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