges, international routes, customer service, reliability and convenience. On the Y axis are the words "Low" and "High." Scoring mostly on the high end of this graph are the Legacy Carriers, who pursue a differentiation strategy. Scoring mostly on the low end of this graph are the Low-Cost Airlines who pursue a cost-leadership strategy. In the middle, is Jet Blue, who oscillates from low to high in a number of categories, indicating a lack of effectiveness in its strategic profile.

Appendix 5 Exhibit 6.4 Cost Leadership Strategy: Achieving Competitive Advantage

On the left, at a disadvantage, is Firm A that offers higher cost and lower value. On the right are two companies that are at an advantage. Both firm B and firm C have lower costs than Firm A, however firm B extracts higher value. In both approaches to cost leadership in this image, Firm B's economic value creation is greater than that of Firm A and Firm C. Yet, both firms B and C achieve a competitive advantage over Firm A. Either one can charge prices similar to its competitors and benefit from a greater profit margin per unit, or it can charge lower prices than its competition and gain higher profits from higher volume. Both variations of a cost-leadership strategy can result in competitive advantage. Although Firm B has a competitive advantage over both firms A and C, Firm C has a competitive advantage in comparison to Firm A.

Appendix 4 Exhibit 6.3 Differentiation Strategy: Achieving Competitive Advantage

On the left, at a disadvantage, is Firm A that offers the lowest amount of value. On the right are two companies that are at an advantage. Both firm B and firm C have higher value than Firm A, however firm B extracts higher value because it has lower costs. Firm A in this image produces a generic commodity. Firm B and Firm C represent two efforts at differentiation. Firm B not only offers greater value than Firm A, but also maintains cost parity, meaning it has the same costs as Firm A. However, even if a firm fails to achieve cost parity (which is often the case because higher value creation tends to go along with higher costs in terms of higher-quality raw materials, research and development, employee training to provide superior customer service, and so on), it can still gain a competitive advantage if its economic value creation exceeds that of its competitors. Firm C represents just such a competitive advantage. For the approach shown either in Firm B or Firm C, economic value creation, (V - C)B or (V - C)C, is greater than that of Firm A (V - C)A. Either Firm B or C, therefore, achieves a competitive advantage because it has a higher value gap over Firm A [(V - C)B > (V - C)A, or (V - C)C > (V - C)A], which allows it to charge a premium price, reflecting its higher value creation. To complete the relative comparison, although both companies pursue a differentiation strategy, Firm B also has a competitive advantage over Firm C because although both offer identical value, Firm B has lower cost, thus (V - C)B > (V - C)C.

Three Drivers That Increase Perceived Value

Product features •Enables differentiation Customer service Complements

Strategic Position

Profile based on value creation and cost •In a specific product market A valuable and unique position, which: •Meets customer needs •At the highest possible product value •For the lowest possible product cost

Appendix 1 The A F I Strategy Framework

The graphic shows the interdependent relationships in the A F I strategy framework. The specifics follow. The important inside circle is titled "Gaining and Sustaining a Competitive Advantage" that is at the very center of the image, with five different circles on the outside of it. Arrows go back and forth from the center circle to each of the five outer circles. The five outer circles are labeled: (1) Getting Started, (2) External and Internal Analysis, (3) Formulation: Business Strategy, (4) Formulation, Corporate Strategy, and (5) Implementation. Each of these outer five circles have a brief description beside them to explain what the circle means: Under the first outer circle titled "Getting Started," it says: Part 1, Strategy Analysis, "What is Strategy (Chapter 1)" and "Strategic Leadership: Managing the Strategy Process (Chapter 2)." Under the second outer circle titled "External and Internal Analysis," it says: Part 1, Strategy Analysis, "External Analysis: Industry Structure, Competitive Forces and Strategic Groups (Chapter 3)," "Internal Analysis: Resources, Capabilities and Core Competencies (Chapter 4)," and "Competitive Advantage, Firm Performance, and Business Models (Chapter 5)." Under the third outer circle titled "Formulation: Business Strategy," it says: Part 2, Strategy Formulation, "Business Strategy: Differentiation, Cost Leadership and Integration (Chapter 6)" and "Business Strategy, Innovation and Entrepreneurship (Chapter 7)." Under the fourth outer circle titled "Formulation: Corporate Strategy," it says: Part 2, Strategy Formulation, "Corporate Strategy: Vertical Integration and Diversification (Chapter 8)," "Corporate Strategy: Strategic Alliances, Mergers and Acquisitions (Chapter 9)," and "Global Strategy: Competing Around the World (Chapter 10)" Under the fifth outer circle titled "Implementation," it says: Part 3, Strategy Implementation, "Organizational Design: Structure, Culture and Control (Chapter 11)," and "Corporate Governance and Business Ethics (Chapter 12)."

Appendix 3 Exhibit 6.2 Strategic Position and Competitive Scope: Generic Business Strategies

The image shows how combining a firm's strategic position with the scope of competition results in the two major broad business strategies: cost leadership and differentiation. This image shows four squares: Cost Leadership (broad scope and focused on cost), Differentiation (broad scope and focused on differentiation), Focused Cost Leadership (narrow scope and focused on cost), and Focused Differentiation (narrow scope and focused on differentiation).

Appendix 8 Exhibit 6.9 Value Innovation Accomplished through Pursuing Differentiation and Low Cost Strategies

This image depicts two triangles, one facing down and the other facing up. The triangle facing down says "costs" with an arrow pointing down. The triangle facing up says "total perceived benefits" with an arrow pointing up. In the middle of these two overlapping triangles is a diamond image that says "Value Innovation."

Appendix 9 Exhibit 6.10 Value Innovation versus Stuck In the Middle

This image shows four squares: Cost Leadership (broad scope and focused on cost), Differentiation (broad scope and focused on differentiation), Focused Cost Leadership (narrow scope and focused on cost), and Focused Differentiation (narrow scope and focused on differentiation). In the middle of this graphic is a square that says "Blue Ocean Strategy vs. Stuck in the Middle." This image suggests how a successfully formulated blue ocean strategy based on value innovation combines both a differentiation and low-cost position. It also shows the consequence of a blue ocean strategy gone bad—the firm ends up being stuck in the middle, meaning the firm has neither a clear differentiation nor a clear cost-leadership profile. Being stuck in the middle leads to inferior performance and a resulting competitive disadvantage.

Differentiation Strategy

Unique features that increase value •Consumers pay a higher price The focus of competition: •Unique product features •Service •New product launches •Marketing and promotion Competitive advantage achieved when: •Value - Cost > competitors