7_Strategy Development Flashcards
How can we offer greater value to customers, while capturing more value than competitors ?
By being unique and taking different (valuable = different in a way, that have value for the consumers) positions from competitors !
How can you increase the margin?
How can you increase the gap between the value and the cost relative to competitors ?
Same questions but formulated differently:
What are the two different ways in order to be different ?
in other words: taking a different position from competitors and beeing unique
You want to deliverately choose a different set of activities to deliver a unique mix of value, by either:
(1) being the cost leader = becoming the lowest-cost producer in the industry
=> Same perceived value but at a lower cost = bigger margin ! But leads to a competitive advantage for the firm !
(2) chosing a differentation strategy = specific way, in which you want to be different => meaning that you compete in areas other than price valued by customers.
=> Producing same as like the competitor but we create higher perceived value and thus a larger margin ! This results in a competitive advantage !!!
What is “cost leadership” and how is it achieved (so called “mechanism”)?
Cost leadership results in superior financial performance
The ‘mechanism’ is that you lower the costs more than you lower the perceived value.
The margin increases and you can set prices lower than competitors and still offer superior value for money!
=> It allows you to set prices lower than competitors and still offer superior value for money and actually be profitable. Cost-Leadership does not have to result in lower prices!
=> With cost advantages, you can either lower the price or you invest in something else to have an advantag in the competition. The decision depends on the environment, how price sensitive the consumers are etc.
Ex: Mars can produce for less money than Hershey but Mars does not lower their prices. They invest in better locations and shelves spaces => so that the consumer can buy mars easierly. Hershey cannot do that because they don’t have that extra money. Mars is willing to give up a part of its margin in order to have a placement advantage on the shelves.
What is the impact of the cost-leadership on the 5 forces ?
It weakens all of them: it weakens rivalry, buyer power, supplier power, threat of substitutes and threat of new entrants (BTE).
Some of these effects benefit all incumbents (substitues and new entrants) => positive externalities in the sens that all firms benefit from a lower threat of new entrants and a lower threat of subsitutes
Explain (ex: Ryanair) the relation between “cost leadership” and the 5 forces
1. Rivalry
Being the low cost leader in the market certainly weakens rivalry because it makes it less attractive for other companies to engage in a price war with you because they know that they won’t be able to out-compete you here on price. So it’s actually to weaken this danger here that we’re going to end the ruinous price war.
2. Buyer
At the same time being the cost leader also reduces buyer power because buyers cannot really force you to lower prices as much as they would want to but actually can only come up with a situation where your price is just as low as the one form the second most efficient company in your industry: If you were willing to offer tickets for price of 10.- and the second most efficient/ cheapest company would be willing to offer ticket prices of 15.- just because their costs are higher, so there’s no way that buyers could drive down your price below the 15.- because there is no way that someone else would be able to offer transportation, at this price. So at 15.- you’re still going to be profitable because you’d also have been willing to offer the tickets at 10.-.
3. Suppliers
Suppliers would like to drive prices up but they can only drive them up to the extent that the average/ second most profitable player in the market would eat up all their profits, but as we saw before, you could still make a profit in that situation because you have a larger margin than the others. And because the cost leader is still going to be profitable if the profits of the margins of the other firms have been eaten up, it weakened supplier problem you’ll still be profitable.
4. Subsitutes
If you are the cost leader, it’s gonna weaken the threat of Substitutes because you’ll be able to charge really low prices if you want to and that reduces the incentives to develop substitutes because they would also have to be really cheap. You’d have also to overcome the situation, that as a new substitute you’d have to be able to offer greater value for money and that’s gonna be quite tricky if you are competing with the cost leader.
5. Threat of new entrants
Similarly if you have a cost leader then there’s a reduced threat of new entrants because again – that would be a barrier to entry that you would have to overcome the considerable cost advantage of some other players.
When can “cost leadership” function and what do you need in general ?
When can cost leadership function:
- You have a segment of overserved/ price sensitive customers < Think of Ryanair customers
- Little room for product quality improvements (commodity)
RYANAIR: got rid of lots of amenities and services that people were used to when they were booking airplane tickets. Ryanair said that people don’t want this whole package – let’s give people less. People were fine with that because previously they had been overserved, charged a higher price then they would have wished for and because of the products involving some things which costs the producers by which the consumers didn’t really value as much.
What you need to explore / aim for:
- Continuous Improvement in operating efficiency < because there can only be one cost leader on the market
- An unbeatable supply chain ex: getting rid of the middle man at Dell
- Product Redesign (standardization) Ex. Using same inputs in different products, using one motor for all products
- Exploit the experience curve/ economies of scale (better than others)
- Experience curve = the more you repeate something, the better you get at making something, for example making an ikea shelf, the more you do it, the quicker you get at making it. It emplies a fix reduction of the costs !
- Economies of scale = do we have higher fix costs associated with production process so that it would be beneficial to increase output to then drive down average cost?
