Strategic Management Chapter #6
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-May involve a single product or a group of similar products that use the same distribution channel
-Concerns the question: “How should we compete?”
-What customer needs, wishes, and desires will we satisfy?
-Why do we want to satisfy them?
-How will we satisfy our customers’ needs?
-Industry Effects: 5 Forces Model, Complements, Strategic Groups
-Firm Effects: Value position and cost position relative to competitors, business strategies: Cost leadership, differentiation, blue ocean
-A firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm’s product creates and the cost required to produce it
-Such choices are necessary because higher value creation tends to generate higher cost
-Managers must address the tension between value creation and the pressure to keep cost in check as to not erode the firm’s economic value creation and profit margin
a firm has a…
it allows firms to…
-Either as a differentiator or a low-cost leader
Either perform similar activities differently or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost
-Goal is to add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price
-A firm following this strategy aims to achieve in the minds of consumers a level of value creation that its competitors cannot easily match
-Company using this strategy can achieve a competitive advantage as long as its economic value created (V-C) is greater than that of its competitors
-Goal is to reduce the firm’s cost below that of its competitors while offering adequate value
-The Cost Leader, as the name implies, focuses its attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer lower prices to its customers
-The cost leader attempts to optimize all of its value chain activities to achieve a low-cost position
-A cost leader can achieve a competitive advantage as long as its economic value created (V-C) is greater than that of its competitors
-Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price
-Economies of scale
-Allows firms to:
–Spread their fixed costs over a larger output
–Employ specialized systems and equipment
–Take advantage of certain physical properties
-As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale
-Large firms tend to become overly bureaucratic, with too many layers of hierarchy, they grow inflexible and slow in decision making
-Although managers need to increase output to operate at a minimum efficient scale, they also need to be watchful not to drive scale beyond Q2, where they would encounter diseconomies
-Monitoring the firm’s cost structure closely over different output ranges allows managers to fine-tune operations and benefit from economies of scale
-Go down as it takes less and less time to produce the same output
-By moving further down a given learning curve than competitors, a firm can gain competitive advantage
-Differences in complexity: In some production processes, effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions, learning effects can be substantial, while economies of scale are minimal
—Managers need to understand such differences to calibrate their business-level strategy. If a firm’s cost advantage is due to economies of scale, a manager should worry less about employee turnover and more about drops in product runs.
-Initiates a new and steeper curve
-An effective marketing campaign
-Intangible resources such as a reputation for innovation, quality, and customer service
-They are fairly well isolated from threats of powerful suppliers to increase input prices, because they’re more able to absorb price increases through accepting lower profit margins
-Can absorb price reductions more easily when demanded by powerful buyers
-The risk of replacement is particularly pertinent if a potent substitute emerges due to an innovation
-Powerful suppliers and buyers may be able to reduce margins so much that the low-cost leader could have difficulty covering the cost of capital and lose the potential for a competitive advantage
-Over time, competitors can beat the low-cost leader by implementing the same business strategy, but more effectively
-How well it helps the firm exploit external opportunities while avoided external threats
-Blue oceans represents untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth
-Red oceans are the known market space for existing industries. In red oceans the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game
-Allows a firm to offer a differentiated product or service at low costs
-The firm can lower its price below that of the differentiator because of it’s lower-cost structure. If the firm offers lower prices than the differentiator, it can gain market share and make up the loss in margin through increased sales
-A cornerstone of Blue Ocean Strategy
-Instead of attempting to out-compete your rivals by offering better features or lower costs, successful value innovation makes competition irrelevant by providing a leap in value creation, thereby opening new and uncontested market spaces
-Requires that a firm’s strategic moves lower its costs and at the same time increase the perceived value for buyers. Lowering a firm’s cost is primarily achieved by eliminating and reducing the taken-for-granted factors that the firm’s rivals in their industry compete on.
-Perceived buyer value is increased by raising existing key success factors and by creating new elements that the industry has not offered previously.
-Reduce. Which of the factors should be reduced well below the industry’s standard?
-Raise. Which of the factors should be raised well above the industry’s standard?
-Create. Which factors should be created that the industry has never offered.
-Difficult to implement because it requires the reconciliation of fundamentally different strategic positions- differentiation and low cost- which in turn require distinct internal value chain activities so the firm can increase value and lower cost at the same time
-Consequence of a strategy gone bad- the firm ends up being stuck in the middle, meaning the firm has neither a clear differentiation nor a clear cost-leadership profile. Being stuck in the middle leads to inferior performance and a resulting competitive disadvantage
-Strong curve has focus and divergence, and it can even provide a kind of tagline as to what strategy is being undertaken or should be undertaken
-Curve that zigzags across the strategy canvas indicates a lack of effectiveness in its strategic profile
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