CH 6 Business Strategy: Differentiation, Cost Leadership and Blue Oceans

strategic trade-offs

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost. tension btw value creation and pressure to keep cost in check

economies of scale

Decreases in cost per unit as output increases.

differences in timing

Learning effects occur over time as output accumulates, while economies of scale are captured at one point in time when output increases.

scope of competition

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

experience curve

change in the underlying technology while holding cumulative output constant

learning effects differ from economies of scale because:

differences in timing differences in complexity

2 fundamentally different generic business strategies

differentiation and cost leadership

diseconomies to learning

not a thing unlike diseconomies to scale

the most important cost drivers that strategic leaders can manipulate to keep their costs low are:

- cost of input factors - economies of scale - learning curve effects - experience-curve effects

strategic position is a value and unique position which:

- meets customer needs - maximizes product value - lowest possible product cost

most salient value drivers that strategic leaders have at their disposal:

- product features - customer service - complements

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

to formulate an appropriate business level strategy, managers must answer:

- who are the customer segments we will serve? - what customer needs, wishes, and desires will we satisfy - why do we want to satisfy them? - how will we satisfy them?

the success of cost leadership, differentiation, and focused variations thereof depends on context and relies on 2 factors:

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

learning by doing allows a firm to _________1._________, while experience-curve effects based on process innovation allow a firm to ______2.___________

1. lower its per-unit costs by moving down a given learning curve 2. leapfrog to a steeper learning curve, thereby driving down its per-unit costs

strategic position

A strategic profile based on value creation and cost in a specific product market

blue ocean strategy

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

differentiation strategy

Generic business strategy that seeks to create higher value for customers than the value that competitors create, while containing costs. class: Unique features that increase value, so that consumers pay a higher price. value - cost > competitors

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. reveals key strategic insights

value curve

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

diseconomies of scale

Increases in cost per unit when output increases.

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.

focused cost-leadership strategy

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

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.

business level strategy

The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. (how to compete)

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.

blue oceans represent

Untapped market space. Creation of additional demand. Opportunities for highly profitable growth.

differentiation parity

a firm creates the same value as another

a value curve that zigzags across the strategy canvas indicates:

a lack of effectiveness in its strategic profile

differences in complexity

in some production processes, effects from economies of scale can be quite significant, while learning effects are minimal and vice versa

the learning-curve effect is driven by:

increasing cumulative output within the existing technology over time

a cost leader can achieve a competitive advantage as long as:

its economic value created is greater than that of its competitors

the goal of a cost-leadership strategy is to:

reduce the firm's cost below that of its competitors while offering adequate value class: also reduce prices for customers and optimize the value chain for low cost

red oceans

the known market space of existing industries

cube square rule

the volume of a body such as a pipe of a tank increases disproportionately more than its surface

different value drivers contribute to competitive advantage only if:

their increase in value creation exceeds the increase in costs

purpose of strategic trade-offs

to maximize the firm's economic value creation and profit margin

To initiate a strategic move that allows a firm to open up new and uncontested market space through value innovation, managers must address four key questions when formulating a blue ocean business strategy:

value innovation-lower costs 1. eliminate. Which of the factors that the industry takes for granted should be eliminated? 2. Reduce. Which of tithe factors should be reduced well below the industry's standard? Value innovation-increase perceived consumer benefits 1. raise. which of the factors should be raised well above the industry's standard? 2. create. which factors should be created that the industry has never offered?

focus of competition in differentiation strategy

• Unique product features. • Service. • New product launches. • Marketing and promotion.