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Week 13 Business strategies: cost leadership - Coggle Diagram
Week 13 Business strategies: cost leadership
Business strategy (functional level learned in week 11)
Generic strategy
COst leadership
Broad differentiation
Cost focus
Differentiation focus
Competitive advantage - learned in week 3
according to Grant (2016, p. 177) there are two types
Differentiation
Differentiation advantage
uniqueness
Lower costs
Cost advantage
lower cost per item
Competitive scope
broad market
many customer segments and/or a broad geographic area)
Narrow market
small segment of customers and/or a narrow geographic area
"The competitive scope is the scope of the market in which the competitive advantage is sought."
Michael Porter (1985)
cost leadership strategy
competitive advantage comes from achieving a cost advantage and the competitive scope is broad. eg broad market and low unit cost (ALdi)
differentiation strategy
competitive advantage comes from the differentiation of products/services and the competitive scope is broad. (vegan products ben&jerrys)
cost focus strategy
competitive advantage from achieving cost advantage in a narrow or niche, market (icecream vans)
differentiation focus strategy.
competitive advantage from product differentiation and where its competitive scope is narrow (alpro)
Week 3 recap value creation and value capture
cost leadership with parity
chare higher price
cost leadership with proximity strategy
charge lower price
Differentiator
usually higher costs to make
may lead to higher price
percieved greatr value
Graph: Cost curve of the cost leader
customer utility curve
customer’s willingness to pay at different levels of quality
industry average cost curve
unitary cost that an average competitor in the industry pays for producing a product with that level of quality
The lower position of the firm cost curve has an impact on its value created and captured and, consequently, on its competitive advantage
cost advantage
gain competitive advantage by producing goods/services at a lower cost than competitors –
7 sources of cost adv
Economies of scale
Grant (2016) eco of scale come sfrom:
technical input–output relationships
produce more with same machinery
indivisibilities
products only avail in bulk orders
difficult for cashflow
specialisation.
dividing work into specialised areads
robot only has 1 job
Besanko et al. (2013)
added two more sources of eco of scale
Eco of scale
Sources of eco of scale
Product-specific fixed costs
Trade-offs among alternative production technologies
Density
Purchasing
Advertising
Inventories
Ambiguous sources
Research and development
sources of diseconomies of scale
Labour costs
Spreading resources too thinly
Bureaucracy
Economies of learning
capabilities - learned experience in firms that is hard to replicate
Production techniques
‘just-in-time’ inventory system, total quality management, and the creation of partnerships with suppliers etc
Product design
conponents & combinations - no packaging? cheaper
Designed to manufacture- designing one design and adapting small parts , Premier inn pod style rooms
Capacity utilisation
ratio of fixed to variable costs
increase in fixed costs
fast and flexible capacity adjustment.
renting facilities more flexible
Input costs
input prices
labour costs and cost of raw materials
ownership of low-cost inputs
reduction of input costs
owning land
non-union labour
bargaining power.
influence outcomes of negotiations.
Residual efficiency
ability to eliminate its organisational slack.
excess resources
RIsks of cost leadership
cost leadership is not risk-free (Porter, 1985)
rivals doing same strategy
technology