Chapter 6: Business strategy: Differentiation, Cost Leadership, and Blue Oceans
A successful blue ocean strategy requires
that trade-offs between differentiation and low cost be reconciled
Assess the benefits and risks of differentiation and cost-leadership strategies vis-a-vis the five forces that shape condition
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Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation
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Describe how business-level strategy determines a firm's strategic position
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Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy
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Examine the relationship between cost drivers and cost leadership strategy
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Examine the relationship between value drivers and differentiation strategy
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Blue ocean strategy
Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs.
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
Decreases in cost per unit as output increases
Differentiation strategy
Generic business strategy that seeks to create higher value for customers than the value that competitors create, while containing costs.
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-a-vis its competitors across the industry's key success factors.
Value curve
Horizontal connection of the pints of each value n the strategy canvas that helps strategic leaders diagnose and determine courses of action.
Diseconomies of scale
Increases in cost per unit when output increases
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.
Focused cost-leadership strategy
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.
Economies of scope
Savings that come from producing two (or more) outputs at less than producing each output individually, despite using the same resources and technology.
Business-level strategy
The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market.
Define business-level strategy
The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market.
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.
Scope of competition
The size-narrow or broad- of the market in which a firm chooses to compete.
In a cost-leadership strategy, the focus of competition is
achieving the lowest possible cost position, which allows the firm to offer a lower price than competitors while maintaining acceptable value.
When firms fail to resolve strategic trade-offs between differentiation and cost, the end up
being "stuck in the middle". They then succeed at neither business strategy, leading to a competitive disadvantage.
Differentiation and cost-leadership strategies allow firms to
carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage.
Differentiation and cost leadership are
distinct strategic positions
Lowering a firms' costs is primarily achieved by
eliminating and reducing the taken-for-granted factors on which the firm's industry rivals compete.
To address the trade-offs between differentiation and cost leadership at the business level, managers must
employee value innovation, a process that will lead them to align the proposed business strategy with total perceived consumer benefits, price, and cost.
Some of the unique value drivers managers can manipulate are
product features, customer service, customization, and complements.
The five forces model helps managers use generic business strategies to
protect themselves against the industry forces that drive down profitability.
Increasing perceived buyer value is primarily achieved by
raising existing key success factors and by creating new elements that the industry has not yet offered.
The goal of a cost-leadership strategy is to
reduce the firm's cost below that of its competitors.
Some of the unique cost drivers that managers can manipulate are
the cost of input factors, economies of scale, and learning- and experience-curve effects.
The goal of differentiation strategy is to increase
the perceived value of goods and services so that customers will pay a higher price for additional features
No matter how low the price, if there is no acceptable value proposition,
the product or service will not sell.
Besides selecting an appropriate strategic position, managers must also define
the scope of competition - whether to pursue a specific market niche or go after the broader market
A blue ocean strategy often is difficult because
the two distinct strategic positions require internal value chain activities that are fundamentally different from one another.
Value drivers contribute to competitive advantage only if
their increase in value creation (Delta V) exceeds the increase in costs, that is: (Delta V) > (Delta C)
Strategic leaders track their opportunities and risks for lowering a firm's cost and increasing perceived vis-a-vis their competitors by
use of a strategy canvas, which plots industry factors among competitors.
Strategic positioning requires that managers address strategic trade-offs that arise between
value and cost, because higher value tends to go along with higher cost
In a differentiation strategy, the focus of competition is on
value-enhancing attributes and features, while controlling costs