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

Firm effects

Attribute firm performance to the actions strategic leaders take. For now, the key point is that strategic leaders' actions tend to be more important in determining firm performance than the forces exerted on the firm by its external environment.

Stuck in the Middle

Blue Ocean Strategy Gone Bad: "Stuck in the middle" —A blue ocean strategy is difficult to implement because it requires the reconciliation of fundamentally different strategic positions — differentiation and low cost — which in turn require distinct internal value chain activities so the firm can increase value and lower cost at the same time. —The firm ends up being stuck in the middle, meaning the firm has neither a clear differentiation nor a clear cost-leadership profile; leads to inferior performance and a resulting competitive disadvantage.

Cost Drivers

Cost leader attempts to optimize all of its value chain activities to achieve a low-cost position. Although staking out the lowest-cost position in the industry is the overriding strategic objective, a cost leader still needs to offer products and services of acceptable value. —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

Industry effects

Describe the underlying economic structure of the industry. They attribute firm performance to the industry in which the firm competes.

Economies of scale

Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases. Cost per unit falls as output increases up to point Q1. A firm whose output is closer to Q1 has a cost advantage over other firms with less output. In this sense, bigger is better.

Value Drivers

Ideally, a firm following a differentiation strategy aims to achieve in the minds of consumers a level of value creation that its competitors cannot easily match. —Managers can adjust a number of different levers to improve a firm's strategic position. These levers either increase perceived value or decrease costs. -Product features -Customer service -Complements (an important task for managers in their quest to enhance their value of their offerings, gauge availability of complements)

Experience-curve effects

In the learning curve, we assumed the underlying technology remained constant, while only cumulative output increased. —In the experience curve, in contrast, we now change the underlying technology while holding cumulative output constant. -Learning by doing allows a firm to lower its per-unit cost by moving down a given learning curve, while experience-curve effects based on process innovation allow a firm to leapfrog to a steeper learning curve, thereby driving down its per-unit costs.

Blue Ocean

Is a business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs in those two distinct strategic positions. —Represents untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth. —Red Oceans -Are the known market space of existing industries. Within this the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game.

Learning-curve effects

Looking at the challenge of learning, many people tend to see it as an uphill battle, and assume the learning curve goes up. But if we consider our productivity, learning curves go down, as 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.

Cost of input factors

One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

Differentiation vs. Cost Leadership

There are fundamentally different generic business strategies—differentiation and cost leadership.

Scope of Competition

When considering different business strategies, managers must decide whether to pursue a specific, narrow part of the market or go after the broader market.

Cost-leadership strategy

in contrast, 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.

Differentiation

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 firm to charge higher prices to its customers.

Benefits vs. Risks (using Porter's Five Forces) - Cost Leadership

—A cost-leadership strategy is defined by obtaining the lowest-cost position in the industry while offering acceptable value. The cost leader, therefore, is protected from other competitors because of having the lowest cost. If a price war ensues, the low-cost leader will be the last firm standing; all other firms will be driven out as margins evaporate. —Although a cost-leadership strategy provides some protection against the five forces, it also carries some risks. If a new entrant with new and relevant expertise enters the market, the low-cost leader's margins may erode due to loss in market share while it attempts to learn new capabilities. —> The low-cost leader also needs to stay vigilant to keep its cost the lowest in the industry. Over time, competitors can beat the cost leader by implementing the same business strategy, but more effectively. Although keeping its cost the lowest in the industry is imperative, the cost leader must not forget that it needs to create an acceptable level of value.

Benefits vs. Risks (using Porter's Five Forces) - Differentiation

—This strategy is defined by establishing a strategic position that creates higher perceived value value while controlling costs. The successful differentiator stakes out a unique strategic position, where it can benefit from imperfect competition and command a premium price. A well-executed differentiation strategy reduces rivalry among competitors. —The viability of this strategy is severely undermined when the focus of competition shifts to price rather than value-creating features. This can happen when differentiated products become commoditized and an acceptable standard of quality has emerged across rival firms. A differentiator also needs to be careful not to overshoot its differentiated appeal by adding product features that raise costs but not perceived value in the minds of consumers.