answer this discussion questions.
Session 2 Business Strategies based on Value Chain
Agenda
Opening case & Porter’s Value Chain hypothesis
Porter’s generic strategies framework
Cost leadership
Differentiation
Two views on Value Chain hypothesis
The Consistency View
The Blue Ocean View
Case
Video case: Nintendo Wii Blue Ocean strategy
The Blue Ocean that Disappeared – The Case of Nintendo Wii
Opening case
To offset its market share losses since 2008, Nestle has sought to aggressively promote linkages in the premium, luxury market – that has been immune to the recession and has been growing rapidly
Nestle as a global corporation has five major business groups; in each, Nestle links its resource transforming functions in very different ways, reflecting the personality and the positioning of its specific brands.
Culinary foods
Maggi
Le Creazioni di Casa Buitoni
Beverages
Nescafe
Nespresso
Confecti-onary
Kitkat
Maisen Cailer
Milk products
Nutrition
Cerelac
Nestle Haagen Dazs
Babynes
Porter’s Value Chain hypothesis
According to Porter’s value chain hypothesis, the primary links among the resource transforming functions should be sequenced as a chain, i.e. design, produce, market, deliver and support (Porter, 1985)
Value chain analysis helps to evaluate effectiveness of a firm in different functions
Strategies for manipulating value linkages for improving strategic advantage of a business are referred to as the “Business-level strategies”
Design
Production
Marketing
Support
Delivery
The Value Chain hypothesis
In Porter’s framework, the functions in a firm’s value chain are grouped into two broad categories of activities: primary and secondary
Primary activities are directly involved in transforming inputs into outputs and in delivery and after-sales support
inbound logistics
Support activities are involved in supporting primary activities
procurement
service—installation, usage guidance, maintenance, parts, and returns
operations
outbound logistics
marketing and sales
technology development
human resource management
firm infrastructure—general management, planning, finance, accounting, legal, government affairs and quality management
Porter’s generic strategies framework
Generic Sources of Strategic Advantage in Value Chains
One of the major purposes of Porter’s framework is to explicate two generic sources of strategic advantage for the businesses of a firm.
Value
Cost
If customers perceive a product or service as superior, they are willing to pay a premium relative to the price they will pay for competing offerings
If a firm gains a cost advantage for performing activities in its value chain at a cost lower than its major competitors, then it has flexibility to undercut competitors and offer greater value for money
Two views on Value Chain hypothesis
There are two views on this hypothesis:
Contingency view
The firms that make consistent, persistent and dedicated investments in “value” differentiation or “cost” leadership, are likely to generate stronger and more sustainable competitive advantage
Blue Ocean View
A strategy built on an integrated approach will position the firm in strategically advantageous uncontested space
The Consistency View of Value Chain hypothesis
is based on three implicit assumptions:
Knowledge processes/ routines assumption
The firms who strategically concentrate all their investments in either cost reduction or in differentiation are likely to develop deep, strong knowledge processes, or routines, to undergird their competitive advantage, as compared to those who strive to do both
Motivational processes/ culture assumption:
The firms who strategically strive to promote either cost reduction or differentiation only are likely to develop deep, strong motivational processes, or culture, to undergird their competitive advantage
The firms who strategically position themselves as capable of cost reduction or differentiation are likely to develop deep, strong reputation, or credibility, to undergird their competitive advantage
Reputational processes/ credibility assumption
The Consistency View of Value Chain hypothesis
The Consistency View offers a typology of two pure business strategies, based on the two generic sources of strategic advantage:
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Differentiation strategy
The strategy involves making a fairly standardized product, combined with aggressive underpricing all rivals (Porter, 1980: 36)
The strategy involves offering superior product features to customers
Cost leadership strategy
The Consistency View of Value Chain hypothesis
There are three different sub-hypotheses on the relationship between differentiation and cost leadership strategies:
Lifecycle hypothesis
At different phases of product and organizational lifecycles, changing conditions enable change in generic strategies and the firms who embrace this change outpace their competitors (Gilbert & Strebel, 1989)
Singularity hypothesis
Both cost reduction and value addition are integral to any business strategy, and are not distinct but singular, i.e. cost is one variable in the overall differentiation strategy
Mutually-exclusive hypothesis
Porter (1980: 38) asserts that a firm must make a choice among generic strategies, otherwise it will become “stuck in the middle.” (Porter, 1985: 11)
The Consistency View of Value Chain hypothesis
There are three different sub-hypotheses on how generic strategies are related to firm performance:
Differentiation hypothesis
Some scholars assert that the firms using differentiation strategy in a market outperform those using a cost-leadership strategy
Equivalency hypothesis
Contingency hypothesis
Porter (1980: 35) asserts that cost leadership and differentiation strategies offer an equally successful and profitable path to strategic advantage. This may be true in a highly cyclical economic environment
Firms from different nations may have different capabilities for differentiation vs. cost leadership advantage
The Consistency View of Value Chain hypothesis
Risks of Pure Business Strategies
Research shows a lack of support for the Consistency view in highly dynamic and turbulent markets – here the firms that focus on only differentiation or cost leadership may not be as successful because of the risks from the following three risk factors:
Risks
Risks of diminishing returns: as one invest more and more in one objective, incremental benefits become less and less.
