Ch6

Economies of Scope

The savings that come from producing two or more outputs at less cost than producing each output individually even though using the same resources and technology.

Cost of Input Factors

Cost Driver Access to lower cost input factors such as: Raw materials Capital Labor IT services.

Learning Curve

Cost Driver God down as it takes less and less time to produce the same output as we learn how to be more efficient - learning by doing drives down cost. The steeper, the more learning has taken place. As cumulative output increases, firms move down the learning curve reaching lower per unit costs. Differences in timing Differences in complexity

Experience Curve

Cost driver Change the underlying technology while holding cumulative output constant.

Cost Drivers

Cost of Input Factors Economies of Scale Learning-curve effects Experience-curve effects

Spreading fixed costs over larger output

Economies of Scale Larger output allows firms to spread their fixed costs over more units. That is why gains in market share are often critical to drive down per unit cost.

Employment Specialized Systems and Equipment

Economies of Scale Larger output also allows firms to invest in more specialized systems and equipment, such as enterprise resource planning (ERP) software or manufacturing robots.

Taking advantage of certain physical properties

Economies of scale also occur because of certain physical properties. Cube-Square rule Minimum efficient Scale

Value Innovation - Lower Costs

Eliminate. Which of the factors that the industry takes for granted should be eliminated? Reduce. Which of the factors should be reduced well below the industry's standard?

Cost Leader

Focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers. They attempt to optimize all of its value chain activities to achieve a low-cost position.

Strategic Position

Its strategic profile based on value creation and cost in a specific product market. A firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm's product creates and the cost required to produce it. Higher value creation tends to be higher cost.

Scale Economies

Taking advantage of certain physical properties Critical to driving down a firm's cost and strengthening a cost-leadership position. Managers need to increase output to operate a minimum efficient scale (between Q1 and Q2)

Complements

Value Driver Add value to a product or service when they are consumed in tandem. The availability of complements as an important force determining the profit potential of an industry. Finding complements is an important task for managers to enhance value of their offerings

Customer Service

Value Driver Focusing on this increases perceived value

Product Features

Value Driver Increasing the perceived value of the product or service affering Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price.

Cost parity

matching prices

Competitive advantage is based on the difference between:

perceived value a firm is able to create for consumers (V) and captured by how much consumers are willing to pay for a product or service, and the total cost (C) the firm incurs to create that value. A business is more likely to lead a competitive advantage if a firm has a clear strategic profile, (differentiator or low-cost leader)

Generic Business Strategy

Can be used by any organization (manufacturing or service, large or small, for profit or nonproft, public or private) Value creation and cost tend to be positively correlated, important trade offs exist between value creation and low cost. A Business strategy is more likely to lead to a competitive advantage if it allows firms to either: - Perform similar activities differently -Perform different activities than their rivals. Must consider Scope of Competition Includes: Differentiation Strategy Focused Differentiation Strategy Cost-Leadership Strategy Focused cost-leadership Strategy

Strategic Trade-offs

Choices between a cost or value position. The choices is necessary because higher value creation tends to generate higher cost. Must keep cost in check so as not to erode the firm's economic value creation and profit margin. A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile either a differentiator or a low-cost leader.

Economies of Scale

Cost Driver Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases. Bigger is better Allows firms to: Spread their fixed costs over a larger output Employe specialized systems and equipment Take advantage of certain physical properties

Differentiation Parity

Creates the same value Hard to achieve because value creation tends to go along with higher costs.

Differentiation Strategy: Benefits and Risks

Defined by establishing a strategic position that crates higher perceived value while controlling costs. Well executed = reduces rivalry among competitors Successful = based on unique or specialized features of the product, effective marketing campaign, or intangible resources such as a reputation for innovation, quality, and customer service. Threat of entry is reduced Providing uniqueness don't rise customer's willingness to pay

Cost-Leadership Strategy: Benefits and Risks

Defined by obtaining the lowest cost position in the industry while offering acceptable value. Protected from other competitors because of having the lowest cost. Price war = the low cost leader will be the last firm standing. Isolated from powerful suppliers New entry pose a risk Relies on: How well the strategy leverages the firm's internal strengths while mitigating its weaknesses. How well it helps the firm exploit external opportunities while avoiding external threats.

Value Innovation

For a ocean strategy to succeed, mangers must resolve trade offs between low cost and differentiation. Aligning innovation with total perceived consumer benefits, price and cost (economic value creation). Successful innovation makes competition irrelevant to providing a leap in value creation, opening a new and uncontested market spaces. Requires that a firm's strategic moves lower its costs and at the same increase the perceived value for buyers.

