Business Strategy - Chapter 4 PDF

CHAPTER 4: BUSINESS STRATEGY 4.1 The nature and sources of competitive advantage: Competitive advantage : a characteristic of the firm that distinguishes it from other competitors of the market, placing the company in a better position for competing and obtaining higher profitability. Basic requi...

CHAPTER 4: BUSINESS STRATEGY 4.1 The nature and sources of competitive advantage: Competitive advantage : a characteristic of the firm that distinguishes it from other competitors of the market, placing the company in a better position for competing and obtaining higher profitability. Basic requirements (profitability !!!) : 1. Characteristics related to key success factors in the market 2. Sufficiently sustainable 3. Sustainable : we want to be in a superior position in the long term. Generic competitive advantage : - Cost leadership - Differentiation - Focus (specific segment) *We can’t implement the two because if you choose differentiation you will need to spend a lot of money. 18 -this topic we also saw in the management of resources and capabilities. -Some authors consider that apart from external factors also are important their internal factors. -Imitation barriers: “patents” obstacles that the competitors will face if they try to imitate the competitive advantage. -Competitors imitation capability: the ability of rivals to imitated -Industry dynamism: if the industry is very dynamic we will have to adapt our resources… not a good thing 4.2 Analysis of cost and differentiation competitive advantage 4.2.1 Cost competitive advantage: The firm is able to offer similar products or services than its competitors but at a lower cost. The firm that has the cost advantage is able to produce it at lower cost. 19 4.2.1 Cost competitive advantage: - Learning effect: less time per unit translates with lower labour cost per unit. - Experience effect: that is the same idea as we gain more experience we are also able to reduce some costs. We might decide to redesign the product - Other factors: - Economies of scale: - Production techniques and product redesign : - Input cost advantages: if they have high bargaining power, if they choice the cheapest raw materials - Firm location: if we are close to our suppliers - Cooperation agreements: just in time→ collaboration with suppliers just in time we can reduce storage cost for example - Bargaining power Sources of cost competitive advantage in large retail stores: - Important economies of scale - Use of standardised marketing technology - Lower labor costs due to the reduction in the number of jobs - High bargaining power with suppliers - Cooperation agreements with some manufacturers - Located on the outskirts of major cities Ex: Alcampo, carrefour, eroski 20 4.2.2 Differentiation competitive advantage: A firm offers a product or service that has certain attributes that make customers perceive it as unique→ pay a higher price for it. - Differentiation? Physical attributes but not the only case. - Potential sources: Value chain and differentiation: 21 Sources of the differentiation competitive advantage: 1. Product characteristics: - Physical: size, shape, technology - Product performance - Complements: after sales services 2. Market characteristics: - Variety of consumer tastes and needs - Product valuation by customers - Intangibles: social, aesthetic 3. Firm characteristics: - Way of interacting with customers - Ethic, values, corporate culture - Firm reputation Customers also assess how a particular firm interacts with customers. Capabilities are ways of doing things. If the customer's values are aligned with the firm it’s more probable that they will buy the products. Why will customers pay a premium price for faster response? Because time is a valuable resource and also the cost that implies. 4. Other variables: - Time (rapid response) - Social responsibility criteria Barriers of imitation: - High level of creativity - Complex interrelations of resources and capabilities: the idea of complementary - Unique location Conditions of application: - Greater complexity and variety of products and services, customers needs, and characteristics of the firms offering the product. *When is appropriate? - When customers pay attention to quality issues (high quality) - socially differentiate themselves - Few competitors - When the resources of differentiation are difficult to imitate. 22 Risks differentiation advantage: Ex: expensive bag Even if you try to differentiate it might not be totally effective, since other firms can also implement the same strategy (strategic groups) 4.3 Strategic clock -Basic premise: customers buy a product or a service in one firm or another according to two criteria. a) Price: ( price differences between competitors) b) Perceived added value: (customer’s appreciation) —> combining these two criteria, it is possible to obtain 8 competitive strategies, that can be grouped into 4 strategic groups. 23  - “No frills” (1): not focus on quality and low prices: customers that are price sensitive. - Low price (2) : the closest to cost leadership - Differentiation (4): prices are medium high and high quality , the closest to differentiation strategy study before. Differentiation in the industry. - Segmented differentiation (5): *see what is the difference - Hybrid: quality price ratio (3): relatively low prices and medium high quality, it’s not easy to achieve this. It requires dual skills. - Strategies destined to fall (6,7,8): high price and low quality, so it's obvious that this will lead to fail. If there is a situation of monopoly this type could be implemented, but in general it will lose market share. - Case study : how is this company competing? They provide high quality products at a medium high price - They implement differentiation : premium price to fast response - What are the resources that they apply? - Product characteristic, the quality, etc -firm characteristics: it’s a way of interacting with customers, the culture -Other variables :the time response -Market characteristics: also that now the customers valuated more the organic products -Family firm: generational business it’s also important Main risks: - Seasonal products 4.4 Lifecycle: strategies for emerging, mature, and declining industries Objective: to adapt competitive strategies to different types of industries, depending on their level of maturity—> emerging, growth, mature, and declining. New or emerging industries: - Recently created - Linked to new innovations, or changes in customer’s needs Characteristics: high initial costs, slow growth in demand, high risk due to uncertainty and instability. 24 Strategies: - risk management (e.g cooperation, rules of the game) Gaining knowledge about the future trends - timing entry , we should be pioniers ( benefits we make the movement first inconvenient we assume all the risk) or followers. Mature industries Low levels of demand growth, or even null. As a result, firm’s growth opportunities decrease. Characteristics: - overcapacity installed - appearance of new competitors - difficulties to innovate - customers’ bargaining power (higher) Strategies: - gaining a substantial competitive advantage (cost leadership, product differentiation, how they gain competitive advantage ) - redefining business scope (diversification , external growth strategies, internationalisation)..--> the last one is corporate strategy. Diversification→ invest in R and D, and search for emerging markets External growth→ internal growth (investing in the firm, external mechanisms, acquisition of another firm) Internalisation→ expand globally Declining industries Characterized by a constant decrease in demand: - Characteristics: large manufacturing overcapacity, aggressive price competition, absence of technological changes, high average age of resources. - Strategies: - industry leadership: become the industry leader - Segmentation: try to move - Harvest: - quick divestment : 25 -could also search for competitive advantage, 4.5 INNOVATION STRATEGY - Inventions: result from combinations of new or existing knowledge - Innovation: involves the commercialization of an invention, creating something new (products and services) to typically address new demands. Difference: inventions is the creation of something new, innovation that then gets commercialised. Why are firms innovative? To remain competitive, make more profit, adapt to the changing market. How firms gain knowledge? combination of knowledge input, promoting knowledge management, how firms manage their knowledge, brainstorming, exploding and transferring the knowledge within the firm. - Innovation→ - Cost advantage→ new technology - Differentiation→ Benefits: innovation is costly, all the investment R and D not always transfer to the products.Also it’s very uncertain and risky. Ex: covid, how many firms wanted to achieve a vaccine. Would you support innovation? Be the pioneer? -Radical innovation: - Incremental innovation: improve current products in reducing characteristics. It’s more common to see this type of innovation. 26