Strategy Chapter 6
Business-level strategy may involve..
a single product or group of similar products that use the same distribution channel
Managers can evaluate performance differences among clusters of firms in the same industry by conducting..
a strategic-group analysis
What do complements achieve for a product?
add value to a product or service when they are consumed in tandem
The cost leader attempt to optimize..
all of its value chain activities to achieve a low-cost position
Differentiation risks with power of buyers
erosion of margins
Differentiation risks with power of suppliers
erosion of margins
cost leadership risks with power of buyers
erosion of margins
cost leadership risks with power of suppliers
erosion of margins
Differentiation risks with threat of entry
erosion of margins; replacement
cost leadership risks with threat of entry
erosion of margins; replacement
What is the reason for diseconomies of scale?
as firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits of scale (large firms tend to become overly bureaucratic, with too many layers of hierarchy- they grow inflexible and slow in decision making)
Why is it difficult to execute a cost-leadership and differentiation position at the same time?
because cost leadership and differentiation are distinct strategic positions, and pursuing them simultaneously results in trade-offs that work against each other
why are those two business strategies called generic strategies?
because they can be used by any organization (manufacturing or service, large or small, for-profit or non-profit, public or private, domestic or foreign) in the quest for competitive advantage, independent of industry context
Why did JetBlue run into some trouble?
because they tried to combine two different business strategies at the same time (a cost-leadership strategy, focused on low cost, and a differentiation strategy, focused on delivering unique features and service)
minimum efficient scale (MES)
between Q1 and Q2, the returns to scale are constant- the output range needed to bring the cost per unit down as much as possible, allowing a firm to stake out the lowest-cost position achievable through economies of scale
strategic trade-offs
choices between a cost or value position
A clear strategic position can form the basis for...
competitive advantage
Although increased value creation is a defining feature of a differentiation strategy, managers must also...
control costs
When considering different business strategies, managers also must..
define the scope of competition
business-level strategy
details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market
cost leadership risks with rivalry among existing competitors
focus of competition shifts to non-price attributes; lowering costs to drive value creation below acceptable threshold
Larger output also allows firms to...
invest in more specialized systems and equipment, such as enterprise resource planning software or manufacturing robots
Differentiation risks with rivalry among existing competitors
focus of competition shifts to price; increasing differentiation of product features that do not create value but raise costs; increasing differentiation to raise costs above acceptable threshold
narrow competitive scope with cost strategic position
focused cost leadership
narrow competitive scope with differentiation strategic position
focused differentiation
examples of input factors
raw materials, capital, labor, and IT services (maybe also regulations)
By launching some innovation, what happens to your curve?
new curve, steeper (called experience-curve effect)
What are often needed to create superior product features?
strong R&D capabilities (getting patents and stuff)
Many firms that attempt to combine cost-leadership and differentiation strategies end up being...
stuck in the middle (managers have failed to carve out a clear strategic position)
Economies of scope
the savings that come from producing two or more outputs at less cost than producing each output individually, even though using the same resources and technology
The focus of competition in a differentiation strategy tends to be on...
unique product features, service, and new product launches, or on marketing and promotion rather than price
In the learning curve, we assumed the underlying technology remained constant, while only cumulative output increased. In the experience curve,
we now change the underlying technology while holding cumulative output constant
diseconomies of scale
when a firm produces too much output to where there's no longer an economies of scale benefit
scope of competition
whether to pursue a specific, narrow part of the market or go after the broader market
To formulate an appropriate business-level strategy, managers must answer the who, what, why, and how questions of competition:
Who- which customer segments will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers' needs?
strategic position
a firm's strategic profile based on value creation and cost
broad competitive scope with cost strategic position
cost leadership
The most important cost drivers that managers can manipulate to keep their costs low are:
cost of input factors, economies of scale, learning-curve effects, experience-curve effects
Learning effects differ from economies of scale as shown:
differences in timing (learning effects occur over time as output accumulates, while economies of scale are captured at one point in time when output increases; no diseconomies to learning), differences in complexity (in the manufacture of steel rods, effects from economies of scale can be quite significant, while learning effects are minimal; complete contrast in brain surgery)
broad competitive scope with differentiation strategic position
differentiation
There are two fundamentally different generic business strategies:
differentiation strategy and cost-leadership strategy
A business strategy is more likely to lead to a competitive advantage if...
it allows firms to either perform similar activities differently or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost
Learning curve (economies of learning)
it takes less and less time to produce the same output as we learn how to be more efficient (learning by doing drives down costs)
A company that uses a differentiation strategy can achieve a competitive advantage as long as...
its economic value created (V-C) is greater than that of its competitors
A cost leader can achieve a competitive advantage as long as...
its economic value created (V-C) is greater than that of its competitors
Even if a firm fails to achieve cost parity, it can still gain a competitive advantage if..
its economic value creation exceeds that of its competitors
In 6.2, it talks about differentiation strategy and mapping out competitive advantage
know how this works- economic value creation stuff
The more complex the underlying process to manufacture a product or deliver a service, the more...
learning effects we can expect
90% learning curve (meaning of this)
per-unit cost drops 10% every time output is doubled
Economies of scale also occur because of certain..
physical properties (cube-square rule: principle that makes big-box stores such as Walmart cheaper to run and build
What are the most salient value drivers that managers have at their disposal?
product features, customer service, complements
Differentiation benefits with rivalry among existing competitors
protection against competitors if product or service has enough differential appeal to command price premium
Differentiation benefits with power of buyers
protection against decrease in sales prices, because well-differentiated products or services are not perfect imitations
cost leadership benefits with power of buyers
protection against decrease in sales prices, which can be absorbed
cost leadership benefits with threat of entry
protection against entry due to economies of scale
Differentiation benefits with threat of energy
protection against entry due to intangible resources such as a reputation for innovation, quality, or customer service
cost leadership benefits with power of suppliers
protection against increase in input prices, which can be absorbed
Differentiation benefits with power of suppliers
protection against increase in input prices, which can be passed on to customers
cost leadership benefits with rivalry among existing competitors
protection against price wars because lowest-cost firm will win
Differentiation benefits with threat of substitutes
protection against substitute products due to differential appeal
cost leadership benefits with threat of substitutes
protection against substitute products through further lowering of prices
The goal of a cost-leadership strategy is to...
reduce the firm's cost below that of its competitors while offering adequate value
cost leadership risks with threat of substitutes
replacement, especially faced with innovation
Differentiation risks with threat of substitutes
replacement, especially when faced with innovation
differentiation strategy
seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping costs at the same or similar levels, allowing the firms to charge higher prices to its customers
cost-leadership strategy
seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers
If a firm's cost advantage is due to economies of scale as opposed to economies of learning, what should managers be focused on?
should be concerned about drops in production runs as opposed to employee turnover
The average per-unit cost curve is a reflection of...
the underlying production function, which is determined by technology and other factors
