Week 5 / Chapters 4 + 5 (Cost Advantage + Differentiation Advantage)

Question 1

Chapter 4: Cost Advantage

Answer 1

Chapter 4: Cost Advantage

Question 2

Two “generic” strategies for offering unique value

to customers:

Answer 2

1) Cost advantage

2) Differentiation Advantage

Question 3

1) Cost advantage

Answer 3

Wins with customers by reducing its prices below all
of its competitors, thereby allowing it to gain market share

The cheapest price possible with minor innovative ideas or tech options

Question 4

Sources of Cost Advanatage

Answer 4

1) Economies of Scale or Scope
2) Leaning and Experience
3) Proprietary knowledge
4) Input Costs
5) Differential business model

Question 5

1) Economies of Scale or Scope

Answer 5

Greater unit volume allows firms to have lower costs by:
• spreading fixed costs across more units
• specialization of equipment and people

A reduction in costs per unit due to increases
in efficiency of production as the number of goods being produced increases.

Economies of scale arise from four principal sources:

1) the ability to spread fixed costs of production,
2) The ability to spread nonproduction costs,
3) Specialization of equipment,
4) Specialization of people.

Question 6

2) Leaning and Experience

Answer 6

Greater cumulative volume drives cost differences due to greater learning and experience within companies with more cumulative experience
in production.

Question 7

3) Proprietary knowledge

Answer 7

Some companies develop proprietary knowledge in the production of their product or service, which leads to a cost advantage.

Question 8

4) Input Costs

Answer 8

Some companies may have lower input costs than others due to:
• greater bargaining power over suppliers or labor
• superior cooperation with suppliers (including lower transaction costs)
• sourcing from low-cost locations (e.g., country comparative advantage)
• preferred access to inputs

Question 9

5) Differential business model

Answer 9

Eliminating activities or steps in the value chain or using a different set of activities altogether may allow a firm to deliver a product or service at lower cost.

Question 10

Fixed cost of production

Answer 10

Costs such as plant and equipment, which are relatively fixed, meaning that they do not increase with
an increase in the number of units produced.

Question 11

In fact, some research has shown that the best predictor of whether an industry is global (meaning that firms in the industry expand to compete on a global basis) is:::

Answer 11

the company’s R&D costs as a percentage of sales

**The higher a firm’s R&D costs as a percentage
of sales, the more incentive the firm has to expand globally to spread those costs across more
customers

Question 12

General and administrative costs (G&A)

Answer 12

Expenses and taxes that are directly related to the
general operation of the company, and executive salaries, general support, and taxes related to
the overall administration of the company.

**include the costs of accounting, finance, human resource management, and the chief executive
and her staff.

Question 13

Task specialization

Answer 13

Breaking a large process into smaller

tasks that require specialized knowledge.

Question 14

Employee specialization

Answer 14

Increased efficiency that results when employees perform a narrow range of tasks over and
over again, leading them to acquire specialized knowledge that helps them complete the task
more efficiently.

Question 15

Scale curve

Figure 4.1 Economies of Scale

Answer 15

A graphic representation of the relationship

between cost per unit and scale (volume) of production in a given time period.

Question 16

Minimum efficient scale

Answer 16

The smallest level of output (unit volume) that a plant or firm can produce to minimize its longrun
average costs. In a graphic presentation of output/unit
volume (x-axis) and cost per unit
(y-axis), it is the output level
where costs per unit flatten and
no longer continue going down
with increased output.

Question 17

Diseconomies of scale

Answer 17

An increase in marginal cost when output is increased.

Why? In large organizations, diseconomies of scale can happen because large plants become very complex to manage. This increase in size and complexity tends to lead to increased waste and lower employee motivation, which, in turn, leads to increased supervision costs

Also, in times of economic downturn, they have difficulty spreading the cost when demand decline

Question 18

During a downturn, how to lower costs to avoid diseconomies

Answer 18

Some firms with heavy fixed costs have moved to reduce the risks of large fixed costs
by shifting more of their cost structure from fixed cost to variable cost

1) One way they do this is by outsourcing more of their activities

2) Another way they may convert fixed to variable costs is by leasing
equipment on a short-term basis, allowing them to turn equipment back to the lessor if
demand is low.

