Session 5 Flashcards
What is Value Creation in strategy?
Value Creation is about defining what the company will offer, including:
- Identifying which customers will be served and where.
- Determining the range of products and services offered.
What is Value Delivery in strategy?
Value Delivery ensures the company can deliver on its promise by:
- Assessing if the company has the capabilities to deliver value.
- Organizing effectively now and in the future.
What is Value Capture in strategy?
Value Capture is about establishing a competitive advantage by:
- Identifying the central source of competitive advantage.
- Understanding why the offering is uniquely valuable.
What are the sources of competitive advantage?
A company’s competitive advantage can stem from:
- Capabilities: Unique skills, expertise, or operational efficiencies.
- Position: Market dominance, brand recognition, or cost leadership.
- Networks: Strategic alliances, partnerships, or supply chain advantages.
- Knowledge: Proprietary information, patents, or superior business insights.
How is competitive advantage established?
Competitive advantage emerges from external and internal sources of change:
External Sources of Change:
- Changing customer demand
- Changing prices
- Technological advancements
- Firms that adapt quickly (resource heterogeneity, speed & effectiveness) gain an edge.
Internal Sources of Change:
- Firms with greater creative and innovative capabilities can differentiate from competitors.
How can a firm sustain its competitive advantage?
A firm can sustain its competitive advantage by preventing imitation through:
- Identification: Making it difficult for competitors to recognize the source of success (e.g., obscure superior performance).
- Incentives for Imitation: Deterring imitators through aggressive responses and preempting by securing resources first.
- Diagnosis: Creating causal ambiguity, so competitors cannot easily replicate success.
- Resource Acquisition: Building advantages based on immobile and difficult-to-replicate resources and capabilities.
How does competitive advantage vary in different industry settings?
Trading Markets:
* Sources of Imperfect Competition: Imperfect information, transaction costs, systematic behavioral trends, overshooting.
* Opportunities for Competitive Advantage: Insider trading, cost minimization, superior diagnosis (e.g., chart analysis), contrarianism.
Production Markets:
* Sources of Imperfect Competition: Barriers to imitation and innovation.
* Opportunities for Competitive Advantage: Identifying and exploiting deterrence, preemption, causal ambiguity, and resource immobility (but difficult to influence or exploit).
What are the main sources of competitive advantage?
A firm gains competitive advantage through:
- Cost Advantage – Offering a similar product at a lower cost.
- Differentiation Advantage – Charging a price premium for a unique product.
Single segment: Focus (either cost or differentiation within a niche market).
Cost Analysis
Does increasing market share always lead to higher profitability?
Not always. While higher market share can reduce costs due to economies of scale (Experience Curve Effect), it doesn’t guarantee higher profitability.
- PIMS Data Insight: Market share correlates with profitability (Return on Sales, ROS).
- Correlation ≠ Causation: Costs of acquiring market share (e.g., price wars, marketing) may outweigh benefits.
Example: If a firm heavily discounts to gain market share but loses profit margins, the cost outweighs the benefit.
Cost Analysis
What are the key drivers of cost advantage?
Firms can lower costs and improve profitability through:
- Economies of Scale: Lower unit costs as production increases.
- Economies of Learning: Workers and managers become more efficient over time.
- Production Techniques: Process innovation improves efficiency.
- Product Design: Standardized designs reduce complexity and costs.
- Input Costs: Cheaper inputs (e.g., supplier power, low-cost labor) provide an advantage.
- Capacity Utilization: Spreading fixed costs over more units.
- Residual Efficiency: Better management and elimination of inefficiencies.
Cost Analysis
What are economies of scale and how do they impact costs?
Economies of Scale: As production volume increases, cost per unit decreases.
Minimum Efficient Plant Size (MEPS): The point where most economies of scale are exhausted.
Sources of Scale Economies:
* Technical Input/Output Relationships: Larger-scale production improves efficiency (e.g., bigger machines).
* Indivisibilities: Fixed costs (e.g., machinery, software, R&D) don’t scale proportionally, lowering per-unit costs.
* Specialization: Workers and machines focus on specific tasks, increasing efficiency.
Example: A car manufacturer spreads the cost of expensive robots over millions of vehicles, reducing per-unit costs.
Cost Analysis
Why do some industries have high product development costs?
Product development requires huge upfront costs, especially in industries like defense, aerospace, and technology.
Examples of expensive projects:
* F-35 Lightning II ($240B, Lockheed Martin)
* B-2 Spirit “Stealth Bomber” ($23B, Northrup Grumman)
* A380 “Super-Jumbo” ($19B, Airbus)
Firms must balance development costs and economies of scale to ensure profitability.
