Chapter 6

Economies of Scale

-a decrease in cost per unit as output increases -cost per unit falls as output increases; in this case, bigger is better

Strategy Canvas

-graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors -reveals key strategic insights

Complements

-important force for determining the profit potential of an industry -complements add value to a product/service when they are consumed in tandem. -finding complements is an important task for managers in their quest to enhance the value of their offerings.

Spreading fixed costs over a larger output

-larger outputs allow firms to spread their fixed costs over more units. -that is why gains in market share are often critical to driving down the per-unit cost

Process Innovation

a new method or technology to produce an existing product

Employ specialized systems and equipment

-larger outputs also allow firms to invest in more specialized systems and equipment, such as enterprise resource planning software or manufacturing robots. -manufacturing the highest quality products at a very large scale

what 2 things must a Business Strategy entail to have a better chance at a competitive advantage?

- if it allows the firm to perform similar activities differently -if it allows the firm to perform different activities than their rivals that result in creating more value or offering similar products/services at lower costs

Differentiation Strategy

-a 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 -if a firm successfully differentiates its products, enjoy a competitive advantage. -increased value creation is a defining feature, but managers cannot forget to control cost -if costs get too high, the value gap will begin to shrink, negating any differentiation advantage -if they can create more value and manage costs, the firm's market share will increase *this strategy focuses on adding value to the products through unique features that respond to customer preferences, customer service during and after the sale, or effective marketing that communicates the value of product features*

Cost-Leadership Strategy

-a generic business strategy that seeks to create the same or similar values for customers at a lower cost -by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers - attempts to optimize all of its value chain activities to achieve a low-cost position -can achieve a competitive advantage as long as its economic value created (V-C) is greater than its competitors -if managers don't cut costs, it will experience a competitive disadvantage when their costs greatly exceed those of its competitors

Cost of Input Factors

-access to lower-cost input factors such as raw materials, capital, labor, and IT services -examples are: access to cheaper fuel, interest-free government loans, and fewer regulations

Experience Curve

-change the underlying technology while holding cumulative output constant

Strategic Trade-offs

-choices between a cost or value position. -Such choices are necessary because higher value creation tends to generate higher cost

what are the most important cost drivers that managers can manipulate to keep their costs low?

-cost of input factors -economies of scale -learning-curve effects -experience-curve effects

Business-Level Strategy

-details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market -may involve a single product or a group of similar products that use the same distribution channel. -concerns the broad questions of: 1)WHO- what customer segment will it serve? 2)WHAT are the customers needs, wishes, and desires will we satisfy? 3)WHY do we want to satisfy them? 4)HOW will we satisfy our customers' needs?

Value Drivers

-different levers that managers can adjust to improve their strategic positioning -the value drivers are related to a firm's expertise in, and organization of, different internal value chain activities -when attempting to increase the perceived value of the firm's product or service offerings, managers must remember that *the different value drivers contribute to competitive advantage ONLY if their increase in value creation exceeds the increase in cost*

Learning Curve

-many people tend to see it as an uphill battle and assume the learning curve goes up -when considering productivity, learning curves go down, as it takes less and less time to produce the same output as we learn how to be more efficient -the steeper the learning curve, the more learning has taken place. -as cumulative output increases, firms move down the learning curve, reaching lower per-unit costs -the speed of learning determines the slope of the learning curve, or how steep the learning curve is

Minimum Efficient Scale (MES)

-output range needed 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

What are the 3 value drivers that managers can adjust to improve a firm's strategic positioning?

