Cost Leadership vs Differentiation – Flashcards
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Differentiation
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Providing something unique that is valuable to the buyer beyond simply offering a low price -total customer responsiveness, creating value at each stage of relationship -focus on customer needs and wants
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Effective differentiation strategies
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-Understand buyers need, behaviours and values -Incorporate features that appeal to buyers and create sustainably distinctive product -use higher prices to recoup differentiation costs
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Effective Differentiations strategies do what:
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-Difficult to duplicate or imitate -create switching costs
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Differentiation Advantages
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-command premium prices -increased sales due to attractive differentiation -brand loyalty that bonds buyers to the firms products
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Differentiation risks
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-Adding too mucho that product exceeds the needs and use pattern of most buyers -overspending on efforts to differentiation the firms product -competitors achieve new, more valued point of differentiation
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Drivers of uniqueness
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-R&D -technology and innovation -input quality -employee skill and training -sales and marketing -quality control -product flues and performance -customer services
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Whats necessary in differentiation strategy
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-select product positioning in relation to product attributes -select target customer group -ensure customer/product compatibility -evaluate costa and benefits
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Differentiate via value chain
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approaches to enhancing differentiation through changes in the value chain -coordinating with channel allies to enhance customer perceptions of value -coordinating with suppliers to better address customer needs
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Differentiation Strategy Works best when
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-diversity of buyer needs and uses for the product -many ways that differentiation can have value for buyers -few rivals follow similar approach -rapid change in technology and product features
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Skills that foster differentiation (few examples)
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-strong marketing -product engineering -creative talent and flair
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Requirements to support and sustain differentiation activities
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-strong coordination among R and D and product dev, and marketing -subject measures and incentives -amenities to attract higher skilled labor, -closeness to cusotmers -popel skilled in sales and operations
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Cost
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Find and exploit all sources of cost advantage and sell a standard, no-frills product -primary basis of competition -firms cumulative costs across its overall value chain must be lower than competitors -relentless in pursuit of savings
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Effective low cost approaches
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-Pursue cost savings that are difficult imitate -avoid reducing product quality to unacceptable levels -perform value chain actives at more cost effectively than rivals -revamp the firms overall value chain to eliminate or bypass cost-producing activities
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Securing a cost advantage
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-use lower cost inputs and hold minimal assts -offer only essential product features -offer only limits product lines -use low cost distribution channels -use most economical delivery methods
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Low cost Advantages
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-greater total profits and increased market share gained from underpricing competitors -larger profit margins when selling products at prices comparable to, and competitive with rivals
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Low cost Risks
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-low pricing does not attract enough buyers -rivals retaliatory price cutting set off a price war
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Drivers of costs advantage
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-economies of scale -economies of learning -production techniques -product design -input costs -capability utilization -residual efficiency
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To get ongoing success as a low cost provider
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Must out manage rivals in finding ways to perform value chain activities faster, more accurately, and more cost0effectively -spending aggressively on resources and capabilities that promise to drive costs out of the business -carefully estimating the cost savings of new technologies before investing in them -constantly reviewing cost saving resources to ensure they remain competitively superior
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Low costs works best when
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- Price competition among rival sellers is vigorous. - Identical products are available from many sellers. - Few ways to differentiate industry products. - Most buyers use the product in the same ways. - Buyers incur low costs in switching among sellers. - Majority of industry sales are made to a few, large volume buyers. - New entrants can use introductory low prices to attract buyers
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Low cost pitfalls to avoid
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- Engage in overly aggressive price cutting that does not result in unit sales gains large enough to recoup forgone profits - Rely on cost advantage that is not sustainable - Become too fixated on cost reduction - Have a rival discover a new lower-cost value chain approach or develop a cost-saving technological breakthrough.
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Cost leadership requirements
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-Skills and resources foster cost leadership -Organization requirements to support and sustain cost leadership activities
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Cost leadership strategy key elements
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• Scale-efficient plants • • Design for manufacture • • Control of overheads and • R&D • • Process innovation • • Outsourcing/offshoring • Avoiding marginal customers
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Differentiation strategy key elements
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• Emphasis on branding • advertising, design, service, • quality, and new product • development
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Cost Leadership resource and organizational requirements
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-Access to capital -Process engineering skills Frequent reports -Tight cost control -Specialization of jobs and functions -Incentives linked to quantitative targets accounts
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Differentiation Resource and organizational requirements
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-Marketing abilities -Product engineering skills Cross-functional coordination Creativity • Research capability • Incentives linked to qualitative performance targets
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Review leadership dimensions
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porters forces benefits and risks
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