Business Policy Test 2


Terms in this set (...)

Cost Leadership
A business-level strategy through which a company seeks cost efficiencies in all operational areas.Ex: Wal-Mart
Product Differentiation
Generate economic value by offering a product that customers prefer over competitors' product. Ex: Rolex
Intended to increase perceived value of firms products
Sources of Cost Advantage
1. economies of scale
2. diseconomies of scale
3. learning curve economies
4. differential low-cost access to productive inputs
5. technology independent of scale
6. policy choices
Economies of Scale
factors that cause a producer's average cost per unit to fall as output rises
-Barrier to entry bc competitors may not be able to match scale
Diseconomies of Scale
the situation in which a firm's long-run average costs rise as the firm increases output
- Risk of international expansion
Learning Curve Economies
-a firm gets more efficient at a process with experience
-the more complicated/technical the process, the greater the experience advantage
-international expansion may propel a firm down the experience curve because of higher volumes
Differential Access to Productive Inputs
- History: right place, right time
- Being first in market
- Natural Endowment: owning a mineral deposit
- Locking up a source: buying all of its output
Technology Independent of Scale
• may allow small firms to become cost competitive
• advantage typically accrues to the "owner" of the
technology—may or may not be the ones who actually use the technology
• size of the advantage depends both on how valuable and protectable the technology is
Policy Choices
-choices firms make about the kinds of products or services they will sell choices that have an impact on relative cost and product differentiation position
-Firms can make policy choices to reduce all costs (Southwest Airlines)
Strategy of cost leadership
Strategy is only as good as implementation.
Structure: Division of management responsibilities & establishing relationships
Control: Policies intended to influence behavior
functional structure
Divides management responsibilities by function
Gets difficult with bigger firms
Divisional Structure
Functions are replicated in each division
Makes sense to use when firm has grown to justify geographic divisions
Functional Structure and Cost
Specialization within functions facilitates cost reduction
Organizational Controls
policies intended to influence behavior by aligning the interests of the individual with the interests of the organization
Bases of Differentiation
Image: Hunger, Comfort, Cleanliness
Beauty: Status, Style, Taste
Safety: Quality, Service, Accuracy
Cause: Reliability, Nostalgia, Belonging
A differentiated product fills one or more need better than competitors
Three Categories of Bases of Differentiation
Product Attributes
Firm & Customer Relationships
Firm Linkages
Product Attributes
exploiting the actual product
-product features
-product complexity
-timing of introduction
Firm & Customer Relationships
customization, consumer marketing, reputation
Firm Linkages
exploiting relationships within the firm and/or relationships with other firms
With Other Firms
Among Functions in the Firm
Product Mix
Distribution Channels
Service & Support
Neutralizing Threats
by altering relationships in an industry, firms may reduce threats and/or create opportunities, thereby increasing profits
Exploiting Industry-type Opportunities
Fragmented Industry
-Branding: Commodity into differentiated product
Emerging Industry
-First mover advantage: captures market share
Mature Industry
-Refining product
Declining Industry
-Exploiting Niches: Serving those with strong needs
Exploiting Other Opportunities
-trends or fads
-social causes
-government policy
-economic conditions
Discuss Whether it is Possible for a Firm to Implement Cost Leadership and Product Differentiation Strategies Simultaneously
The organizational requirements of these strategies are essentially contradictory. Cost leadership requires simple reporting relationships, whereas product differentiation requires cross-divisional/cross-functional linkages. Cost leadership requires intense labor supervision, whereas product differentiation requires less intense supervision of creative employees. Cost leadership requires rewards for cost reduction, whereas product differentiation requires rewards for creative flair.
Some have argued that if a firm implements both strategies, it will do neither well. Firms that do not choose either strategy are often said to be "stuck in the middle" and will fail.