Chp 6 - Business Strategy: Differentiation, Cost Leadership

Blue Ocean Strategy

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

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

Value Curve

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

Product Features

increase perceived value turns commodity products into differentiated products - strong R&D capabilities are often needed - looking for very demanding customers - becoming reliable

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 scale

Value Drivers - Differentiation Strategy

1. Product Features 2. Customer Service 3. Complements add value through product's unique features are responsive to customer preferences can increase costs - additional R&D is needed - innovation is needed - customers have to be willing to pay a premium * these only help your competitive advantage if their increase in value creation exceeds the increase in costs

Learning effects differ from economies of scale as shown:

1. differences in timing 2. differences in complexity

The success of each type of strategy depends on 2 factors:

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

Gaining Competitive Advantage through Leveraging Learning and Experience Curve Effects

Learning Curve: - rate of improvement in performing a task is a function of time - rate of change in average cost (in hour or dollars) is also a function of cumulative output Experience Curve: - the learning curve assumes a constant technology - the experience curve takes into account process innovation

Value Innovation Accomplished through Simultaneously Pursuing Differentiation (V in) and Low Cost (C dec)

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's standard? 4. Create - Which factors should be created that the industry has never offered?

Customer Service

process of ensuring customer satisfaction with a product or service

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

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

Differentiation Strategy: Achieving Competitive Advantage

(V-C)b > (V-C)c > (V-C)a

Cost of Input Factors

- Raw materials - Capital - Labor - IT services Example: the airline industry - Access to cheaper fuel - Interest-free government loans - Access to nighttime takeoffs and landings

Assess the risks of a blue ocean strategy, and explain why it is discussed to succeed at value innovation

- a successful blue ocean strategy requires that trade-offs between differentiation and low cost be reconciled - a blue ocean strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another - when firms fail to resolve strategic trade offs between differentiation and cost, they end up being "stuck in the middle". They then succeed at neither business strategy, leading to a competitive disadvantage

Complements

- increases perceived value -> one stop shop - consumed in tandem

Information about Demand

1. Conjoint analysis •statistical technique helps determine how people value different attributes (feature, function, benefits) that make up an individual product or service 2. Focus groups 3. Existing data •Segment analysis: Income, education, gender, etc •American Marketplace, newspapers, industry associations and journals

Cost Drivers

1. Cost of Input Factors 2. Economies of Scale 3. Learning-Curve Effects 4. Experience-Curve Effects

What causes per-unit cost to drop as output increase? Economies of scale allow firms to:

1. Spread their fixed costs over a larger output 2. Employ specialized systems and equipment 3. Take advantage of certain physical properties

Jet Blue - Case Study

Attempted to enhance perceived value by... - high touch (enhance customer experience) - high tech (to drive down costs) The difficulty in resolving the trade offs caused Jet Blue to experience a sustained competitive disadvantage "Stuck in the middle"

Focused Cost Leadership Strategy

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

Strategic Trade Offs

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost. 1. Images or reputations trade offs - limitations in capacity to manage multiple messages 2. Activities often can not be configured to support two alternative positions - operational trade offs 3. Organization structure and incentives can not support disparate goals - organizational trade offs 4. Financial resources are limited - financial trade offs

To formulate an appropriate business-level strategy

Who: which customer segments will we serve? What: customer needs, wishes, and dishes will we satisfy? Why: can we satisfy them? How: will we satisfy our customers' needs?

Economies of Scale

decreases in cost per unit as output increases Economies of scale allows firms to: - spread their fixed costs over a larger output - employ specialized systems and equipment - take advantage of certain physical properties

Differentiation Strategy

generic business strategy that seeks to create higher value for customers than the value that competitors create a company that uses a differentiation strategy increases the perceived value of its product while maintaining adequate costs levels

Cost Leadership Strategy

generic business strategy that seeks to create the same or similar value for customers at a lower cost the goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors while offering adequate value

Strategy Canvas

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

Diseconomies of Scale

increases in cost per unit when output increases

Strategic Positioning

its strategic profile based on value creation and cost in a specific market a firm attempts to stake out a valuable and unique position that meets customers needs while simultaneously creating as large a gap as possible between the value of the firm's products creates and the cost required to produce it

Business-Level Strategy

the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market "How should we compete in this market?"

Scope of Competition

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