MGT 497 Exam 2

Product proliferation

"filling the niches"

Low Cost strategic choices

- Appeals to the "average" or typical consumer - Comp. Adv. gained through lower cost structure - Efficiency, superior reliability, process innovation - gained through economies of scale, lean production, continuous improvement, streamline/automate business processes, JIT inventory control systems, create a frugal culture

Business Level Strategies

- Broad low-cost strategy (Cost-Leader) - Broad differentiation strategy - Focus low-cost strategy - Focus differentiation strategy

Strategies for Fragmented Industries

- Chaining - Franchising - Horizontal merger/acquisition

Low Cost Disadvantages

- Competitors can lower cost structure - Competitors may imitate cost leader's methods - Cost reductions may affect demand

Mature Industry Evolution

- Consolidated - Strategy based on established companies collectively reducing intensity of competition - Interdependent companies protect industry profitability

To cross the chasm (companies must)

- Correctly identify needs of first wave of early majority users - Alter business model in response - Alter value chain & distribution channels to reach early majority - Design product to meet needs of early majority so product can be modified, produced, & provided at low cost - Anticipate moves of competitors

Differentiation

- Create products different or distinct from competitors in important ways - Key is to add value to customers

Mature Industry Strategies

- Deter Entry - Manage Rivalry

Differentiation Disadvantages

- Difficulty to maintain long-term distinctiveness in customer's minds - Competitors may imitate - Can increase cost structure too much & over differentiate - Difficulty maintaining premium price

Winning a Format War

- Ensure supply of complements - produce complements - Killer applications - new products so compelling customers adopt rapidly killing demand for competition - Aggressively price/market (razor & blade strategy) - price product low to increase installed base, price complements high for profits - Cooperate with competitors - speed up adoption - License format - reduce incentive for competitors to develop own

First mover advantages

- Exploit network effects & positive feedback loops - Establish significant brand loyalty - Ramp up sales volume early - Create switching costs for customers - Accumulate valuable knowledge ** First movers don't always succeed

Focus Strategic Choices

- Focuser selects specific market based on: * geography * type of customer * segment of product line - focused company positions self as either: * low-cost or * differentiatior

Choosing a global strategy

- Globalization standard - Localization - Transnational

Customer Groups

- Innovators - Early Adopters - Early Majority - Late Majority - Laggards

Declining Industries

- Leadership - seeks to become dominant player - Niche - focuses on pockets of demand declining more slowly - Harvest - optimizes cash flow and exits industry through liquidation - Divestment - sells business to others before steep decline to recover investments

Low Cost Advantages

- Less affected by powerful suppliers - Ability to reduce price to compete with substitute products - Low costs create a barrier to entry

Differentiation Advantages

- Less affected by powerful suppliers - Brand loyalty builds barrier over substitute products - Brand loyalty creates a barrier to entry

Reasons for Slow Growth (in Embryonic and Growth Industries)

- Limited performance & poor quality of the first products - Customer unfamiliarity with what the new product can do for them - Poorly developed distribution channels - Lack of complementary products - High production costs

Reasons for fragmented industries

- Low barriers to entry permit constant entry by new companies - Brand loyalty is primarily local - Diseconomies of scale *A focused strategy is the best generic business level strategy*

Crossing the Chasm (Early Majority, mass market)

- Need to ensure product reliability and ease of use - Require mass market distribution and mass media advertising campaigns - Require large scale mass production to produce high quality product at a low price

International Pressures

- Pressures for cost reduction - Pressures to be locally responsive

Manage Rivalry

- Price signaling - increase/decrease prices to convey intentions (Tit for Tat strategy) - Price leadership - one company assumes the responsibility for setting the price option * formal version of this is illegal - Control excess capacity - Nonprice competition - using product differentiation to compete

Deter Entry

- Product proliferation - "filling the niches" - Price cutting - cut prices when a new company enters (or threatens to enter) the market to send a signal - Strategic commitment - maintaining excess capacity

