case study questions
steve912
WPC480CostLeadershipStrategy.pptxWPC 480. Week 7
1
For next week…
Topic: Differentiation & Niches based on readings below…
Textbook Reading:
Chapter 6, Chapter 5 (pgs 165 – 171)
Submit an article on a corporate merger or acquisition that’s not completed yet if you haven’t.
(After tonight – 1 class till Spring Break)
2
Team Presentation
Strategy
Mission: A firm’s long term purpose – what it aspires to be and what it will avoid in the meantime.
Objectives: Specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission.
Strategy
What is strategy?
Your strategy is your theory of how to excel at the game you are playing
A firm’s strategy is its theory of how to achieve high levels of performance in the markets and industries within which it is operating.
Strategy is a position:
Combine resources & capabilities that ‘position’ your firm in the industry
Different positions in the industry are subject to distinct 5-forces
Generic strategies:
Differentiation – design strategies with core competencies to increase willingness to pay for target customers more than it increase costs for the firm
Cost-leadership – design strategies with core competencies to lower costs for the firm by more than it decreases willingness to pay for target customers
Strategy
Blue Ocean Strategy
7
Blue Ocean Strategy
Value Innovation: Aligning consumer utility, price and cost for maximizing value to company and consumer – product differentiation and low cost.
8
Business-level Strategies
Customer Focus
Key Issues in Business-level Strategy
Who will be served?
What needs will be satisfied?
How will those needs be satisfied?
Tradeoffs (stop imitators)
Triad necessary for successful strategy
Strong Positioning (competitive strategy) creates guides for making tradeoffs and creating organizations that fit
Consistent tradeoffs create an organization that fits a competitive strategy and helps create barriers to competition
Fit creates capabilities and resources that can be a guide to creating a strategy and making tradeoffs.
Positioning (vs competitors)
Fit (inside & outside)
The Triad
Cost leadership
Confusing name – it really is about having the lowest price in your industry
Generally low price requires lowest costs everywhere, but lowest prices are relative to competitors (so could be high absolute costs in some cases)
Sources of keeping costs down and prices low
Cost of input factors (supplier power matters here)
Economies of scale
Employing specialized systems and equipment
Minimum efficient scale – increases in volume do not lead to further cost reductions
Implies large market share almost always to get the best economies of scale
8
Cost leadership: It takes time to reduce costs
Learning Curve Effects – price drops (and quality increases) as volume increases over time
Versus Economy of Scales: Economy of Scales are a specific points in time versus accumulation over time
Differences in Complexity: Depending on product/service EoS may have stronger impacts than learning curves
Experience Curve Effects – price drops (and quality increases) with changes in technology of production
Process Innovation: changes in technology allow increased efficiency with same output volume.
Technology can be changes in methods or machinery
9
Cost leadership: It takes time to reduce costs
Cost Leadership requires optimization of value chain overall, not just single steps
Supplier/buyer relationships matter
May increase costs in one step to lower them overall
Ex: a costly automated packaging line lowers costs when demand is variable/grows
Cost reductions must not threaten to impact product or service quality – they should increase or maintain quality
9
Cost leadership: Discipline in managing growth
Growth can cause diseconomies of scale also
Example: increasing layers of hierarchy as firm grows if it doesn’t decentralize
Success does not, generally, lead to people being “tighter” with money
Have to fight the impulse to start adding extra costs because doing well
Success can lead to a sense of higher status which can lead to increased spending to match new status
Discipline includes unchanging rules about what to NOT to do
Example: never increase profits when costs go down; keep margins the same
Prohibitions on specific actions are easier to follow and communicate than abstract goals
10
Cost Leadership: Requires a culture of discipline and long view of time
Needs to be a value everyone agrees upon to keep prices and costs low
Continuous improvement only comes from a long-term commitment
Top management has to keep focus to avoid growth traps and getting “stuck in the middle”
11
Cost Leadership Strategy
Product Characteristics
Relatively standardized (commoditized) products
Features broadly acceptable to many customers
Lowest competitive price
Goal
Reduce the firm’s cost below its competitors
Offer adequate value
Resources are focused on
Reducing cost/ exploiting efficiencies
Reducing prices for customers
Activity
18
Create a 2x2 with the company and the competitors – Value on one axis and your choice on the other axis
Tell us the factors aligned with the Cost Leadership Strategy.
Supported with examples with activities, resources or capabilities
How did they build or acquire these?
19
Activity
Auto Industry – Hynduai, Kia
Hotels – MicroTel, Motel 6
Mattresses – Casper, Tuft&Needle
Real Estate Listings – Redfin
Car Care – JiffyLube
Personal Care Products – Razors
Car Rentals – Budget
20
Cost Response to Five Forces
Threat of Rivalry
rivals hesitate to compete on basis of price
lack of price competition leads to greater profits
Power of Buyers
drives prices far below competitors, causing them to exit, thus shifting power with buyers (customers) back to the firm
increase switching costs
Power of Suppliers
able to absorb cost increases due to low cost position.
able to make very large purchases, reducing chance of supplier using power
Cost Response to Five Forces
Threat of New Entrants
enter on a large scale in order to be cost competitive
increase the time it takes to move down the industry learning curve
Threat of Substitutes
lower prices in order to maintain its value position
make investments to add features unavailable in substitutes
Risks of Cost Leadership Strategy
Processes used may become obsolete
Erosion of Margins
Competitors catch up and erode cost leader’s advantage
Competitors shift consumer focus to non-price attributes
Competitors, using their own core competencies, may successfully imitate the cost leader’s strategy
Cost reductions may occur at expense of customers’ perceptions of value (cheap)
