Chapter 6: Differentiation, Cost Leadership, and Blue Oceans

Value innovation

aligning innovation with total perceived consumer benefits, price, and cost

Blue Ocean Strategy

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.

Although increased value creation is a defining feature of a differentiation strategy, managers must also control _______

cost

When considering different business strategies, managers also must define the ______________________

scope of competition

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.

4 most important cost drivers that managers can manipulate to keep their costs low are:

1. cost of input factors 2. economies of scale 3. learning-curve effects 4. experience-curve effects see exhibit 6.5

2 Generic Business Strategies

1. differentiation 2. cost leadership

3 most salient value drivers that managers have at their disposal

1. product features 2. customer service 3. complements

Strategic trade-offs

Choices between a cost or value position.

T/F: A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created (V − C) is LOWER than that of its competitor

False

T/F: Managers do NOT need to address the tension between value creation and the pressure to keep cost in check so as not to erode the firm's economic value creation and profit margin

False

T/F: The greater the economic value created (V − C), the LOWER a firm's potential for competitive advantage

False

cost leadership strategy: 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.

T/F: A blue ocean strategy is only successful if the firm can implement some type of value innovation that reconciles the inherent trade-off between value creation and underlying costs.

True

T/F: A business strategy is more likely to lead to a competitive advantage if a firm has a clear strategic profile, either as differentiator or a low-cost leader.

True

T/F: A cost leader can achieve a competitive advantage as long as its economic value created (V − C) is greater than that of its competitors

True

T/F: Blue oceans represent untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth.

True

T/F: Successful value innovation requires that a firm's strategic moves lower its costs AND also increase the perceived value for buyer

True

T/F: To answer the business-level strategy question of how to compete, managers have TWO primary competitive levers at their disposal: value (V) and cost (C).

True

T/F: To formulate an appropriate business-level strategy, managers must answer the who, what, why, & how

True

cost leader

focuses its attention and resources on reducing the cost to manufacture a product or on lowering the operating cost to deliver a service in order to offer lower prices to its customers

diseconomies of scale

increases in cost per unit when output increases

To formulate an effective business strategy, managers need to keep in mind that competitive advantage is determined jointly by _________ and ________ effects

industry; firm

Reason JetBlue could not maintain an initial competitive advantage

it was unable to keep its costs down sufficiently

A blue ocean strategy allows a firm to offer a differentiated product or service at ________

low cost

Differentiation Strategy

seeks to create higher value for customers than the value that competitors create, while containing costs

Cost- Leadership-Strategy

seeks to create the same or similar value for customers at a lower cost

To achieve a desired strategic position, managers must make _________________

strategic trade-offs

Business level strategy

the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market

Economies of scope

the savings that come from producing two (or more) outputs at less cost than producing each output individually, even though using the same resources and technology

Product features

~ Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price. ~ Strong R&D capabilities are often needed to create superior product features ~ ex: OXO- kitchen utensil company

cost leadership strategy: benefits

~ 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. ~ cost leader mostly likely has large marketshare

Complements

~ add value to a product or service when they are consumed in tandem ~ smartphone & cellular services

Customer Service

~ can increase the perceived value of their firms' product or service offerings by focusing on customer service ~ ex: Zappos

Focused cost leadership strategy

~ same as the cost-leadership strategy except with a narrow focus on a niche market ~ ex: BIC company

Focused differentiation strategy

~ same as the differentiation strategy except with a narrow f focus on a niche market ~ ex: Mont Blanc

Red Ocean

~ the known market space of existing industries ~ the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game

Scope of competition

~ the size (narrow or broad) of the market in which a firm chooses to compete ~ ex: automobile industry