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Chapter 5 Creating Business Strategies

Chapter 5 Creating Business Strategies. LEARNING OBJECTIVES. 1. Define generic strategies and explain how they relate to a company’s strategic position. 2. Describe the drivers of low-cost, differentiation, and focused strategic positions.

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Chapter 5 Creating Business Strategies

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  1. Chapter 5Creating Business Strategies

  2. LEARNING OBJECTIVES • 1. Define generic strategies and explain how they relate to a company’s • strategic position. • 2. Describe the drivers of low-cost, differentiation, and focused strategic positions. • 3. Identify and explain the risks associated with each generic strategic position. • 4. Show how different strategic positions fit with stages of the industry life cycle. • 5. Evaluate the quality of a company’s strategy.

  3. An Introduction to Business Strategies – Chapter Overview • Framework for strategic positioning • Conditions under which strategic positions are • viable • Strategic positions and the industry life cycle • Testing the quality of a strategy

  4. Types of Strategies - Finding a Position that Works • Strategic Positioning – How to situate a company relative to its rivals? • A firm can gain advantage over rivals in two ways: • 1) Differentiation • 2) Low Cost

  5. Types of Strategies - Finding a Position that Works • Description • No advantage overrivals • Advantage over rivals • Produce a differentiated product and charge suffici-ently higher prices to more than off-set the added costs of differentiation • Differentiation • Produce an essentially equivalent product at a lower cost • Low-cost

  6. Low-Cost Leadership • Differentiation • Capture market share by offering lower-price or • Earn higher margins by maintaining price parity • Capture market share by offering higher quality at same price or • Earn higher margins by raising prices over competitors • Benefits • Ciram • Gerdau AmeriSteel • Wal-Mart • Home Depot • Coca-Cola and Pepsi • CAE • Maple Leaf Foods • Honda, Yamaha, and Suzuki motorcycles • Examples Types of Strategies - Finding a Position that Works Low-cost leadership and differentiation offer greater market share and profits.

  7. Types of Strategies - Finding a Position that Works Strategic Positioning Examples • Wal-Mart • Ciram • Maple Leaf Foods • Coca-Cola • Broad • Strategictarget • Holt Renfrew • Mechtronix • Porter Airlines • Dollarama • Menu Foods • Zellers • Narrow • Low-cost • Differentiation • Strategic advantage

  8. Types of Strategies - Finding a Position that Works • Chosen strategic position depends on: • 1. Company resources and capabilities • 2. Condition of industry environment

  9. Economic Drivers of Strategic Positioning Key Drivers of Low-Cost Advantage: • Economies of Scale • Learning • Economies of Scope • Production Technology • Product Design • Location advantages of sourcing inputs

  10. Economic Drivers of Strategic Positioning • Economiesof scale • Economies of scale exist during a period of time if the average total cost for a unit of production is lower at higher levels of output • You must review costs to assess whether economies of scale exist: • Fixed costs remain the same for different levels of production • Variable costs are the costs of variable inputs (such as raw materials and labour) and vary directly with output • Marginal cost is the cost of the last unit of production • Total cost is the sum of all production costs and always increases as output goes up • Average cost is the mean cost of total production during a given period (e.g., a year) • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

  11. Some sourcesof economies • Some sourcesof diseconomies • Specialization • Spreading fixed costs • Technological scale • Better use of joint products • Bureaucracy • High labour costs • Inefficient operations Economic Drivers of Strategic Positioning Diseconomies of Scale – Size Does Not Ensure Economies of Scale • Economiesof scale • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

  12. Costs decrease … • Economiesof scale • as the scale of operation increases during any given period of time • Learning curve • with the cumulative level of production since the production of the first unit Economic Drivers of Strategic Positioning • Economiesof scale How Learning Differs from Scale • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

  13. Economic Drivers of Strategic Positioning • Economiesof scale • If a firm produces two or more products and can share resources among two or more of these (e.g., share manufacturing machines) – thereby lowering the costs of each product – it benefits from economies of scope. • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

  14. Economic Drivers of Strategic Positioning • Economiesof scale • Often, a new entrant who wants to compete against industry incumbents with significant scale and experience advantages, tries to match or beat incumbents’ costs by introducing a production technology that is subject to different economics (e.g., Co-Steel, EarthRenew Organics). • Learning • Economiesof scope • Productiontechnology • Productdesign • Location

  15. Economic Drivers of Strategic Positioning • Economiesof scale • Learning • Product design can sometimes be altered to lower a firm’s production costs (e.g., Canon vs. Xerox). • Economiesof scope • Productiontechnology • Productdesign • Location

  16. Economic Drivers of Strategic Positioning • Economiesof scale • Learning • Sometimes firms try to attain lower production costs by locating their operations in cheaper labour markets (e.g., Pacific Cycle manufactures in China and Taiwan to achieve lower costs than Trek who manufactures in the US). • Economiesof scope • Productiontechnology • Productdesign • Location

  17. To drive up customer’s willingness to pay and generate demand sufficient to • Premium brand image • Customization • Convenience • Unique styling • Speed • Unusually high-quality • Recoup added costs and • Generate enough profits to make strategy worthwhile Economic Drivers of Strategic Positioning Key Drivers of Differentiation Advantage: Key Drivers Purpose

  18. Drivers • Threats • Economies of scale • Learning • Economies of scope • Superior technology • Product design • Location • New technology • Inferior quality • Social, political, and economic risks of outsourcing • Low-cost • Premium brand image • Customization • Unique styling • Speed • Convenient access • Unusually high-quality • Failure to increase buyers’ willingness to pay higher prices • Underestimating costs of differentiation • Overfulfilling buyers’ needs • Lower-cost imitation • Differentiation Threats to Successful Strategic Positioning

  19. Threats to Successful Strategic Positioning • Threats to Focus Positions: • all of the above • also being outfocused by competitors • Threats to Integrated Positions: • Straddling – unsuccessful attempt to integrate both low-cost • and differentiation positions

  20. Strategies and Fit with Industry Conditions • Phases of Industry Life Cycle • 1. Embryonic • 2. Growth • 3. Mature • 4. Decline

  21. Strategies and Fit with Industry Conditions • Phases of • industry life cycle • Embryonic • Growth • Mature • Decline

  22. Testing the Quality of a Strategy

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