BIZ Strat
8. In what sense might innovation be called the single most important building block of competitive advantage?
A company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability and profit growth of other companies competing for the same set of customers. The higher the profitability, the greater its competitive advantage. Successful innovation can transform the nature of industry competition. It can lower the fixed costs of production, increase efficiency, increase quality, increase differentiation, or allow adaptation to changing customer needs. When an effective innovation enters an industry it can be the major factor in industry evolution and give the pioneering innovator a huge competitive edge. Innovation can apply to processes as well as products. New manufacturing innovations in Toyota have dramatically reduced setup times, obtaining efficiency gains years ahead of their competition. Other examples include Walmart pioneering the low-price discount superstore concept. Or Dell innovating a new way of selling PCs (via the telephone). This is from the book that I found after I wrote all of that. pg 130 Innovation can be the most important source of competitive advantage. This is because innovation can result in new products that better satisfy customer needs, can improve the quality of existing products, or can reduce the costs of making products. Innovation can allow a company to differentiate its products and charge a premium price, and/or lower its cost structure below that of its rivals. Competitors, however, can imitate successful innovations. Therefore maintaining a competitive edge requires a continuing commitment to innovation. Examples include the Walkman CD or Nokia cell phone.
11. For each of the generic strategies—cost leadership, differentiation, and focus—describe one advantage and one disadvantage. pg 155
An advantage of cost leadership would be because it has lower cost structure, it will be more profitable than its closest competitors (and it can offer a lower price which can attract more customers.) A disadvantage would be when a competitors are able to develop new strategies that lower their cost structure and beat the cost leader at its own game. An advantage of differentiation is that it can protect a company from competitors when customers develop brand loyalty for its products, a valuable asset that allows it to charge a premium price. Therefore a differentiators can tolerate moderate increases in input prices better than the cost leader can. A disadvantage is about how well strategic managers can maintain a product's perceived difference or distinctness to customers and hence maintain premium pricing. An advantage of focused cost leadership concentrates on small-volume custom products for which it has a cost advantage and leaves the large-volume standardized market to the national cost leader. Because it has no cost disadvantage it can operate on the value creation frontier. A disadvantage is that a makes and sells only a relatively small quantity of a product and its cost structure will be higher than the cost leader. An advantage of focused differentiator possess better knowledge about the needs of a small customer set or particular field, thereby increasing customer responsiveness and operating on the value frontier. A disadvantage is that it cannot easily move to another market segment, so if the market segment disappears or customers taste change, it can be a danger to the company.
16. Discuss how companies can use product differentiation and capacity control to manage rivalry and increase an industry's profitability.
Capacity control manages rivalry and increases profitability by -not flooding the market with a product and causing price cutting because there's and excess capacity. You forecast an increase in demand and coordinate with rivals Product differentiation manages rivalry and increases by -allowing industry rivals to compete for market share by offering products with different or superior features or by applying different marketing techniques. -increases profitability because brand names can command higher prices, refining and improving products can improve their business models, leveraging the product differentiation advantages of their brand name can help the company to sell in new market segments, and when a new niche develops, the leader profits.
10. What is meant by the term "strategic group" and why is it important for managers to understand this in order to position their companies in a competitive marketplace? pg 55 pg 168
Companies in an industry often differ significantly from each other with respect to the way they strategically position their products in the market. A strategic group is often defined in terms of such factors as the distribution channels they use, the market segments they serve, the quality of their products, technological leadership, customer service, pricing, advertising... etc. As a result of these differences, it is possible to observe groups of companies in which each company follows a business model that is similar to that pursued by other companies in the group but different from the business model followed by companies in another group. The competitive position of companies can change rapidly due to technological innovations that permit increased differentiation, the identification of new customer groups and the discovery of ways to lower cost structure. Higher performing companies are able to gain if they can position themselves competitively to pursue broad differentiation. If a company does not realize how fast their competitive position is deteriorating because of their rivals' strategies, it might be too late to rebuild their business models. By using strategic group analysis, managers can better understand the dynamics of competitive positioning so they can change their business models to be on the value frontier creating above average profitability.
6. Give two reasons why companies fail and discuss two steps that companies can take to avoid failure. PG 99-102
Companies seem to fail because they find it difficult to change their strategies and structures when adapting to changing competitive conditions. Also successful companies become specialized and they lose sight of market realities and the fundamental requirements for achieving a competitive advantage. Avoiding failure requires a constant focus on the basic building blocks of competitive advantage and adoption of the best industrial practice and achieving victory over inertia.
