MGT 497 Exam 2
Product proliferation
"filling the niches"
Low Cost strategic choices
- Appeals to the "average" or typical consumer - Comp. Adv. gained through lower cost structure - Efficiency, superior reliability, process innovation - gained through economies of scale, lean production, continuous improvement, streamline/automate business processes, JIT inventory control systems, create a frugal culture
Business Level Strategies
- Broad low-cost strategy (Cost-Leader) - Broad differentiation strategy - Focus low-cost strategy - Focus differentiation strategy
Strategies for Fragmented Industries
- Chaining - Franchising - Horizontal merger/acquisition
Low Cost Disadvantages
- Competitors can lower cost structure - Competitors may imitate cost leader's methods - Cost reductions may affect demand
Mature Industry Evolution
- Consolidated - Strategy based on established companies collectively reducing intensity of competition - Interdependent companies protect industry profitability
To cross the chasm (companies must)
- Correctly identify needs of first wave of early majority users - Alter business model in response - Alter value chain & distribution channels to reach early majority - Design product to meet needs of early majority so product can be modified, produced, & provided at low cost - Anticipate moves of competitors
Differentiation
- Create products different or distinct from competitors in important ways - Key is to add value to customers
Mature Industry Strategies
- Deter Entry - Manage Rivalry
Differentiation Disadvantages
- Difficulty to maintain long-term distinctiveness in customer's minds - Competitors may imitate - Can increase cost structure too much & over differentiate - Difficulty maintaining premium price
Winning a Format War
- Ensure supply of complements - produce complements - Killer applications - new products so compelling customers adopt rapidly killing demand for competition - Aggressively price/market (razor & blade strategy) - price product low to increase installed base, price complements high for profits - Cooperate with competitors - speed up adoption - License format - reduce incentive for competitors to develop own
First mover advantages
- Exploit network effects & positive feedback loops - Establish significant brand loyalty - Ramp up sales volume early - Create switching costs for customers - Accumulate valuable knowledge ** First movers don't always succeed
Focus Strategic Choices
- Focuser selects specific market based on: * geography * type of customer * segment of product line - focused company positions self as either: * low-cost or * differentiatior
Choosing a global strategy
- Globalization standard - Localization - Transnational
Customer Groups
- Innovators - Early Adopters - Early Majority - Late Majority - Laggards
Declining Industries
- Leadership - seeks to become dominant player - Niche - focuses on pockets of demand declining more slowly - Harvest - optimizes cash flow and exits industry through liquidation - Divestment - sells business to others before steep decline to recover investments
Low Cost Advantages
- Less affected by powerful suppliers - Ability to reduce price to compete with substitute products - Low costs create a barrier to entry
Differentiation Advantages
- Less affected by powerful suppliers - Brand loyalty builds barrier over substitute products - Brand loyalty creates a barrier to entry
Reasons for Slow Growth (in Embryonic and Growth Industries)
- Limited performance & poor quality of the first products - Customer unfamiliarity with what the new product can do for them - Poorly developed distribution channels - Lack of complementary products - High production costs
Reasons for fragmented industries
- Low barriers to entry permit constant entry by new companies - Brand loyalty is primarily local - Diseconomies of scale *A focused strategy is the best generic business level strategy*
Crossing the Chasm (Early Majority, mass market)
- Need to ensure product reliability and ease of use - Require mass market distribution and mass media advertising campaigns - Require large scale mass production to produce high quality product at a low price
International Pressures
- Pressures for cost reduction - Pressures to be locally responsive
Manage Rivalry
- Price signaling - increase/decrease prices to convey intentions (Tit for Tat strategy) - Price leadership - one company assumes the responsibility for setting the price option * formal version of this is illegal - Control excess capacity - Nonprice competition - using product differentiation to compete
Deter Entry
- Product proliferation - "filling the niches" - Price cutting - cut prices when a new company enters (or threatens to enter) the market to send a signal - Strategic commitment - maintaining excess capacity
Crossing the Chasm (Innovators & Early Adaptors)
