Week 7: Chapter 7

Value Configuration

The resources and activities that produce this value

Scope

The scope of customers that the business chooses to serve. - Focus on narrow customer segments (i.e. Youth market) - Focus on Broad customer segment

Tacit Collusion

Where companies agree on a certain strategy without any explicit communication between (i.e. avoid price competition)

Competitive Failures

Where competitors are also stuck in the middle, there is less competitive pressure to remove competitive disadvantage

Hypercompetition

permanent, ongoing, intense competition brought about in an industry by advancing technology or changing customer tastes

Types of Focus Strategies

- Cost Focusers: Identify areas where broader cost cased strategies fail because of the added costs of trying to satisfy a wide range of needs. - Differentiation Focusers: Look for specific needs that broader differentiators do not serve so well. Focusing on one particular need helps to build specialist knowledge and technology increases commitment to service and can improve brand recognition and customer loyalty.

Cost Drivers of Cost Leadership Strategy

- Input Costs: Labor, raw materials - Economies of Scale: How to increase scale while reducing the average costs of operations over a particular time period. Spread fixed costs over high levels of output - Experience: The cumulative experience gained by an organization with each unit of output leads to reductions in unit costs Product/Process Design: Efficiency can be 'designed in' at the outset.

cost leadership strategy: Two options

- Parity/Equivalence: Achieve parity with competitors in product or service features valued by customers. (i.e. It cost me cheaper to make it but I can charge the same price as the average market value) - Proximity/Closeness: To competitors in terms of features. Makes it easy for customers to switch when competition is close.

Successful competitive interaction in Hyper competition

1. An organization has to be willing to cannibalize the basis of its own OLD advantage and success 2. Smaller moves can create a series of temporary advantages 3. Surprise and unpredictability and even apparent irrationality can be important 4. Organization might signal a particular move but then so something else

Cooperative Strategy

A strategy in which firms work together to achieve a shared objective. - May provide advantage over other competitors or new entrants - Can be explicit (formal agreements to cooperate) OR tacit (informal mutual understandings between organizations) - Firms must be careful to avoid illegal collusion

Marketing and Reputation

Can help achieve differentiation by building a brand image that sets it a part.

Competitor Response

Challenging a competitor in one area might lead to a counter-attack in another

interactive strategies

Competitors moves and counter moves underlies the dynamic and interactive nature of business strategy. - The generic strategies of cost leadership and differentiation should not be seen as static positions. - Should be seen as dynamic trajectories along the axes of price and quality.

Business Model

Describes a value proposition for customers and other participants, an arrangement of activities that produces this value and associated revenue and cost structures.

Disecnomies of scale

Large volumes of output that require special overtime payments to workers or involve the neglect of equipment maintenance can soon become very expensive.

The Strategy Clock

Provides another way of approaching generic strategies and gives more scope for hybrid strategies. Two distinctive features: 1. It is focused on prices to customers rather than costs to the organization. So making it easier to compare competitors 2. The circular design of the clock allows for more continuous and incremental choices.

Business Model vs Business Strategy

Organizations can share a business model but their business strategy can still differ.

Interactive Price and Quality Strategies

Organizations compete by either emphasizing either low prices or high quality or some mixture of the two

Focus Strategy

Targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others. - The focuser achieves competitive advantage by dedicating itself to serving its target segments better than others that are trying to cover a wider range of segments.

Technological or Managerial Innovation

Technological and managerial innovations can allow radical improvements in both cost and quality.

Primary Differentiation Drivers

- Product and Service Attributes: Certain product attributes can provide better or unique features than comparable products or service for the customer. - Customer Relationships: Differentiation can rely on the relationship between the organization providing the product and the customer. - Complements: Differentiation can also build on linkages to other products or services. The perceived value of some products can be significantly enhanced when consumed together with other product or service complements

Benefits of Hybrid Strategy

- Used for Market Entry - Increase Market Share

The Strategy Clock: Three Zones of Feasible Strategies

1. Differentiation (Zone 1): This zone contains a range of feasible strategies for building on high perceptions of product or service benefits among customers and its impact on price premiums (which determines the hybrid of Cost differentiation vs Focus differentiation) 2. Low-Price (Zone 2): This zone allows for different combinations of low prices and low perceived value. 3. Hybrid Strategy (Zone 3): A distinctive feature of the strategy Clock is the space it allows between low-price and differentiation strategies. Hybrid strategies involve both lower prices than differentiation strategies and higher benefits than low-price strategies. 4. Non-Competitive Strategies (Zone 4): The final set of strategies occupies a zone of unfeasible economies, with low benefits and high prices. Typically leads to failure

Three Key Factors for Focus Strategies

1. Distinct Segment Needs: Focus strategies depend on the distinctiveness of segment needs. If distinctiveness erodes it becomes harder to defend the segment against broader competitors. 2. Distinct Segment Value Chain: Focus Strategies are strengthened if they have distinctive value chains that will be difficult or costly for rivals to construct. (i.e. production processes or distribution channels) 3. Viable Segment Economies: Segments can easily become too small to serve economically as demand or supply conditions change.

