Chapter Five Crafting Business Strategy

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Chapter Five Crafting Business Strategy. OBJECTIVES. 1. Define generic strategies and show how they relate to a firms strategic position. 2. Describe the drivers of low-cost, differentiation, and focus strategic positions. 3. - PowerPoint PPT Presentation

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<ul><li><p>*Chapter FiveCrafting Business Strategy</p></li><li><p>*OBJECTIVES Define generic strategies and show how they relate to a firms strategic position</p><p>1Describe the drivers of low-cost, differentiation, and focus strategic positions 2Identify and explain the risks associated with each generic strategy position3Show how different positions fit with various stages of the industry life cycle 4Evaluate the quality of the firms strategy5</p></li><li><p>*JUDO STRATEGYAt its heart, judo strategy is about developing a deep understanding of your competition and the moves that will turn your competitors strength to your advantage. David Yoffie and Mary KwakFrom Judo Strategy </p></li><li><p>*TOWS MATRIX</p></li><li><p>*STRATEGIC POSITIONING SHOULD IMPROVE PROFITABILITYWhere managers of a company situate that company relative to its rivals along important competitive dimensionsDefinitionPurposeTo reduce the effects of rivalry and thereby improve profitability</p></li><li><p>*No advantage over rivalsAdvantage over rivalsLow-cost Differentiation DescriptionProduce an essentially equivalent product at a lower cost Produce a differentiated product and charge suffici-ently higher prices to more than offset the added costs of differentiationA FIRM CAN GAIN ADVANTAGE OVER RIVALS IN TWO WAYS</p></li><li><p>*Adapted from poster, M.1980. Competitive strategy, 1980.Low-costDifferentiationStrategic advantageStrategic targetNarrow (i.e., particular segment only)Broad (i.e., industry wide)Broad differentiationFocused cost leadershipFocused differentiationBroad low-cost leadershipTHE STRATEGIC POSITIONING MODEL</p></li><li><p>*LOW-COST LEADERSHIP AND DIFFERENTIATION OFFER GREATER MARKET SHARE AND/OR PROFITS</p></li><li><p>*Low-costDifferentiationStrategic advantageStrategic targetNarrowBroadTrek BicyclesCoca-colaJet BlueIkeaGodivaMontagueWal-MartGallo WinesSTRATEGIC POSITIONING EXAMPLES</p></li><li><p>*KEY DRIVERS OF COST ADVANTAGE Economies of scale LearningProduct technologyProduct designLocation advantages for sourcing inputs</p></li><li><p>*ECONOMIES OF SCALE Economies of scaleLearningEconomies of scopeProduction technologyProduct designLocationEconomies of scale exist during a period of time if the average total cost for a unit of production is lower at higher levels of outputYou must review cost to assess whether economies of scale exist:Fixed costs remain the same for different levels of productionVariable costs are the costs of variable inputs (such as raw materials and labor) and vary directly with outputMarginal cost is the cost of the last unit of productionTotal cost is the sum of all production costs and always increases as output goes upAverage cost is the mean cost of total production during a given period (say, a year) </p></li><li><p>*DISECONOMIES OF SCALE SIZE DOES NOT ENSURE ECONOMIES OF SCALE LearningEconomies of scopeProduction technologyProduct designLocationEconomies of scale</p></li><li><p>*LEARNING CURVE AS A SOURCE OF COST ADVANTAGEEconomies of scaleLearningEconomies of scopeProduction technologyProduct designLocationHow Learning Differs from Scale</p></li><li><p>6-*Learning/Experience Curve EffectsExhibit 5.4 Comparing Experience Curve Effects</p></li><li><p>*ECONOMIES OF SCOPE AS A SOURCE OF COST ADVANTAGEEconomies of scaleLearningEconomies of scopeProduction technologyProduct designLocationIf a firm produces two or more products and can share resources among two or more of these (e.g., share manufacturing machines) thereby lowering the costs of each product it benefits from economies of scope (Coca Cola/Snapple example) </p></li><li><p>*PRODUCTION TECHNOLOGY AS A SOURCE OF COST ADVANTAGEEconomies of scaleLearningEconomies of scopeProduction technologyProduct designLocationOften, a new entrant who wants to compete against industry incumbents with significant scale and experience advantages, tries to match or beat incumbents costs by introducing a production technology that is subject to different economics (e.g., Jet Blue, Nucor Steel)</p></li><li><p>*PRODUCTION DESIGN AS A SOURCE OF COST ADVANTAGEEconomies of scaleLearningEconomies of scopeProduction technologyProduct designLocationProduct design can sometimes be altered to lower a firms production costs (e.g., Canon vs. Xerox)</p></li><li><p>*LOCATION AS A SOURCE OF COST ADVANTAGEEconomies of scaleLearningEconomies of scopeProduction technologyProduct designLocationSometimes firms try to attain lower production costs by locating their operations in cheaper labor markets (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US)</p></li><li><p>*KEY DRIVERS OF DIFFERENTIATION ADVANTAGESKey DriversPurpose</p></li><li><p>*DRIVERS AND THREATS TO DIFFERENTIATION AND LOW-COST ADVANTAGE</p></li><li><p>*STRATEGIES FOR DIFFERENT PHASES OF THE INDUSTRY LIFE CYCLE DeclineMatureEmbryonicGrowthPhases of in- dustry life cycle</p><p>ArenasVehiclesDifferentiatorsStagingEconomic LogicLocalInternal developmentAlliances to secure missing inputs or distribution accessTarget basic needs, minimal differentiationTactics to gain early footholdsPrices tend to be high. Costs are also high Focus is on securing additional capital to fund growth phase. Penetration into adjacent marketsAlliances for cooperationAcquisitions in targeted marketsIncreased efforts toward differentiationLow cost leaders emerge through gaining experience advantages and scaleIntegrated positions require choice of focusing first on cost or differentiationMargins can improve rapidly because of experience and scalePrice premiums accrue to successful differentiatorsGlobalizationDiversification Mergers and acquisitions result in consolidationMore stable positions emerge across competitorsChoosing international markets and new industry diversification; need rational sequencingConsolidation results in fewer competitors (favoring higher margins) but declining growth demands cost containment and rationalization of operations.Some arenas may be abandoned if decline is severeFocus on segments which provide most profitabilityAcquisitions for diversifying movesDivestitures to exit for some competitorsRationalizing cost</p></li><li><p>*TESTING THE QUALITY OF A STRATEGY</p><p>Key Evaluation CriteriaSub-questions1. Does your strategy exploit your key resources?With your particular mix of resources, does this strategy give you an advantageous position relative to your competitors?Can you pursue this strategy more economically than competitors?Do you have the capital and managerial talent to do all you envision? Are you spread too thin? 2. Does your strategy fit with current industry conditions?Is there healthy profit potential where you're headed? Are you aligned with the key success factors of your industry?3. Will your differentiators be sustainable?Will competitors have difficulty imitating you? If imitation cannot be foreclosed, does your strategy include a ceaseless regimen of innovation and opportunity creation to keep distance between you and the competition?4. Are the elements of your strategy consistent and aligned with your strategic position?Have you made choices of arenas, vehicles, differentiators, and staging, and economic logic? Do they all fit and mutually reinforce each other?6. Can your strategy be implemented?Will your stakeholders allow you to pursue this strategy? Do you have the proper complement of implementation levers in place?Is the management team able and willing to lead the required changes?</p><p>**Full quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.</p><p>- Carl Jung******************</p></li></ul>