Question 19

Economies of Scope

Answer 19

The average total cost of production decreases as a result of increasing the number of different goods produced.

Opening multiple stores in a mall under the same mothership can allow for negotiation of leases and shipping / transportation

Question 20

2) Learning and Experience

Answer 20

2) Learning and Experience Beyond This

Question 21

Basic saying for this

Answer 21

“practice makes perfect”

Question 22

Learning and Experience

Answer 22

These companies are relying on the fact that humans can perform tasks more efficiently—more quickly, with greater dexterity—the more a task is repeated which can also lead to the employee becoming effective at finding ways to complete the task

Question 23

The Learning Curve

Answer 23

The concept that labor costs per unit decrease
with increases in volume due to learning. New skills or knowledge can be quickly acquired initially, but subsequent learning becomes much slower.

*The learning curve is more complex than a scale curve to calculate because it requires gathering data on the cumulative volume of a given product or service produced

Question 24

Experience curve

requires cumulative volume data

Answer 24

A representation of the relationship between cumulative volume and product cost.

Learning and experience curve slopes tend to be steeper in the early stages of production
because learning occurs more rapidly in the early stages of production

An experience curve does a better job of capturing learning effects than a scale curve, because it is based on cumulative volume, like the learning curve. But it also does a better job of capturing the effects of economies of scale than a learning curve does, because it includes all costs, not just labor

Question 25

Law of experience

Answer 25

Costs per unit decrease with increases in

cumulative volume of production.

Question 26

The Relationship Between Market Share and Profitability in Retail Industries

Answer 26

The logic was as follows: the higher the company’s
volume (its market share), the lower the costs per unit, and the better the profit performance

The initial conclusion from studies on the market share/profitability relationship was that
if a company wants to increase its profitability, it should increase its market share

Question 27

What are Scale and Experience Curves used for?

Answer 27

Scale and experience curves are useful tools for making practical strategic decisions about
growth and investment strategies, pricing strategies, strategies for managing costs, and acquisition
strategies.

Question 28

Relative cost

Answer 28

The costs incurred by one company compared to the

costs paid by a competitor.

Question 29

Proprietary Knowledge

Answer 29

Information that is not public and that is viewed as the property of the holder.

Example: Toyota making cars better than GM, Ford
Example: TATA cars patenting technologies

Question 30

4) Lower Input Costs

Answer 30

Beyond this

Question 31

Inputs

Answer 31

Resources such as people, raw materials, energy,
information, or financing that are put into a system (such as an economy, manufacturing plant,
computer system, etc.) to obtain a desired output.

Labour, capital, land too

Question 32

Four primary ways that companies achieve cost advantage through lower-cost inputs:

Answer 32

(1) exercising strong bargaining power over suppliers, (2) cooperating especially well with suppliers,
(3) getting inputs from low-cost locations
(4) arranging better access to inputs than other companies have.

Question 33

Bargaining Power over Suppliers

Answer 33

The most important way that companies get lower-cost inputs

There are two main sources of bargaining power:

1) buying a lot from the supplier
2) using successful negotiating tactics

Question 34

1) buying a lot from the supplier / Purchasing Volume

Answer 34

Indeed, as a rule of thumb, suppliers are known to drop prices by 5 percent to 10 percent with a doubling of purchased volume.

Question 35

2) using successful negotiating tactics / Purchasing and Negotiating Tactics

Answer 35

Even when two firms purchase similar volumes
of inputs, one of the firms may have negotiation skills and purchasing tactics that allow it
to get inputs at lower prices

Example: Walmart spreads its purchases across numerous suppliers, so that no
one supplier has a dominant market share in any particular product category

Question 36

(2) cooperating especially well with suppliers

Answer 36

Toyota is known for working cooperatively with suppliers to get lower-cost and higher-quality inputs.

Question 37

(3) getting inputs from low-cost locations

Answer 37

The price of inputs can vary significantly between locations because of differences in wage rates, exchange rates, or raw material or energy costs.

Question 38

(4) arranging better access to inputs than other companies have.

Answer 38

particular inputs—it can get them more easily than other companies can.

