5-9 – Flashcard

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Led to globalization of production and markets
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1. The average tariff rate on manufactured goods traded between advanced nations has fallen 2. Regulations prohibiting foreign companies from entering domestic markets and establishing production facilities or acquiring domestic companies has been removed
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Implications for competition within an industry
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1. Industry boundaries do not stop at national borders. 2. The shift from national to global markets has intensified competitive rivalry in industry after industry. 3. Although globalization has increased both the treat of entry and intensity of rivalry within many formerly protected national markets, it has also created enormous opportunities for companies based in those markets.
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Expanding the Market: Leveraging Products and Competences
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A company can increase its growth rate by taking goods or services developed at home and selling them internationally. Based upon distinctive competences (unique skills) that underlie the production and marketing of those goods or services.
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Economies of Scale
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1. By spreading the fixed costs associated with developing a product and setting up production facilities over its global sales volume, a company can lower its average unit cost. 2. By serving a global market, a company can potentially utilize its production facilities more intensively, which leads to higher productivity, lower costs, and greater profitability. 3. As global sales increase the size of the enterprise, its bargaining power with suppliers increase, which may allow it to bargain down the cost of key inputs and boost profitability that way.
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Location economies
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The economic benefits that arise from performing a value creation activity in the optimal location for that activity.
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Locating a value creation activity
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1. Can lower costs of value creation, helping the company achieve a low-cost position or 2. It can enable a company to differentiate its product offering, which gives it the option of charging a premium price or keeping price low and using differentiation as a means of increasing sales volume.
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Leveraging the skills of global subsidiaries
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Skills can be created anywhere within a multinational’s global network of operations, wherever people have the opportunity and incentive to try new ways of doing this.
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Pressure for cost reductions
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Lower the costs of value creation. Ex. A manufacturer might mass-produce a standardized product at the optimal location in the world, to realize economies and location economies.
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Universal needs
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Exist when the tastes and preferences of consumers in different nations are similar if not identical.
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Differences in customer tastes and preferences (local responsiveness)
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Emerge when customer tastes and preferences differ significantly between countries as they may for historical or cultural reasons. Creates pressures for the delegation of production and marketing responsibilities and functions to a company’s overseas subsidiaries.
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Differences in infrastructure and traditional practices (local responsiveness)
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Fulfilling this need may requires the delegation of manufacturing and production functions to foreign subsidiaries. Ex. North America consumer electrical systems are based on 110 volts, whereas in some European countries 240-volt systems are standard.
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Differences in Distribution channels (local responsiveness)
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May necessitate the delegation of marketing functions to national subsidiaries. Pharmaceutical companies have to adopt different marketing practices in Britain and Japan that are softer than the hard sell used in the United States.
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Host Government Demands (local responsiveness)
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Threats of protectionism, economic nationalism, and local content rules (which require that a certain percentage of a product be manufactured locally) dictate that international businesses manufacture locally.
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Pressure for local responsiveness
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Differences in consumer tastes and preferences Infrastructure and traditional practices Distribution channels Host government demands
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Global Standardization strategy
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Focus on increasing profitability by reaping the cost reductions that come from scale economies and location economies, that, is their strategy to pursue a low-cost strategy on a global scale. Try not to customize their product offering and marketing strategy to local conditions. Market a standardized product worldwide so they can reap the maximum benefits from economies of scale.
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Localization Strategy
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Focuses on increasing profitability by customizing the company’s goods or services so that they provide a good match to tastes and preferences in different national markets. This is most appropriate where there are substantial differences across nations with regard to consumer tastes and preferences and where cost pressures are not too intense. Makes sense if the added value associated with local customization supports higher pricing.
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Transnational Strategy
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Must try to realize location economies and scale economies from global volume, transfer distinctive competences and skills within the company, and simultaneously pay attention to pressures for local responsiveness. Must also focus on leveraging subsidiary skills.
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International Strategy
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These enterprises are selling a product that serves universal needs, but they do not face significant competitors and thus are not confronted with pressure to reduce their cost structure. Tend to centralize product development functions such as R&D at home.
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International Strategy may not be viable
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In the long term, so. to survive, companies need to shift toward a global standardizations strategy, or perhaps a transnational strategy, in advance of competitors.
