Chapter 6-Business Strategy: Differentiation, Cost Leadership, and Blue Oceans

Product Features

Increasing the perceived value of the product or service offering. Allows a firm to turn commodity products into differentiated products commanding a premium price. Strong R&D usually needed.

Competitive Advantage is determined jointly by what effects?

Industry & firm effects- these two effects are not independent but rather they are interdependent.

Exhibit 6.8

pg. 202 Competitive positioning and the five forces benefits and risks of differentiation and cost leadership

Cost drivers that managers can manipulate to keep their costs low are:

1. Cost of input factors 2. Economies of scale 3. Learning-curve effects 4. Experience-curve effects

Differences between learning curves and economies of scale

1. Differences in timing: Learning curve effects occur over time as output accumulates, while economies of scale are captured at one point in time when output increases. 2. Differences in Complexity

Success of business level strategies depends on:

1. How well the strategy leverages the firm's internal strengths while mitigating its weaknesses 2. How well it helps the firm exploit external opportunities while avoiding external threats.

Value Drivers:

1. Product features 2. Customer service 3. Complements Related to a firm's expertise in, an organization of, different internal value chain activities. Should allow strategic leaders to identify other important clause and cost drivers unique to their business

Economies of Scale allows firms to:

1. Spread their fixed costs over a larger output: This is why gains in market share are often critical to drive down per-unit cost. 2. Employ specialized systems and equipment: Economies of scale occur because of physical properties. One property is called cube-square rule: The volume of a body such as a pipe or tank increases disproportionately more than its surface. 3. Take advantage of certain physical properties

A successfully implemented blue ocean strategy offers firms two pricing options:

1. The firm can charge a higher price than the cost leader, reflecting its higher value creation and thus generating greater profit margins. 2. The firm can lower its price below that of the differentiator because of its lower-cost structure.

In order to come up with an appropriate business-level strategy, managers must answer what questions?

1. Who: Which customer segments will we serve? 2. What: Customer needs, wishes, and desires will we satisfy? 3. Why: do we want to satisfy them? 4. How will we satisfy our customers' needs?

Blue Ocean Strategy

A business level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs in those two distinct strategic positions.

Process Innovation

A new method or technology to produce an existing product may initiate a new and steeper curve.

Cost of input factors

Access to lower-cost input factors such as raw materials, capital, labor, and IT services.

Complements

Add value to a product or service when they are consumed in tandem. It is an important task for managers in their quest to enhance the value of their offerings.

Economies of Learning

Allow movement down a given learning curve based on current production technology.

Why is a blue ocean strategy 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 so the firm can increase value and lower cost at the same time.

Why are the cost-leadership and differentiation strategies called generic strategies?

Because they can be used by any organization- manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign-in the quest for competitive advantage, independent of industry context.

Strategic Trade Offs

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

Economies of Scale

Denote decreases in cost per unit as output increases

Economies of Scope

Describes 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.

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.

Cost-Leadership Strategy

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

Strategy Canvas

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

Experience curve

Holds cumulative output constant, and looks at the change in underlying technology.

Value Curve

Horizontal connection of the pointes of each value on the strategy canvas that helps strategic leaders diagnose and determine courses of action.

A blue ocean strategy is only successful when:

If a firm can implement some type of value innovation that reconciles the inherent trade-off between value creation and underlying costs

What is a defining feature of a differentiation strategy?

Increased value creation

Diseconomies of scale

Increases in cost per unit when output increases.

What is the learning curve effect driven by?

Increasing cumulative output within the existing technology over time. Only variable difference between two points is the size of cumulative output.

A business strategy is more likely to lead to competitive advantage if

It allows firms to either perform similar activities differently or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost.

What happens when pursuing two different business strategies at the same time?

It can be difficult to implement them at the same time, due to trade-offs that work against each other.

A cost leader can achieve competitive advantage so long as...

It's economic value created (V-C) is greater than that of its competitors

What does a value curve that zigzags across the strategy canvas indicate?

Lack of effectiveness in its strategic profile.

Customer Service

Managers can increase their perceived value of their firms' products or services by focusing on customer service.

Learning curves

Many people tend to see it as an uphill battle, and assume that the learning curve goes up. But if considering productivity then learning curves go down as it takes less and less time to product the same output as we learn to be more efficient- learning by doing drives down costs.

Strategic leaders need to be aware of what?

Not being stuck in the middle of two distinct business strategies. A clear strategic position- is more likely to form the basis for competitive advantage.

Minimum Efficient Scale

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. Also applies to how to organize work.

Exhibit 6.1

Pg. 186- Industry and Firm Effects Jointly Determine Competitive Advantage

Exhibit 6.2

Pg. 187 Strategic Position and Competitive Scope: Generic Business Strategies

Exhibit 6.9

Pg. 205 Value innovation Accomplished through simultaneously Pursuing Differentiation and Low Cost

Exhibit 6.10

Pg. 207 Value Innovation vs. Stuck in the Middle

Focused Cost-Leadership Strategies

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

Focused Differentiation Strategy

Same as the differentiation strategy except with a narrow focus on a niche market.

What happens with large firms that cause diseconomies of scale?

The complexity of managing and coordinating the production process raises the cost, negating any benefits to scale. Also tend to become overly bureaucratic, with too many layers of hierarchy. Grow inflexible and slow in decision making

What happens when a firm becomes stuck in the middle?

The firm has neither a clear differentiation nor a clear cost-leadership profile. Leads to inferior performance and a resulting competitive disadvantage.

Red Oceans are what?

The known market space of existing industries. The rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game. Any market share gains comes at the expense of other competitors in the same industry.

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.

Successful differentiation strategy is likely to be based on..?

Unique or specialized features of the product, on an effective marketing campaign, or on an intangible resource such as reputation for innovation, quality and customer service.

Blue oceans represent what

Untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth.

Scope of Competition

Whether to pursue a specific, narrow part of the market or go after the broader market.

Business-level strategy

details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. Determines the firm's strategic position.

Exhibit 6.5

pg. 194 Economies of Scale, Minimum Efficient Scale and Diseconomies of Scale