MGMT 466 Ch. 4

When selecting a business level strategy, firm evaluate two types of potential competitive advantages

"lower cost than rivals or the ability to differentiate and command a premium price that exceeds the extra cost of doing so"

Basis for customer segmentation in consumer markets

1. demographic factors 2. socioeconomic factors 3. geographic factors 4. psychological factors 5. consumption patterns 6. perceptual factors

In order to achieve above-average returns from a differentiation strategy a firm must apply its

Knowledge capital to provide customers with a differentiated product that provides them with value for which they are willing to pay

Through effective management of the relationship between a firm and the one to which it outsources an activity, what can develop

Trust can develop. In turn, trust may be the foundation on which a firm might choose to integrate an outsourcing firm into its value chain to find ways to reduce its costs further.

The goal of an FMS is to eliminate the

low cost vs. product variety trade off that in inherent in traditional manufacturing technologies

The purpose of a business-level strategy is to

create differences between the firm's position and those of its competitors

The fourth risk of the differentiation strategy is

Counterfeiting.

Using a flexible manufacturing system (FMS), firms

integrate human, physicial, and information resources to create somewhat differentiated products and to sell them to consumers at a relatively low price.

The cost leadership strategy is an

integrated set of actions taken to produce products with features that are acceptable to customers at the lowest cost, relative to that of competitors.

Other business models that also support the sue of any of the five generic business level strategies are

1. a freemium model 2. an advertising model 3. a peer-to-peer model

Market segments firms may choose to serve by implementing a focus strategy include

1. a particular buyer group 2. a different segment of a product line 3. a different geographic market

What is a franchise business model?

A firm licensing its trademark and the processes it follows to create and deliver a product to franchisees. The firm franchising its trademark and processes captures value by receiving fees and royalty payments from its franchisees

An example of a focused cost leadership strategy is

IKEA. "to reduce costs without compromising quality" The firm's target market is young buyers desiring style at a low cost.

What is the final risk of the cost leadership strategy?

Imitation is the final risk.

Research suggest that having a competitive advantage in what creates more value with a cost leadership strategy than with a differentiation strategy

In logistics.

What is a business model

It describes what a firm does to create, deliver, and capture value for its stakeholders.

What is the second risk of the cost leadership strategy?

It is that too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers' perceptions of "competitive levels of differentiation"

What are the three dimensions of relationships with customers?

Reach, Richness, and Affiliation

What is one company that uses the integrated cost leadership/differentiation strategy?

Target. "Expect more. Pay less."

What is one risk that the cost leadership strategy has

That the processes used by the cost leader to produce and distribute its product could become obsolete because of competitors' innovations

What is the subscription business model?

The business model finds a firm offering a product to customers on a regular basis such as once per month or once per year or upon demand.

The second additional risk to the focus strategy is that

a company competing on an industry wide basis may decide that the market segment served by the firm using a focus strategy is attractive and worthy of competitive pursuit

The first additional risk of the focus strategy, due to its narrow target market, is

a competitor may be able to focus on a more narrowly defined competitive segment and thereby out-focus the focuser.

Another risk of the differentiation strategy is that

a firm's means of differentiation may cease to provide value for which customers are willing to pay or that how the firm seeks to differentiate its offerings is unclear to target customers.

For employees, the firm creates and delivers value in the form of

a job about which they are passionate as well as through which they have opportunities to develop their skills by participating in continuous learning experiences.

For customers, the firm creates and delivers value in the form of

a product featuring the combination of price and features for which they are willing to pay

For shareholders, the firm captures and distributes value to them in the form of

a return on their investment

The focus strategy leads to success when the firm serves

a segment well whose unique needs are so specialized that broad based competitors choose not to serve that segment or when they create value for a segment that exceeds the value created by industry wide competitors

Firms that are "stuck in the middle" fail to earn

above average returns and earn average returns only when the structure of the industry in which they compete is highly favorable.

Effective use of the cost leadership strategy allows a firm to earn

above-average returns in spite of the presence of strong competitive forces.

Firms that use the integrated cost leadership/differentiation strategy successfully usually

adapt quickly to new technologies and rapid changes in their external environments

The differentiation strategy is

an integrated set of actions taken to produce products (at an acceptable cost) that customers perceive as being different in ways that are important to them. Differentiators target customers for whom the firm creates value because of the manner in which its products differ from those produced and marketed by competitors

The focus strategy is

an integrated set of actions taken to produce products that serve the needs of a particular segment of customers. They utilize their core competencies to serve the needs of a particular industry segment or niche to the exclusion of others.

Two types of target markets are

broad and narrow market segments

Each business level strategy can help the firm establish and exploit a

competitive advantage as the basis for how it will create value for customers within a particular competitive scope

The relationship between brand loyalty and price sensitivity insulates a firm from

competitive rivalry. Positive reputations with customers sustain the competitive advantage of firms when using a differentiation strategy.

To maintain success by implementing the differentiation strategy, the firm must

consistently upgrade differentiated features that customers value and/or create new valuable features within significant cost increases. They seek to be different from its competitors in as many dimensions as possible.

