Ch. 6 MGT 491

Benefits to scale cannot go on indefinitely. Beyond minimum efficient scale, firms experience diseconomies of scale—increases in cost as output increases. As firms get too big, the complexity of managing and coordinating raises the cost, negating any benefits to scale. Large firms tend to become overly bureaucratic, with too many layers of hierarchy. They grow inflexible and slow in decision making.

delivers low-cost products and services to a specific, narrow part of the market.

Superior customer service

Strategic positions are not fixed, and firms have to refine their positions over time.

A company that uses a differentiation strategy can achieve a competitive advantage as long as its economic value created is greater than that of its competitors. This allows the company to charge a premium price, reflecting its higher value creation. Although a differentiation strategy is generally associated with premium pricing, managers have an important second pricing option. When a firm is able to offer a differentiated product or service and can control its costs at the same time, it is able to gain market share from other firms by charging a similar price but offering more perceived value.

Economies of scale allow firms to: • Spread their fixed costs over a larger output. • Employ specialized systems and equipment. • Take advantage of certain physical properties.

trade-off between value creation and production cost.

An integration strategy is difficult to implement because it requires the reconciliation of fundamentally different strategic positions—differentiation and low cost—which in turn require distinct internal value chain activities in order to allow the firm to increase value and lower cost at the same time. Many firms that attempt to pursue an integration strategy fail because they end up being stuck in the middle: They succeed at neither a differentiation nor a cost-leadership strategy. In a world of strategic trade-offs, increasing value and lowering cost have opposite effects. Improved product features, customer services, and customization all result in higher cost, while offering a no-frills product reduces perceived value. It happens quite often that a firm can't do both but must choose to be either a differentiator or a cost leader.

focus its research and development on product technologies to add uniqueness.

They can be used by any organization independent of industry context.

Although a cost-leadership strategy provides some protection against the five forces, it also carries some risks. If a new entrant with new and relevant expertise enters the market, the low-cost leader's margins may erode due to loss in market share while it attempts to learn new capabilities.

TrueDisk creates a greater economic value than SW Storage.

The value and the cost position of the firm relative to its competitors

Differentiation

Choosing a strategic position requires making important trade-offs between value and cost positions.

Correct Business-level strategy details the goal-directed actions managers take in their quest for competitive advantage when competing in a single product market. It may involve a single product or a group of similar products that use the same distribution channel. It concerns the broad question, "How should we compete?" To formulate an appropriate business-level strategy, managers must answer the "who-what-why-and-how" questions of competition: • Who—which customer segments—will we serve? • What customer needs, wishes, and desires will we satisfy? • Why do we want to satisfy them? • How will we satisfy our customers' needs?

There are some important differences between economies of scale and learning effects: • Learning effects occur over time as output is accumulated, while economies of scale are captured at one point in time when output is increased. Although learning declines at some point, there are no diseconomies to learning (unlike diseconomies to scale). • In some production processes (e.g., a simple one-step process in the manufacture of steel rods), effects from economies of scale can be quite significant, while learning effects are minimal. In contrast, in some professions (brain surgery or the practice of estate law), learning effects can be substantial, while economies of scale are minimal.

low-cost input factors.

An integration strategy allows a firm to offer a differentiated product or service at low cost. A successful integration strategy requires that trade-offs between differentiation and low cost are reconciled. This is often difficult because differentiation and low cost are distinct strategic positions that require the firm to effectively manage internal value chain activities that are fundamentally different from one another. For example, a cost leader would focus research and development on process technologies in order to improve efficiency, but a differentiator would focus research and development on product technologies in order to add uniqueness. When successful, investments in differentiation and low cost are not substitutes but are complements, providing important spill-over effects.

Minimum efficient scale

It appeals to the price-conscious buyers.

the intent of an integration strategy is not to be the absolute lowest-cost provider because an integrator must also increase perceived value.

The quality of a product denotes its durability and reliability. Quality not only can increase a product's perceived value, but also can lower its cost. Through techniques like total quality management, companies design and build products with quality in mind, while increasing their differentiated appeal. By building in better quality, companies lower the cost of both production and after-sale service requirements. From the customer's perspective, the product has increased value because it reduces the total cost of ownership. Quality is a two-pronged activity: It raises economic value creation (V - C) by simultaneously increasing value and lowering cost.

Correct One of the obvious but most important levers that managers can adjust are the product features and attributes, thereby increasing the perceived value of the product or service offering. Adding unique product features allows firms to turn commodity products into differentiated products commanding a premium price. Strong R&D capabilities are often needed to create superior product features.

Learning by doing can drive down cost. As individuals and teams engage repeatedly in an activity, whether writing computer code, developing new medicines, or building submarines, they learn from their cumulative experience. The concept of an experience curve attempts to capture both learning effects and process improvements. In this perspective, economies of learning allow movement down a given learning curve based on current production technology. By moving further down a given learning curve than competitors, a firm can gain a competitive advantage. Taken together, learning by doing allows a firm to lower its per-unit costs by moving down a given learning curve, while combining experience based learning and process innovation allows the firm to leapfrog to a steeper learning curve, thereby further driving down its per-unit costs.

When mass manufacturing pens

integration strategy

Every time the cumulative output is doubled, the cost per unit will decline by 20 percent.

create higher customer perceived value than the value that competitors create.

Economies of scope

reaches the productivity frontier

The firm is at an advantage when compared to its competitor.

Economic value creation, V - C, is also called the value gap. A firm achieves a competitive advantage when it has a higher value gap than its competitors, which allows it to charge a premium price, reflecting its higher value creation.

set of best-in-class strategic positions the firm can take relating to value creation and low cost at a given point in time.

focus its research and development on process technologies to improve efficiency.

A firm's business-level strategy determines its strategic position—its strategic profile based on value creation and cost—in a specific product market. A firm attempts to stake out a valuable and unique position that meets customer needs while simultaneously creating as large a gap as possible between the value the firm's product creates and the cost required to produce it. Higher value tends to require higher cost. To achieve a desired strategic position, managers must make strategic trade-offs—choices between a cost or value position. Managers must address the tension between value creation (which tends to generate higher cost) and the pressure to keep cost in check so as not to erode the firm's economic value creation and profit margin.

When attempting to increase the perceived value of the firm's product or service offerings, managers must remember that the different value drivers contribute to competitive advantage only if their increase in value creation (ΔV) exceeds the increase in costs (ΔC). The condition of ΔV > ΔC must be fulfilled if a differentiation strategy is to strengthen a firm's strategic position and thus enhance its competitive advantage.

Shoes Cult has a competitive advantage over Aros.

Lower value gap

The rock-bottom air fares

Student answers will vary. In a focused differentiation strategy, a firm seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features and with a narrow focus on a niche market. For example, a cosmetics brand pursues a focused differentiation strategy when it offers premium, superior-quality cosmetics priced at several hundred dollars.

Product features

While there are no diseconomies to learning, there are diseconomies to scale.

Low-cost input factors