Risks of diminishing demand: as one invests more and more in one objective, it becomes less attractive for a broader group.
Risks of competitive interplay: as one gains dramatic cost or value edge over rivals, new rivals emerge to capture a share of the market.
The Consistency View of Value Chain hypothesis
Benefits of a Hybrid Business strategy
In highly dynamic markets, the success of the firms pursuing a hybrid strategy, based on the integration of the linkages for differentiation or cost leadership, may be attributed to the following three factors:
Benefits
Benefits of increasing demand
Benefits of increasing returns
Benefits of competitive priorities
The Blue Ocean View of Value Chain hypothesis
Kim and Mauborgne (2005) characterize cut-throat target markets as ‘Red oceans’, where the sharks compete mercilessly. To succeed in dynamic environments, the firms need to pursue a blue ocean strategy, taking an integrated approach aimed at not killing the competition, but rather to make the competition irrelevant
Blue ocean strategy refers to the creation by a firm of a new, uncontested market space that makes competitors irrelevant and that creates new consumer value often while decreasing costs. It focuses less on competitors, but more on alternatives. It also focuses less on existing customers, but more on non-customers, or potential new customers
The Blue Ocean View of Value Chain hypothesis
The four actions framework for Blue Ocean Strategy
Alternate target customers,
with alternate value factors
Reduce:
What factors should be reduced well below the industry standard?
Create:
What factors should be created that the industry has never offered?
Raise:
What factors should be raised well above the industry standard?
Eliminate:
What factors should be eliminated from what the industry has taken for granted?
The Blue Ocean View of Value Chain hypothesis
The four actions framework for Cirque du Soleil
Cirque du Soleil adopted the blue ocean strategy using a hybrid focus approach; it helped the company gain a significant strategic advantage and grow very rapidly by redefining circus
| Eliminate Start Performers Animal Shows Aisle concession sales Multiple show arenas | Raise Unique venue |
| Reduce Fun and humor Thrill and danger | Create Theme Refined watching environment Artistic music and dance |
Strategy Canvas for Cirque du Soleil
Reduce
Raise
Create
The Blue Ocean View of Value Chain hypothesis
Using Bricolage for constructing Blue Ocean Value Chains
Bricolage offers a useful perspective for constructing blue ocean value chains in fast-changing competitive environments
Bricolage means using whatever available resources as the inputs into a creative process
A classic example of Bricolage is the printing press. As noted in the Wall Street Journal, “The printing press is a classic combinatorial innovation. Each of its key elements—the movable type, the ink, the paper and the press itself—had been developed separately well before Johannes Gutenberg printed his first Bible in the 15th century.” (Johnson, 2010). Gutenberg made use of the available materials to develop a printing press
The Blue Ocean View of Value Chain hypothesis
Limitations of Traditional Value Chain Analysis
It takes a static view of both capabilities and markets, and thus contributes to the commodification of the functions, by promoting similarities in what firms do.
It ignores the opportunities for broader network relationships that might shape several inter-related activities.
Video case: Nintendo Wii Blue Ocean strategy
Case: The Blue Ocean that Disappeared – The Case of Nintendo Wii
The case evaluates the ‘‘turning points’’ and the timing of Nintendo’s strategies in transforming a Red Ocean to a Blue Ocean, and back again
With the launch of Nintendo Wii in 2006, the company created a Blue Ocean by offering a unique gaming experience to previous non-customers and at the same time keeping the cost of its system lower than Sony’s and Microsoft’s. Wii became a market leader by emphasizing its simplicity and lower price (compared to Sony and Microsoft) to break down barriers for new customers
Case: The Blue Ocean that Disappeared – The Case of Nintendo Wii
The competitors’ reaction to Nintendo’s Wii – launch of similar devices:
In response Nintendo releases the new Wii U in 2012 in an attempt to differentiate its new console and create a “Blue Ocean” again. However, if the original Wii represented a shift away from the hardcore gaming market, the
Wii U signals a movement back towards the hardcore gaming market space
This case underlines that the Blue Ocean strategy cannot be a static process (Kim and Mauborgne, 2005).
Nintendo must create a dynamic strategy in order to stay in the Blue Ocean and not to allow turning it into a Red Ocean again
Sony PlayStation Move
Kinect for Xbox 360