5 - International Strategy I: Basics II Flashcards
ch. 5 Single-business strategy
Overview
- 1 Generic competitive strategy
- 1.1 Low-cost strategy
- 1.2 Differentiation strategy
- 1.3 Focus or niche strategy
- 2 Hybrid strategies
ch. 5.1 Generic competitive strategies
Generic competitive strategies
Positioning by increasing customer value
Types:
- Differentiation strategy
- Low-cost strategy
- Focused strategy
Developments:
- Hybrid strategies
Markert target x Type of advantage sought:
Broad range of buyers & Differentiation: - Differentiation strategy Broad range of buyers & Low cost: - Low-cost strategy Narrow buyer segment or niche & wathever: - Focused strategy
5.1.1 Low-cost strategy
Overview & Evaluation (Requirements + Risks) of low-cost strategy
True cost leadership is only achieved by the possession of defendable cost advantages!
The objective is to realize a margin premium that reflects the size of the cost advantage
(a.k.a. minimize cost so we can charge the same as the competitor but get more profit)
Evaluation: Requirements - Operating / Overhead cost control - Product / service standardization - Economies of scale and scope - Learning effects - Outsourcing / Vertical integration - Bargaining Power / Input costs
Risks
- Catch-up of competitors
- Cost-price dynamics (“hypercompetition”)
- Technical changes
- Changes in consumer behavior
Example cost leadership: Ratiopharm (“Good price, good health!” )
5.1.1 Low-cost strategy
Approaches to securing a cost advantage
- Use knowledge about cost drivers to manage costs of each activity down year after year
- Find ways to restructure value chain to eliminate nonessential work steps and low-value activities
Approach 1: Controlling cost drivers
- Control costs of resource inputs
- Find sharing opportunities with other business units
- Compare vertical integration vs. outsourcing
Approach 2: Restructuring the value chain
- Shift to e-business technologies
- Simplify product design and production process
5.1.2 Differentiation strategy
Overview differentiation strategy
True differentiation is only achieved by satisfying buyer needs uniquely and subsequently increasing their willingness to pay!
(a.k.a.: same production cost, high price. e.g. apple shit)
The objective is to realize a price premium that
exceeds the cost of the differentiation
Evaluation:
Requirements
- Brand name / Reputation / Image
- Superior product quality
- First mover advantage
- Strong service and process skills
- Design / Marketing skills
- Ability to attract creative
- employees
Risks
- Over engineering
- Overspending erodes profitability
- Inadequate price premiums
- Imitation (temporary advantage)
- Inadequate buyer segmentation
Example differentiation: Aspirin
5.1.2 Differentiation strategy
Identifying potential for differentiation
Decision flowchart:
Product
- > What needs does it satisfy?
- > What are key attributes?
Customer
- > By what criteria do they choose?
- > What are customer preferences for product attributes?
- > What price premiums do product attributes allow?
- > What motivates them?
- > What are demographic, sociological, psychological factors of customer behavior?
Then, formulate differentiation strategy:
- Select product positioning in relation to product attributes
- Select target customer group
- Ensure customer and product compatibility
- Evaluate costs and benefits of differentiation
5.1.3 Focus or niche strategy
Overview: Characterization & Evaluation
Characterization
- Satisfy the needs of a specific customer segment better than any other competitor
- Achieve lower costs than rivals in serving a well-defined buyer segment (focused low-cost strategy)
- Offer a product appealing to unique preferences of a well-defined buyer segment (focused differentiation strategy)
- Required ability: Protect niche through entry barriers:
- patents/technology
- customer loyalty
- unique service
- unique bundling
- etc…
Evaluation Realization: Criteria for niche segmentation: - Product features - Buyer type / customer segment - Distribution channels - Geographic coverage - Pre-Sale / after-sale service - Volume - Payment method - Quality
Risks
- Niche becomes unattractive
- Niche becomes attractive to competitors
- New players re-segment the market
- The strategy is imitated in duration
5.1.3 Focus or niche strategy
Value creation of the different strategy types
The danger of being “stuck in the middle” is rejected by several researchers
There is now useful empirical evidence that some firms do pursue differentiation and low-cost strategies at the same time (e.g. Toyota)
That graphic abour Relative market share x ROI
critical area, minimal ROI on the midlle Relative market share. Depending on the side of the curve, apply one of the strategies
5.2 Hybrid strategies
Reasons for the “stuck in the middle” phenomenon
Combining both strategies by following one after another
Distinction of hybrid strategies: Sequential or Simultaneous
Hypothesis of convexity:
- Relation between market share and strategy
Hypothesis of consistency:
- Conflicting approaches to implement the strategy types
Hypothesis of concentration:
- All resources and processes must be focused on one source of competitive advantage (cost or differentiation)
But:
Successful combination of price and cost leadership with a differentiated product (i.e. McDonalds, Swatch/SMH,Progressive or Citibank) is possible
5.2 Hybrid strategies
combining both strategies by following
one after another
A hybrid strategy enables a company to gain an additional competitive advantage by shifting from one strategy to the other.
Simultaneous pursuit of cost leadership and differentiation?
No:
- Different strategies usually require different and conflicting competences;
- competitors force a choice
Yes:
- New manufacturing and processing technologies allow for quality and cost to be jointly targeted
Temporal use of each strategy:
- following one strategy first, then shifting to the other while maintaining competitive advantages
5.2 Hybrid strategies
Simultaneous Hybrid Strategies
Differentiation strategy and effects of volume
Variety strategy :
- Product variants increase -> market potential increase -> sales volume increase
- Made possible by Economies of Scope
Quality strategy:
- Positive correlation between differentiation variables and return on investment (PIMS research)
- Made possible by Economies of Quality
Innovation strategy:
- Gaining market share with “first-mover-advantages”
- Made possible by Economies of Speed