9. True or false and explain. All product differentiation is based on a product's physical attributes. pg 145
False. Product differentiation is the process of designing products to satisfy customers' needs. Companies that seek to create something unique about their product differentiate their products to a much greater degree than others so they can satisfy customers' needs in ways others can't. Creating unique products can be achieved in countless different ways. It can be achieved physically by pursuing innovation or quality such as state of the art car safety system or fine leather seats. Or it can be differentiated by responsiveness to customers, or appealing to customers' psychological needs, such as a personal need for prestige or a "lifestyle".
18. What are the potential benefits and risks of global strategic alliances? What actions can a firm take to minimize the risks and fully exploit the benefits?
Global Strategic Alliance Benefits -Facilitate entry to foreign market -Allows form to share fixed cost -Brings together complementary skills/assets that neither company could easily develop themselves -Makes sense because you can set tech. standards for industry Risks -Give away technology know-how and market access to alliance while getting very little in return To minimize risk -select partners carefully and pay attention to their reputation -structure alliances to avoid transfers of 'know-how' that are unintended
7. What role can top management play in helping a company achieve superior quality?
Overall Management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable and should be eliminated. Quality of supervisors should be improved by allowing more time for supervisors to work with employees and giving them appropriate skills for the job. Management should create an environment in which employees will not fear reporting problems or recommending improvements. Work standards should not only be defined as numbers or quotas but also include some notion of quality to promote the production of defect-free output. Management is responsible for training employees in new skills to keep pace with changes in the workplace. Achieving better quality requires the commitment of everyone in the company. Management should set goals and create incentives for employees to work in the company.
4. Under what environmental conditions are price wars most likely to occur in an industry? What are the implications of price wars for a company? pg 58-60
Price wars are most likely to occur after the industry experiences it's growth stage. When it enters the shakeout stage, the demand growth slows while capacity continues to grow. This is called industry shakeout. When there is a gap between capacity and demand, companies often cut prices. The result can be a price war which drives many of the most inefficient companies into bankruptcy. Price war also can also exist in mature industries when growth is slow and competition for market share develops. In order to survive the price war, companies begin to focus on minimizing costs and building brand loyalty. Because these factors constitute a significant barrier to entry, the threat of entry by potential competitors is often greatly diminished. Although companies that have survived the shakeout often consolidate and become oligopolies, there is always the threat of further price wars. Mature industries tend to recognize their interdependence and enter into price-leadership agreements. However, when a industry faces declining demand, agreements break down, rivalry increases, and prices and profits fall. When the exit barriers of a declining industry are high, the harder it is for companies to reduce capacity and the greater the threat of severe price war, forcing some companies to experience huge losses or even bankruptcy.
13. What are the advantages and disadvantages of a differentiation strategy?
Product differentiation allows industry rivals to compete for market share by offering products with different or superior features or by applying different marketing techniques. Some of the advantages of product differentiation are that it prevents costly price cutting and price wars.In market penetration, the advantages of differentiation are that it creates customers' brand choice and a brand-name reputation for the company, while the huge advertising outlays create barriers to entry. In product development, refining and improving products is crucial to improving a companies business models in a mature industry. Market development uses product differentiation that companies can leverage their brand name in new market segments. Product proliferation uses product differentiation to develop stable industry competition. The disadvantages of the differentiation strategy in market penetration are that all companies must engage in intensive advertising and battle for market share. In Product development, the R&D costs to create new products can greatly increase a company's cost structure, which can be as vicious as a price war. In market development and product proliferation, there are no disadvantages to product differentiation.
3. Define the strategic group and industry life cycle models and discuss their limitations.
Strategic groups are groups of companies pursing the same or a similar strategy. Industries go through a well defined life cycle from an embryonic stage, growth, shakeout, and maturity, and eventually decline. Each stage has different implications for the competitive structure of the industry. The strategic group models have been criticized for de-emphasizing the importance of individual company differences. A company will not be profitable just because it is based in an attractive industry or strategic group this is because much more is required. The industry life cycle model is a generalization that is not always followed, particularly when innovations revolutionize an industry.
2. Use Porter's five forces model to analyze the Home Video Game industry.
The Porter five forces model can be used to describe the home video game industry. The industry is comprised of intense rivalry from the established firms which include Sony and Nintendo. In order to compete with each other the struggle must be fought using price, product design, advertising, and promotional spending as well as many non-price competitive weapons. Sony and Nintendo kept innovating new products with large marketing campaigns to struggle over market share. The rivalry is often a function of industry competitive structure, demand and cost conditions, and the height of exit barriers. There is always the risk of entry by potential competitors. However, the video game industry has barriers of entry which prevent just any company from entering the industry. Barriers include economies of scale, brand loyalty, absolute cost advantages, customer switching costs, and government regulations. A competitor, which entered the industry with the XBox was Microsoft. By initially being such a large company, they were able to make the large investments needed to create games and produce consoles, allowing them to seize some of the market share from the existing companies and bypass the barriers of entry. The Porter model describes the bargaining power of buyers, which ultimately are the consumers of the products. Buyers can play the supplying companies against each other to force the prices down. In the case of video games, most suppliers had to offer their consoles at near cost and profit mostly from software because of the buyers. The bargaining power of suppliers occurs when a product that suppliers sell has few substitutes. This can be exemplified when Sony ran into problems when creating the Blu-Ray player in the PS3 model. It needed a specific part that limited it's production and held back it's release date. The final force in the Porter model is substitute products which are products of a different business or industry that can satisfy similar customer needs. In the example of the home video game industry, PC games are a substitute product which can take the place of video games for many consumers.