Cost Analysis
How do large brands achieve cost advantages in advertising?
Scale Economies in Advertising: Larger brands (e.g., Coca-Cola, Pepsi) spend heavily but have lower cost per unit than smaller competitors.
As sales volume increases, advertising cost per unit decreases.
Why?
* Fixed Cost Spreading: Large sales distribute advertising costs efficiently.
* Brand Recognition: Established brands require less ad spending per unit.
* Bargaining Power: Large firms negotiate better ad rates.
Effect: Big brands leverage economies of scale, making competition harder for smaller firms.
Cost Analysis
How does value chain analysis help in cost management?
Value chain analysis divides a company’s activities into steps, allowing firms to analyze costs at each stage.
Stages of Cost Analysis:
- Identify Value Chain Activities – Break down operations into specific activities.
- Allocate Total Costs – Assign costs to each stage.
- Identify Cost Drivers – Find key cost influencers (e.g., labor, raw materials, marketing).
- Identify Linkages Between Activities – Understand cost relationships across stages.
- Identify Cost Reduction Opportunities – Optimize high-cost areas.
Example: Automobile manufacturing value chain includes purchasing, R&D, component manufacturing, assembly, testing, sales, distribution, and customer service.
Differentiation Analysis
What is the difference between differentiation and segmentation?
- Differentiation: How a firm distinguishes its products from competitors (how it competes).
- Segmentation: Choosing which customers and needs to target (where it competes).
Types of Differentiation:
- Broad Scope: Appeals to common needs (e.g., McDonald’s, Honda).
- Focused Differentiation: Targets specific customer segments (e.g., Harley-Davidson, Armani).
Note: Differentiation does not always require segmentation—it depends on strategy.
Differentiation Analysis
How do value chain linkages enhance differentiation?
- Value chain linkages refer to how different stages of production and operations influence each other.
- They help firms enhance product uniqueness, efficiency, and customer experience.
- Differentiation isn’t just about the product itself, but also how it’s produced, distributed, and supported.
What are key value chain linkages that enhance differentiation in can manufacturing?
- Unique Can Design (Marketing): Premium designs (e.g., embossed logos) make products more attractive.
- High Manufacturing Tolerances (Reliability): Precise production reduces defects and disruptions.
- Frequent, Reliable Delivery (Just-In-Time): Minimizes inventory costs and waste.
- Efficient Order Processing (Lower Costs): Streamlined order management reduces administrative costs.
- Competent Technical Support (Better Efficiency): Strong customer service fosters loyalty.
Value chain linkages add value at multiple points, strengthening differentiation.
How does demand-side differentiation influence a firm’s strategy?
Focus: Aligning product positioning with customer needs and willingness to pay.
Key Considerations:
* What needs does the product satisfy?
* What are its key attributes?
* How do customer preferences link to product attributes?
* What price premiums do attributes command?
* What demographic, sociological, and psychological factors drive customer behavior?
Strategy Development:
* Select product positioning based on attributes.
* Identify target customer groups.
* Ensure compatibility between the product and customer needs.
* Evaluate the cost-benefit tradeoff of differentiation.
What are the main sources of uniqueness in supply-side differentiation?
Supply-side differentiation focuses on a company’s internal capabilities that create unique value.
Main Sources of Uniqueness:
- Product Features & Performance – Superior design, quality, or functionality.
- Complementary Services – Extra value through credit, delivery, or repair services.
- Marketing Activities – Strong branding through advertising and promotions.
- Technology & Innovation – Advanced manufacturing or unique patents.
- Quality of Inputs – High-end materials or ethical sourcing.
- Customer Experience Procedures – Strong service, warranties, or quality control.
- Skilled Employees – Expertise in craftsmanship or innovation.
- Location Strategy – Premium store locations or exclusive distribution.
- Vertical Integration – Controlling supply chains for efficiency and reliability.
Winning Strategy: Align internal capabilities with customer expectations to sustain competitive differentiation.
What is product integrity, and why is it important for differentiation?
Product Integrity: The ability of a product to maintain a consistent and reliable balance of features that meet customer expectations.
Types:
* Internal Integrity: Ensures function matches structure (e.g., a high-performance car must deliver its advertised speed).
* External Integrity: Ensures the product aligns with customer needs, values, and lifestyle (e.g., an eco-friendly car for environmentally conscious buyers).
Successful differentiation requires both internal and external integrity for consistency and customer alignment.
Cost leadership focuses on efficiency and price advantage (cost control, economies of scale).
What are the key elements of a cost leadership strategy?
