Mgt 247 Chapter 6 Notes - Summary Strategic Management PDF

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Took comprehensive notes on chapter 6 of textbook...

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6.1 Business Level Strategy: How to Compete for Advantage Business Level Strategy ○ The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market ○ How should we compete? ● Must answer the who what why and how ● Competitive advantage is determined jointly by industry effects and firms effects ● Industry effects - industry attractiveness, complements, strategic groups ● Firm effects - value position, cost position, business strategy ● These 2 are interdependent and on a firm level everything is relative to other companies in the industry Strategic Position ● Strategic trade offs ○ Choices between a cost or value position ○ Such choices are necessary because higher value creation tends to generate higher cost ● Economic value created = value - cost ● Higher value creation tends to require higher costs, making competitive advantage difficult ● More likely to lead to competitive advantage if clear strategic profile, either differentiator or low cost leader Generic Business Strategies ● Differentiation strategy ○ generic business strategy that seeks to create higher value for customers than the value that competitors create ○ Often done by delivering products or services with unique features while keeping cost relatively the same ● Cost-leadership strategy ○ Generic business strategy that seeks to create the same or similar value for customers at a lower cost ○ Allows the firm to offer lower prices to their customers ● Can both be used by any organization to get a competitive advantage ● Important trade offs exist between value creation and low cost because they are correlated ● More likely to be a competitive advantage if perform similar activities differently or perform different activities ● Scope of Competition ○ The size - narrow or broad - of the market in which a firm chooses to compete ○ Example - GM with Cadillac which is differentiation and Chevy which is low cost oriented (Broad) vs. Tesla which just targets high end luxury cars and electric cars (narrow) ● Focused Cost leadership strategy

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Same as the cost leadership strategy expect with a narrow focus on a niche market Focus differentiation strategy ○ Same as the differentiation strategy except with a narrow focus on a niche market Example: BIC pursues focused cost leadership because they create pens at low cost Example: Mont Blanc focuses on focused differentiation because they sell high end pens and have a clear strategic profile Straddling different strategic positions can be difficult and may hurt a company because a more focused company will have more success

6.2 Differentiation Strategy: Understanding Value Drivers ● Goal of differentiation strategy ○ Add unique features that will increase perceived value ○ Achieve value creation that competitors cannot match easily ○ Tends to be by unique product features, service, new product launches, marketing and promotion (rather than changing price) ● Economic value created (V-C) needs to be greater than competitors to achieve competitive advantage ○ Even if a firm fails to achieve cost parity it can still gain a competitive advantage if its ECV is greater than competitors ● Managers must also control costs, because rising costs reduce economic value created and erode profit margins ○ If costs rise too much as firm tries to create value, value gap shrinks ● When a firm is able to offer a differentiated product or service and can control costs, it can gain market share by charging a similar price but offering more value ○ Ex: marriot is able to appeal with superior customer service and quality and offer a line of different hotels which all generally offer a higher perceived value ○ With line of diff hotels, Marriott can benefit from economies of scale and scope and keep cost in check ● Economies of scale ○ Decrease in cost per unit as output increases ● Economics of scope ○ Savings that come from producing two or more outputs at less cost than producing each output individually even though using same resources and tech. ● Managers can adjust different things to improve strategic position (these are called value

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drivers) ○ Product features ■ Adding unique product attributes allow firms to turn commodity products into differentiated products commanding a premium price ■ Strong R&D needed to create superior features ■ patents ○ Customer service ■ Ex. Zappos having amazing customer service increases their perceived value ■ Free shipping back and forth-thought of it as their “marketing budget” instead of an extra expense ■ Encouraged to build trust with customer ○ Complements ■ Add value to product or service when consumed together ■ Bundling products together ● Ex. ATT bundled internet access, phone, TV services and also DVR but when included as “free add on” customers see it as more valuable By choosing differentiation strategy as a strategic position, managers focus on adding value to product through unique features that respond to customers. This might increase costs but customers will be willing to pay premium price.

6.3 Cost-Leadership Strategy: Understanding Cost Drivers ● GOAL: ○ Reduce firm’s cost below that of it’s competitors while offering adequate value ● Cost leader: ○ Focuses attention and resources on reducing the cost to manufacture a product or deliver a service in order to offer low price ○ Attempts to optimize its value chain activities to achieve low cost position ○ Low cost might override strategic objective ○ CAN ACHIEVE A COMPETITIVE ADVANTAGE as long as its EVC is greater than competitors ● Most important drivers that managers can manipulate to keep costs low ○ Cost of input factors ■ Access to lower cost input factors such as raw materials, labor, IT services ■ Outsource value chain activities such as booking and online customer service to india ○ Economies of scale ■ Firms with greater share can reap this ■ Decreases in cost as output increases ● Spread their fixed costs over a larger output ● Employ specialized systems and equipment ● Take advantage of certain physical properties