With either focus strategy, the firm faces the same set of general risks the company using the

cost leadership or the differentiation strategy on an indsutry-wide basis faces.

What are the five business level strategies?

cost leadership, differentiation, focused cost leadership, focused differentiation, integrated cost leadership/differentiation

One risk of the differentiation strategy is that

customers may decide that the price differential between the differentiator's product and the cost leader's product is too large.

Richness concerns the

depth and detail of the two-way flow of information between the firm and customers. This leads many firms to offer online services as a means of superior management of information exchanges with them

A fifth risk of the differentiation strategy is

failing to provide crisp and identifiable differentiation to customers in the form of a firm's products

A third risk of the differentiation strategy is that

experience can narrow customer's perceptions of the value of the product's differentiated features.

Affiliation is concerned with

facilitating useful interactions with customers. Viewing the world through the customer's eyes and constantly seeking ways to create more value for the customer

The integrated cost leadership/differentiation strategy

finds a firm engaging simultaneously in primary value-chain activities and support functions to achieve a low cost position with some product differentiation

By linking companies with their suppliers, distributors, and customers, information networks provide another source of

flexibility

Because the firm using the differentiation strategy charges a premium price for its products, suppliers must provide

high-quality components, driving up the differentiator's costs

The firm's business level strategy is a deliberate choice about

how it will perform the value chain's primary and support activities to create unique value.

Total quality management (TQM) involves the

implementation of appropriate tools/techniques to provide products and services to customers with best quality. 1. increase customer satisfaction 2. Cut costs 3. reduce the amount of time required to introduce innovative products to the marketplace.

After deciding who the firm will serve and the specific needs those customers have, the firm

is prepared to determine how to use its resources, capabilities and competencies to develop products to satisfy its target customer's needs. (How)

A product substitute becomes a concern for the cost leader when

its features and characteristics, in terms of cost and levels of differentiation that are acceptable to customers, are potentially attractive to the firm's customers.

The low profit margins make it necessary for the cost leader to sell

large volumes of its product to earn above average returns. However, firms striving to be the cost leader must avoid pricing their products so low that they cannot operate profitably, even through volume increases.

Firms use the value chain to determine if they are able to

link the activities required to create value by using the differentiation strategy

Market segmentation is the process

of dividing customers into groups based on their needs. This helps to determine who the target customer is that the firm intends to serve with its business-level strategy.

Customer Relationship Management is

one form of an information-based network process firms use to effectively manage their relationship with its customers to understand their needs. An effective CRM system provides a 360-degree view of the company's relationship with customers, encompassing all contact points, business processes, and communication media and sales channels

A number of factors influence the degree of rivalry that firms encounter when implementing the cost leadership strategy:

organizational size, resources possessed by rivals, a firm's dependence on a particular market, location and prior competitive interactions between firms, a firm's reach, richness, and affiliation with its customers.

Firms selling brand-name products to loyal customers hold an attractive position relative to

product substitutes

Customer loyalty and the need to overcome the uniqueness of a differentiated product create substantial barriers to

potential entrants

Firm's using the cost leadership strategy commonly sell

standardized goods or services, but with competitive levels of differentiation, to the industry's most typical customers.

The distinctiveness of differentiated products reduces the customers' sensitivity to

price increases. Customers are willing to accept a price increase when a product still satisfies their unique needs better than does a competitor's offering.

With a focus strategy, firms must be able to complete various

primary value chain activities and support functions in a competitively superior manner to develop and sustain a competitive advantage and earn above average returns

Strategy defines the path that

provides the direction of actions organizational leaders take to help their firm achieve success

For firms to effectively use the cost leadership/differentiation strategy over time they must

reduce costs incurred to produce products (as required by the cost leadership strategy) and to increase product differentiation (as required by the differentiation strategy) simultaneously.

Powerful customers can force a cost leader to

reduce its prices. However, they may not choose to do that because it could force a company out of the market, leaving the cost leader with less competition and an even stronger bargaining position. Instead, they may pressure firms to provide innovative products and services.

Firms serving a narrow market segment intend to

serve the needs of a narrow customer group.

The reach dimension of relationships with customers revolves around

the firm's access and connection to customers. Firms seek to extend their reach, adding customers in the process of doing so.

The third additional risk to using the focus strategy is

that the needs of customers within a narrow competitive segment become more similar to those of industry-wide customers as a whole over time

To earn even average returns, new entrants must have t

the competencies required to match the cost levels of competitors other than the cost leader.

The effectiveness of each of the five strategies are contingent on

the opportunities and threats in a firm's external enviornment and the strengths and weaknesses derived from its resource portfolio

A business level strategy is

the set of commitments and actions that yield the path a firm intends to follow to gain a competitive advantage by exploiting its core competencies in a specific product market.

After the firm decides who it will serve, it must identify

the targeted customers group's needs that its products can satisfy. Needs (what) are related to a product's benefits and features

Firms serving a broad market seek to

use their capabilities to create value for customers on an industry wide basis