Strat Test 2

Valuable product differentiation (temp. advantage): Reducing Environmental Threats

- new entry: Costs of overcoming incumbent firms' product differentiation advantages - rivalry: carve out unique product niche / each customer is different - substitutes: making products appear more attractive than substitutes through marketing - suppliers: more difficult to pass on increased costs to customers if there's no differentiation - buyers: product differentiation causes a quasi-monopoly when buyers have to purchase from a particular firm (ex: if Revlon is popular enough, Walmart pretty much has to purchase them)

A(n) _____ is any investment in an exchange that has significantly more value in the current exchange than it does in alternative exchanges. A) opportunistic investment B) transaction-specific investment C) opportunity-specific investment D) competition-specific investment

B) transaction-specific investment

Cost leadership is what kind of _____-level strategy

Business-level

_____ focuses on the relationship between the volume of production at a given point in time and average unit costs, the ______ focuses on the relationship between the cumulative volume of production and average unit costs. A) Competitive advantage; economies of scale B) Economies of scale; competitive advantage C) Economies of scale; learning curve D) Learning curve; economies of scale

C) Economies of scale; learning curve

Bases of product differentiation: Service & Support

Customer Service

The most obvious way that firms can try to differentiate their products is by A) introducing the product at the right time. B) making the product more complex. C) customizing the product for a particular segment. D) altering the features of the products they sell.

D) altering the features of the products they sell.

As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production is reached, after which the average costs of production begin to rise because of A) economies of scope B) economies of scale C) diseconomies of scope D) diseconomies of scale

D) diseconomies of scale

10) The major substitute for vertical integration is A) a low-cost strategy. B) a product-differentiation strategy. C) vertical disintegration. D) strategic alliances.

D) strategic alliances.

Sustained advantage: Imitability

Direct duplication: - May be costly - Product features are easy to duplicate (temp. advantage unless patented) - Product mix, links w/ other firms, customization, complexity, & marketing can sometimes be costly to duplicate - Links between functions, timing, location, reputation (most costly), distributions, service & support are costly to duplicate Substitutes: - Many of the bases of differentiation can be partial substitutes for each other (product features, customization & complexity) - Other strategies can be substitutes for these bases

Sustained competitive advantage of cost leadership: Imitability

Easy to duplicate: - Economies & diseconomies of scale - not protected by history, uncertainty, or socially complex R/C May be costly to duplicate: - Learning-curve economies: depending on managerial implications - Technological hardware: if propriety - Policy choices: if complex decisions involved Costly to duplicate: - Differential access to low-cost inputs - Tech. software ^ both have historical, uncertain, & socially complex R/C

A firm that chooses a cost-leadership business strategy focuses on gaining advantages by reducing its costs to a level equal to all of its competitors.

False

One of the least important productive inputs in almost all companies is labor and it is unlikely that differential low cost access to labor can give a firm a cost advantage.

False

Product differentiation effectively reduces rivalry to zero.

False

Product features, product customization, and product complexity have few obvious close substitutes and may be sources of sustained competitive advantages.

False

The threat of rivalry is increased when low-cost firms set their prices equal to those of higher cost competitors.

False

Timing-based product differentiation relies solely on being a first mover.

False

Organization of cost leadership

Functional organization structure/U-form structure: - Each business function is managed by a functional manager - All report to CEO - matrix structure avoided CEO responsibility in U-form: - formulate strategy - coordinate activities of functional managers Management control systems: - Tight cost control - Close supervision of labor, raw materials, inventory, and others Compensation: - Reward for cost reduction - Incentives for employees to be involved in cost reduction

Cost advantage of a cost leadership strategy: Size

Having economies of scale

Elasticity

How well your customers respond to price changes - more elastic = better response

Opportunism of vertical integration

If the business you work with has opportunity to get rid of you, vertically integrate so you own that part of your operations (value chain)

Product differentiation

Increasing perceived value relative to other firms - Can be rivals or substitutes - Charge higher prices - Always a matter of customer perception

Bases of product differentiation: Links Within & Between Firms

Linkages between functions: - Architectural competence: ability to use org. structure to facilitate coordination among disciplines Linkages with other firms: - May be cooperative strategic alliance strategies - Ex: Burger King sponsoring NASCAR (different businesses)