Crossing the Chasm (Innovators & Early Adaptors)

- Technologically sophisticated and willing to tolerate the limitations of the product - Reached through specialized distribution channels to word of mouth - Relatively few in number and not particularly price sensitive

Exporting advantages

- ability to realize location economies - realize cost economies

Joint Venture advantages

- access to local partner's knowledge - shared development cost and risks - political dependency

Differentiation strategic choices

- customize product offering to diff. market segments - Comp. Adv. gained through satisfying customers needs in a way competitors cannot, thus allowing PREMIUM PRICES to be changed - Superior quality, product innovation, & customer responsiveness

First movers

- first to develop/pioneer revolutionary products

Niche (in declining industries)

- focuses on pockets of demand declining more slowly •Makes sense when company has distinctive strengths in niche areas

Wholly owned subsidiaries disadvantages

- high costs and risks

Exporting disadvantages

- high transportation costs - trade barriers - problems with local marketing agents

Franchising disadvantages

- inability to engage in global strategic coordination - lack of control over quality

Joint Venture disadvantages

- inability to engage in global strategic coordination (J) - inability to realize location economies - lack of control over technology

Licensing disadvantages

- inability to realize location economies or cost economies (L) - inability to engage in global strategic coordination - lack of control over technology

Franchising advantages

- low development costs and risks (F)

Licensing advantages

- low development costs and risks (L)

Harvest (in declining industries)

- optimizes cash flow and exits industry through liquidation •Makes sense when a steep decline is expected •Characterized by exchanging market share for cash flow

First mover disadvantages

- pioneering costs - prone to mistakes - risk building wrong resources & capabilities - may invest in interior/obsolete technology (no need for product)

Wholly owned subsidiaries advantages

- protection of technology - ability to engage in global strategic coordination - ability to realize location economies

Leadership (in declining industries)

- seeks to become dominant player •Makes sense when company has distinctive strengths and the speed of decline and intensity of competition are moderate •Characterized by excessive marketing and aggressive pricing and acquiring competitors

Divestment (in declining industries)

- sells business to others before steep decline to recover investments •Sell to a company that is following a leadership strategy

Mass Markets Develop When (in Embryonic and Growth Industries)

- technological progress makes product easier to use and increases its value to the average customer - Key complementary products are developed that add value to customer - Companies find ways to reduce production costs, allowing them to lower prices

Business Level Strategy

-Overall competitive theme of a business. -Way a company positions itself in the marketplace to gain a competitive advantage. -Different positioning strategies

Firms must decide

1. Customer needs (What) - desires, wants, or cravings to be satisfied through product attributes - differentiation vs. price (cost) 2. Customer groups (Who) 3. Distinctive Competencies (How)

Three ways standards emerge

1. Firms lobby government to mandate industry standard public domain - falls into public domain 2. Standards often set by cooperation among firms/forums to reduce uncertainty in consumers' minds - falls into public domain 3. Standard often selected by market demand - strategy & business model for promoting tech standard are critical because ownership of an industry standard that is protected is valuable

Exploiting First-Mover Advantages Strategies

1. Going it alone 2. Strategic alliance/joint venture 3. License innovation

Benefits of Standards

1. Guarantee compatibility between products & complements 2. Reduce consumer confusion 3. Reduce production costs due to mass production 4. Reduce risks associated with supplying complementary products

Factors of intensity in declining industries

All of these feed into Intensity of Competition - Speed of decline - Height of exit barriers - Level of fixed costs - Commodity nature of product

Focus Advantage

Closest to the customer

Focus Disadvantage

Cost leader - cost structure never as low as broad cost leader Differentiator - invites competition

Low Cost

Establishes a cost structure that allows them to provide goods/services at lower unit costs

Innovators

First to purchase and experiment with a product based on new technology; "technorants"

Growth Industry

First-time demand is expanding rapidly as many new customers enter market

Focus

Focuser strives to serve needs of targeted niche market segment where it has either a low-cost or differentiated competitive advantage

