Ch. 6

economies of scale allow firms to:

-spread their fixed costs over a larger output -employ specialized systems and equip -take advantage of certain physical properties.

learning curve

learning by doing can also drive down cost. learning curves were first documented in aircraft manufacturing as US ramped up production in WWII. -as learning occurs, you move down the learning curve. -the steeper the curve the more learning there is ex: 90% learning curve means that per-unit cost drops 10% every time output is DOUBLED

diseconomies of scale

increases in cost as output increases. as firms get too big, managing the business raises the cost. ex; GORE-TEX avoid these problems they break up the company into smaller units.

integration strategy vs. stuck in the middle

integration: cost leadership, differentiation stuck in the middle: focused cost leadership, focused differentiation

Employing Specialized Systems and equipment

larger output also allows firms to invest in more specialized systems and equipment ex: ERP enterprise resource planning.

customer service

managers can increase the perceived value of their business by focusing on customer service ex: Zappos...does NOT outsource its customer service

integration to succeed:

managers must resolve trade-offs between the two generic strategic positions- low cost and differentiation.

cost of input factors

one advanatage a firm can have over its rivals is access to lower cost input factors such as raw materials, capital, labor and IT services ex: GE has a lower cost of capital than other industrial companies like Siemens or Philips.

levers to overcome these challenges:

qaulity, economies of scope, innovation, and the firms structure, culture, and routines.

product features

-by adding uniqueness it can turn commodity products into differentiated products -strong R&D are needed to create great products ex: Whole Foods increased its value by improving its differentiated appeal while keeping costs in check

cost drivers that managers can use to keep their costs low are:

-cost of input factors -economies of scale -learning-curve effects -experience-curve effects

differences between economies of scale and learning effects:

-learning effects occur OVER TIME as output is accumulated VS. economies of scale are captured at ONE POINT in time when output is increased. -in some production processes effects from economies of scale can be significant, while learning effects are minimal ex: simple one-step process in the manufacture of steel rods -in contrast- brain surgery learning effects can be substantial while economies of scale are minimal.

value drivers AKA levers for differntiation strategy

-product features -customer service -complements

value and cost drivers:

SICQE: -structure, culture, routines -innovation -customization -quality -economies of scope

complements

add value to a product or service when they are consumed in tandem. finding complements will enhance value of their offerings. ex: AT&T U-verse is how managers leveraged complements to increase their perceived value becuase they bundled interent, phone, and TV.

ambidextrous organization

an org that enables managers to balance and harness different activities in trade-off situations. ambidexterity describes a firms ability to address trade-offs not only at one point but also over time. -balance exploitation (applying current knowledge to enhance firm performance in the short term) WITH -exploration (searching for new knowledge that may enhance a firms future performance)

integration strategy

business level strategy that successfully combines differentiation and cost-leadership activities. -trade-off between differentiation and low cost are reconciled. this is difficult because differentiation and low cost are distinct strategic positions that require the firm to effectively manage internal value chain activities.

Experience curve

captures both the learning curve and process improvements. economies of learning allow movement down a GIVEN learning curve based on current production technology. when you move further down a firm gains comp adv. -process inovation- new method or tech to produce an existing product-may initiate a new and steeper learning curve.

strategic trade offs

choices between a cost or value position

cost leadership strategy

create the same or similar value for customers by delivering products or services at a lower cost than competitors ex: Rolex= diffentiation strat...high qaulity with unique features VS. Timex= cost leadership strategy....lower cost and acceptable qaulity

economies of scale

decreases in cost per unit as output increases. ex: airframe industry- Boenig built 100 dreamliners with more than 800 orders for the new airplane. this will allow them to reap lower per-unit cost.

Quality:

denotes duarbility and reliability. increases value and can also lower cost

innovation

describes any new product and process or any modification of existing ones

business level strategy

details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. -who -what -why -how

taking advantage of certain physical properties

economies of scale also occur because of certain physical properties. ex: cube-square rule: the volume of a body such as a pipe or a tank increases disproportionately more than its surface. this makes stores like: Walmart, best buy, home depot cheaper to build and run.

focused differentiation strategyt

essentially the same as the "generic" one above but the competitive scope is narrower. EX: mont blanc offers exquisite pens priced very high

focused cost-leadership strategy

essentially the same as the "generic" one above but the competitive scope is narrower. ex: BIC pursues a focused cost leadership strategy which offers disposable pens

spreading fixed costs over larger output

gains in market share are often critical to drive down per-unit cost. ex: Microsoft spent billions on R&D for Windows 7. the expense was a fixed cost. because they sell to so many people they were able to leverage its economies of scale to drive down the per-unit cost for each additional copy of Windows 7.

Goal of cost-leadership:

reduce the firms cost below that of its competitors while offering adequate value. focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices. -they can achieve comp. adv. as long as economic value created (V-C) is greater than that of its competitors

economies of scope;

savings that come from producing two or more outputs at less cost than producing each output individually ex: starbucks...shares its production assets over multiple outputs

differentiation strategy

seeks to create higher value

economic value created (V-C) =

the greater the firms competitive advantage -V- value -C-cost

mass customization

the manufactures of a large variety of customized products or services done at a relatively low unit cost

minimum efficient scale (MES)

the output range between Q1 and Q2 is considered the MES in order to be cost-competitive. between Q1 and Q2 the returns to scale are CONSTANT ex: Prius reached MES this allows the company to offer the car at a relatively low price and still make a profit.

productivity frontier

the value-cost relationship that captures the result of performing best practices at any given time. firms that exhibit effectiveness and efficiency reach the productivity frontier.

stuck in the middle:

they dont succeed at a differnetiaon or cost strategy ex: JetBlue was stuck in the middle by trying to combine two diff strat positions; cost leadership and differentiation. the result was bad performance compared to its competitors

goal of generic differentiation strategy:

to add unique features that will increase the perceived value of goods and services in the minds of the consumers so they are willing to pay a higher price -increased value creation is a defining feature of diff strat.

scope of competition

whether to pursue a specific, narrow part of the market or go after the broader market