Strategic management chapter 5

customization (value and cost driver)

moves beyond differentiation by allowing customers to purchase customized products/services -advances in technology have made mass customization more feasible -e.g., Nike.com allows customers to build their own shoes

economies of scope (value and cost driver)

savings that come from producing two or more outputs at less cost than producing each output individually -e.g., Taco Bell already had all the fixed capita to produce breakfast items, so added them to their menu increases economies of scope

Business-level strategies

success depends on your strategy matching your resources and environmental circumstances -most industries have firms that follow each of these strategies: e.g., Virgin Airline v. JetBlue Airline v. Spirit Airline v. Southwest Airline

cost-leadership strategy (generic strategy)

the goal of a cost-leadership strategy is to reduce the firm's cost below competitors while offering similar value -e.g., Dunkin, Walmart, Kia, Hyundai, Supercuts, Payless, Nutty bars

differentiation (generic strategy)

the goal of a differentiation strategy is to add unique features to products in an effort to increase their perceived value -if value is increased, consumers will pay a higher price -ideally, a differentiator firm adds value that cannot be easily matched -the focus of competition in differentiation strategy tends to be on: unique product features, service, and new product lounges, market and promotion, NOT price

quality (value and cost driver)

the quality of a product signals its durability and reliability -can increase value, but also CAN decrease costs -e.g., TQM can help firms find ways of improving quality and efficiency by continuously looking to improve the production/distribution process

business level strategy broadly defines the question:

"how should a firm compete?" -WHO will we serve (i.e. customer segments) -WHAT customer needs will we satisfy -WHY do we want to satisfy them -HOW will we satisfy our customers' needs

Cost drivers (cost leader)

-Cost of input factors -Economies of Scale -Learning-curve effects -Experience curve

Differentiation advantages

-ability to charge higher prices -strong profit margins -increased customer loyalty -lower customer price sensitivities -decreases competitiveness of new industry entrants

Differentiation disadvantages

-can be risky if customers are not willing to pay premium prices -imitators may steal customers with look-alike products -depends on perceptions of value -customers may switch to low-cost alternative if economic conditions change

what defines a narrow target market varies across firms, including:

-customer segment (e.g., Claire's sells inexpensive jewelry) -sales channel (e.g., Redbox rents/sells movies via vending machines)

cost leader advantages

-firms with higher market shares enjoy higher profits -can more easily endure pressure on prices such as during a price war

cost leader disadvantages

-may suffer from perceptions of low quality -difficult to attract customers that are brand loyal; struggle in fragmented markets (e.g., Coke vs. Pepsi) -Generally smaller profit margins - must sell a lot to make money -A focus on costs may lead firms to be late-movers on key trends -similarly, a focus on efficiency may make it difficult to change

2 competitive dimensions that are key to business-level strategy

1. Source of competitive advantage -cost-based or uniqueness based? 2. Scope of operation -Broad target or narrow target customer segment?

Managers can adjust a number of different levers to improve a firm's STRATEGIC POSITION by either:

1. increasing perceived value (improve value position - mainly for differentiation strategy) 2. Decreasing costs (improve cost position - mainly for low-cost strategy)

The most salient VALUE DRIVERS that managers have to improve their firm's strategic position are:

1. product features 2. customer services 3. complements value drivers add value to a firm's offering ONLY if the added value creation EXCEEDS the increased costs

Best cost strategy (generic strategy)

Value and cost drivers: -quality -economies of scope -customization -innovation -structure, culture, and routines

Differentiation cont.

While firms CAN create superior value and gain a competitive advantage at most any cost position, firms must control costs -rising costs erode profitability and reduce economic value created In addition to a price premium, firms have a second pricing option -firms can price their products similar to competitors to gain additional market share -e.g., Hyatt is able to leverage their superior brand name in luxury hotel market to gain additional market share for Hyatt Place -must be careful not to lower their prices too much

cost of input factors (cost driver)

access to lower-cost input factors such as raw materials, capital, labor, and IT services -e.g., SWA's fleet consists almost exclusively of a single aircraft class (Boeing 737)

product features (value driver)

additional value is created by adding unique product features -turns commodity products into differentiated products that command a premium price -e.g., fruit vs. organic fruit or Chevrolet Equinox vs. Range Rover

customer service (value driver)

additional value is created by focusing on superior customer service and responsiveness -e.g., in addition to product quality, Chick-fil-A's focus on customer service adds value to their products

complements (value driver)

adds value to a product of service when consumed in tandem -e.g., AT&T U-verse allowed users to bundle services; Samsung products integrate easily

structure, culture, and routines (value and cost driver)

appropriate factors that support internal value chain activities that help firms integrate cost and value positions -low-cost position requires a structure that emphasizes cost control while differentiation requires a structure that allows for creativity and customer responsiveness -AMBIDEXTROUS ORGANIZATIONS can effectively focus on EXPLORATION and EXPLOITATION

Broad target vs. narrow target customer segment (scope of operation)

broad target: Toyota targets a wide range of customers with a variety of different projects Narrow target: Ferrari offers only a few, high-priced options that target a much smaller segment of auto customers

Generic strategies

business-level strategies that can be deployed in any organization

experience curve (cost driver)

captures both learning effects and process improvements that allow a firm to move to a new learning curve -ECONOMIES OF LEARNING - describes improved efficiencies based on accumulated knowledge from experience -PROCESS IMPROVEMENTS - a function of process innovations, which describe a new production method or technology that improves efficiency

Cost based vs. uniqueness based (source of competitive advantage)

cost based: McDonalds scrutinizes every element of their operation to reduce costs uniqueness based: Burgerfi incurs higher costs to offer customers a higher-quality product and unique dining experience

economies of scale (cost driver)

costs per unit of producing a product decreases as firms gain greater market share

focused differentiation strategy (generic strategy)

depends on offering unique features that fulfill needs of a narrow target market -e.g., whole foods sell only organic and natural food items to a discerning set of customers willing to pay higher prices similar to FCL strategy, what defines a "narrow market" varies -customer segment (only sells vegetarian options) -sales channel (Stichfix offers personal shopping online)

Innovation (value and cost driver)

describes any new product, process, or any modification of an existing product or process -frequently required when firms attempt an integration strategy -e.g., Apple innovated iTunes as a product/service to complement the iPod, but allowed them to sell music for lower price than CDs

Best-cost cont.

firms attempting a best-cost strategy often find themselves STUCK IN THE MIDDLE -features are not unique enough to differentiate, but not necessarily low priced -e.g., Arby's has struggled to find its place (varied food options that have little broad appeal, expensive relative to quality) leaders should avoid trying to serve the varied needs of all customers in an industry -strategy is as much about what NOT to offer as it is deciding WHAT to offer Firms may also find themselves stuck in the middle if outmaneuvered by competitors -firms fail to address changes in the industry; maintain appeal -e.g., Circuit city

Focused cost leadership (generic strategy)

firms following a focused cost leadership strategy compete on price in a narrow target market -not always the lowest prices in the industry, but low prices relative to other firms in the target market -e.g., Papa Murphy's (cheaper alternatives like frozen pizza, but cheaper than other carryout options (Dominoes)

learning-curve effects (cost driver)

firms learn how to do things better by doing them repeatedly OVER TIME -as firms produce more units, they learn how to be more efficient

Business level strategy

goal-directed actions managers take in their quest for competitive advantage in a SINGLE PRODUCT MARKET may involve: 1. a single product, or 2. a group of similar products