For example, drilling
oil in Saudi Arabia requires only the simplest drilling technologies, because drilling is less complicated
in the desert and oil is more frequently found relatively close to the surface.

Question 39

5) Different Business Model or Value Chain

Answer 39

Slides beyond this

Question 40

Business model

Answer 40

The plan and set of activities implemented by a company to offer unique value and generate revenue and make a profit from operations.

Question 41

Value chain

Answer 41

The sequence of all activities that are performed by

a firm to turn raw materials into the finished product that is sold to a buyer.

Question 42

There are two basic ways to create a new business

model:

Answer 42

1) to eliminate activities or steps in the value chain

2) to perform different activities altogether

Question 43

Eliminating Steps in the Value Chain

Answer 43

One reason Ryanair has a cost advantage over other airlines in Europe is because it does not
offer any in-flight meals, pillows, blankets, or even air-sick bags.

By not offering these items, Ryanair not only doesn’t have to purchase the items itself, but it also is able to significantly reduce the labor costs associated with getting meals on and off its airplanes or laundering blankets and pillows.

Question 44

Performing Completely New Activities

Answer 44

In 1995, Amazon.com began
to sell books in a completely different way—over the Internet. It was much cheaper for
Amazon to build a few large warehouses, take orders online, and ship books directly to the
customers’ homes than to do the things Barnes & Noble was doing: building superstores,
hiring employees to staff the stores, and buying and storing inventory

Question 45

CHAPTER 5 Differentiation Advantage

Answer 45

CHAPTER 5 Differentiation Advantage

Question 46

When customers go to purchase a product to get a job done, they tend to consider two factors:`

Answer 46

1. The way a product is differentiated from other products to perform the job (or jobs) they want done
2. The price of the product

Question 47

Product Differentiation

Answer 47

A strategy whereby companies attempt to gain competitive advantage by offering value that
is not available in other products or services or that other products don’t do as well.

Question 48

Four major categories of differentiation

Answer 48

(1) different product/service features,
(2) superior quality or reliability,
(3) convenience,
(4) brand image

Question 49

(1) different product/service features,

Answer 49

1. The product does a “better job” of meeting a customer need on existing product features
2. The product does “more jobs” for the customer than other products.
3. The product does a “unique job” that nothing else does.

Question 50

1. The product does a “better job” of meeting a customer need on existing product features

Answer 50

Some companies differentiate their products
by focusing on one particular feature and doing a better functional job than other products
of providing value on that particular feature

Example: Dyson Vacuum cleaners are better at sucking

Question 51

2. The product does “more jobs” for the customer than other products.

Answer 51

In some cases, a product might not do a better functional job but simply does more jobs, or meets more needs, for customers than competitor offerings.

For example, Facebook did a job that the other social networking sites did not do when it gave users the
ability to alert their friends about their “relationship status,” a particularly important piece of information for teenagers and college students.

Question 52

3. The product does a “unique job” that nothing else does.

Answer 52

Some products do a completely unique job that other products simply do not do. Rather than simply doing existing jobs better or doing more of jobs than
other products, they offer a completely new feature to the market.

Example: Disney theme parks are the only places you can go to see Mickey Mouse or ride the
Pirates of the Caribbean to see Captain Jack Sparrow.

Question 53

Mass customization

Answer 53

When a company mass-produces the various modules of the product and then allows the customer
to select which modules will be combined together.

Question 54

(2) superior quality or reliability,

Category 2 of differentiation

Answer 54

The product doesn’t necessarily do a better job as far as performance on existing features. It doesn’t do
more jobs than other products, and it doesn’t do a unique job. It simply lasts longer.

Question 55

(3) convenience,

Category 3 of differentiation

Answer 55

Another differentiator used by companies is making their products more convenient to find and
purchase

Example: Starbucks is an example of a company that succeeds, in part, through convenience (they’re fucking everywhere)

Question 56

Network effects

Answer 56

When some products or services are more convenient to use because there is a large network of other users.

Example: Facebook having so many users makes it enticing for more to join

Question 57

(4) brand image

Category 4 of differentiation

Answer 57

Definition: When products are differentiated through marketing, via advertisements, promotions,
and other marketing activities.

