Week 4

Question 1

Value chain Analysis

Answer 1

Differentiates between 2 types of activities:

1. Primary
2. Secondary

Question 2

Primary Activities

Answer 2

Consist of activities that add direct value to the company, so the activities that convert inputs into outputs as the product or services goes horizontally through the firm’s internal value chain.

Supply chain management, operations, distribution, marketing, sales, and after-sales service are considered primary activities.

Question 3

Secondary or support activities

Answer 3

Activities that are needed to be done in order to be able to do the primary activities.

R&D, information systems, human resources, accounting, finance, firm infrastructure, processes, policies, and procedures are considered secondary activities.

An example of this is Harley-Davidson, which is selling not only a motorcycle, but also a lifestyle. This is because they are not producing the “best” motorcycles, but they sell vintage ones.

Question 4

Industry Positioning

Answer 4

We get the competitive advantage from our position in the industry (low cost or differentiation) and from our resources and capabilities.

The position of the industry is viewed from an outside-in perspective, whereas the resources and capabilities are viewed from an inside-out perspective.

Question 5

4 different types of industry positioning

Answer 5

1. cost leadership,
2. focused cost leadership,
3. differentiation,
4. focused differentiation.

Question 6

Cost leadership

Answer 6

Try to make a profit by having the lowest prices in the industry.

Question 7

Focused cost leadership

Answer 7

Same as cost leadership but you have a very clear customer segment in the industry.

Question 8

Differentiation

Answer 8

Develop a unique product that has a specific value to the customer, so they will choose your product over the competitors’.

Question 9

Focused differentiation strategy

Answer 9

Same as differentiation but you focus on a specific part of the industry with your differentiation strategy.

Question 10

Differentiation advantage

Answer 10

1. Tangible products

2. Intangible products

Question 11

Differentiation advantage with tangible factors

Answer 11

With tangible factors, this can mean either things that are directly related to the product, like performance or functionality, or things that indirectly relate to the product after it has been bought, like quick delivery or training courses.

Question 12

Differentiation advantage with intangible factors

Answer 12

With the intangible factors, we look at the (positive) influence a brand or reputation adds to the product in a social, emotional, or psychological way.

Question 13

Competitive advantage with blue ocean strategy

Answer 13

With a blue ocean strategy, you basically create a new market. In doing so, you get a differentiated product for a low price, so basically create a cost and differentiation advantage.

Since you are creating your own market, you do not have to worry about competition, as there is none. If you want to pursue a blue ocean strategy, you start doing value innovation, which means that you have to eliminate, reduce, raise, and create.

Question 14

Business level strategies

Answer 14

The goal-directed actions managers take in their quest for competitive advantage.

Question 15

Differentiation strategy

Answer 15

The goal of differentiation is to add unique features that will increase the perceived value of the goods, so that they can be offered at a higher price. Therefore, there is a focus on product features, marketing, and services, not price.

If a firm has the same cost as your firm, they are said to have a cost parity. Even if a firm does not have cost parity, if it can create more value it can still have a competitive advantage.

However, while the value is most important in differentiation, you also have to control costs.

Question 16

Cost parity

Answer 16

Under a differentiation strategy if a firm has the same cost as your firm, they are said to have a cost parity.

Question 17

To control costs, firms can take advantage of two “economies”

Answer 17

1. Economies of scale

2. Economies of scope

Question 18

Economies of scale

Answer 18

The decreases in cost per unit as output increases.

Question 19

Economies of scope

Answer 19

Savings that come from producing two or more outputs at less of a cost than producing each output individually.

For example, if two products use the same marketing department this is an economy of scope.

Question 20

Value Drivers

Answer 20

Differentiated firms need to nurture their value drivers which is what a firm has expertise in and has organized its business around.

The three most salient value drivers are:

1. product features,
2. customer service,
3. complements.

Question 21

Cost leadership strategy

Answer 21

The goal of this strategy is to reduce costs below that of competition while offering adequate value.

The firm should attempt to optimize all its value chain activities to achieve a low cost position. However, it still needs to provide products of acceptable value.

A firm that has the same value as your firm is said to have a differentiation parity. A cost-leadership strategy can, therefore, either increase value created while maintaining costs, or lower both the costs and value created.

Question 22

Differentiation parity

Answer 22

Under a cost leadership strategy when a firm has the same value as your firm is said to have a differentiation parity.

Question 23

Four cost drivers under a cost leadership strategy

Answer 23

Cost leadership firms need to control four cost drivers;

1. Cost of input factors,
2. Economies of scale,
3. Learning curve effects,
4. Experience-curve effects.

Question 24

Cost of input factors

Answer 24

Having access to lower-cost input factors compared to competitors.