Differentiation Strategy

Generic business strategy that seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to its customers. Increase perceived value of goods and services so consumers are willing to pay that higher price. Firms that successfully differentiate their products enjoy a competitive advantage. Generally associated with premium pricing When a firm is able to offer a differentiated product or service and can control its costs at the same time it is able to gain market share from other firms in the industry by charging a similar price but offering more perceived value. Unique product features, service, and new product launches. Value drivers: Product features Customer Service Complements

Business-Level Strategy

Goal-oriented actions managers take in their quest for competitive advantage when competing in a single product market. Broad questions: "How should we compete?" Managers must answer: Who - which customer segments will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers' needs?

Strategy Canvas

Graphical depiction of a company's relative performance vis a vis its competitors across the industry's key success factors.

Value Curve

Horizontal connection of the points of each value on the strategy canvas that helps strategist diagnose and determine courses of action A strong curve has its focus and divergence and can provide a tagline as to what strategy is being undertaken or should be undertaken. Zigzag indicates lack of effectiveness in its strategic profile.

Stuck in the middle

Inferior performance and competitive disadvantage

Value Innovation - Increase Perceived Consumer Benefits

Raise. Which of the factors should be raised well above the industry's standard? Create. Which factors should be created that the industry has never offered?

Value Drivers

Related to a firm's expertise in and organizations of different internal value chain activities. Product features Customer Service Complements Managers must remember that the different value drivers contribute to competitive advantage ONLY if their value creation exceeds the increase in costs.

Focused Differentiation Strategy

Same as differentiation strategy BUT has a narrow focus on a niche market.

Cost-leadership Strategy

Seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers. Firms can keep their cost at the lower point in the industry while offering acceptable value are able to gain a competitive advantage. Goal is to reduce the firm's cost below that of its competitors while offering adequate value.

Diseconomies of Scale

Taking advantage of certain physical properties Increases in costs as output increases As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale. Large firms become overly bureaucratic with too many layers of hierarchy

minimum efficient scale (MES)

Taking advantage of certain physical properties Output range needed (Between Q1 and Q2, cost advantage) to bring down the cost per unit as much as possible allowing a firm to stake out the lowest cost position that is achievable through economies of scale Less than Q1 or more than Q2 = cost disadvantage. Also applies to manufacturing, managerial tasks, how to organize

Cube-square rule

Taking advantage of certain physical properties The volume of a body increases disproportionately more than its surface (pipe or tank)

Economic Value Created

(V-C) V = value C = cost The greater economic value created, the greater is a firm's potential for competitive advantage. Rising costs reduce economic value created and erode profit margins. Higher value creation tneds to require higher costs

Industry Effects

One route to competitive advantage is by: Industry Attractiveness - 5 Forces Model for profit potential - Complements - Within industry (Strategic Groups)

Blue Ocean Strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs Blue oceans represent untapped market space, creation of additional demand, resulting opportunities for highly profitable growth. Allows to offer a differentiated product. Red oceans represents rivalry among existing firms is cut throat because the market space is crowded and competition is a zero sum game. Products become commodities and competition mainly focused on price. Difficult to implement because it requires the reconciliation of fundamentally different strategic positions - differentiation and low cost - which in turn require distinct internal value chain activities. Strategy gone bad means stuck in the middle leads to inferior performance and ended up in red ocean of cut throat competition

Firm Effects

One route to competitive advantage is by: Value position (relative to competitors OR Cost Position (Relative to competitors) Business Strategy (Cost Leadership, Differentiation, Blue Ocean)

Differences in Complexity

Learning Curve Effects from economies of scale can be quite significant while learning effects are minimal. Some professionals learning curve can be substantial while economies of scale are minimal.

Differences in timing

Learning Curve Occur over time as output accumulates while economies of scale are captured at one point in time when output increases. Learning can decline or flatten, there are no diseconomies of learning.

Process Innovation

New method or technology to produce an existing product may initiate a new and steeper curve. Experience curve on a process innovation. Learning by doing allows a firm to lower its per unit costs by moving down a given learning curve while experience curve effects based on process innovation allow a firm to leapfrog to a steeper learning curve thereby driving down its per unit costs

Focused Cost-Leadership Strategy

Same as Cost-Leadership strategy BUT has a narrow focus on a niche market.

Scope of Competition

Whether to puruse a specific, narrow part of the market or go after the broader market. Broad: Cost leadership, differentiation Narrow: Focused cost leadership, focused differentiaton.