CH 6: BUSINESS STRATEGY: Differentiation, Cost Leadership & Integration – Flashcards
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Details the actions manager take in their quest for competitive advantage when competing in a single product market
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Business level Strategy
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Who- which customer segments- will we satisfy? What- customers needs, wish's & desires will we satisfy? Why- do we want to satisfy them? How- will we satisfy you customers' needs?
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Business level strategy questions
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determined jointly by industry characteristics and firms characteristics more attractive, more profitable it is Better advantage if, perform similar activities different or same activities at lower costs
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What determines Competitive Advantages?
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determined by value and cost positions relative to competitors. (whole foods strong value but weak cost position bc of cost structure)
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What determines Performance ?
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Difference between Perceived Value, consumer V by how much consumers are willing to pay, Total Cost C Economic value created: V- C.
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Competitive advantage formula
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its strategic profile based on Value creation & Cost (Determined by Business-level Strategy )
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Strategic Position
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Situation that required choosing between a Cost or Value position (Higher value creation, higher cost and keep cost in check no to erode)
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Strategic Trade-off
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*Differentiation Strategy *Cost Leadership *Scope of Competition: -Focused Cost-Leadership -Focused differentiation *Integration Strategy
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Generic Business Strategy
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Seeks to create a higher value for customers than the value that competitors create. Unique features and control Cost to same or original levels Value Driver -Consumers willing to pay premium price. -Focus unique features to respond to customer services, customer preferences, marketing features to target market.
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Differentiation Strategy
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Seeks to create same or similar value for customers by focusing attention and resources on reducing cost, enabling the firm to offer lower prices to its consumers. Value chain activities achieves low-cost proposition Cost Drivers Economic Value created= V-C, is greater than competitors
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Cost Leadership Strategy
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How?
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Business-level Strategy addresses ____ we will compete
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Broad- WHAT? Middle- HOW ? Focus- WHY ?*** Successful and effective companies communicate from the inside out by starting with belief of why they are in the business, how they provide it and finally what are they selling
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Company Communication approach
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Product Features Customer Services Customization Complements ...... -Related to firms expertise in & Organization of different internal value chain activities - Increase in value creation exceeds the increase in costs -Conditions V > C must be fulfilled if strengths strategic position and this enhance C.A
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Value Drivers
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most obvious but most important levers that managers can adjust are the product features & attributes, thereby increasing the perceived value of the product offering
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Product Features
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Increase the perceived value of their firm's product/service offering by focusing on customer service and responsiveness
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Customers Service
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Allows firms to go beyond merely adding differentiating features to tailoring products/services for specific customers (Mass Customization)
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Customization
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the manufacture of a large variety of customized products done at relatively low unit cost. [Attainable because of technology]
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Mass customization
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Identified the availability of complements as an important force determining the profit potential of an industry (Add value when consumed in tandem, quest to enhance value offerings)
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Complements
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Cost of input factors Economies of scale Learning curve effect Experience curve effect.
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Cost Drivers
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IT IS NOT THE SAME AS COST LEADER, may be cost leader but not price leader
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Price Leadership
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one of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw material, capital, labor and IT services.
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Cost of Input factors
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ONLY 1 COST LEADER in industry everyone else has a Cost Strategy
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Cost, leader vs strategy
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decreases in cost per unit as output increase -Larger firms. -Bigger is better -Left hand side of per unit vs output graph Allows firms to: *Spread Fixed cost over larger output *Employ specialized systems & Equipment *Take advantage of certain physical properties (Cube Square Rule)
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Economies of Scale
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the volume of a body such as a pipe or tank increases disproportionately more than its surface (Walmart, Costco, large QTY, boxes)
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Cube Square Rule
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To be Cost-competitive. Range between Q1-Q2 bc it's the lowest point in the graph -@Constant returns of scale
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Minimum Efficient Scale (MES)
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-Increase costs as output increases -"the bigger the worse effect" -Complexity of managing & coordinating raises that cost, negating scale benefit. -overly bureaucratic (large firms)
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Diseconomies of Scale
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Learning by doing can also drive down cost. individuals/teams engage repeatedly in an activity, they learn from their cumulative experience (writing, computer code, developing meds, building) -As you learn, you move down the learning curve. -Steeper learning curve, more learning takes place, Learning effects can be substantial while economies are minimal.
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Leaning Curve
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attempts to capture both economies of scale and learning effects. -Economy of scale allows movement down a given learning curve, based on tech production -Lower in the curve, stronger C.A.
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Experience Curve
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-Trouble when comp tries to be everything to everyone. -Firms end up stuck in the middle bc didn't succeed in cost or value. -Most difficult bc value chain activities that are different from one another. *ex. cost leader: R&D tech process to improve efficiency Differentiation: R&D focus tech to add uniqueness -Is not highest value and lowest cost. As long as its below average of industry -It can lead to competitive advantage, depends on the Economic value created (V -C)
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Integration Strategy
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1st- firms can charge a higher price than the cost leader, reflects higher value, generating a greater profit margin. 2nd- firm can lower price below the differentiator. To gain market share & makeup loss w/ more sales
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Integration allows firms to
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-Reconciliation of fundamentally different strategic positions- diff & low cost. -Require diff internal value chain activities to balance V & C -Cost and Value are Complements NOT substitutes, provides important spill-over effects -Requires trade-offs between differentiation and low cost are reconciled.
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Integration Strategy Requires
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Quality Economies of Scope Innovation Structure, Culture, and Routines
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Integration Drivers
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One equipment that can produce more services/ products from the same equipment. -savings from producing two or more outputs at less cost than producing each output individually, even though using the same resources and technology
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Economies of Scope
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describes any new product and process or any modification of existing ones. -Require to resolve existing trade-offs when comp pursue integration strategy.
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innovation
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-Denotes its durability and reliability. -Increases products perceived value & lower its cost -simultaneously raises economic value creating, V up and lowering C
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Quality
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Critical when pursuing integration strategy -Structure org that has control cost and allows for creativity. -Low-cost positioning requires an organization structure that relies on strict budget controls. -Differentiation requires creativity and customer responsiveness to thrive. (Ambidextrus organization)
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Structure, Culture and Routines
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Enables managers to balance and hardness different activities in trade-off situations -Man practices ( flex & lean Manufacturing systems) -Decentralize decision-making -Others *Encourages managers to balance: -Explotation- apply current knowledge to enhance firm performance in ST. -Exploration -searching for new knowledge may enhance a firms future performance
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Ambidextrous Organization
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Corporate- Concerns WHERE to compete Business- HOW to compete Functional- How to implement
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Formulation Strategy Levels
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Corporate level strategy concerns that overall competitiveness of a multi-business company.
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Conglomerate
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Conglomerate and other companies may decide to coordinate integrated strategy into corporate level instead of business level. Concern decisions about which industries a company should compete in and which type of business level each unit should pursue to max shareholder value.
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Integration at Corp-Level
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Adapt to external environment changes. (not 180 degrees but twitches) -The only constant is change -Productivity frontier, graph Differentiation vs Cost Leadership. (movement within graph) -Value-cost relationship that captures best practice at any given time - strategic positioning within the graph is determined by strategy
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Dynamics of Competitive Positions
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Goal is to not fall behind the productivity frontier. Theoretically possible best practice at any give time Strategic positioning is critical to gain C.A. Strategies enhance obtaining superior performance Rely on innovation to succeed at integration
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Dynamics goal
