MGT 496 - Chapter 6

What are the risks of a differentiation strategy?

-It is undermined in price competition rather that value-creating features. -One needs to be careful to not overshoot appeal by adding features that raise cost but not value. -One needs to be vigilant that cost of uniqueness does not exceed customers' willingness to pay.

What are the risks of the cost-leadership strategy?

-New Entrants with new/relevant expertise can lower margins while learning the new capabilities. -Threat of substitutes emerging due to innovation pose risk of replacement. -Powerful suppliers & buyers can reduce margins & create difficult covering cost of capital. -Must be vigilant to keep cost lowest in industry while maintaining acceptable level of value. -When focus shifts from price to non-price competition, cost leaders face difficulties.

What are the benefits of the cost-leadership strategy?

-Protection from competitors (because of having the lowest cost) -Economies of scale/large market share reduces threat of entry. -Isolated from powerful suppliers (can absorb price increases via lower profit margins) -Can absorb price reductions when demanded by powerful buyers. -Can fend of threat of substitutes by lowering prices.

What two factors does the success of each strategy depend on?

1. How well the strategy leverages the firm's internal strengths while mitigating its weaknesses 2. How well it helps the firm exploit external opportunities while avoiding external threats.

What are the three most salient value drivers that managers have at their disposal to improve a firm's strategic position?

1. Product Features 2. Customer Service 3. Complements Quality and Customization are also important value drivers.

What is process innovation?

A new method or technology to produce an existing product.

What is a Blue-Ocean Strategy?

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

How are lowering a firm's costs primarily achieved?

By eliminating and reducing the taken-for-granted factors that the firm's rivals in their industry compete on.

How does value innovation make competition irrelevant?

By providing a leap in value creation, thereby opening new and uncontested market spaces (instead of attempting to out-compete your rivals by offering better features or lower costs.

How is perceived buyer value increased?

By raising existing key success factors and creating new elements that the industry has not offered previously.

What are Strategic Trade-Offs?

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher costs.

What are Economies of Scale?

Decreases in cost per unit as output increases (up to point Q1).

Do learning curves go up or down?

Down... it takes less and less time to produce the same output as we learn how to be more efficient. The steeper the learning curve, the more learning has taken place. As cumulative output increases, firms move down the learning curve, reaching lower per-unit costs.

What is a Differentiation Strategy?

Generic business strategy that seeks to create higher value for customers than the value that competitors create.

What is a Cost Leadership Strategy?

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

What is the Strategy Canvas?

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

What is the Value Curve?

Horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action. A firm with an effective strategic position will have a consistent value curve; one that is stuck in the middle will have a value curve that is all over the place.

What are Diseconomies of Scale?

Increases in cost per unit when output increases.

What are the benefits of a differentiation strategy?

It reduces all five forces... -Rivalry Among Competitors -Threat of Entry -Power of Suppliers (increases passed on to customers) -Power of Buyers (value builds customer loyalty) -Threat of substitutes (unique features keep customers loyal)

What determines a firm's strategic position?

It's business-level strategy.

What is the 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 scales.

What is a Focused Cost-Leadership Strategy?

Same as the Cost-Leadership Strategy except with a narrow focus on a niche market.

What is a Focused Differentiation Strategy?

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

What are 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.

What does successful value innovation require of a firm's strategic moves?

That a firm's strategic moves lower its costs and at the same time increase the perceived value for buyers.

What must managers keep in mind to formulate an effective business strategy?

That competitive advantage is determined by industry and firm effects.

What questions must managers answer to formulate an appropriate business-level strategy?

The Who, What, Why, and How questions of competition: Who - which customer segments will we serve What - customers needs, wishes, desires will we satisfy? Why - do we want to satisfy them How - will we satisfy our customers needs?

What is a Business-Level Strategy?

The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. It concerns the broad question, "How do we compete?"

What is a Red-Ocean Strategy?

The known market space of existing industries. In red oceans, the rivalry among existing firms is cut-throat because the market space is crossed and competition is a zero-sum game.

What is 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.

What is the Scope of Competition?

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

What is the cube-square rule?

The volume of a body such as a pipe or a tank increases disproportionately more than its surface.

How do economies of scale cause per-unit cost to drop as output increases?

They allow firms to: •Spread their fixed costs over a larger output •Employ specialized systems and equipment •Take advantage of certain physical properties

In order for a blue-ocean strategy to succeed, managers must resolve trade-offs between the two generic strategic positions - low cost and differentiation. How is this done?

Through value innovation.

What do experience curves allow a firm to do?

To leapfrog to a steeper learning curve, thereby, driving down its per-unit costs.

What are the two primary competitive levers that managers have at their disposal to answer the business-level strategy question of how to compete?

Value (V) and Cost (C).

What are the four key questions managers must answer to initiate a strategic move that allows a firm to open a new and uncontested market space through value innovation?

Value Innovation - 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? Value Innovation - Increase Perceived Consumer Benefits 3. Raise. Which of the factors should be raised well above the industry standard? 4. Create. Which factors should be created that the industry has never offered?

What is the difference between the learning curve and the experience curve?

With the learning, curve the underlying technology remained constant while only cumulative output increased; in the experience curve, the change is in technology while holding cumulative output constant.

What is necessary for an integration (blue-ocean) strategy to be successful?

You have to have customers who want a product in the middle (willing to pay a little more for something a little better).

What are the most important cost drivers that managers can manipulate to keep their costs low?

•Cost of input factors (i.e., lower cost raw materials, capital, labor, and IT services) •Economies of Scale •Learning-curve effects •Experience-curve effects

How do learning curves differ from economies of scale?

•Differences in timing: learning effects occur over time as output accumulates vs. one point in time when output increases, and there are no diseconomies to learning effects. •Differences in complexity: in some cases, learning effects can be minimal while economies of scale are substantial and visa versa.