Slide of strategic management w7

Bma799 Strategic management Lecture Seven: Business Level Strategies Learning Objectives • Describe how cost advantage and differentiation are fundamentally different approaches to achieving a competitive advantage through business-level strategy • Identify the basic sources of cost advantage in an industry and appreciate its potential for creating competitive advantage • Explain how value chain analysis is used to understand cost advantage Learning Objectives • Identify the basic sources of differentiation, recognise its different forms and appreciate its • • • potential for creating competitive advantage Explain how value chain analysis is used to understand differentiation advantage Understand a focus strategy and appreciate its potential for creating competitive advantage Understand how competitive advantage can be created by an integration of cost advantage and differentiation Business-level Strategy • Strategy • an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage • Business-level strategy • an integrated and coordinated set of commitments and actions designed to gain a competitive advantage by exploiting core competencies in specific, individual product markets Business-level Strategy (cont.) • Indicates choices the firms make to compete in individual product/service market • Key issues Which good or service to offer customers? How to Business-level strategy manufacture or create it? How to distribute it? Business-level Strategies • An organisation can achieve a competitive advantage over rivals through either of the following ways: • cost advantage: supplying an equivalent product or service at a lower cost • differentiation: differentiating its product or service in such a way that customers are willing to pay a price premium that exceeds the cost of creating the differentiation • Each option represents a fundamentally different approach to business-level strategy Five Business-Level Strategies The Sources of Cost Advantage Table 7.1 Economies of Scale • Economies of scale refers to cost savings attributed to decreased fixed costs per unit • when the volume of production and sales increases The predominance of large corporations in most manufacturing and service industries is a consequence of economies of scale Economies of Scale • Scale economies arise from three principal sources: • Technical input-output relationships • Indivisibilities • Specialisation Process Technology and Process Design • Process technology and process design can deliver cost savings attributed to • • improved efficiency via innovation of the production process A process is technically superior to another when, for each unit of output, it uses less of one input without using more of any other input For most goods and services, alternative process technologies exist Using the Value Chain to Analyse Costs • Analysing costs requires disaggregating the company’s value chain to identify: • • • • The relative importance of each activity with respect to total cost The cost drivers for each activity and the comparative efficiency with which the company performs each activity How costs in one activity influence costs in another Which activities should be undertaken within the company and which activities should be outsourced The Principal Stages of Value Chain Analysis • A value chain analysis of a company’s cost position comprises the following stages: • Disaggregate the company into separate activities • Establish the relative importance of different activities in the total cost of the product • Compare costs by activity • Identify cost drivers • Identify linkages • Identify opportunities for reducing costs Risks of Cost Advantage • Although strategy analysis has traditionally emphasised cost advantage as the • primary basis for competitive advantage, the cost leadership strategy offers a less secure basis for competitive advantage than does differentiation cost advantage is vulnerable to: • new technology • strategic innovation • unpredictable external forces Differentiation Variables • The potential in any product or service for differentiation is limited only by the boundaries of the human imagination • Differentiation extends beyond the physical characteristics of the product or service to encompass everything about the product or service that influences the value customers derive from it • In analysing differentiation opportunities, one should distinguish tangible and intangible dimensions of differentiation Analysing Differentiation: the Demand Side • Successful differentiation involves matching customers’ demand for differentiation with the company’s capacity to supply differentiation • Analysing demand begins with understanding why customers buy a product or service The Role of Social and Psychological Factors • Most buying reflects social goals and values in terms of the desire to find community • with others, to establish one’s own identity, and to make sense of what is happening in the world It is therefore important to understand customer demand and identify profitable differentiation opportunities requires that we not only analyse the product and its characteristics, but also customers, their lifestyles and aspirations, and the relationship of the product to these lifestyles and aspirations Analysing Differentiation: the Supply Side • Demand analysis identifies customers’ demands for differentiation and their • • willingness to pay for it, but creating differentiation advantage also depends on a company’s ability to offer differentiation It is important therefore for organisations to identify their potential to supply differentiation One must examine the activities the company performs and the resources it has access to for differentiation Using the value chain to analyse differentiation Fig 7.3 Value Chain Analysis of Producer Goods • Using the value chain to identify opportunities for differentiation advantage involves four principal stages: • Construct a value chain for the company and the customer • Identify the drivers of uniqueness in each activity • • Select the most promising differentiation variables for the company Locate linkages between the value chain of the company and that of the buyer Value Chain Analysis of Consumer Goods • Value chain analysis of differentiation opportunities can also be applied to consumer goods • In most cases, consumers are involved in value chain activities for acquisition and purchase • There are significant opportunities for innovative differentiation Differentiation and Segmentation • Whereas segmentation is a feature of market structure, differentiation is a strategic • • choice by a company Differentiation is concerned with how a company competes — the ways in which it can offer uniqueness to customers Segmentation is concerned with where a company competes in terms of customer groups, localities, and product types Focus Strategy • A focus strategy allows companies to concentrate their resources on the chosen target market and advantage is achieved by a better understanding of the customer’s needs and the ability to satisfy them • It cuts across the two basic generic strategies of cost advantage and differentiation Integrated Approach of Cost Advantage & Differentiation • Issues to consider: • Are there only three generic business strategies: cost advantage, differentiation • • and focus? Whether it was possible to use successfully both cost advantage and differentiation? Michael Porter’s response Summary • This session has covered many interrelated issues including: • Why is business-level strategy important? • How is competitive advantage created? • What is the limit of differentiation within a company? • How is value chain analysis useful? ... 7.1 Economies of Scale • Economies of scale refers to cost savings attributed to decreased fixed costs per unit • when the volume of production and sales increases The predominance of large corporations... consequence of economies of scale Economies of Scale • Scale economies arise from three principal sources: • Technical input-output relationships • Indivisibilities • Specialisation Economies of Learning... of Learning • Economies of learning refer to cost savings attributed to cost reductions as a result of • fewer mistakes and improvement in problem solving by repetition of operations Learning