Slide of strategic management w7

Learning Objectives• Identify the basic sources of differentiation, recognise its different forms and appreciate its potential for creating competitive advantage • Explain how value chai

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

Which good or service to offer customers?

How to manufacture or create it?

How to distribute it?

Business-level Strategy (cont.)

• Indicates choices the firms make to compete in individual product/service market

• Key issues

Business-level Strategies

• An organisation can achieve a competitive advantage over rivals through either of the following ways:

• 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

• 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?