Interestingly, numerous studies have shown that the more people are exposed to something, be it a brand, company, or product, the more they come to trust it.

Question 58

Mere exposure effect

Answer 58

a psychological phenomenon by which people tend to develop a preference for things merely because
they are familiar with them.

Question 59

Prestige brands

Answer 59

When products are differentiated by being associated with positive qualities in the minds of customers.

Question 60

How to Find Sources of Product Differentiation

Answer 60

Two major ways:

1) customer segmentation
2) mapping the consumption chain

Question 61

Customer Segmentation

Answer 61

Grouping customers based on

similar needs.

Question 62

Customer segments

Answer 62

Groups of people who share similar needs

and thus are likely to desire the same features in a product.

Question 63

Groups of people who share similar needs

and thus are likely to desire the same features in a product.

Answer 63

The first problem is that they may
add features, and costs, to their products that some groups of customers don’t really want and
don’t want to pay for.

The second problem is that they may not add features that certain groups
care about and would be willing to pay for, potentially losing market share to rival firms that do
offer those features.

Question 64

Marketers typically segment markets in one of three ways:

Answer 64

1. Based on various attributes or the price of products
2. Based on attributes of the individuals or companies
   who are customers, including demographics
   or psychographics
3. Based on attributes of the customer’s circumstance, or what is called the job-to-be-done view, an alternative way of segmenting customers that has emerged recently

Question 65

Product Attributes

Answer 65

For example, customers looking to buy motorcycles may place different value on different attributes,
such as power (speed), reliability, ease of handling, gas consumption, or customizability.

By assessing the relative importance that customers put on different attributes, and grouping
customers based on what they want in those attributes, it may be possible to design products
to meet the needs of that customer segment

Question 66

Demographics/Customer Attributes

Answer 66

Popular ways to segment the consumer market include by age, socioeconomic status (e.g., income), education, profession, and ethnic group

For example, teenagers might be considered one segment of the market because they are viewed
to be similar in terms of what they want from certain types of products or services

Question 67

Mapping the Consumption Chain

Answer 67

Identifying all the steps through which customers pass,
from the time they first become aware of your product to the time when they finally have to dispose of it or discontinue using it.

Question 68

How Do Consumers Become Aware of Their Need for a Product or Service?

Answer 68

The first step in the consumption chain occurs when customers become aware that
they need a product or service. A company may be able to differentiate its product if it can
find a unique way to make consumers aware of a need

Question 69

Table 5.2

Answer 69

Mapping the Consumption Chain

Question 70

How Do Consumers Find Your Offering?

Answer 70

After potential customers are aware
that they have a need for a product, they then must find it.

Companies can differentiate their
offering if they can make the search process easier for customers by making it less complicated,
more convenient, or less expensive

Question 71

How Do Consumers Make Their Final Selections?

Answer 71

After a consumer has narrowed down the possibilities, they must make a choice. This is the time when product attributes typically dominate, and it is critical to ensure that consumers are aware of features
that differentiate a product

A comparison list
makes it easier for consumers to see which product has more features, or has the features they
care about the most

Question 72

How Do Customers Order and Purchase Your Product or Service?

Answer 72

Another way to differentiate a product is to make the process of ordering and purchasing more
convenient

Example: Amazon one click purchase

One potential benefit of making your product more convenient to order is your company
can create a switching cost, especially for repeat customers

Question 73

How Is Your Product or Service Delivered and/or Installed?

Answer 73

Customers sometimes need to have products that they purchase delivered, installed, or assembled.

Transporting and assembling products are stumbling blocks for customers, so these services can be
a source of differentiation

Example: RC Willey 48 hour guaranteed delivery

Question 74

How Is Your Product Stored?

Answer 74

When it is expensive, inconvenient, or even dangerous
for customers to have a product simply sitting around, a company has the potential to differentiate
the product by providing better or easier storage options.

Example: easily foldable treadmills

Question 75

What Do Customers Need Help With When They Use Your Product?

Answer 75

Sometimes a customer will need assistance when using a product or service.