Corporate strategy

Opening in several businesses simultaneously

Organizing to Implement

Organizational structure: - U-form - Determined by vertical integration - Functional conflicts for a CE Management controls: - Budgeting process may lead to overemphasizing S/T behavior increase maintenance & mgt. training - Mgt. Committee Oversight Process executive: CEO & senior managers to track S/T performance operations: track performance L/T Compensation: - Opportunism-based: employees who make firm-specific investments create more value * investments by employees that have more value in a particular firm because of the time & effort they put into it

Organization to Implement Differentiation

Organizational structure: - U-form: cross-divisional & cross-functional (matrix structure) where employees have 2+ bosses; skunk works Management controls: - Broad decision-making: brings order to the chaos; not too much or too little freedom - Policy of experimentation Compensation policies: - Rewards risk-taking

Sustained competitive advantage of cost leadership: Rarity

Rare: - Learning-curve economies of scale (especially in emerging businesses - Differential low-cost access to inputs - Technological software Less rare: - Economies of scale (except when efficient plant size roughly = total industry demand) - Diseconomies of scale (for competitors) - Technological hardware (unless proprietary) - Policy choice

A firm engages in backward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring it closer to gaining access to raw materials.

True

A firm's level of vertical integration is the number of steps in its value chain that the firm accomplishes within its boundaries.

True

Decisions about whether or not to vertically integrate often determine whether or not a firm is operating in a single business or industry or multiple businesses or industries.

True

Flexibility refers to how costly it is for a firm to alter its strategic and organizational decisions.

True

If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm.

True

If one of a firm's exchange partners behaves opportunistically, this reduces the economic value of the firm.

True

In fragmented industries firms can use product differentiation to help consolidate a market.

True

Large transportation costs can offset cost reductions attributable to the exploitation of economies of scale in manufacturing.

True

While firms often alter the objective properties of their products or services in order to implement a product-differentiation strategy, the existence of product differentiation is always a matter of customer perception.

True

With regard to the threat of suppliers, product differentiation A) increases the threat of suppliers because a firm with a highly differentiated product is unable to pass increased costs on to customers. B) reduces the threat of suppliers because a firm with a highly differentiated product can pass increased costs on to customers. C) can either increase or reduce the threat of suppliers. D) has no impact on the threat of suppliers

b) reduces the threat of suppliers because a firm with a highly differentiated product can pass increased costs on to customers.

Which of the following bases of product differentiation is usually costly to duplicate? A) product mix B) reputation C) links with other firms D) product features

b) reputation

8) A decision-making setting is ________ when the future of an exchange cannot be known when investments in that exchange are being made. A) flexible B) uncertain C) opportunistic D) dynamic

b) uncertain

In the bicycle industry, the feel of high-end bicycles when they are ridden is important. As a serious rider becomes accustomed to a particular bicycle, it is very difficult for that rider to switch to an alternative supplier. This is an example of product differentiation through which of the following? A) location B) product complexity C) product customization D) linkages between functions

c) product customization

Firms for whom the price of the products or services they sell is determined by market conditions and not by the individual decision of the firms are known as a) profit makers b) price takers c) profit takers d) price makers

c) profit takers

Which of the following bases of product differentiation attempts to create the perception that a firm's products or services are unusually valuable by focusing on links within and between firms? A) product complexity B) reputation C) consumer marketing D) product mix

d) product mix

Actions that firms take to gain competitive advantage in a single market or industry are known as A) functional-level strategies B) business-level strategies C) corporate-level strategies D) macro-level strategies

B) business-level strategies

Bases of product differentiation: Product Mix

- Products are technologically linked or - Single set of customers purchase several of a firms products - Can be within a firm or between firms

Capabilities of vertical integration

- Teamwork, cooperation

Vertical integration

- The number of steps in the value chain that a firm accomplishes in its boundaries - Backwards vertical integration: incorporates more stages of value chain within its boundaries that bring it closer to the beginning - Forwards vertical integration: same as backwards except it brings it closer to the end of the chain

Rarity in vertical integration

- Transaction-specific investment: Can make these investments to serve customers more efficiently and if the cost is not too high - Capabilities: V&R = vertical integration - Uncertainty: Resolving uncertainty faster than competition - Vertical dis-integration: outsource an activity

Policy choices

- What kinds of products to sell - Reducing costs is the responsibility of all managers & employees

Value of vertical integration: Threat of Opportunism

- When a firm is unfairly exploited in an exchange which reduces economic value of firm - Reduce by vertically integrate into this exchange (if cost is lower than cost of opportunism) - Greatest when a party to an exchange has made transaction-specific investments * any investment that has significantly more value in the current exchange than it does in alternative exchanges * which party has the better end of the bargain?

