Strat 290 Quiz 5

Spirit

-has a cost advantage relative to other low-cost carriers -has low price and low costs

Economies of scale

-technical input-output relationship (Ex. in many activities, an increase in output does not require proportionate increases in input) -indivisibilities (Ex. many resources and activities are lumpy/not available in small sizes. National tv advertising campaign for Toyota versus Mazda example) -specialization (Ex. increased scale permits greater task specialization that is manifest in greater division of labor--Ford's auto plants) -Economies of scale are a cost advantage because competitors may not be able to match the scale because of capital requirements (barrier to entry) -average cost per unit falls as quantity increases until the minimum efficient scale is reached

Nature of differentiation

-the key to differentiation is understanding customers and how the product can meet their needs -differentiation is not only about the product, but the whole customer relationship -Customers=Demand Side -Firms=Supply Side

Differentiation

A firm differentiates itself from its competitors "when it provides something unique that is valuable to buyers beyond simply offering a low price"

Key to competitive advantage

A firm in a competitive market can have competitive advantage only if it creates and captures more value than its rivals.

How does a firm compete in a given industry?

Actions/choices made by a firm to position itself and gain advantage vis-à-vis other firms in the same industry.

Business strategy

Actions/choices of a firm to position itself and gain advantage with respect to other firms in the industry.

Key insights of understanding cost leadership

-A firm can sustain low prices in the long run only when it is a cost leader (business strategy) -What enables that strategy? (consistent actions/choices) -What enables those actions/choices? (resources/capabilities)

Two representative strategies

-Cost advantage -Differentiation -In the same industry, firms can follow different business strategies successfully Ex: Kia vs. BMW Ex: Casio vs. Rolex Ex: Bic pens (low cost strategy) vs. Montblanc (differentiation strategy)

Increase profits

-Differentiation allows a firm to increase price -Cost leadership allows a firm to decrease costs

Key insights of cost advantage

-Steady performance in a mature industry requires that the firm grows incrementally and profitably by building a system of complementary assets. This pattern of incremental investment often supports a low cost position -The major challenge for industry leaders in mature, unattractive industries is in finding new opportunities for growth that will not compromise the formula (the established model) -Competitive advantage can come from both value creation (choice of activities and R&C) or value capture (bargaining power)

Cost leadership more profitable than differentiation

-The nature of the product limits opportunities for enhancing its perceived benefits Ex: commodity products like paper or aluminum -Customers are relatively price-sensitive (not willing to pay a premium to enhanced quality or performance) -A buyer can assess quality of the good prior to purchase (differentiation based on product features likely to be imitated) Ex: warranty signals guarantee of good quality

Differentiation more profitable than low cost

-The typical consumer is willing to pay a significant price premium for enhanced product attributes (E.g. automobiles, Tiffany's jewelry) -The industry has significant economies of scale that are being exploited by larger incumbents (E.g. microbreweries)

Key to successful differentiation

-There is little point in identifying the product attributes that customers value most if the firm is incapable of supplying them -Similarly, there is little purpose in identifying a firm's ability to supply certain elements of uniqueness if these are not valued by customers -The key to successful differentiation is matching the firm's capacity for creating differentiation to the attributes that customers value most

Drivers of differentiation supply side

Demand analysis identifies customer demands for differentiation and their WTP for it, but creating differentiation advantage ALSO depends on the firm's ability to offer (supply) differentiation.

Input costs

Location advantages; ownership of low-cost inputs; non-union labors; bargaining power. Location: an important one is wage rate differences from one country to another. Ex: in auto assembly, the hourly rate in China plants was $2 an hour in 2008 compared with $60-70 in the US Ownership: in raw material-intensive industries, ownership or access to low-cost sources can offer crucial cost advantage Non-union labor: labor unions result in higher levels of pay and benefits and work restrictions that lower productivity Bargaining power: where bought-in products are a major cost item, differences in buying power among the firms in an industry can be an important source of cost advantage

Residual Efficiency

Organizational slack/X-inefficiency, motivation and culture, managerial effectiveness -depends on the firm's ability to eliminate "organizational slack" or "x-inefficiency" -x-inefficiency is surplus costs/organizational fat -high levels of residual efficiency are typically the result of management system and company values that are intolerant toward unnecessary costs and glorify frugality -Ex: Walmart, Ikea, Ryanair, Air Asia--relentless cost efficiency is embodied in management systems and embedded in corporate culture