- Technologically sophisticated and willing to tolerate the limitations of the product - Reached through specialized distribution channels to word of mouth - Relatively few in number and not particularly price sensitive
Exporting advantages
- ability to realize location economies - realize cost economies
Joint Venture advantages
- access to local partner's knowledge - shared development cost and risks - political dependency
Differentiation strategic choices
- customize product offering to diff. market segments - Comp. Adv. gained through satisfying customers needs in a way competitors cannot, thus allowing PREMIUM PRICES to be changed - Superior quality, product innovation, & customer responsiveness
First movers
- first to develop/pioneer revolutionary products
Niche (in declining industries)
- focuses on pockets of demand declining more slowly •Makes sense when company has distinctive strengths in niche areas
Wholly owned subsidiaries disadvantages
- high costs and risks
Exporting disadvantages
- high transportation costs - trade barriers - problems with local marketing agents
Franchising disadvantages
- inability to engage in global strategic coordination - lack of control over quality
Joint Venture disadvantages
- inability to engage in global strategic coordination (J) - inability to realize location economies - lack of control over technology
Licensing disadvantages
- inability to realize location economies or cost economies (L) - inability to engage in global strategic coordination - lack of control over technology
Franchising advantages
- low development costs and risks (F)
Licensing advantages
- low development costs and risks (L)
Harvest (in declining industries)
- optimizes cash flow and exits industry through liquidation •Makes sense when a steep decline is expected •Characterized by exchanging market share for cash flow
First mover disadvantages
- pioneering costs - prone to mistakes - risk building wrong resources & capabilities - may invest in interior/obsolete technology (no need for product)
Wholly owned subsidiaries advantages
- protection of technology - ability to engage in global strategic coordination - ability to realize location economies
Leadership (in declining industries)
- seeks to become dominant player •Makes sense when company has distinctive strengths and the speed of decline and intensity of competition are moderate •Characterized by excessive marketing and aggressive pricing and acquiring competitors
Divestment (in declining industries)
- sells business to others before steep decline to recover investments •Sell to a company that is following a leadership strategy
Mass Markets Develop When (in Embryonic and Growth Industries)
- technological progress makes product easier to use and increases its value to the average customer - Key complementary products are developed that add value to customer - Companies find ways to reduce production costs, allowing them to lower prices
Business Level Strategy
-Overall competitive theme of a business. -Way a company positions itself in the marketplace to gain a competitive advantage. -Different positioning strategies
Firms must decide
1. Customer needs (What) - desires, wants, or cravings to be satisfied through product attributes - differentiation vs. price (cost) 2. Customer groups (Who) 3. Distinctive Competencies (How)
Three ways standards emerge
1. Firms lobby government to mandate industry standard public domain - falls into public domain 2. Standards often set by cooperation among firms/forums to reduce uncertainty in consumers' minds - falls into public domain 3. Standard often selected by market demand - strategy & business model for promoting tech standard are critical because ownership of an industry standard that is protected is valuable
Exploiting First-Mover Advantages Strategies
1. Going it alone 2. Strategic alliance/joint venture 3. License innovation
Benefits of Standards
1. Guarantee compatibility between products & complements 2. Reduce consumer confusion 3. Reduce production costs due to mass production 4. Reduce risks associated with supplying complementary products
Factors of intensity in declining industries
All of these feed into Intensity of Competition - Speed of decline - Height of exit barriers - Level of fixed costs - Commodity nature of product
Focus Advantage
Closest to the customer
Focus Disadvantage
Cost leader - cost structure never as low as broad cost leader Differentiator - invites competition
Low Cost
Establishes a cost structure that allows them to provide goods/services at lower unit costs
Innovators
First to purchase and experiment with a product based on new technology; "technorants"
Growth Industry
First-time demand is expanding rapidly as many new customers enter market
Focus
Focuser strives to serve needs of targeted niche market segment where it has either a low-cost or differentiated competitive advantage
Early Majority
Practical and understand the value of new technology; leading wave of mass-market
Late Majority