Flexibility of vertical integration

- compensation that focuses on employees making firm-specific investments important for vertical integration - if you need more, don't vertically integrate - you need flexibility when things are uncertain

The bases of differentiation & their limitations

- All of the bases of differentiation are an expression of creativity - Limited to opportunities & willingness and ability of firms to creatively explore ways to take advantage of those

Value of vertical integration: Capabilities

- Attempt to have a sustained advantage (V,R,I) through vertical integration if they have these resources

Cost advantage of a cost leadership strategy: Volume of production & cost of manufacturing

- Cost of manufacturing: Larger containers in process manufacturing require less material per unit volume (2/3 rule) - When volume is higher, employee specialization increases - When volume is higher, overhead costs decrease per unit

Different cumulative levels of production/learning curve

- Cumulative production is how much a firm produces over time - Learning curve: average unit costs decrease (as low as possible) as cumulative volume increases - Not restricted to manufacturing - The first firm to do this successfully obtains a cost advantage (must acquire market share however)

Imitability in vertical integration

- Direct duplication: sustained if path dependent, socially complex, or causally ambiguous - Substitutes: strategic alliances

Bases of product differentiation: Distribution channels

- Exclusive rights - Networks

Valuable product differentiation (temp. advantage): Opportunities

- Facilitate consolidation of fragmented markets - Emerging industries: first-mover - Mature industries: product refinement - Declining industries: discover a viable market niche to survive

Bases of product differentiation: Attributes

- Features - Complexity of products - Timing of introduction: * first mover: set tech standards, preempt strat. valuable assets, develop customer-switching costs * introducing at the right time - Location

Reasons to vertically integrate

- Focus more on building your own competitive advantage - Take advantage of someone else's economies of scale/high volume - Lower costs - Don't have knowledge of certain processes - New market (no suppliers) - Can't get distribution

Value of vertical integration: Flexibility

- How costly to alter its strategic & organizational decisions - High when cost of changing strategy is low - In general vertical integration is less flexible than not (reversing these changes is costly) - Only valuable when decision-making setting is uncertain

Cost Leadership: Diseconomies of scale

- If volume rises above optimal point, it can increase per unit costs - Physical limits of manufacturing facilities - More important: managerial diseconomies (high complexity) - Worker de-motivation: more specialization & narrowly defined tasks - Distance of facility & where goods are sold or where raw materials are purchased (higher transportation costs)

AirAsiaX

- Low cost airline model - transformed into a long haul budget airline - Unbundled services - Point to point rather than hub & spoke system Cost advantage sources: - More seats - economies of scale, policy choices - Low labor cost - access to low cost inputs - relationship with AirAsia - managerial know how, learning curve

Value of cost leadership: Reducing environmental threats

- New entrants: cost-barriers - Rivalry: pricing strategies in a low-cost firm - Substitutes: keeping costs low relative to rivals' products - Suppliers: greater flexibility in absorbing higher-cost suppliers; larger volume = larger purchases of raw materials - Buyers: reduction in revenues and still have normal performance; backward vertical integration (won't have as low of costs); buyer dependence because of high levels of production

Technological advantages independent of scale

- Not just physical tools but any processes in a firm - Hardware & software: quality of relations between labor & mgt, culture of organization, quality of managerial controls

Bases of product differentiation: relationship with customers

- Product customization: for particular customer applications - Consumer marketing: features of product may not have changed - Reputation: most important!*, socially complex relationship, can last a long time

Differential low-cost access to productive inputs

- Productive inputs are any supplies used to conduct business activities (labor, capital, land, raw materials) - Must compare to the value of that advantage

9) The essence of the ________ to vertical integration is that if a firm possesses valuable, rare, and costly-to-imitate resources in a business activity, it should vertically integrate into that activity otherwise it should not vertically integrate into that activity. A) firm capability explanation B) flexibility-based explanation C) opportunity-based explanation D) opportunism-based explanation

A) firm capability explanation

7) Research suggests that, in general, vertically integrating is ________ than not vertically integrating. A) less flexible B) somewhat more flexible C) comparatively flexible D) significantly more flexible

A) less flexible

In order to create a cost advantage, the cost of acquiring low-cost productive inputs must be ______ the cost savings generated by these factors. A) less than B) greater than C) greater than or equal to D) equal to

A) less than

Sustained advantage: Rarity

Ability of firms to be creative in finding new ways to differentiate that are rare in the industyr

Threat of opportunism, capabilities, and flexibility

All are complementary & may lead to the same conclusion