-product features -customer service -complements

Focused Cost-Leadership Strategy

-same as the cost-leadership strategy except with a narrow focus on the market

Focused Differentiation Strategy

-same as the differentiation strategy except with a narrow focus on a niche market

Economies of Scope

-savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology -allows firms to achieve greater economic value than its competitors, and thus to gain market share and post superior performance

Product Features

-the most important lever that managers can adjust, increasing the perceived value of the product/service. -adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price -strong R&D capabilities are often needed to create superior product features

Cube-scale rule

-the volume of a body such as a pipe or a tank increases disproportionately more than its surface

Value Curve

A graphical depiction of how a firm and major groups of its competitors are competing across its industry's factors of completion -graphically depicts a company's relative performance across its industry's factors of competition -a strong value curve has focus and divergence -a zig-zag value curve means it lacks effectiveness in its strategic profile

What does a firm's Business-Level strategy determine?

it determines its Strategic Positioning

Strategic Positioning

its strategic profile based on value creation and cost

Cost Leadership and Porters 5 Forces

*Benefits* -threat of entry: protection against entry due to economies of scale --power of suppliers: protection against the increase in input prices, which can be absorbed -power of buyers: protection against the decrease in sales price can be absorbed --threat of substitutes: protection against substitute products through further lowering prices -rivalry w/ competitors: protection against price wars because the lowest-cost firm will win *risks* --threat of entry: Erosion of margins; replacement -power of suppliers: Erosion of margins -power of buyers: Erosion of margins --threat of substitutes: Replacement, especially when faced with innovation -rivalry w/ competitors: the focus of competition shifts to non-price attributes; lowering costs to drive value creation below acceptable threshold

Differentiation Strategy and Porters 5 Forces

*Benefits* -threat of entry: protection against entry due to intangible resources such as a reputation for innovation, quality or customer service -power of suppliers: protection against the increase in input prices, which can be passed on to consumers -power of buyers: protection against the decrease in sales price because well-differentiated products are not perfect imitations -threat of substitutes: protection against substitute products due to differential appeal -rivalry w/ competitors: protection against competitors if the product has enough differential appeal to command premium price *risks* --threat of entry: Erosion of margins; replacement -power of suppliers: Erosion of margins -power of buyers: Erosion of margins -threat of substitutes: Replacement, especially when faced with innovation -rivalry w/ competitors: focus of competition shifts to price, increasing differentiation that doesnt increase value, but increases costs, costs rising above acceptable thresholds

Diseconomies of Scale

- increase in cost per unit when output increases -as firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale. -Large firms tend to become overly bureaucratic, with too many layers of hierarchy -Large firms tend to become inflexible and become slow in decision making -to avoid this problem, huge firms tend to split up its company into smaller units -for example: "when people start parking on the grass, we know its time to open another store"; i.e. build another store instead of hiring more employees at the current location

what are the 2 dimensions used for describing a firm's strategic positioning? what are the 2 dimensions used to describe a firm's scope of competition?

- strategic positioning: differentiation vs cost -scope of competition: narrow vs broad

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, the creation of additional demand, and the resulting opportunities for highly profitable growth--low costs and differentiations are considered complements, not substitutes -Red oceans are the known market space of existing industries. In red oceans, the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game. --Red oceans: products become commodities and competition is focused mainly on price, any market share gain comes at the expense of other competitors in the same industry, turning the oceans bloody red

Taking advantage of certain physical properties

-economies of scale also occur because of certain physical properties. One such property is known as the cube-square rule -can stock much more merchandise and handle inventory more efficiently. -their huge size makes it difficult for department stores or small retailers to compete on cost and selection -minimum efficient scale (MES)

what is the difference between the learning curve and the experience curve?

-learning curve assumes the underlying technology remains constant, while only cumulative outputs increase -experience curve assumes that the underlying technology changes, while the cumulative outputs remain constant

Customer Service

-managers can increase the perceived value of their firms' product/service by focusing on customer service

Value Innovation

-the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy --lowering cost: eliminate factors the industry takes advantage of and reduce factors well below industry standards --increase perceived benefit: Raise factors above industry standards and create factors that the industry has never offered before

Scope of Competition

-the size-narrow or broad- of the market in which a firm chooses to compete -whether to pursue a specific, narrow part of the market or go after a broader market

what causes the per-unit cost to drop as output increases?

1) spread their fixed costs over a larger output 2) employ specialized systems and equipment 3)take advantage of certain physical properties

differences between the learning curve and economies of scale

1)Differences in timing: learning curve effects occur over time as output accumulates; economies of scale are captured at one point in time when output increases 2) Differences in complexity: -manufacturing steel rods: economies of scale is more important - brain surgery, learning curve effects are more important