5. What are the four generic building blocks of competitive advantage? Give examples of companies to illustrate each of the blocks. PG 85-89
The four generic building blocks of competitive advantage are efficiency, quality, innovation, and responsiveness to customers. Efficiency is transforming inputs into outputs through basic factors of production. For example, If it takes GM 30 hours to assemble a car and it takes Ford 25 hours to assemble a car we can say that Ford is more efficient because there producing the same results in less time. Quality can be thought of as a bundle of attributes which make the product stand out. For example, a Rolex watch has attributes such as design, styling, performance, and reliability that customers perceive as being superior to the same attributes in other watches. Innovation refers to the act of creating new products of processes. For example, Intel's invention of the microprocessor in the early 1970's would be an innovation. An example of customer responsiveness would be that Saturn builds cars to order for individual customers, letting them choose form a wide range of colors and options.
1. What are the major components of the strategic management process? What are the roles of the general managers and functional managers in this process?
The major components of the strategic management process are defining the mission, vision, values, and major goals of the organization. General Managers have responsibility for the overall performance of the company or major sub-unit. Functional managers are responsible for supervising a particular function, task, activity, or an operation such as accounting, marketing, research and development and information technology. `
12. What is meant by the value creation frontier? How can companies pursuing cost-leadership and differentiation lose their place on the value frontier?
The value creation frontier is the curve on an axes connecting differentiating products (higher costs/higher prices) and the lowest cost structure (lower costs/higher prices). The curve represents the maximum amount of value that products of different companies in an industry can provide to customers at any one time. Companies must work continuously to improve their business model. If they fail to identify and respond to changing opportunities and threats in the industry, they can lose their position on the value creation frontier. Either they have lost the source of their competitive advantage or their rivals have found ways to push out the frontier and leave them behind.
15. What are the stages in the industry life cycle model? How might a company's strategy change over that cycle?
embryonic stage - when companies emphasize the development of a distinctive competency to build a successful business model growth stage - when the company must strengthen its business model to provide the competitive foundation it needs to survive the coming shakeout shakeout stage - when consumer demand is increasing and competition by price or product characteristics becomes intense maturity stage - when companies want to reap the rewards of their previous investments in developing the business models that have made them dominant industry competitors decline stage - when the size of the total market is shrinking, competition tends to intensify, and profit rates tend to fall. At the embryonic stage the company will want to use the share-building strategy to build market share by developing a stable and distinct competitive advantage to attract customers who have no knowledge of the company's products. During the growth stage, they would want to use the growth strategy where the goal is to grow with the expanding market. At the shakeout stage, they would use the share-increasing strategy to attract customers from weak companies exiting the market. At the maturity stage, they would use the hold-and-maintain strategy to defend their business models and ward off threats from focused companies that might be attempting to grow and compete with industry leaders During the decline stage, they would use the leadership strategy by which a company seeks to become the dominant player in a declining industry, or a niche strategy, which focuses on pockets of demand that are declining more slowly than the industry as a whole, or a harvest strategy, which optimizes cash flow, or a divestment strategy, by which a company sells off the business to others.
17.Identify and discuss the general ways in which companies can increase their profitability and profit growth through global expansion.
expanding the market:leveraging products - a company can increase its growth rate by taking goods or services developed at home and selling them internationally. realizing cost economies from global volume - in addition to growing profits more rapidly, by expanding its sales volume through international expansion, a company can realize cost savings from economies of scale, thereby boosting profitability. realizing location economies-location economies are the economic benefits that arise from performing a value creation activity in the optimal location for that activity, wherever in the world that may be (transportation cost and trade barriers permitting). Location economies can 1) lower the cost of value creation, helping the company achieve a low-costing position or 2) enable a company to differentiate its product offering, which gives it the option of charging a premium price or keeping prices low and using differentiation as a means of increasing sales volume leveraging the skills of global subsidiaries - leveraging the skills created within subsidiaries and applying them to other operations within the firms global network may create value
14. True or false and explain. An important strategy for companies in fragmented industries is diversification.
the four strategies are 1) chaining 2) franchising 3) horizontal mergers and 4) It and the internet False