Value Creation and Cost Management Quiz

Value Creation vs. Cost Control

• Firm's purpose is to maximize economic value creation and profit margin
• Tension between value creation and pressure to keep costs in check

Economies of Scale

• Decreases in cost per unit as output increases
• Bulk rate and fixed cost spreading
• Takes advantage of certain physical properties

Diseconomies of Scale

• Increases in cost per unit as output increases
• Fixed cost spreading
• Specialized systems and equipment
• Firms become too big, leading to complexity, inflexibility, and slowness

PESTEL Framework

• Environmental factors categorized into six segments:
  • Political
  • Economic
  • Sociocultural
  • Technological
  • Ecological
  • Legal

PESTEL Segments

• Political Factors:
  • Influenced by government bodies and shaped through lobbying, public relations, contributions, and litigation
• Economic Factors:
  • Largely macroeconomic phenomena, including growth rates, unemployment rates, interest rates, and price stability
• Sociocultural Factors:
  • Society's cultures, norms, and values that are constantly in flux and differ across groups
• Technological Factors:
  • Application of knowledge, including new processes and products, innovations in process technology, and innovations in product technology
• Ecological Factors:
  • Broad environmental issues, including natural environment, climate change, and sustainable economic growth
• Legal Factors:
  • Official outcomes of political processes, including laws, mandates, regulations, and court decisions

Porter's Five Forces

• Result: Industry profit potential
• Threat of Entry:
  • Low when barriers are high, including economies of scale, network effects, customer switching costs, capital requirements, government regulation, and brand loyalty
• Supplier Power:
  • High when supplier industry concentration is high, switching costs are high, and supplier brands are important to consumers
• Buyer Power:
  • High when there are few buyers, switching costs are low, and buyers have high bargaining power
• Threat of Substitutes:
  • High when customer awareness is high, availability is high, and competitive price is comparable
• Competitive Rivalry:
  • High when industry concentration is low, prices are similar, and brand importance is low

Strategic Groups

• Set of companies with similar strategies in the same industry
• Modeled by choosing two key dimensions and graphing companies along those dimensions

Resources and Capabilities

• Firm assets that can be used for crafting and executing strategy
• Tangible: physical attributes
• Capabilities: organizational and managerial skills necessary to put resources to good use
• Examples: structure, routines, and culture

Dynamic Capabilities

• Firms need to modify and leverage their resource base to respond to a constantly changing environment
• Resources are created, deployed, modified, reconfigured, or upgraded
• Examples: technological change, deregulation, globalization, and demographic shifts

Core Competencies

• Unique strengths embedded deep within a firm that allow it to strategically position and create higher value
• Expressed through structures, processes, and routines

Generic Types of Strategies

• Differentiation:
  • Seeks to create higher value vs. competitors
  • Charges higher prices
  • Focuses on unique product features, service, and new product launches
• Cost Leadership:
  • Goals: reduce cost below competitors and offer adequate value
  • Reduces prices for customers and optimizes the value chain for low cost

Blue Ocean Strategy

• Value Innovation:
  • Aligns innovation with total perceived consumer benefits, price, and cost
  • Not about out-competing with better features or lower costs
  • Makes a leap in value creation

Strategic Trade-offs

• Choices between a cost or value position
• Requires balancing different factors to achieve a strategic position

Test your knowledge on the tension between value creation and cost management in firms. Explore concepts such as economic value creation, profit margin, economies of scale, and (dis)economies of scale.