A company can differentiate on that dimension if it understands what kind of help customers need and can provide that assistance more effectively than other companies

Example: Butterball’s 24-hour Turkey Talk-Line fields questions from thousands of these customers every
Thanksgiving

Question 76

What If Customers Aren’t Satisfied and Need a Return or Exchange?

Answer 76

While many companies focus on the customer through the sale and installation of a product, others realize that long-term loyalty requires attention to customers’ needs throughout their experience with a product.

Handling problems well when the product doesn’t work out for a customer can be as important as meeting the need that motivated the initial purchase

Example: Nordstrom’s no hassle returns

Question 77

How Is Your Product Repaired, Serviced, or Disposed Of?

Answer 77

As many users of technologically sophisticated products will attest, repair experiences—both good and bad— can influence a lifetime of subsequent purchases.

Example: This is particularly true if you are highly
inconvenienced because the product fails to work properly, as is the case of an elevator (nobody
wants to get stuck in an elevator)

Question 78

New Thinking: Achieving Low Cost and Differentiation

Answer 78

Despite the concern that Porter expresses about being “stuck in the middle,” some companies
have found ways to succeed through differentiation and cost leadership

Example, Intel was able to successfully differentiate its microprocessors through superior processing speed and with its “Intel Inside” and “Pentium” branding

Question 79

Assessing Differentiation Performance

Answer 79

“What metric can I use to assess how well my differentiation strategy is working?”

The answer to that question lies in whether you can satisfy customers to such a degree that they
are willing to recommend your company (or product) to a friend or colleague.

Net promoter score: a tool that can be used to assess how well a differentiation strategy is working to turn customers into promoters of a company’s offering

Question 80

Strategy in Your Career: What Is Your Unique Value?

Answer 80

You want to be a differentiator

Question 81

Every “job” has three dimensions. Which of the following is NOT one of those three dimensions

Answer 81

Aesthetical

Question 82

For a luxury high-end product, which of three “job” dimensions is not as important?

Answer 82

Functional

Question 83

Example: What is Walmart Value proposition

3C Strategy for Harley-Davidson

Answer 83

Providing a wide selection of low priced products at convenient locations to price-sensitive consumers

OR from the slides

Everyday low prices for a broad range of goods that are always in stock in convenient locations

Question 84

3C Strategy for Harley-Davidson

Answer 84

Harley Davidson provides a wide selection of personalized, unique motorcycles with customizable attributes to individuals with an interest in adventure and community

Question 85

The generic business strategies of cost and differentiation represent a fundamentally different approach to creating and sustaining a competitive advantage because dedifferentiation is usually _______

Answer 85

Costly

Question 86

Three jobs of a product

Answer 86

Functional: Yummy treat

Social job: Appease my kids

Emotional job: Commute companion, happiness, belonging, community

Question 87

Barriers to imitation are ________ by firms through developing unique resources and capabilities

Answer 87

created

Question 88

Barriers to imitation are primarily of two types:

Answer 88

–Barriers to cost imitation (e.g., access to inputs, scale, experience)

–Barriers to product/service imitation and accessing customers (e.g., features, patents, brands, convenience, etc.)

Question 89

Barriers to imitation also act as _____

Answer 89

barriers to entry

Question 90

When a company chooses a low cost strategy, it will be successful by keeping its focus on cost to the exclusion of everything else

Answer 90

False

It is more than just low cost

Question 91

“practice makes perfect” applies to which cost advantage?

Answer 91

Learning and experience

Question 92

Which of the following is true about economies of scale

Answer 92

Cost / unit is lower

Question 93

Which of the following is not a way to lower input costs?

Answer 93

Building a new business model

Question 94

What are the two generic strategies for offering unique value to customers

Answer 94

Differentiation advantage and cost advantage

Question 95

Two products with the exact same technical features can be differentiated because of customer percpetion?

Answer 95

True

Question 96

Which of the following is not one of the three dimensions of a job?

Answer 96

Aesthetic

Question 97

For a luxury high-end product, which job dimension is least important

Answer 97

Functional

Question 98

Which of the following would be least effective to differentiate product features

Answer 98

Have products that do less-expensive jobs

Question 99

Which of the following best characterizes a product that is differentiated with quality or reliability

Answer 99

The product lasts longer