Crafting And Executing Strategy 20th Edition By Arthur Thompson - Test Bank

Having suppliers locate their plants or warehouses close to a company’s own plant facilitates just-in-time deliveries to the site where they will be used in making the company’s product. This not only lowers incoming shipping costs but also curbs or eliminates the company’s need to build and operate storerooms for incoming parts and components and to have plant personnel move the inventories to the workstations as needed for assembly.

Dramatic cost advantages can often emerge from redesigning the company’s value chain system in ways that eliminate costly work steps and entirely bypass certain cost-producing value chain activities. Such value chain revamping can include:

• Selling direct to consumers and bypassing the activities and costs of distributors and dealers.

• Streamlining operations by eliminating low-value-added or unnecessary work steps and activities.

• Reducing materials handling and shipping costs by having suppliers locate their plants or warehouses close to the company’s own facilities.

The primary determinants of a company’s profitability are whether the company chooses to compete on cost advantage or product differentiation and the scope of its target market: narrow or broad. Defining a target market allows a company to create products to suit the target customers and generates the need to devise a strategy that is best suited for generating profitability for customers and the company alike.

There are two ways to gain a competitive edge over rivals: either perform value chain activities more effectively than rivals or revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

The two biggest factors that distinguish one competitive strategy from another boil down to (1) whether a company’s market target is broad or narrow and (2) whether the company is pursuing a competitive advantage linked to lower costs or differentiation.

The manufacturer has used a focused differentiation strategy by concentrating on a narrow customer segment and outcompeting rivals by offering customers attributes that meet their specialized needs and tastes.

A company’s competitive strategy deals exclusively with the specifics of management’s game plan for competing successfully, which gives rise to five competitive strategies: low-cost provider, broad differentiation, focused low-cost, focused differentiation, best-cost provider.

For all types of generic strategies, success in sustaining the competitive edge depends on having resources and capabilities that rivals have trouble duplicating and for which there are no good substitutes.

A company achieves low-cost leadership when it becomes the industry’s lowest-cost provider rather than just being one of perhaps several competitors with comparatively low costs. Successful low-cost providers boast lower costs than rivals—but not necessarily the absolutely lowest possible cost.

To achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall value chain must be lower than competitors’ cumulative costs.

Relying on an approach to reduce costs that can be easily copied by rivals is one of the pitfalls to avoid while pursuing a low-cost strategy. If rivals find it relatively easy or inexpensive to imitate the leader’s low-cost methods, then the leader’s advantage will be too short-lived to yield a valuable edge in the marketplace.

A company has two options for translating a low-cost advantage over rivals into attractive profit performance. Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment.

To achieve product differentiation, a company must incorporate desirable features into its product or service to clearly set itself apart from rivals lacking attributes. A differentiation strategy calls for a customer value proposition that is unique. The strategy achieves its aim when an attractively large number of buyers find the customer value proposition appealing and become strongly attached to a company’s differentiated attributes.

There are two major avenues for achieving a low-cost edge over rivals:1. Perform value chain activities more cost-effectively than rivals.2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities.

Capturing all available economies of scale allows a company to perform value chain activities more cost-effectively than rivals and build a cost advantage over rivals. Outsourcing all support activities, controlling as much of the industry value chain as possible, and minimized spending on R&D are not sure indicators of cost-relative advantages. Paying low salaries could hurt employee morale and minimal advertising could reduce the reach of the products.

The fast-food restaurant is using just-in-time inventory method to reduce supply chain inefficiency; the products are made-to-order thereby reducing the waste.

A dazzling array of features and options not only drives up product price but also runs the risk that many buyers will conclude that a less deluxe and lower-priced brand is a better value since they have little occasion to use the deluxe attributes.

For a company to do a more cost-efficient job of managing its value chain than rivals, managers must diligently search out cost-saving opportunities in every part of the value chain. No activity can escape cost-saving scrutiny, and all company personnel must be expected to use their talents and ingenuity to come up with innovative and effective ways to keep costs down.

Corporate diversity would be beneficial in a number of ways but it would not necessarily empower a company to achieve cost-efficient management of its value chain activities, whereas the other factors allow a company to drive costs out of their business by cost-efficiently managing its processes.

A good corporate culture can substantially improve employee morale and workplace pride, boost productivity, and generate positive working environment thereby contributing indirectly to cost cutting.

Whether a company is able to operate at or near full capacity has a big impact on unit costs when its value chain contains activities associated with substantial fixed costs. Higher rates of capacity utilization allow depreciation and other fixed costs to be spread over a larger unit volume, thereby lowering fixed costs per unit.

Having suppliers locate their plants or warehouses close to a company’s own plant facilitates just-in-time deliveries of parts and components to the exact workstation where they will be used in assembling the company’s product. This not only lowers incoming shipping costs but also curbs or eliminates the company’s need to build and operate storerooms for incoming parts and components and to have plant personnel move the inventories to the workstations as needed for assembly. The other options provide methods of cost-efficient management of value chain activities.

Company B uses the best method to improve its supply chain activities to cut costs. Just-in-time inventories reduce waiting time for producers and consumers.

Integrating into the activities of either suppliers or distribution channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position.

With common user requirements, a standardized product can satisfy buyers’ needs, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.

Low-cost providers are in the best position to compete offensively on the basis of price, to gain market share at the expense of rivals, to win the business of price-sensitive buyers, to remain profitable despite strong price competition, and to survive price wars.

A low-cost strategy works best for entrants who could use low prices based on low costs to attract buyers; it also works when price competition among rival sellers is vigorous, the products of rival sellers are essentially identical and readily available from many eager sellers, and it is difficult to achieve product differentiation in ways that have value to buyers.