Early Majority

Practical and understand the value of new technology; leading wave of mass-market

Late Majority

Purchase a new technology only when it is obvious that it has great utility and is here to stay; signals end of growth stage

Pressures for cost reduction

Standardize product and achieve economies of scale - differentiation on non-price factors difficult (commodities) - competitors are based in low-cost location - consumers are powerful & face low switching costs - persistent excess capacity (entire industry)

Laggards

Unappreciative of the use of new technology; only adapt if forced to

Early Adoptors

Understand that the technology may have important future applications

Technical Standards

a set of technical specifications that producers adhere to when making the product or a component of it - ex. computer keyboard

Complementary assets

assets required to exploit a new innovation - manufacturing capabilities - marketing know how & sales force to gain brand loyalty

Transnational

business model that simultaneously: - achieves low costs (invest in a few large-scale manufacturing facilities in optimal locations) - differentiates across markets (create plants to tweak products that require local features) - fosters a flow of skills between subsidiaries (global learning)

Localization

customizing to match preferences in different national markets - substantial differences across countries - pressures for cost reductions are minimal

Price Cutting

cut prices when a new company enters (or threatens to enter) the market to send a signal

Capability of competitors

depends on the competitors R&D skill and access to complementary assets

Pressures for local responsiveness

differentiate and create product specific to each country's needs; customized products should be considered when there are differences in: - customer tastes & preferences - infrastructure & traditional practices - distribution channels - host government demands

Location economies

economic benefits from performing value creation in optimal location - Allows for: * lowers cost of value creation * differentiate the product offering ***must also consider transportation costs, trade barriers, as well as political & economic risks***

Franchising

franchiser sells intangible property & insists franchisee follow rules on doing business

Cost Economies

from global volume - economies of scale - global sales volume can decrease unit costs - use production facilities more intensely - increase bargaining power with suppliers - learning capabilities

Barriers to imitation

give the innovator time to establish a competitive advantage

Leveraging products

goods/services developed at home and selling internationally - maximize a distinctive competency

Price signaling

increase/decrease prices to convey intentions (Tit for Tat strategy)

Embryonic Industry

just beginning to develop when technological innovation creates new market or product opportunities

Leveraging skills

learning from subsidiaries - skills & capabilities are often formed in global situations - applying subsidiary skills to other operations can add value

Licensing

licensee buys rights to produce product & puts up most of the overseas capital

Strategic commitment

maintaining excess capacity

Horizontal merger/acquisition

merging with or acquiring competitors and combining them into a single large enterprise - Office Max & Office Depot - American Airlines & U.S. Air

Exporting

most use to begin expansion but later switch to another mode

Price Leadership

one company assumes the responsibility for setting the price option - formal version of this is illegal

Chaining

opening additional locations that adhere to the same basic formula, that the company owns - linked outlets to achieve large scale output - build national brand - increase buying power

Wholly-Owned Subsidiaries

parent company owns 100% of subsidiary's stock

Standardization approach

producing a standardized product for the average customer, ignoring different segments

Segmentation approach

producing different offerings for different segments, serving many segments or the entire market

Globalization standard

reaping cost reductions from economies of scale and location - strong pressures for cost reduction - minimal demand for local responsiveness - universal needs

Dominant design

refers to a common set of features or design characteristics - ex. when sitting at a desktop computer, you see a monitor, keyboard, and mouse

Technology

scientific knowledge used in production of goods or services

Focus strategy

serving a limited number of segments or just one segment

Franchise

the franchisor (parent company) grants to its franchisees the right to use the parent's name, reputation, and business model, in return for a fee and percentage of the profits - The Good: * Franchise puts up capital * Increased incentive to run efficiently * Are often entrepreneurial - The Bad: * Lack of control * Partial profits - majority goes to the franchisee

Joint Ventures

typically a 50/50 venture & favored mode for entering new market