BA Exam 2
As markets mature.... A.costs continue to increase. B.applications for patents increase C.differentiation opportunities increase. D.there is increasing emphasis on efficiency.
there is increasing emphasis on efficiency
A focus strategy has two variants:
Cost focus: Creates a cost advantage in its target segment. Exploits differences in cost behavior Differentiation focus: Differentiates itself in its target market. Exploits the special needs of buyers
A firm may diversify into related businesses: What are benefits? And unrelated
For Related business Benefits derive from horizontal relationships: -Sharing intangible resources such as core competencies in marketing -Sharing tangible resources such as production facilities A firm may diversify into unrelated businesses : Benefits derive from hierarchical relationships: -Value creation derived from the corporate office, -Leveraging support activities in the value chain
Industry Life Cycle Stages
Industry Life Cycle Stages: The industry life cycle 1. Introduction 2. Growth 3. Maturity 4. Decline Generic strategies, value-creating activities, & overall objectives all vary over the course of an industry life cycle
Differentiation requires
-A level of cost parity relative to competitors -Integration of multiple points along the value chain -Superior material handling operations to minimize damage -Accurate and responsive order processing -Personal relationships with key customers -Rapid response to customer service requests -Differentiation along several different dimensions at once
Turnaround Strategies
-A turnaround strategy involves reversing performance decline & reinvigorating growth toward profitability through: Asset & cost surgery, Selected market & product pruning, Piecemeal productivity improvements Example =Ford Motor Company Example =Jamba Juice
Cost leadership involves?
-Aggressive construction of efficient scale facilities -Vigorous pursuit of cost reductions from experience -Tight cost & overhead control -Avoidance of marginal customer accounts -Cost minimization in all activities in the firm's value chain, such as R&D, service, sales force, & advertising
Advantages of Differentiation based on 5 forces
-Creates higher entry barriers due to customer loyalty -Provides higher margins that enable the firm to deal with supplier power -Reduces buyer power because buyers lack suitable alternatives -Establishes customer loyalty and hence less threat from substitutes
Overall Cost Leadership & Examples
-Creating a low-cost position relative to a firms peers -Managing relationships throughout the entire value chain to lower costs ex: mcdonalds, wal-mart
Disadvantages of Focus
-Erosion of cost advantages within the narrow segment -Highly focused products and services are still subject to competition from new entrants & from imitation -Focusers can become too focused to satisfy buyer needs
Advantages to Integrated overall low cost and differentiation strategy based on 5 forces
-Improving Competitive Position vis-à-vis the Five Forces -Creates higher entry barriers due to both cost leadership & differentiation -Can provide higher margins that enable the firm to deal with supplier power -Reduces buyer power because of fewer competitors -An overall value proposition reduces threat from substitutes
Advantages to Focus based on 5 forces:
-Improving Competitive Position vis-à-vis the Five Forces -Creates higher entry barriers due to cost leadership or differentiation or both -Can provide higher margins that enable the firm to deal with supplier power -Reduces buyer power because the firm provides specialized products or services -Focused niches are less vulnerable to substitutes
How low cost leadership provides advantages using the 5 forces
-Improving Competitive Position vis-à-vis the Five Forces -Protects a firm against rivalry from competitors -Protects the firm against powerful buyers -Provides more flexibility to cope with demands from powerful suppliers who want to increase input costs -Provides substantial entry barriers due to economies of scale and cost advantages -Puts the firm in a favorable position with respect to substitute products
Combination Strategies: Integrating Low-Cost & Differentiation
-Integration of low-cost and differentiation strategies makes it difficult for competitors to duplicate or imitate strategy -The goal of a combination strategy is to provide unique value in an efficient manner Combining overall low-cost and differentiation strategies can take several forms: 1. Automated & flexible manufacturing systems allow for mass customization 2. Exploitation of the profit pool concept creates a competitive advantage 3. Using information technology, firms can integrate activities throughout the extended value chain
Cost Leadership Requires: Explain the Experience curve and Competitive Parity
