Management 404- Chapter 6

value innovation

For a blue ocean strategy to succeed, managers must resolve trade-offs between the two generic strategic positions—low cost and differentiation. This is done through?

focused differentiation strategy

Same as the differentiation strategy except with a narrow focus on a niche market. Ex: exquisite pens at several hundred dollars

strategic trade-offs

choices between a cost or value position

differentiation & cost leadership

two fundamentally different generic business strategies

cost-leadership strategy

Which kind of strategy is focused on low cost?

value curve

Horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action.

strategy canvas

-Graphical depiction of a company's performance -Relative to its competitors -Viewed across the industry's key success factors

unique product features, service, new product launches, marketing & promotion

4 focuses of competition in the Differentiation Strategy

Who—which customer segments will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers' needs

In the Business-Level Strategy, what are the 4 questions concerning who, what, why, and how?

Cost of input factors. Economies of scale. Learning-curve effects. Experience-curve effects.

The most important cost drivers that managers can manipulate to keep their costs low are

scope of competition

The size-narrow or broad-of the market in which a firm chooses to compete.

economic value creation & profit margin

The two purposes of trade offs are to maximize the firm's?

value-cost > competitors

competitive advantage is achieved when?

industry and firm effects

competitive advantage is determined jointly by?

cost leader

focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers

scale economies are critical to driving down a firm's cost and strengthening a cost-leadership position

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minimum efficient scale (MES)

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale; The concept of this applies not only to manufacturing processes but also to managerial tasks such as how to organize work.

focused cost-leadership strategy

Same as the cost-leadership strategy except with a narrow focus on a niche market; ex: disposable pens and lighters at low cost

cube-square rule

The volume of a body such as a pipe or a tank increases disproportionately more than its surface

business-level strategy

Which kind of strategy details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market? May involve a single product; "How should we compete?"

differentiation strategy

Which kind of strategy is focused on delivering unique features and services?

differentiation strategy

Which strategy seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firm to charge higher prices to its customers?

cost-leadership strategy

Which strategy seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers?

blue ocean strategy

a business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs in those two distinct strategic positions

value innovation

aligning innovation with total perceived consumer benefits, price and cost

economies of scope

describe the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology

diseconomies of scale

increases in cost as output increases

Lower Costs - Eliminate. Which of the factors that the industry takes for granted should be eliminated? - Reduce. Which of the factors should be reduced well below the industry's standard? Increase Perceived Consumer Benefits - Raise. Which of the factors should be raised well above the industry's standard? - Create. Which factors should be created that the industry has never offered?

managers must answer the four key questions below when formulating a blue ocean business strategy:

A business strategy, therefore, is more likely to lead to a competitive advantage if it allows firms to either perform similar activities differently or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost

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A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V - C) is greater than that of its competitors.

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A cost leader can achieve a competitive advantage as long as its economic value created (V - C) is greater than that of its competitors

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A differentiation strategy is defined by establishing a strategic position that creates higher perceived value while controlling costs. The successful differentiator stakes out a unique strategic position, where it can benefit from imperfect competition and command a premium price. A well-executed differentiation strategy reduces rivalry among competitors; a differentiator is likely able to pass on price increases to its customers as long as its value creation exceeds the price charged; A strong differentiated position also reduces the threat of substitutes, because the unique features of the product have been created to appeal to customer preferences, keeping them loyal to the product; a differentiator needs to be vigilant that its costs of providing uniqueness do not rise above the customer's willingness to pay.

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A firm's business-level strategy determines its strategic position—its strategic profile based on value creation and cost—in a specific product market

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A successfully implemented blue ocean strategy allows firms two pricing options: First, the firm can charge a higher price than the cost leader, reflecting its higher value creation and thus generating greater profit margins. Second, the firm can lower its price below that of the differentiator because of its lower-cost structure

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Although a cost-leadership strategy provides some protection against the five forces, it also carries some risks. If a new entrant with new and relevant expertise enters the market, the low-cost leader's margins may erode due to loss in market share while it attempts to learn new capabilities; the low-cost leader faces significant difficulties when the focus of competition shifts from price to non-price attributes.

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Although a differentiation strategy is generally associated with premium pricing, managers have an important second pricing option. When a firm is able to offer a differentiated product or service and can control its costs at the same time, it is able to gain market share from other firms in the industry by charging a similar price but offering more perceived value.

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Dr. Shetty: "The Henry Ford of Heart Surgery" •Trained in London •Conducted open-heart surgery on Mother Teresa •Goal: drive down costs through process innovation •Applies learning curves to his work -They work six days per week -Their skills improve quicker than their U.S. counterparts •Achieves economies of scale -Fixed costs spread over larger volume -They can employ more specialized equipment -They share common services with the cancer clinic •Data suggests -Higher volume does not compromise quality

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How JCPenney Sailed Deeper into the Red Ocean: Ron Johnson hired as CEO - He previously led Apple's retail stores Attempted a strategic change: - From cost leadership - To a blue ocean strategy Many changes implemented: - More in-store boutiques - Removed clearance racks and coupons •Results: -Sales dropped by 25%. -Their stock was dropped from the S&P 500 index. -Johnson was fired. -His predecessor came out of retirement to step in. -Experienced a sustained competitive disadvantage

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In a cost-leadership strategy, managers must focus on lowering the costs of production while maintaining a level of quality acceptable to the customer

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In the experience curve, in contrast, we now change the underlying technology while holding cumulative output constant. In general, technology and production processes do not stay constant. Process innovation—a new method or technology to produce an existing product—may initiate a new and steeper curve; Learning by doing allows a firm to lower its per-unit costs by moving down a given learning curve, while experience-curve effects based on process innovation allow a firm to leapfrog to a steeper learning curve, thereby driving down its per-unit costs.

