Chapter 6: Business Strategy- Differentiation, Cost Leadership, and Blue Oceans

Question 1

Define business-level strategy

Answer 1

The goal-directed actions manager take in their quest for competitive advantage when competing in a single product market. “How should we compete?”

Question 2

Competitive advantage for managers is determined by both…? (2)

Answer 2

Industry effects and Firm effects

Question 3

What determines performance at the firm level?

Answer 3

value and cost positions relative to competitors

Question 4

Define strategic trade-offs

Answer 4

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.

Question 5

Define strategic position

Answer 5

a firm’s strategic profile based on value creation and cost in a specific product market.

Question 6

What are the 4 generic business strategies?

Answer 6

differentiation, cost-leadership, focused cost-leadership, and focused differentiation.

Question 7

Define differentiation strategy

Answer 7

Generic business strategy that seeks to create higher value for customers than the value that their competitors create.

Question 8

Define cost-leadership strategy

Answer 8

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

Question 9

Define focused cost-leadership strategy

Answer 9

Same as cost-leadership except with a narrow focus on a niche market.

Question 10

Define focused-differentiation strategy

Answer 10

Same as differentiation strategy except with a narrower focus on a niche market.

Question 11

Define scope of competition

Answer 11

The size- narrow or broad- of the market in which a firm chooses to compete. Ex- GM vs BMW

Question 12

What determines the success of a differentiation strategy?

Answer 12

successfully differentiating products (increased value creation) and producing the most economic value (low cost, high profit).

Question 13

Define economies of scope

Answer 13

Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology.

Question 14

Define economies of scale

Answer 14

denotes decreases in cost per unit as output increases.

Question 15

What are the 3 most salient value drivers?

Answer 15

Product features, customer service, and complements.

Question 16

A cost-leadership strategy can gain competitive advantage when…?

Answer 16

its economic value created (V-C) is greater than that of its competitors.

Question 17

What is differentiation parity

Answer 17

Creating the same perceived value as competitors at a lower cost.

Question 18

What are then 4 most important cost drivers that managers can manipulate to keep their costs low?

Answer 18

1. ) cost of input factors
2. ) economies of scale
3. ) Learning-curve effects
4. ) Experience-curve effects

Question 19

Economies of scale allow a firm to…? (3)

Answer 19

1. ) Spread their fixed costs over a larger output.
2. ) Employ specialized systems and equipment.
3. ) Take advantage of certain physical properties.

Question 20

Give an example of a firm that spread fixed costs over a larger output.

Answer 20

Microsoft. Almost all the input costs went into R&D for windows 7. Once a single copy was developed, costs dropped practically to zero. So, producing a larger output led to more profit.

Question 21

What is the cube-square rule?

Answer 21

Part of certain physical properties of firms. The larger a firm is, the more merchandise it can store and sell, making them cheaper to build and run. ex- Walmart.

Question 22

Define minimum efficient scale (MES)

Answer 22

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

Question 23

Define diseconomies of scale

Answer 23

increases in cost per unit when output increases.

Question 24

Explain learning curves

Answer 24

Learning by doing drives down costs. It takes less and less time to produce.

Question 25

Explain the experience curve

Answer 25

In the learning curve, it is assumed tech stays the same while cumulative output increases. In the experience curve, the technology changes but the cumulative output stays the same. It drives down per-unit costs.

Question 26

Benefits of differentiation strategy (2)

Answer 26

Can benefit from imperfect competition and command a premium price.

Question 27

Risks of differentiation strategy (2)

Answer 27

focus of competition can switch from value to price, or similar products can be created (iPhone and android)

Question 28

Benefits of Cost-leadership strategy (2)

Answer 28

can withstand a price war, and well-isolated from threats of powerful suppliers to increase profit margins because it is more able to absorb the price increase by accepting lower profits.

Question 29

Risks of cost leadership (2)

Answer 29

Replacement, especially when faced with innovation. Low costs can drive value below acceptable level.

Question 30

What is the blue ocean strategy?

Answer 30

Business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent tradeoffs.

Question 31

What is value innovation?

Answer 31

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.