Purchase a new technology only when it is obvious that it has great utility and is here to stay; signals end of growth stage
Pressures for cost reduction
Standardize product and achieve economies of scale - differentiation on non-price factors difficult (commodities) - competitors are based in low-cost location - consumers are powerful & face low switching costs - persistent excess capacity (entire industry)
Laggards
Unappreciative of the use of new technology; only adapt if forced to
Early Adoptors
Understand that the technology may have important future applications
Technical Standards
a set of technical specifications that producers adhere to when making the product or a component of it - ex. computer keyboard
Complementary assets
assets required to exploit a new innovation - manufacturing capabilities - marketing know how & sales force to gain brand loyalty
Transnational
business model that simultaneously: - achieves low costs (invest in a few large-scale manufacturing facilities in optimal locations) - differentiates across markets (create plants to tweak products that require local features) - fosters a flow of skills between subsidiaries (global learning)
Localization
customizing to match preferences in different national markets - substantial differences across countries - pressures for cost reductions are minimal
Price Cutting
cut prices when a new company enters (or threatens to enter) the market to send a signal
Capability of competitors
depends on the competitors R&D skill and access to complementary assets
Pressures for local responsiveness
differentiate and create product specific to each country's needs; customized products should be considered when there are differences in: - customer tastes & preferences - infrastructure & traditional practices - distribution channels - host government demands
Location economies
economic benefits from performing value creation in optimal location - Allows for: * lowers cost of value creation * differentiate the product offering ***must also consider transportation costs, trade barriers, as well as political & economic risks***
Franchising
franchiser sells intangible property & insists franchisee follow rules on doing business
Cost Economies
from global volume - economies of scale - global sales volume can decrease unit costs - use production facilities more intensely - increase bargaining power with suppliers - learning capabilities
Barriers to imitation
give the innovator time to establish a competitive advantage
Leveraging products
goods/services developed at home and selling internationally - maximize a distinctive competency
Price signaling
increase/decrease prices to convey intentions (Tit for Tat strategy)
Embryonic Industry
just beginning to develop when technological innovation creates new market or product opportunities
Leveraging skills
learning from subsidiaries - skills & capabilities are often formed in global situations - applying subsidiary skills to other operations can add value
Licensing
licensee buys rights to produce product & puts up most of the overseas capital
Strategic commitment
maintaining excess capacity
Horizontal merger/acquisition
merging with or acquiring competitors and combining them into a single large enterprise - Office Max & Office Depot - American Airlines & U.S. Air
Exporting
most use to begin expansion but later switch to another mode
Price Leadership
one company assumes the responsibility for setting the price option - formal version of this is illegal
Chaining
opening additional locations that adhere to the same basic formula, that the company owns - linked outlets to achieve large scale output - build national brand - increase buying power
Wholly-Owned Subsidiaries
parent company owns 100% of subsidiary's stock
Standardization approach
producing a standardized product for the average customer, ignoring different segments
Segmentation approach
producing different offerings for different segments, serving many segments or the entire market
Globalization standard
reaping cost reductions from economies of scale and location - strong pressures for cost reduction - minimal demand for local responsiveness - universal needs
Dominant design
refers to a common set of features or design characteristics - ex. when sitting at a desktop computer, you see a monitor, keyboard, and mouse
Technology
scientific knowledge used in production of goods or services
Focus strategy
serving a limited number of segments or just one segment
Franchise
the franchisor (parent company) grants to its franchisees the right to use the parent's name, reputation, and business model, in return for a fee and percentage of the profits - The Good: * Franchise puts up capital * Increased incentive to run efficiently * Are often entrepreneurial - The Bad: * Lack of control * Partial profits - majority goes to the franchisee
Joint Ventures
typically a 50/50 venture & favored mode for entering new market