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Exportinq
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Advantages: It avoids the cost of establishing manufacturing operations in the host country it may be consistent with scales economies and location economies Disadvantages: may not be appropriate if there are lower-cost locations for manufacturing the product abroad High transport costs can make exporting uneconomical (manufacture bulk products on a regional basis, realizing some economies from large-scale production while limiting transport costs) Tariff barriers A common practice among companies that are just beginning to export also poses risks
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International Licensing
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An arrangement whereby a foreign licensee buys the rights to produce a company’s product in the licensee’s country for a negotiated fee (normally, royalty payments on the number of units sold)
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Advantages of licensing
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the company does not have to bear the development costs and risks associated with opening a foreign market
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Drawbacks of licensing
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Does not give a company the tight control over manufacturing, marketing, and strategic functions in foreign countries that it needs to have in order to realize scale economies and location economies, as companies pursuing both global standardization and transnational strategies try to do. 2. Competing in a global marketplace may make it necessary for a company to coordinate strategic moves across countries so that the profits earned in one country can be used to support competitive attacks in another. 3. Risk associated with licensing technological know-how to foreign countries
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Franchising
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A specialized form of licensing in which the franchisor not only sells to the franchisee intangible property but also insists that the franchisee agree to abide by strict rules as to how it does its business. (service companies)
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Advantages of Franchising
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Franchisor does not have to bear the development costs and risks of opening up a foreign market on its own. Build up global presence quickly with a low cost.
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Disadvantages of Franchising
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A franchisor does not have to consider the need to coordinate manufacturing in order to achieve scale of economies and location economies. Lacks quality of control. A company can set up a subsidiary in each country or region in which it is expanding. The subsidiary then assumes the right and obligation to establish franchisees throughout that particular country or region.
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Joint Ventures
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A separate corporate entity in which two or more companies have an ownership stake. Company can benefit from a local partner’s knowledge of a host country’s competitive conditions, culture, language, political systems, and business systems. 2. When development costs and risks of opening up a foreign market are high, a company might gain by sharing these costs and risks with a local partner. 3. Political considerations make join ventures the only feasible entry mode.
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Drawbacks of joint ventures
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-Risks losing control over its technology to its venture partner – does not give a company the tight control over its subsidiaries that it might need in order to realize scale economies or location economies, as both global standardization and transnational companies try to do, or to engage in coordinated global attacks against its global rivals.
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Wholly owned subsidiary
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100% of the subsidiary’s stock is owned by the parent company 1. When a company’s competitive advantage is based on its control of a technological competence a wholly owned subsidiary will normally be the preferred entry mode, since it reduces the company’s risk of losing this control. 2. Gives a company the kind of tight control over operations in different countries that it needs if it is going to engage in global strategic coordination. 3. Realizes the location economies that flow from producing a standardized output from a single plant or a limited number of manufacturing plants.
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Distintive Competence
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Derives from its control of proprietary technological know-how, licensing and joint venture arrangement should be avoided if possible, in order to minimize the risk of losing control of that technology.
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Cost Reduction
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The greater the pressures for cost reductions are, the more likely it is that a company will want to pursue some combination of exporting and wholly owned subsidiaries.
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business level strategy
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the strategic initiatives a firm takes at the business unit level and cuts across all functions for that particular business unit
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customer needs
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WHAT is to be satisfied- desires, wants, cravings satisfied through product attributes (Choose based on way product is differentiated and price)
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customer groups
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WHO is to be satisfied
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distinctive competencies
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HOW customers are to be satisfied
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market segmentation
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customers grouped based on differences in needs or preferences
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main approaches to segmenting markets
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1.- ignore differences in segments (make product for typical customer 2.- recognize differences between segments (make products that meet needs of all/most segmetns 3.- target specific segments (focus on one or two selected segments)
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generic business level strategies
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-cost leadership -focused cost leadership -differentiation -focused differentiation
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cost leadership
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lowest cost structure competitors allowing price flexibility and higher profitability (lower costs/lower prices, high efficiency and quality to reliability ex. Walmart)
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focused cost leadership
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cost leadership in selected market niches where it has a local or unique cost advantage
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differentiation
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features important to customers and distinct from competitors that allow premium pricing (higher costs/higher prices, high innovation and quality as excellence ex. Nordstrom)
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focused differentiation