Question 25

Economies of scale

Answer 25

Firms with large markets can decrease cost per unit as output increases.

Causes of economies of scale include spreading fixed costs over larger output, employing specialized systems and equipment, and taking advantage of certain physical properties.

Question 26

Minimum efficient scale

Answer 26

A cost-leadership firm needs to produce on its minimum efficient scale, which is the output range where costs are consistently low, allowing the firm to be cost competitive.

Output should not be increased too much, because after the minimum efficient scale diseconomies of scale show up as a result of coordination issues and bureaucracy, which increase costs.

Question 27

Learning curve effects

Answer 27

Productivity increases as time goes on.

For example, an 80% learning curve means the per-unit cost drops 20% every time output is doubled.

An important thing to note is that the learning curve effect is driven by increasing cumulative output within existing technology over time. When a firm is further down the learning curve, it is said to have economies of learning.

Question 28

The experience-curve effects

Answer 28

Happen when the underlying technology changes while cumulative output is the same.

This often happens with process innovation, when there is a new method or technology to produce existing products. Innovation create steeper learning curves, allowing firms to “leapfrog” to lower costs even if their output is the same as competitors..

Question 29

Learning curves VS Economies of scale

Answer 29

Learning curves occur over time while economies of scale are captured at one point in time when output increases.

Moreover, in complex tasks economies of learning tend to be prominent, while in simple tasks economies of scale are often larger.

Question 30

Benefits of a successful differentiator

Answer 30

A successful differentiator hopes to benefit from the imperfect competition by reducing rivalry among competitors. Differentiation strategies are usually based on intangible resources and reduce the threat of entry.

If the differentiator can also increase margins significantly, it will not be threatened by powerful suppliers raising input prices.

A differentiator can also pass on prices easily to buyers if the value creation still exceeds the price charged.

Differentiated products also reduce the threat of substitutes because unique product features appeal to customer preferences, creating loyalty.

Question 31

Benefits of being a cost leader

Answer 31

A cost-leader is protected from other competitors because it has the lowest cost.

Since economies of scale are so important for low-cost leaders, they likely have a large market share, which means a lower threat of entry.

The cost leader is also not worried about supplier price increases because it can absorb price increases by reducing its margins.

It can also absorb buyers’ demand for lower prices, and fend off substitutes by lowering its prices, so the value created for customers is the same as the substitute.

However, new entrants with expertise can come in and erode cost leaders’ margins due to loss of market share while the cost leader attempts to learn new capabilities.

Question 32

The success of a business strategy

Answer 32

The success of a business strategy depends on context and relies on two factors:

1. How well the strategy leverages strengths and mitigates weaknesses;
2. How well it helps companies to exploit opportunities and avoid threats.

Question 33

Blue VS Red Oceans

Answer 33

Blue oceans are untapped market spaces.

Red oceans are the market space of existing industries.

Blue oceans allow additional demand creation and highly profitable growth, while red oceans are a zero-sum game with cut-throat competition.

Question 34

Advantages of a successful blue ocean strategy

Answer 34

If the blue ocean strategy is successful, differentiation and low cost become complements rather than substitutes.

In this case, a blue ocean strategy offers two pricing options. They can charge higher price than the cost leader due to higher value creation, or they can charge a price lower than differentiators because of lower cost structure.

However, a Blue-Ocean Strategy requires value Innovation.

Question 35

Value innovation

Answer 35

Value innovation is a process in which a company introduces new technologies or upgrades that are designed to achieve both product differentiation and low costs.

Aligning of innovation with total perceived consumer benefits, price, and cost.

It makes competition irrelevant because it leaps over competition into new uncontested market spaces.

Costs are reduced by eliminating or limiting taken-for-granted factors that industry rivals compete on, while buyer value is increased by raising key success factors or creating new elements the industry has not offered yet.

Question 36

Four key questions to formulate a blue ocean business strategy

Answer 36

1. Eliminate. Which factors that the industry takes for granted should be eliminated?
2. Reduce. Which factors should be reduced well below the industry standard?
3. Raise. Which factors should be raised well above the industry standard?
4. Create. Which factors should be created that the industry has never offered before?

Question 37

Strategy Canvas

Answer 37

Blue ocean is difficult to execute in practice because strategic positions require different internal value chain activities. There is danger of being stuck in the middle, which leads to inferior performance.

To prevent this a firm can use a strategy canvas. This is a graphical depiction of a company’s performance relative to competitors, across key industry success factors.

Question 38

Value curves

Answer 38

A strategy canvas has multiple value curves which are curves that show how high a firm performs on each success factor.

You want the value curve to be quite flat, not bouncing up and down the whole time, as that indicates a lack of effectiveness In the strategic profile. Strategic positioning requires making important trade-offs, since you cannot be good at everything.