What is a differentiation strategy and how does it function ? What is the “mechanism” ?
Differentiation strategies result in superior financial performance– Coke vs. Pepsi (very similar production process, but Coke has an advantage due to value-conception)
The „mechanism“ is that you increase the perceived value more than you increase the costs
The margin increases and you can set prices higher than competitors and still offer superior value for money!
When we say that a firm has differentiated itself, we mean that it has boosted the willingness of customers to pay for its output—that it commands a price premium.
What is the relation between “differential strategy” and the 5 forces ?
Which company is a good example of this strategy ?
Differentation strategy weakens all five forces.
- Weakens Rivalry: not competing on prices
- Weakens Buyer Power: higher switching costs, consumer more loyal
- Weakens Supplier Power: differentiated input factors, you also require specific input factors from suppliers
- Weakens Threat of Substitutes: people are becoming loyal, having higher switching costs; substitutes would have to offer greater perceived value for money which may be problematic for them; ex: Coke: even when the other substitutes where free, people still had this strong preference for Coke vs. other or carbonated soft drinks more generally vs. other drink substitutes.
- Weakens Threat of New Entrants (BTE), ex: Coke: Strong brands and being differentiated actually weakens the threat of new entrants
Good example is Emirates! Emirates has a higher flight quality, they encure higher costs because they have to train their staff etc. That increase of value perception is linked with higher costs !
Yet the result is that emirates ist still profitable !
=> Strategy similar to the Cost-Leadership strategy where overall it helps to weaken the five forces.
When can differentiation work and what do you need ?
Differentation function when:
- You have a segment of underserved/ non price sensitive customers < people are willing to pay for a higher customer experience
- Economies of scale/ experience effects do not exist or they are being exploited already
What you need to explore/ aim
- Understanding customers inside-out
- Meaningful differentiators < not just different but meaningfully different
- Continuous innovation (if you stop, it’s over!)
Is the choice between differentation and cost-leadership industry dependent ?
No, look at Ryanair vs Emirates and Alnatura vs Aldi.
What makes these strategies (cost leadership and differentation) attractive for consumers ?
Explain what each one can offer
It is thei value propositions that is attractive for consumers.
There in total 9 potential value propositions but only 4 (or maybe 5) are actually attractive for consumers
Differentiation, can offer
- more benefits for more (higher price) or
- more benefits for the same (price)
Cost leadership, can offer
- same benefit for less (lower price) or
- less benefit for much less (way lower price)
Also but relatively rare: Dual Competitive Advantage (CA) offering more for less, meaning to offer a suprior product but for less.
What do the two strategies (cost leadership and differentiator) have in common and what is fundamentaly different ?
Both strategies (cost leadership and differentiator) aim to be unique, create larger margin, long term competitive advantage, they result in funadmentally different organizations and processes.
Cost Leadership (ex: Ryanair):
- Continuous improvement in operating efficiency
- an unbeatable supply chain
- commitment to standardization
- systemic understanding of costs/ cost drivers
- relentless reduction of costs
- product redesign
- exploit the experience curve / economies of scale
- sacrifice of nonconforming customers
Differentiator (ex: Coke):
- Undestanding customer inside-out (deep & holistic)
- meaningflull differentiator
- continuous innovation
- jealous guarding of customers
- intensive brand building
What is the first important thing to not forget when choosing a strategy (differentiator or cost leadership) ?
The first important thing to not forget is the internal analysis: resources and capabilities !
=> Sometimes the capabilities & requirements may link to the customers perception of your existing brands !
People didn’t have the right associations with the VW brand for them to offer a luxurious car !
Lexus did not have the heritage, history and associations of Toyata and thus was detached of a low segment car and could offer a line of only luxurious cars.
Link to Will’s Grill: if he wants to go into Catering, should he change his name ?
Secondly important is to not forget your value chain configuration which may require improvement
What is the second important thing to not forget when choosing a strategy (differentiator or cost leadership) ?
Secondly, (after the internal analysis) it is important to look at your value chain configuration which may require improvement.
You might have to reconfigure it ! How do your activities affect your costs and how do they affect the willingness to pay of the consumers ?
You want to design the value chain in a way that you can reduce the costs as much as possible (in particular if you are the cost leader) and what are really the activities that boost consumers willingness to pay (when you are the differentiator) without bringing the costs too high.
Note: We want to increase the margin relative to competitors! So the analysis needs to look at relative differences with competitors, too! We have to come with a unique mix of strategies.
How is the “competitive scope” of an organization defined ?
Internet: The competitive scope of an organization is defined as a function of the number of value chains (distinct but interrelated) in which the organization is engaged. The competitive scope is classified as broad scope and narrow scope.
The broad scope normally involves engaging in cost leadership or differentiation strategy.
The narrow scope involves getting into focused strategy where focus can be on cost leadership or on differentiation strategy.
