Chapter 6: Business Strategy: Differentiation, Cost Leadership, and Blue Oceans

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

scope of competition

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

cost leadership strategy

-obtaining the lowest-cost position in the industry while offering acceptable value -goal: to reduce the firm's cost below its competitors and offer adequate value -resources are focused on reducing cost" to manufacture a product and to offer a service -reducing prices for customers -optimizing the value chain to achieve low-cost

value drivers

-product features, -customer service, -complements

value innovation

-the simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy -aligning innovation with total perceived consumer benefits, price and cost

learning curve effects

1. Learning drives down costs -It takes less time to produce the same output. - We learn how to be more efficient. 2. People learn from cumulative experience: -Writing computer code -Developing new medicines -Building submarines 3. First noted during WWII: -When production doubled, per-unit cost dropped 20%.

blue ocean strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs.

focused differentiation strategy

same as the differentiation strategy except with a narrow focus on a niche market

economies of scope

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

strategic trade-offs

-Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost. -there is tension between value creation and pressure to keep cost in check -purpose of trade offs are to maximize the firm's economic value creation and profit margin

Experience Curve effects

-When technology is changed while output is constant Ex. -a new production process -implementing lean manufacturing

cost drivers

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

differentiation strategy

-generic business strategy that seeks to create higher value for customers than the value that competitors create -offers products or services with unique features -keeps the firm's cost structure as low as possible -chargers higher prices -establishing a strategic position that creates higher perceived value while controlling costs -consumers willing to pay a higher price -unique features that increase value of goods and services. -competiitve advanatage when V-C > competitors

cost leadership strategy

-generic business strategy that seeks to create the same or similar value for customers at a lower cost -products or services delivered at lower cost -chargers lower prices

The Success of Business Strategy Relies On

-how well the strategy leverages the firm's internal strengths and mitigates its weaknesses -how well it helps the firm exploit external opportunities and avoid external threats

focused cost leadership strategy

same as the cost-leadership strategy except with a narrow focus on a niche market

economies of scale

decreases in cost per unit as output increases -spread their fixed costs over a larger output -employ specialized systems and equipment -take of certain physical properties

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

strategy canvas

graphical depiction of a company's relative performance vis-a-vis its competitors across the industry's key success factors

value curve

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

diseconomies of scale

increases in cost per unit when output increases

Cost of inputs factors

raw materials, capital, labor, IT services. Ex. airline industry (cheaper fuel)

business level strategy

the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market

Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

■ A successful blue ocean strategy requires that trade-offs between differentiation and low cost be reconciled. ■ A blue ocean strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another. ■ When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being "stuck in the middle." They then succeed at neither business strategy, leading to a competitive disadvantage.

Define business-level strategy and describe how it determines a firm's strategic position.

■ Business-level strategy determines a firm's strategic position in its quest for competitive advantage when competing in a single industry or product market. ■ Strategic positioning requires that managers address strategic trade-offs that arise between value and cost, because higher value tends to go along with higher cost. ■ Differentiation and cost leadership are distinct strategic positions. ■ Besides selecting an appropriate strategic position, managers must also define the scope of competition—whether to pursue a specific market niche or go after the broader market.

Assess the benefits and risks of differentiation and cost-leadership strategies vis-à-vis the five forces that shape competition.

■ The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability. ■ Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage. ■ Exhibit 6.7 details the benefits and risks of each business strategy.

Examine the relationship between cost drivers and the cost-leadership strategy.

■ The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors. ■ In a cost-leadership strategy, the focus of competition is achieving the lowest possible cost position, which allows the firm to offer a lower price than competitors while maintaining acceptable value. ■ Some of the unique cost drivers that managers can manipulate are the cost of input factors, economies of scale, and learning- and experience-curve effects. ■ No matter how low the price, if there is no acceptable value proposition, the product or service will not sell.

Examine the relationship between value drivers and differentiation strategy.

■ The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features. ■ In a differentiation strategy, the focus of competition is on value-enhancing attributes and features, while controlling costs. ■ Some of the unique value drivers managers can manipulate are product features, customer service, customization, and complements. ■ Value drivers contribute to competitive advantage only if their increase in value creation (ΔV) exceeds the increase in costs, that is: (ΔV) > (ΔC).

Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.

■ To address the trade-offs between differentiation and cost leadership at the business level, managers must employ value innovation, a process that will lead them to align the proposed business strategy with total perceived consumer benefits, price, and cost. ■ Lowering a firm's costs is primarily achieved by eliminating and reducing the taken-for-granted factors on which the firm's industry rivals compete. ■ Increasing perceived buyer value is primarily achieved by raising existing key success factors and by creating new elements that the industry has not yet offered. ■ Managers track their opportunities and risks for lowering a firm's costs and increasing perceived value vis-à-vis their competitors by use of a strategy canvas, which plots industry factors among competitors (see Exhibit 6.10).