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Larger output allows firms to spread their fixed costs over more units so market share is usually critical to drive down cost per unit ● Larger output=invest in more specialized systems and equipment ● Economies of scale also can occur because of certain physical properties ○ Cube square rule: volume of a body increases disproportionately more than its surface, also makes bigger retail stores cheaper to build and run because they can stock more merchandise and handle inventory more efficiently ● Minimum efficient scale: output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest cost petition that is achievable through economies of scale ○ If firm’s cost is below Q1 or above Q2 the firm is at a cost disadvantage ● Benefits to economies of scale cannot go on indefinitely, bigger is not always better Learning curve effects ■ Productivity: it takes less and less time to produce the same output as we become more efficient, learning by doing drives down cost ■ The steeper the curve, the more learning has taken place ■ As cumulative output increases, firms move down the learning curve reaching lower per unit costs ■ Driven by increasing cum output within the existing technology over time ■ By moving further down a given learning curve than competitors, a firm can gain a competitive advantage ■ **learning effects differ from economies of scale as shown ● Differences in timing: learning effects occur over time as output accumulates while economies of scale are captured at one point in time when output increases ● Although learning can decline or flatten, there are no diseconomies to learning ● Differences in complexity: in some production processes like manufacturing steel rods, effects from economies of scale can be quite significant while learning effects are minimal. In others some professions like brain surgery have learning effects being substantial and economies of scale being minimal ■ If a firm’s low cost position is based on complex learning, a manager should be much more concerned if a key employee was to leave Experience-curve effects ■ Now change the underlying technology while holding cumulative output constant ■ Technology and production processes do not stay constant

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Process innovation: a new method or technology to produce an existing product- may initiation a new and steeper curve While learning allows a firm to lower its per unit costs by moving down on a curve, experience allows a firm to jump to a steeper learning curve which drives down its per unit costs COST LEADERSHIP: ● Managers must focus on lowering the costs of production while maintaining a level of quality acceptable to the customer ● If firms can share the benefits of lower costs with consumers, cost leaders appeal to the bargain-conscious buyer whose main criterion is price

6.4 Business-Level Strategy and the Five Forces: Benefits and Risks ● Strong strategic positions that enhance the likelihood of gaining and sustaining competitive advantage ● Five forces model helps to assess the forces Differentiation Strategy: Benefits and Risks Competitive Force

Benefits

Risks

Threat of Entry

→ protection against entry due to intangible resources such as a

→ erosion of margins -->replacement

reputation for innovation quality or customer service Power of suppliers

→ protection against increase in input prices which can be passed on to customers

→ erosion of margins

Power of buyers

→ protection against decrease in sales prices, because welldifferentiated products or services are not perfect limitations

→ erosion of margins

Threat of Substitutes

→ protection against substitute products due to differential appeal

→ replacement, especially when faced with innovation

Rivalry among existing competitors

→ protection against competitors if product or service has enough differential appeal to command premium price

→focus of competition shifts to price → increasing differentiation of product features that do not create value but raise costs → increasing differentiation to raise costs above acceptable threshold

Cost Leadership Strategy: Benefits and Risks Competitive Force

Benefits

Risks

Threat of Entry

→ protection against entry → erosion of margins due to economies of scale → replacement

Power of Suppliers

→ protection against increase in input prices, which can be absorbed

→ erosion of margins

Power of Buyers

→ protection against decrease in sales prices, which can be absorbed

→ erosion of margins

Threat of Substitutes

→ protection against substitute products through further lowering of price

→ replacement, especially when faced with innovation

Rivalry among existing competitors

→ protection against price wars because lowest cost firm will win

→ focus of competition shifts to non-price attributes → lowering costs to drive value creation below acceptable threshold

● 6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership ● Managers should not pursue complex strategy of differentiation and low cost because of the trade-offs in those two distinct strategic positions ● Blue ocean strategy ○ Business-level strategy that successfully combines differentiation and costleadership activities using value innovation to reconcile the inherent trade-off ○ Blue oceans mark untapped market space, the creation of additional demand and the resulting opportunities for highly profitable growth ○ Red oceans are the known market space of existing industries ■ Fierce competition, cut throat style, market share gain comes at the expense of another competitor ○ Example: trader joes, offers quality products of Whole Foods but cheaper and has great customer service ○ Investments in differentiation and low cost are complements not substitutes ○ Offers two pricing options ■ Can charge a higher price than the cost leader, reflecting its higher value creation and thus generating greater profit margins ■ Firm can lower its price below that of the differentiator because of its lower cost structure, which helps to gain market share ● Value Innovation ○ The simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers; considered a cornerstone of blue ocean strategy ○ Makes competition irrelevant by providing a leap in value creation, opening a new and uncontested market space ○ Lower costs and at the same time increase the perceived value for buyers ○ Raising existing key success factors and by creating a new element that the

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industry has not offered previously 4 key questions to initiate a strategic move that allows a firm to open a new market space ○ Value innovation - lower costs ■ Which of the factors that the industry takes for granted should be eliminated? ■ Which of the factors should be reduced well below the industries standards? ○ Value innovation - increase perceived consumer benefits ■ Which of the factors should be raised well above the industries standards? ■ Which factors should be created that the industry has never offered? ○ Good example of using all of these is IKEA ■ Eliminated salespeople, expensive but small retail outlets in prime urban locations and shopping malls ■ Reduced the need for staff in mega stores because of the do it yourself model ■ Raised the number of items that they sold, more furniture and accessories ■ Created a new way for people to shop for furniture ■ Leverages its deep design and engineering expertise to offer furniture that is stylish and functional and that can be easily assembled by the customer ■ IKEA has been able to pursue a blue ocean strategy by opening a new market and making changes to their strategy

6.6 Blue Ocean Strategy Gone Bad: “Stuck in the Middle”’ ● Difficult to realistically achieve a blue ocean strategy ● Stuck clear cost

in the middle - no differentiation or leadership profile

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Value curve ○ Horizontal connection of the points of each value on the strategy canvas that helps strategists diagnose and determine courses of action ○ A strong value curve has focus and divergence and it can even provide a kind of tagline as to what strategy is being undertaken Strategy Canvas ○ Graphical depiction of a company's relative performance

Reveals key strategic insights to see where companies are creating their competitive advantage and where some companies can improve A value curve that zigzags across the strategy canvas indicates a lack of effectiveness in its strategic profile Visually shows how a company can be stuck in the middle...