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distinctiveness in selected market niches where it better meets the needs of customers than the broad differentiators (selects based on geography, type of customer, or segment of product line)
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advantages of cost leadership
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include: -protected from competitors -less affected by incrased prices of inputs if there are powerful suppliers -less affected by a fall in price of outputs if there are powerful buyers -purchases in large quantities increase bargaining power over suppliers -ability to reduce price to compete with substitutes -low costs and prices are barrier to entry
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disadvantages of cost leadership
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include: -competitors may lower their cost structure -competitors may imitate cost leader’s methods -cost reductions may affect demand
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advantages of differentiation
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include: -customers develop brand loyalty -powerful suppliers not a problem because company geared more toward price it can charge than costs -can pass price increases on to loyal customers -powerful buyers not a problem because product distinct -differentiation and brand loyalty are barriers to entry -threat of substitute products depend on competitor’s ability to meet customer needs
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disadvantages of differentiation
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include: -difficulty maintaining long term distinctiveness in customer’s eyes (quickly imitate/patents and first-mover advantage are limited in duration) -difficulty maintaining premium price
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advantages of focused differentiation
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include: -focuser protected from rivals to extent can provide a product/service they cannot -focuser has power over buyers because they cannot get same thing elsewhere -threat of new entrants limited by customer loyalty to focuser -customer loyalty lessens threat from substitutes -focuser stays close to customers and changing needs
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disadvantages of focused differentiation
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include: -focuser at disadvantage to powerful suppliers because it buys in small volume -because of low volume, focuser may have higher costs than low cost company -focuser’s niche may disappear because of technological change or changes in customer’s tastes -differentiators will compete for focuser’s niche
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competitive sweet spot
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becoming a broad differentiator- companies that successfully differentiate their products while also lowering their cost structure over time
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failures in competitive positioning
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due to companies: -not working continuously to improve business model -not performing strategic group analysis -often failing to ID/respond to changing opportunities and threats in environment -losing sight of the customer
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strategic groups
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set of companies that pursue a similar business model and compete for the same group of customers
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3 Generic Strategies
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1. Overall Cost Leadership 2. Differentiation 3. Focus
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Overall Cost Leadership
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Low-cost position relative to a firm’s peers Manage relationships throughout the entire value chain Ex. McDonalds, Wal-Mart
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Differentiation
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Create products and/or services that are unique & valued Non-price attributes for which customers will pay a premium Ex. Harley Davidson, Apple
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Focus
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Narrow product lines, buyer segments, or targeted geographical markets Attain advantages either through differentiation or cost leadership Ex. Rolex, Lamborghini
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Tight set of interrelated tactics for overall cost leadership that includes:
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-Tight cost and overhead control -Avoidance of marginal customer accounts -Cost minimization in all activities in the firm’s value chain
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Experience curve
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-Refers to how business “learns” to lower costs as it gains experience with production processes -With experience, unit costs of production decline as output increases in most industries
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Competitive parity
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A firm’s achievement of similarity, or being “on par” with competitors with respect to low cost differentiation, or other strategic product characteristic
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Improving competitive position vis-a-vis the five forces
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1. Protects a firm against rivalry from competitors 2. Protects a firm against powerful buyers 3. Provides more flexibility to cope with demands from powerful suppliers for input cost increases 4. Provides substantial entry barriers from economies of scale and cost advantages 5. Puts the firm in a favorable position with respect to substitute products
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Pitfalls of overall cost leadership strategies
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-Too much focus on one of a few value-chain activities -All rivals share a common input or raw material -The strategy is imitated too easily -A lack of parity on differentiation -Erosion of cost advantages when the pricing information available to customers increases
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Differentiation strategy
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a firm’s generic strategy based on creating differences in the firm’s product or service offering by creating something that is perceived industry-wide as unique and valued by customers -firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique
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Differentiations
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Prestige or brand image Technology Innovation Features Customer service Dealer network
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Differentiation: Improving Competitive Position
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-Creates higher entry barriers due to customer loyalty -Provides higher margins that enable the firm to deal with supplier power -Establishes customer loyalty and hence less threat from substitutes -Reduces buyer power because buyers lack suitable alternative
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Potential pitfalls of Differentiation strategies
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-Uniqueness that is not valuable -Too much differentiation -Too high a price premium -Differentiation that is easily imitated -Diffusion of brand identification through product-line extensions -Perceptions of differentiation may vary between buyers and sellers
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Focus
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Based on the choice of a narrow competitive scope within an industry -Firm selects a segment or group of segments (niche) and tailors its strategy to serve them -Firm achieves competitive advantages by dedicating itself to these segments exclusively