-Learning to lower costs through experience: the experience curve -With experience, unit costs of production processes decline as output increases -This strategy also requires competitive parity Being on par with competitors with respect to low-cost, differentiation, or other strategic product characteristics -Permits cost leaders to translate cost advantages directly into higher profits
Focus Strategy & Example
-Narrow product lines, buyer segments, or targeted geographic markets -Advantages obtained either through differentiation or cost leadership -Companies pursuing a focus strategy:Ikea, Costco -A focus strategy is based on the choice of a narrow competitive scope within an industry. -A firm selects a segment or group of segments (or niche) and tailors its strategy to serve them -A firm achieves competitive advantages by dedicating itself to these segments exclusively Ex: Ikea, Costco
A differentiation strategy can take many forms:
-Prestige or brand image -Technology -Innovation -Features -Customer service -Dealer network
Differentiation & Examples
-Products and/or services that are unique & valued -Emphasis on Nonprice attributes for which customers will gladly pay a premium EX: Companies pursuing a differentiation strategy: Apple,Target
Internet-Enabled Focus Strategies
-The Internet and digital technologies have created new ways of competing in a narrow market segment -Customers can access markets less expensively, and small firms can extend their reach -Social media allows niche firms to solicit input and respond quickly to customer feedback
Internet-Enabled Differentiation Strategies
-The Internet and digital technologies have created new ways of differentiating by enabling mass customization -Customers can judge the quality & uniqueness of a product or service by their ability to be involved in its planning & design -Lowered transaction costs allow firms to achieve parity on cost while providing a unique experience
Internet-Enabled Combination Strategies
-The Internet and digital technologies have provided all companies with greater tools for managing costs -With lower costs for all, the net effect is fewer rather than more opportunities for sustainable advantage -The ease of comparison shopping also erodes differentiation advantages
Internet-Enabled Low-Cost Leader Strategies / what is disintermediation
-The Internet and digital technologies lower transaction costs: No in-person sales calls, Paperless transactions -Disintermediation or removing intermediaries also lowers transaction costs, Reduced search costs, No need for a permanent retail location
Disadvantages of cost leadership
-Too much focus on one or a few value chain activities. -Increase in the cost of the inputs on which the advantage is based (Labor in China to decline by 30% in next 12 years; 18-24yrs peak period - govt policy consequence) -The strategy is imitated too easily -A lack of parity on differentiation -Reduced flexibility -Obsolescence of the basis of a cost advantage
Disadvantages of Differentiation
-Uniqueness that is not valuable -Too much differentiation -Too high a price premium -Differentiation that is easily imitated -Dilution of brand identification through product line extensions -Perceptions of differentiation may vary between buyers and sellers
How to overcome the five forces and achieve competitive advantage? (3 ways)
Overall cost leadership Differentiation Focus
Disadvantages to Combination Strategies
Pitfalls of Combination Strategies: -Firms that fail to attain both overall low-cost & differentiation strategies may end up with neither and become "stuck in the middle" -Firms can also underestimate the challenges & expenses associated with coordinating value-creating activities in the extended value chain -Firms can also miscalculate sources of revenue and profit pools in the firm's industry
Strategies in the Decline Stage
The decline stage: -Industry sales and profits begin to fall -Price competition increases -Industry consolidation occurs Strategies: Maintaining the product position Harvesting profits & reducing costs Exiting the market Consolidating or acquiring surviving firms
Strategies in the Growth Stage
The growth stage: -Characterized by strong increases in sales -Attractive to potential competitors -When firms can build brand recognition Strategies: Create branded differentiated products Stimulate selective demand Provide financial resources to support value-chain activities
Strategies in the Introduction Stage
The introduction stage: -Products are unfamiliar to consumers -Market segments are not well-defined -Product features are not clearly specified -Competition tends to be limited Strategies: Develop a product and get users to try it Generate exposure so the product becomes "standard"
Strategies in the Maturity Stage
The maturity stage: -Aggregate industry demand slows -Market becomes saturated, few new adopters -Direct competition becomes predominant -Marginal competitors begin to exit Strategies: Create efficient manufacturing operations Lower costs as customers become price-sensitive Adopt reverse or breakaway positioning