Chapter 6: Business Strategy
Blue Ocean Strategy
Blue Ocean Strategy = Business-Level Strategy that successfully combines differentiation & cost-leadership activities using value innovation to reconcile the inherent trade-offs - prevent being stuck in the middle - use value innovation to reconcile the trade-offs Blue Oceans = untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth - let's firm offer differentiated product at lower cost - ex) Trader Joes vs. Whole Foods Red Oceans = known market space of existing industries
What must managers define in a business strategy?
after choosing from the strategic trade-off of value vs. lowering costs, a leader must define the scope of competition. Scope of Competition = decision on size; whether to pursue a narrow part of the market or go after a broader market
Cost Driver: Experience Curve
- a change in underlying technology, while cumulative output is constant Based on "process innovation" = a new method/technology to produce an existing product, may initiate a new and steeper curve
Differentiation: Goal
- adding unique features to increase perceived value - maintaining "cost parity" - highest value gap (V-C) - adjust levels to improve firm's strategic position (levers increase perceived value or decrease cost)
Cost Driver→ Learning Curve Effects
- assume underlying tech remains constant, while cumulative output increases - curve goes down as it takes less and less time to produce the same output "Economies of Learning" = let movement down a given learning curve based on current product level; moving further down curve gains you a higher competitive advantage
Cost-Leadership: Goal
- reduce cost to manufacture product OR lower operating costs to deliver service at a lower price - "differentiation parity"; you can achieve advantage without this as long as economic value is higher
2 Factors that impact Business Strategy
1) Industry Effects 2) Firm/Organization Effects
Cost-Leadership: Cost Drivers
1. Cost of Input Factors - access lower cost input factors: raw materials, capital, labor, IT services 2. Economies of Scale - decreases in cost per unit (marginal cost) as output increases - spread fix costs over larger output -employ specialized systems and equipment (ERP = enterprise resource planning) - take advantage of certain physical properties 3. Learning-Curve Effects (same tech, output increases) - assume underlying tech remains constant, while cumulative output increases - curve goes down as it takes less and less time to produce the same output - "Economies of Learning" = let movement down a given learning curve based on current product level; moving further down curve gains you a higher competitive advantage 4. Experience-Curve Effects (new tech, output constant) - a change in underlying technology, while cumulative output is constant - based on "process innovation" = a new method/technology to produce an existing product, may initiate a new and steeper curve
3 Business Strategies
1. Cost-Leadership Strategy 2. Differentiation Strategy 3. Blue Ocean Strategy
2 things Economies of Scale vs. Learning Curve Effects
1. Differences in Timing - learning effects over time as output accumulates - economies of scale are captured at a point in time 2. Differences in Complexity - in some production processes, the effects of economies of scale can be significant, while learning effects are minimal - in some professions (brain surgery) learning effects can be large, while economies of scale are minimal
2 Generic Strategies- strategic position
1. Differentiation = creating higher value, containing costs 2. Cost-Leadership = lower cost for same value
Differentiation: 3 Value Drivers
1. Product Features - increase perceived value by adding unique product attributes 2. Customer Service - increase perceived value by focusing on the customer 3. Complements - to enhance value find complements which add value to product when used in tandem
Differentiation: Risks
1. Threat of Entry - erosion of margins - replacement 2. Power of Suppliers - erosion of margins 3. Power of Buyers - erosion of margins 4. threat of substitutes - replacement, especially when faced with innovation 5. Rivalry among existing Competitors - if focus of competition shifts to price - if increasing differentiation of product features does not create value, instead raises costs (must make sure additional feature raises perceived value for customers) - if product becomes commoditized - if costs > benefits
Cost-Leadership: Risks
1. Threat of Entry - erosion of margins - replacement 2. Power of Suppliers - erosion of margins, if it reduces margins so much that cost leader has trouble covering cost of capital, so looses advantage 3. Power of Buyers - erosion of margins 4. threat of substitutes - risk of replacement, especially when faced with innovation 5. Rivalry among existing Competitors - focus of competition shifts to non-price attributes - lowering costs drives value below acceptable threshold
Differentiation: Benefits
1. Threat of Entry - protection against entry due to intangible resources such as a reputation for innovation, quality, or customer service - intangible advantage of reputation cannot be imitated 2. Power of Suppliers - protected against increased input prices which can e passed on to customers 3. Power of Buyers -protection against decrease in sales price because well-differentiated products are not perfect imitations 4. threat of substitutes - protection due to differential appeal 5. Rivalry among Existing Competitors - protected against competitors if product has enough differential appeal to command premium price
Cost-Leadership: Benefits
1. Threat of Entry - protection from economies of scale 2. Power of Suppliers - protection against increase in input margins, which can be absorbed by accepting lower profit margins (bc high sales) 3. Power of Buyers - protection against decrease in sales prices, which can be absorbed 4. threat of substitutes - protection against substitutes by lowering prices more 5. Rivalry among existing Competitors - protection against price-wars because lowest cost firm wins
Generic Business Strategies Matrix
Competitive Scope: - narrow - broad Strategic Position (trade off) - differentiation - cost focused strategy = same as cost-leadership or differentiation strategy, but with a narrow focus on a niche market
Learning Curve vs. Experience Curve
Learning curve: assume underlying technology remains constant, while cumulative output increases → learning by DOING lets a firm lower per-unit cost by moving DOWN a learning curve · Experience Curve: change in underlying technology, while holding cumulative output constant - based on process innovation → let a firm LEAP FROG to a STEEPER learning curve which then drives down per-unit costs
4 Questions to answer before blue ocean strategy
Lower Costs: eliminate & reduce Increase Perceived Benefit: raise & create 1. which of the factors that industry takes for granted should be ELIMINATED 2. which of the factors should be REDUCED well below the industry's standards 3. which of the factors should be RAISED over industry's standards 4. which factors should be CREATED that the industry has never offered
Value Innovation
Value Innovation = simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and consumers 4 Questions Before Blue Ocean Strategy: Lower Costs 1) Eliminate → which of the factors that the industry takes for granted should be eliminated? 2) Reduce → which of the factors should be reduced well below the industry's standard? Increase Perceived Consumer Benefit 3) Raise → which of the factors should be raised well above the industry's standard? 4) Create → which factors should be created that the industry has never offered
Strategic Trade-Offs
deciding on business strategy involves: strategic trade-offs = choices between a cost or value position.
Business Level Strategy - define - 4 questions to ask when formulating
it details the goal-directed actions managers take in their quest for a competitive advantage when competing in a single product market - a plan or approach to growth & competition in chosen business segment - many business strategies based on core competencies Ask 4 questions to determine "How to Compete": 1. who are the customer segments we will serve 2. what customers needs, wants, desires will we satisfy? 3. why do we want to satisfy them 4. how will we satisfy our customers needs?
Blue Ocean Strategy: Strategy Canvas & Value Curve
the "value curve" is the basic component of the "strategy canvas" Value Curve = horizontal connection of the points of each value on the strategy connection that helps strategic leaders diagnose & determine course of action - strong value curve → focus & divergence Strategy Canvas = graphical depiction of a company's relative performance vs. its competitors across the industry's key success factors
value innovation definition
value innovation is the processing of pursuing differentiation and low cost at the same time - to create a leap in value for both firm and consumers