Chapter 8 Flashcards
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Business level strategy
Concerns how a specific business should compete in their particular market
Business model
describes a value proposition for customers and other participants, an arrangement of activities that produces this value, and associated revenue and cost structures (p. 247)
Two fundamental means to achieve competitive advantage
(i) Structurally lower costs than its competitors or (ii) products or services that are differentiated from competitors products or services in ways that are so valued by customers that it can charge higher prices that cover the additional costs of the differentiation. Can be illustrated in a 4x4 matrix where scope dimension is also included (broad or narrow) (i.e. Porters generic strategies).
Cost-leadership strategy
i.e. becoming the systematically lowest cost organisation in a domain of activity.
Describe the four key cost drivers that can help deliver cost leadership
- Through cheap input costs such as labour or raw materials, for example locating their labour in countries such as China or Bangladesh. Or locations close to raw material sources, can reduce costs of transportation.
- Through economies of scale , which spreads the fixed costs over a high level of output. Definition: Cost reductions due to higher produced volumes.
- Through experience, that increases the efficiency in two ways; firstly gains in labour productivity through experience (improved capabilities). Secondly, companies with high market share have more ´cumulative experience´ simply because of greater volumes.
- Through product/process design; e.g. (i) engineers can choose to create a product with cheap components rather than expensive and specialised ones. (ii) Communication with customers through cheap web-based solutions rather than through physical stores. (iii) Tailor their offerings in order to meet the most important customer needs.
What are the requirements for cost-based strategies?
Firsly, the principle of competitive advantage implies that a business cost structure needs to be systematically lowest cost (i.e. lower than all its competitors).
Secondly, the low-cost strategy should not be pursued in total disregard of quality, they have to meet market standards. Which leaves them with the following options; (i)* Parity* with competitors in products or services valued by customers, which allows them to charge the same price and translate their cost advantage into profit. (ii) Proximity to competitors in terms of features. Where a competitor is sufficiently close to competitors in terms of product or service features, customers may only require small price cuts in order to compensate for slightly lower quality.
Define Differentiation strategy
Differentiation strategy involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium.
Describe the three primary differentiation drivers.
(i) Product and service attributes can provide better or unique features than comparable products or services.
(ii) Customer relationships. The perceived value of a product can increase through customer service and responsiveness. E.g. BMW with their high-end after sales offers, such as seasonal tire replacement. Can also be through marketing and reputation, which includes emotional and psuchological aspects.
(iii) Complements. Differentiation may build on linkages to other products or services. The perceived value of some products can be significantly enhanced when consumed togheter with other products and services rather than in isolation. E.g. Apple with complementary services in Itunes or App Store, one of the reasons which allow them to charge a premium.
Important consideration for differentiation strategies
Differentiation strategies often include large investments in R&D, branding or staff quality. Hence, it is important to make sure that the additional costs of differentiation are not exceeding the possible gains in price.
Define a Focus strategy
A Focus strategy targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others. They come in two way either differentiation focus or cost focus.
Hybrid strategy
Strategies that combines different generic strategies. E.g. Ikea exploits economies of scale to adopt a low cost strategy, while being differentiated by offering differentiated Scandinavian designs. Organisations can also have different SBUs that pursues different strategies.
Value innovator
A value innovator is a company that manages to identify new CSFs that are either particularly valued by customers (differentiation) or which provide a significant advantage in terms of cost (low cost) and thus competes in blue oceans (i.e. uncontested market space)
Business strategy vs. Business model
A business strategy refers to how a business aims to competes within a particular market. While a business model describes what a business does to generate value and its associated revenue and cost structures.
How are Business models best described?
**Value creation, configuration and capture.
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Business models are best described through three intercorrelated components; (i) the first emphasises value creation, a proposition that adresses a specific customer segments needs and problems and those of other participants. (ii) The second component is the value configuration of the resources and activities that produce this value. (iiI) The final value capture part explains revenue streams and cost structures that allow the organisation and other stakeholders to gain a share of the total value generated.
Give examples of a few business models
The razor and blade business model. Builds on Gilettes classic model of selling razors at a very low price and the compatible replacement blades at a quite high price. In other industries it can be parts, services and maintenance that is priced high while the original product is very cheap.
The Freemium business model. Refers to how a basic product or service is free in order to build a high volume of customers and eventually convince a portion of those to buy a variety of premium services, e.g. online games. However, the Freemium business model also aims for networks effects as the overall value of the service increases with more users.
The peer-to-peer (P2P) business model. Brings people or businesses together without necessarily going through a middleman.
Multi-sided platform brings together two or more distinct but interdependent groups of participants to interact on a platform. They are distinct as they perform separate functions on the platform, and they are interdependent as the platform is of value to each group of participants only if the other group is also present. E.g. Youtube, which includes creators of videos, viewers and advertisers. Other examples are Uber and video consoles.