Goal: Achieve the lowest costs in the industry to offer low prices (e.g., Walmart, Ryanair).
Key Strategy Elements:
- Economies of scale – Large-scale production reduces unit costs.
- Process innovation – Streamlining operations for efficiency.
- Outsourcing/offshoring – Using cheaper suppliers to cut costs.
- Strict cost control – Eliminating unnecessary expenses.
Organizational Requirements:
* Access to capital for large-scale operations.
* Tight cost monitoring.
* Incentives focused on cost reduction metrics.
What are the key elements of a differentiation strategy?
Goal: Offer unique products or services that justify premium pricing (e.g., Apple, BMW).
Key Strategy Elements:
- Strong branding, advertising, and design.
- High product quality and service.
- Continuous innovation and R&D.
Organizational Requirements:
- Marketing and creative abilities.
- Cross-functional coordination between R&D, production, and sales.
- Qualitative performance targets (e.g., customer satisfaction, brand strength).
Differentiation focuses on unique features, branding, and quality (marketing, R&D, customer experience).
What is SWOT analysis, and how does it help maintain competitive advantage?
SWOT Analysis identifies strategic advantages and risks by analyzing:
Internal Factors:
- Strengths: Internal resources that sustain a competitive edge.
- Weaknesses: Internal limitations that create disadvantages.
External Factors:
- Opportunities: External situations firms can exploit for growth.
- Threats: External risks that could harm business performance.
What are the four SWOT strategies for maintaining a competitive advantage?
SWOT Strategies:
1. S-O Strategy: Use strengths to seize opportunities.
1. W-O Strategy: Improve weaknesses by leveraging opportunities.
1. S-T Strategy: Use strengths to defend against threats.
1. W-T Strategy: Minimize weaknesses to reduce vulnerability to threats.
The SWOT Matrix aligns internal capabilities with external conditions to sustain competitive advantage.
What are the main reasons for the erosion of competitive advantage?
Even firms with strong advantages face competitive pressures over time. Key reasons include:
- Environmental Changes – New technology, shifting customer preferences.
- Knowledge Decay – Outdated expertise or processes.
- Knowledge Leakage – Competitors gaining insights (e.g., employee turnover, partnerships).
- Competitor Actions – New market entrants, aggressive innovation.
- Imitation – Rivals replicating a firm’s products/services.
Firms must continuously innovate, protect knowledge, and adapt to change to sustain a competitive edge.
How can knowledge serve as a competitive advantage, and what threatens it?
Knowledge as a Competitive Advantage:
Provides a sustainable edge when a firm has unique expertise, patents, or proprietary processes.
Must be protected and maintained by:
* Leveraging knowledge as long as it’s useful.
* Preventing knowledge decay (keeping it relevant and up to date).
* Preventing competitors from acquiring it (e.g., employee retention, patents).
Threats to Knowledge:
* Competitors: Industrial espionage.
* Irrelevance: Outdated technology (e.g., Polaroid cameras).
* Decay: Firms forgetting processes over time.
* Leakage: Employees leaving with key knowledge.
Firms must protect, refresh, and manage knowledge strategically to sustain a competitive edge.
What are knowledge repositories, and what are their weaknesses?
Knowledge Repositories store critical business knowledge in four areas:
- People: Tacit knowledge (e.g., engineers, sales experts).
- Tasks: Procedures, workflows, and routines.
- Tools/Technology: Software, machinery, design systems.
- Networks: Shared memory systems (e.g., supply chain relationships).
Weaknesses of Knowledge Repositories:
- People: Employees may expose or forget key knowledge.
- Tools: Embedded knowledge can become obsolete or be reverse-engineered.
- Tasks: Over-reliance on routines can create organizational inertia (inability to adapt).
ow can companies defend their knowledge repositories?
Mitigation Strategies to Protect Knowledge:
People:
* Use NDAs and organizational culture to prevent leaks.
* Develop specialized knowledge that is difficult to transfer.
Tools:
* Invest in proprietary technology that is hard to copy.
* Use digital tools, though retention can be challenging.
Tasks:
* Build routines that create non-transferable knowledge.
* Embed knowledge in workflows that are difficult to replicate.
Strategic knowledge management protects a firm’s advantage and reduces competitive risk.
How can companies sustain their competitive advantage?
- External Threats: Competitive advantage is challenged by new entrants, substitutes, and buyer/supplier power.
- Knowledge as an Asset: A key source of differentiation, but decay, leakage, and irrelevance pose risks.
Defense Strategies:
* Identify where competitive advantage resides (people, tools, tasks).
* Develop strategies to protect and sustain it (can apply to brand, cost, leadership, etc.).