Production techniques

Process innovation; re-engineering of business processes. -process technology and process design -new process technology may radically reduce costs -full benefits of new processes typically require system-wide changes in job design, employee incentives, product design, organizational structure, and management controls -BRP (business process re-engineering) is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality, service, and speed

Capacity Utilization

Ratio of fixed to variable costs; fast and flexible capacity adjustment. -plant capacity is more-or-less fixed, and variations in output cause capacity utilization to rise or fall -underutilization raises unit costs because fixed costs must be spread over fewer units of production -in business where most costs are fixed (airlines, theme parks), profitability is highly sensitive to shortfalls in demand -pushing output beyond normal full-capacity operation also creates inefficiencies (operating above normal capacity increases unit costs due to overtime pay, premiums for night and weekend shifts, increased defects, and higher maintenance)

Product integrity

Refers to the consistency of a firm's differentiation → the extent to which a product achieves a TOTAL BALANCE of numerous product characteristics (including basic functions, esthetics, semantics, reliability, and economy) Ex: failed integrity of Nike with Zion's shoe blowing out Ex: from the reading MTV and Harley Davidson

Signaling and reputation

Relates to the way in which the firm communicates its uniqueness to its customers -firms need to find a way to signal the qualities/characteristics of experience goods -brand names, warranties, expensive packaging, money-back guarantees, sponsorship of sports and cultural events, and a carefully designed retail environment are all signals of quality

Drivers of differentiation demand side

Understand well the product and the customer Product: -what needs does it satisfy? -what are its key attributes? Customers: -By what criteria do they choose? What is their willingness-to-pay for each attribute? -What motivates them? What are the demographic, sociological, and psychological correlates of customer behavior?

Intangible differentiation

Unobservable and subjective characteristics -social, emotional, psychological, and aesthetic considerations Ex: Tom's One for One campaign, Patagonia and environmental aspect, LV and social status, Ben and Jerry's and social change -desires for status, exclusivity, individuality, and security

Drivers of cost advantage

economies of scale, economies of learning, production techniques, product design, input costs, capacity utilization, residual efficiency

Economies of learning

Increased individual skills; improved organizational routines. -the more complex a product or process, the greater the potential for learning -Ex: steepest learning curve for shipbuilding, second steepest was automotive assembly, least steep was pizza franchise (think about the graph in class) -learning curves are exceptionally steep in semiconductor fabrication

Creating cost advantage

1. Construct a value chain for the firm 2. Identify drivers of cost for each activity 3. Select the mot promising variables for cost reduction in the activities of the firm 4. Locate the linkages among the value chain activities and analyze the impact of cost reduction on linked activities 5. Develop recommendations for cost reduction

Creating differentiation advantage

1. Construct a value chain for the firm and the customer 2. Identify drivers of uniqueness for each activity 3. Select the most promising differentiation variables for the firm 4. Locate the linkages between the value chain of the firm and that of the buyer

Efficiency frontier

Ex: Spirit is low cost, Jet Blue is differentiated, Frontier is inefficient/inside the curve Ex: Four Seasons or Ritz Carlton (differentiated)versus Motel 6 or Best Western (low cost)

Tangible differentiation

Observable product characteristics -size, color, materials, etc. -performance -packaging -complementary services (ex. luxury automobiler giving you a car to drive when they're servicing your car)

Differentiation advantage

Occurs when the firm is able to obtain from its differentiation a price premium in the market that exceeds the cost of providing the differentiation

Drivers of uniqueness

Opportunities for creating uniqueness in its offering to customers are not located within a particular function or activity, but can arise in virtually everything that it does -Product features and performance -Complementary services -Intensity of marketing (insurance companies like Geico) -Technology in design and manufacture -Quality of inputs -Procedures influencing the conduct of each activity -Skill and experience of employees -Location -Degree of vertical integration (Amazon, Target, Apple)

Product design

Standardization of designs and components; design for manufacture. -designing products for the ease of production rather than simply for functionality and esthetics can offer substantial cost savings, especially when linked to introduction of new process tech