Two guiding principles that arise from Interdependence

1. Get in the mind of the competitors: Strategist need to put themselves in the position of the competitors. Understand their game-plan to plan their own. 2. Think forwards and reason backwards: Think forward to what competitors might do in the future and reason backwards to what would be sensible to do in light of this now

Michael Porter's Two Fundamental means of achieving competitive Advantage:

1. Have structurally lower costs than your competitors. 2. Have products or services that are differentiated from competitors products or services in ways that are so valued by customers that it can charge higher prices that cover the additional costs of the differentiation.

Business Model Patterns

1. Razor and Blade: Primary focus is on the value capture component (revenue model). Selling two technically interlinked products separately (one cheap and the relating product more expensively) 2. Freemium: Primarily related to online businesses. Refers to how a basic version of a service pr product is offered for free so as to build a high volume of customers and eventually convince a portion of the customers to buy a variety of premium services. 3. Multi-Sided Platforms: Brings together two or more distinct but interdependent groups of customers on one platform. ie. video games and consoles (The players and the developers)

Interactive Price and Quality Strategies: Three key decisions for competitors moves and counter moves

1. Threat Assessment: Determine if the threat is substantial or not and what type of threat it is (Cost or differentiation) 2. Differentiation Response: If there are enough customers prepared to pay for your product or service, the high cost organization can seek out new points of differentiation. The low cost organization must decide weather to match quality 3. Cost Response: Merger with other high cost organizations may help reduce costs and match prices through economies of scale. The low cost organization must decide weather to increase price difference between itself and new High quality organization.

Game Theory Insights

1. War Gaming: Helpful where it is important to get stakeholders to deeply appreciate each others positions through actually playing out their respective roles 2. Mathematical Game Theory: Useful where there is a clear but limited range of outcomes and the values associated with each outcome can be reasonably quantified.

Value Creation

Addresses a specific customer segment's needs and problems and those of other participants.

Business strategies

Are about how to compete in a marketplace

cost leadership strategy

Becoming the lowest-cost organization in a domain of activity.

Business Strategy vs Business Model

Business Strategy: Method used to achieve core company objectives vs Business Model: Systematic method used to generate revenue in a profitable company. - consider what value is created and how to CAPTURE it.

Game Theory

Encourages an organization to consider competitors' likely moves and the implications of these moves for its own strategy. - Encourages cooperation over aggressive competition. - Particularly relevant where competitions are interdependent (where the outcomes of choices made by one competitor is dependent on the choices made by other competitors).

Value Capture

Explains revenue streams and cost structures that allow the organization and other stakeholders to gain a share of the total value generated.

differentiation strategy

Involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium.

Competitive Advantage

Is about how a company, business unit or organization creates value for its users which is both greater than the costs of supplying them and superior to that of rivals.

Competitive Strategy

Is concerned with how a company, business unit or organization achieves competitive advantage in its domain of activity. - Involves issues such as costs, product and service features and branding.

Organizational Separation

It is possible for a company to create separate SBUs, each pursuing different generic strategies and with different cost structures.

Strategic Business Unit (SBU)

Supplies goods and services for a distinct domain of activity. - SBU's in different products or market areas may have different business strategy depending on the specific needs of their served market.

Whole of life costs

The cost of a product or service of not just the purchase but also the use and maintenance.

Strategic signals

The messages that an organization's moves might convey to competitors

Customer Services and Responsiveness

The perceived value of a product can increase through CSandR. - i.e distribution services, payment services, after sales, etc

Hybrid Strategy

a strategy that combines different generic (cost-leadership, differentiation, focus) strategies. - Are complex and should be pursued with caution

Generic Strategies

basic types of business level strategies based on breadth of target market (industry wide versus narrow market segment) and type of competitive advantage (low cost versus uniqueness) - Cost Leadership - Differentiation - Scope - Focus - Hybrid