Chapter 6

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. **similar but different concept from scale economies: it's not about making a lot vs. a little of the same product, but about making different but compatible products

experience curve

The inverse relationship between the total value-added costs of a product and the company experience in manufacturing and marketing it.

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

scope of competition

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

experience curve effects

difference between 2 possible learning curve is the experience curve effect

the 2 generic strategies (can be used by any organization)

differentiation strategy and cost-leadership strategy

learning curve effect

driven by increasing cumulative output within the existing technology over time

focused cost leadership strategy and focused differentiation strategy

focused CL: Same as the cost-leadership strategy except with a narrow focus on the niche market. Focused Diff: Same as the differentiation strategy except with a narrow focus on the niche market.

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.

how can cost leader achieve competitive advantage

if its economic value (V-C) is greater than competitors. Even if value created is less than competitor, can still have comp advantage if cost is significantly less than competitor

value curve that zigzags across the strategy canvas

indicates a lack of effectiveness in its strategic profile

stuck in the middle on the strategy canvas

inferior performance and thus a sustained competitive disadvantage

red ocean space

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

goal of cost leadership strategy

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

T/F None of the business-level strategies (cost leadership, differentiation, and focused variations thereof) is inherently superior.

true

blue ocean strategy

uses value innovation, reconciling trade-offs between generic business strategies that are low cost and differentiation

80% learning curve vs 90% learning curve

-80% curve is steeper and has competitive advantage because can achieve lower costs -In a 90 percent learning curve, per-unit cost drops 10 percent every time output is doubled. The steeper 80 percent learning curve indicates a 20 percent drop every time output is doubled.

blue ocean strategy

-Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile inherent trade-offs. -represent untapped market space, creation of additional demand, and the resulting opportunities for highly profitable growth

value curve

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

2 factors that determine success of a business level strategy

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

complements and examples

-Increases perceived value -Consumed in tandem examples: AT&T U-verse: -Bundles Internet access, phone, and TV services

product features

-Increases perceived value -Turns commodity products into differentiated products -Strong R&D capabilities are often needed

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 should we compete?"

differentiation strategy

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.

strategic tradeoffs

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

cost drivers

Cost of Input Factors: -Raw materials -Capital -Labor -IT services Economies of Scale: -Decreases in cost per unit as output increases. -Economies of scale allow firms to: Spread their fixed costs over a larger output. Employ specialized systems and equipment. Take advantage of certain physical properties. Learning Curve Effects: - Rate of improvement in performing a task is a function of time. -Rate of change in average cost (in hours or dollars) is also a function of cumulative output. -learning curves go down and decrease costs Experience Curve Effects

how to achieve competitive advantage from learning curves

Economies of learning allow movement down a given learning curve based on current production technology. By moving further down a given learning curve than competitors, a firm can gain a competitive advantage

differentiation strategy

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

cost leadership strategy

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

strategy canvas

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

diseconomies of scale

Increases in cost as output increases

minimum efficient scale

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. Going past this results in diseconomies of scale

customer service and examples

Process of ensuring customer satisfaction with a product or service. examples: Zappo's: -Offers free shipping both ways -They do not outsource customer service -Don't use pre-determined scripts for service

value drivers

Product Features Customer Service Complements -Add value to products and services -Are responsive to customer preferences - Can increase costs because: --Additional R&D is needed --Innovation is needed --But customers are willing to pay a premium

to formulate appropriate business level strategy, must answer...

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?

how to achieve experience curve effects

based on process innovation allow a firm to leapfrog to a steeper learning curve, thereby driving down its per-unit costs.

what is learning curve effect driven by

by increasing cumulative output within the existing technology over time. That implies that the only difference between two points on the same learning curve is the size of the cumulative output. The underlying technology remains the same

at firm level, how is performance determined

by value and cost positions relative to competitors. This is the firm's strategic position

cost parity and competitive advantage

cost parity is having same amount of costs as another firm but achieves comp. advantage if firm creates higher value at same cost (higher V-C)

what determines the speed of learning on a learning curve

slope of the learning curve, or how steep the learning curve is (e.g., 80 percent is steeper than a 90 percent learning curve)