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Cost Focus
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Firm strives to create a cost advantage in its target segment
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Differentiation Focus
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Firm seeks to differentiate in its target market
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Focus: Improving Competitive Position
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-Creates barriers of either cost leadership or differentiation, or both -Used to select niches that are least vulnerable to substitutes or where competitors are weakest
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Pitfalls of Focus strategies
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-Erosion of cost advantages within the narrow segment -Focused products and services still subject to competition from new entrants and from imitation -Focusers can become too focused to satisfy buyer needs
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3 Combination Approaches
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1. Automated and flexible manufacturing systems 2. Exploiting the profit pool concept for competitive advantage 3. Coordinating the “extended” value chain by way of information technology
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Mass customization
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A firm’s ability to manufacture unique products in small quantities at low cost
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Goal of combination strategy
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Provide unique value in an efficient manner
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Pitfalls of combination strategies
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-Firms that fail to attain both strategies may end up with neither and become “stuck in the middle” -Underestimating that challenges and expenses associated with coordinating value creating activities in the extended value chain -Miscalculating sources of revenue and profit pools in the firm’s industry
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Internet-Enabled low cost leader strategies
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-Online bidding and order processing eliminate the need for sales calls and minimize sales-force expenses -Online purchase orders have made many transactions paperless, thus reducing the costs of procurement and paper -Direct assets to progress reports and the ability of customers to periodically check work in progress minimize rework -Collaborative design efforts using internet technologies that link designers, materials suppliers, and manufacturers reduce the costs and speed the process of new product development
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Internet-Enabled differentiation strategies
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-Personalized online access provides customers with their own “site within a site” in which their prior orders, status of current orders, and requests for future orders are processed directly on the supplier’s website -Online access to real-time sales and service info is being used to empower the sales force and continually update R&D and technology development efforts -Internet-based knowledge management systems that link all parts of the org are shortening response times and accelerating org learning -Quick online responses to service requests and rapid feedback to customer surveys and product promotions are enhancing marketing efforts
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Internet-Enabled focus strategies
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-Permission marketing techniques are focusing sales efforts on specific customers who opt to receive advertising notices -NIche portals that target specific groups are providing advertisers with access to viewers with specialized interests -Virtual organizing and online “officing” are being used to minimize firm infrastructure requirements -Procurement technologies that use internet software to match buyers and sellers are highlighting specialized buyers and drawing attention to smaller suppliers
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Industry life cycle
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Refers to the stages of introduction growth, maturity, and decline that typically occur over the life of an industry
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Stages of the industry life-cycle
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Introduction Growth Maturity Decline
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Introduction stage
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the first stage of the industry life cycle, characterized by new products that ate not known to customers, poorly defined market segments, unspecified product features, low sales growth, rapid technological change, operating losses and a need for financial support
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For the introduction stage
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-Develop product and get users to try it -Generate exposure so product becomes “standard”
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Growth stage
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second stage of the product life cycle characterized by strong increases in sales, growing competition, developing brand recognition, and a need for financing complementary value-chain activities sucs as marketing, sales, customer service and R&D
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For the growth stage
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-Brand recognition -Differentiated products -Financial resources to support value-chain activities
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Maturity stage
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third stage in the product life cycle characterized by slowing demand growth, saturated markets, direct competition, price competition, and strategic emphasis on efficient operations -reverse positioning, breakaway positioning
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Decline stage
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fourth stage of the product life cycle characterized by falling sales and profits, increasing price competition, and industry consolidation
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Strategies for the decline stage
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-Maintaining -Harvesting -Exiting the market -Consolidation
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Turnaround strategy
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a strategy that reverses a firm’s decline in performance and returns it to growth and profitability -Asset cost surgery -Selective product and market pruning -Piecemeal productivity improvements
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Asset cost surgery
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try to aggressively cut administrative expenses and inventories and speed up collection of receivables, costs can also be reduced by outsourcing production of various inputs for which market prices may be cheaper than in-house production
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Selective product and market pruning
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discontinue such product lines and focus all resources on a few core profitable areas
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Piecemeal productivity improvements
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improving business processes by reengineering them, benchmarking specific activities against industry leaders, encouraging employee input to identify excess costs, increasing capacity utilization, and improving employee productivity lead to a significant overall gain

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