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Instead of attempting to out-compete your rivals by offering better features or lower costs, successful value innovation makes competition irrelevant by providing a leap in value creation, thereby opening new and uncontested market spaces.

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Learning curves were first documented in aircraft manufacturing as the United States ramped up production in the 1930s, prior to its entry into World War II; By moving further down a given learning curve than competitors, a firm can gain a competitive advantage; learning drives down costs; people learn from cumulative experience

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Learning effects differ from economies of scale as shown: Differences in timing. Learning effects occur over time as output accumulates, while economies of scale are captured at one point in time when output increases. Although learning can decline or flatten, there are no diseconomies to learning. Differences in complexity. In some production processes (e.g., the manufacture of steel rods), effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions (brain surgery or the practice of estate law), learning effects can be substantial, while economies of scale are minimal.

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The automobile industry provides an example of the scope of competition. Alfred P. Sloan defined the carmaker's mission as providing a car for every purse and purpose. GM was one of the first to implement a multi-divisional structure in order to separate the brands into strategic business units, allowing each brand to create its unique strategic position within the broad automotive market. For example, GM's product lineup ranges from the low-cost-positioned Chevy brand to the differentiated Cadillac brand. In this case, Chevy is pursuing a broad cost-leadership strategy, while Cadillac is pursuing a broad differentiation strategy. The two different business strategies are integrated at the corporate level at GM. On the other hand, Tesla Motors, the maker of all-electric cars, offers a highly differentiated product and pursues only a small market segment. At this point, it uses a focused differentiation strategy. In particular, Tesla focuses on environmentally conscious consumers who are willing to pay a premium price. Taken together, GM's competitive scope is broad—with a focus on the mass automotive market—while Tesla's competitive scope is narrow—with a focus on high-end luxury cars.

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The goal of a differentiation strategy is to add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price

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The success of business strategy relies on: •How well the strategy: -Leverages the firm's internal strengths -Mitigates its weaknesses •How well it helps the firm: -Exploit external opportunities -Avoid external threats

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To answer the business-level strategy question of how to compete, managers have two primary competitive levers at their disposal: value (V) and cost (C)

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What causes per-unit cost to drop as output increases (up to point Q1)? Economies of scale allow firms to: - Spread their fixed costs over a larger output (ex: Microsoft spent billions on R&D for Windows 7 before single copy was sold) - Employ specialized systems and equipment (ex: demand for Tesla's Model S sedan allowed it to employ cutting-edge robotics) - Take advantage of certain physical properties. (Ex: big box stores can stock more merchandise and handle inventory efficiently)

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managers must remember that the different value drivers contribute to competitive advantage only if their increase in value creation (ΔV ) exceeds the increase in costs (ΔC)

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the cost-leadership and differentiation strategies are called generic strategies because they can be used by any organization

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IKEA eliminated several taken-for-granted competitive elements: salespeople, expensive but small retail outlets in prime urban locations and shopping malls, long wait after ordering furniture, after-sales service, and other factors

note about "elimination" question on blue ocean strategy

•Add value to products and services •Are responsive to customer preferences •Can increase costs -Additional R&D is needed -Innovation is needed -But customers are willing to pay a premium

note about DIFFERENTIATION STRATEGY

red oceans

the known market space of existing industries; the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game

One of the obvious but most important levers that managers can adjust is product features, thereby increasing the perceived value of the product or service offering. Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price. Strong R&D capabilities are often needed to create superior product features

note about PRODUCT FEATURES

JetBlue experienced a competitive disadvantage because it was unable to effectively address the strategic trade-offs inherent in pursuing a cost-leadership and differentiation strategy at the same time. A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile, either as differentiator or a low-cost leader

note about trade offs

IKEA created a new way for people to shop for furniture. The customer strolls through a predetermined path winding through the fully furnished showrooms.

note on "create" question on blue ocean strategy

IKEA raised several competitive elements: It offers tens of thousands of home furnishing items in each of its big-box stores, versus a few hundred at best in traditional furniture stores; it also offers more than furniture, including a range of accessories such as place mats, laptop stands, and much more

note on "raise" question on blue ocean strategy

IKEA also reduced several other taken-for-granted competitive elements: 25-year warranties on high-end custom furniture, high degree of customization in selection of options such as different fabrics and patterns, and use of expensive materials such as leather or hardwoods, among other elements

note on "reduce" question on blue ocean strategy

•Changes the competitive landscape •Opens up new areas of competition •Requires the firm to: -Reconcile trade-offs •Increasing value •Lowering production costs -Pursue both business strategies simultaneously •Example: Toyota -Introduced lean manufacturing -Delivered higher quality cars at lower cost

note on successful blue ocean strategy

blue oceans

represent untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth

product features, customer service, complements

the most salient value drivers that managers have at their disposal

to reduce the firm's cost below that of its competitors while offering adequate value

what is the goal of the cost-leadership strategy?

economies of scale

which cost driver decreases in cost per decreases in cost per unit as output increases?

cost of input factors

which cost driver includes raw materials, capital, labor, and IT services?