Ch 6

Focus of competition in a cost-leadership strategy

On reducing the cost to manufacture a product or deliver service in order to offer lower prices to its customers

Focus of competition in a differentiation strategy:

On unique product features, service, and new product launches, or on marketing and promotion rather than price

Goal of 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

Goal of cost-leadership strategy:

To reduce the firm's cost below that of its competitors while offering adequate value

Differences between economies of scale and learning effects:

-Learning effects occur over time as output is accumulated, while economies of scale are captured at one point in time when output is increased -No diseconomies to learning -In some production processes, effects from economies of scale can be quite significant, while learning effects are minimal (one-step processes in manufacturing); in contrast, the opposite is true (brain surgery or practice of law)

Successfully implemented integration strategy allows firms two pricing options:

1) Charge higher price than the cost leader, reflecting its higher value creation and thus generating greater profit margins 2) Lower its price below that of the differentiator because of its lower-cost structure, thereby gaining market share and making up the loss in margin through increased sales

Success of each business-level strategy is each contact-dependent and relies on two factors:

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

Ambidextrous organization

An organization able to balance and harness different activities in trade-off situations

Integration strategy

Business-level strategy that successfully combines differentiation and cost-leadership activities Difficult because differentiation and low cost are distinct strategic positions that require the firm to effectively manger internal value chain activities that are fundamentally different from one another

Cost drivers

COST OF INPUT FACTORS - raw materials ECONOMIES OF SCALE - decrease in cost per unit as output increases LEARNING-CURVE EFFECTS - as individuals and teams engage repeatedly in an activity, they learn from their cumulative experience EXPERIENCE-CURVE EFFECTS - learning effects and process improvements

Strategic trade-offs

Choices between a cost or value position; such choices are necessary because higher value tends to require higher cost

Economies of scale

Decrease in cost per unit as output increases Allow firms to: -Spread their fixed costs over a larger output -Employ specialized systems and equipment -Take advantage of certain physical properties Managers needs to be watchful not to drive scale beyond the minimum efficient scale, where they would encounter diseconomies; monitoring the firm's cost structure closely over different output ranges allows managers to fine-tune operations and benefit from economies of scale

Two fundamentally different generic business strategies

Differentiation and Cost-leadership Because value creation and cost tend to be positively correlated, there exist important trade-offs between value creation and low cost

Focused versions of the generic business strategies

FOCUSED cost-leadership strategy and FOCUSED differentiation strategy Essentially the same as the broad generic strategies except that the competitive scope is narrower

"Stuck in the middle"

Firms that succeed at neither a differentiation nor a cost-leadership strategy

Differentiation strategy

Generic business strategy that seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping the firm's cost structure at the same or similar levels

Cost-leadership strategy

Generic business strategy that 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

Competitive advantage is determined jointly by:

INDUSTRY and FIRM effects Not independent, but rather INTERdependent

Diseconomies of scale

Increases in cost per unit when output increases As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale Physical limits to scale

Experience-curve effects

Learning effects plus process innovation Learning by doing allows a firm to lower its per-unit costs by moving down a given learning curve, while combining experience-based learning and process innovation allows the firm to leapfrog to a steeper learning curve, thereby further driving down its per-unit costs

Minimum efficient scale (EMS)

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 Applies not only to manufacturing processes but also to managerial tasks such as how to organize work Depends on the specific industry

Value drivers

PRODUCT FEATURES - allows firms to turn commodity products into differentiated products commanding a premium price CUSTOMER SERVICE - during and after the sale COMPLEMENTS - add value to a product or service when they are consumed in tandem Related to a firm's expertise in, and organization of, different internal value chain activities; different value drives contribute to competitive advantage only if their increase in value creation exceeds the increase in costs

Value AND cost drivers

QUALITY - durability and reliability 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 CUSTOMIZATION - tailoring products and services for specific customers INNOVATION - any new product and process, or any modification of existing ones STRUCTURE, CULTURE, AND ROUTINES - having strict budget controls but allowing creativity

Productivity frontier

Relationship that captures the result of performing best practices at any given time; the function is concave (bulging outward) to capture the trade-off between value creation and production cost

Focused cost-leadership strategy

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

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

Business-level strategy

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

Mass customization

The manufacture of a large variety of customized products or services at relatively low unit cost

Scope of competition

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

Differentiation parity

When one firm creates the same value as its competitor

Cost parity

When one firm has the same costs as its competitor