A low-cost strategy works best when price competition among rival sellers is vigorous, the products of rival sellers are essentially identical and readily available from many eager sellers, buyers incur low costs in switching their purchases from one seller to another, and it is difficult to achieve product differentiation in ways that have value to buyers.

When the differences between product attributes or brands do not matter much to buyers, buyers are nearly always sensitive to price differences, and industry-leading companies tend to be those with the lowest-priced brands. With common user requirements, a standardized product can satisfy buyers’ needs, in which case low price, not features or quality, becomes the dominant factor in causing buyers to choose one seller’s product over another’s.

Look-alike products and/or overabundant product supply set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies whose profits get squeezed the most.

Setting the industry’s price ceiling to capture volume gains and achieve economies of scale is a cost cutting method to optimally lower unit costs and increase production to gain profits.

A low-cost provider’s products may have weak product differentiation as look-alike products and/or overabundant product supply set the stage for lively price competition; in such markets, it is the less efficient, higher-cost companies whose profits get squeezed the most.

Differentiation strategies are attractive whenever buyers’ needs and preferences are too diverse to be fully satisfied by a standardized product offering. A company must incorporate distinctive, desirable features into its product or service to clearly set itself apart from rivals lacking attributes.

Successful product differentiation requires careful study to determine what attributes buyers find appealing, valuable, and worth paying for. Then the company must incorporate these desirable features into its product or service to clearly set itself apart from rivals lacking attributes. A differentiation strategy calls for a customer value proposition that is unique.

Successful differentiation allows a firm to do one or more of the following:

• Command a premium price for its product.

• Increase unit sales (because additional buyers are won over by the differentiating features).

• Gain buyer loyalty to its brand (because some buyers are strongly attracted to the differentiating features and bond with the company and its products).

Price-conscious buyers are looking for a basic product at a bargain-basement price.

Differentiation enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation.

A differentiation strategy calls for a customer value proposition that is unique. The strategy achieves its aim when an attractively large number of buyers find the customer value proposition appealing and become strongly attached to a company’s differentiated attributes. It enhances profitability whenever a company’s product can command a sufficiently higher price or produce sufficiently bigger unit sales to more than cover the added costs of achieving the differentiation

Differentiation is not something hatched in marketing and advertising departments, nor is it limited to the catchalls of quality and service. Differentiation opportunities can exist in activities all along an industry’s value chain. The most systematic approach that managers can take, however, involves focusing on the value drivers.

Value drivers are a set of factors—analogous to cost drivers—that are particularly effective in creating differentiation.

A value driver is seeking out high-quality inputs. Input quality can ultimately spill over to affect the performance or quality of the company’s end product.

Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise. Brands create customer loyalty, which increases the perceived “cost” of switching to another product.

Quality control processes reduce product defects, prevent premature product failure, extend product life, make it economical to offer longer warranty coverage, improve economy of use, result in more end-user convenience, or enhance product appearance.

A company’s incentive system can encourage not only greater worker productivity but also cost-saving innovations that come from worker suggestions.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising.

Incorporating important tangible features increases customer satisfaction with the product, such as product specifications, functions, and styling. This can be accomplished by including attributes that add functionality, enhance the design, save time for the user, are more reliable, or make the product cleaner, safer, quieter, simpler to use, more portable, more convenient, or longer-lasting than rival brands.

Superior value could be delivered by signaling the value of the company’s product offering to buyers. Typical signals of value include a high price (in instances where high price implies high quality and performance), more appealing or fancier packaging than competing products, ad content that emphasizes a product’s standout attributes, the quality of brochures and sales presentations, and the luxuriousness and ambience of a seller’s facilities (important for high-end retailers and for offices or other facilities frequented by customers).

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim: lower the buyer’s overall costs, incorporate tangible features that increase customer satisfaction with the product, incorporate intangible features that enhance buyer satisfaction in noneconomic ways, and signal the value of the company’s product offering to buyers.

Differentiation strategies depend on meeting customer needs in unique ways or creating new needs through activities such as innovation or persuasive advertising. The objective is to offer customers something that rivals can’t—at least in terms of the level of satisfaction. There are four basic routes to achieving this aim: lower the buyer’s overall costs, incorporate tangible features that increase customer satisfaction with the product, incorporate intangible features that enhance buyer satisfaction in noneconomic ways, and signal the value of the company’s product offering to buyers.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

Marketing and advertising can have a tremendous effect on the value perceived by buyers and therefore their willingness to pay more for the company’s offerings. They can create differentiation even when little tangible differentiation exists otherwise. Signaling value is particularly important (1) when the nature of differentiation is based on intangible features and is therefore subjective or hard to quantify, (2) when buyers are making a first-time purchase and are unsure what their experience with the product will be, (3) when repurchase is infrequent, and (4) when buyers are unsophisticated.

Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating a differentiated product offering.

Diverse buyer preferences allow industry rivals to set themselves apart with product attributes that appeal to particular buyers. For instance, the diversity of consumer preferences for menu selection, ambience, pricing, and customer service gives restaurants exceptionally wide latitude in creating a differentiated product offering.

Rapid product innovation and frequent introductions of next-version products heighten buyer interest and provide space for companies to pursue distinct differentiating paths. Companies that fail to come up with new and improved products and distinctive performance features quickly lose out in the marketplace.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

The best differentiation approaches involve trying to appeal to buyers on the basis of attributes that rivals are not emphasizing. A differentiator encounters less head-to-head rivalry when it goes its own separate way in creating value and does not try to out differentiate rivals on the very same attributes.

Rapid imitation means that no rival achieves differentiation, since whenever one firm introduces some value-creating aspect that strikes the fancy of buyers, fast-following copycats quickly reestablish parity. This is why a firm must seek out sources of value creation that are time-consuming or burdensome for rivals to match if it hopes to use differentiation to win a sustainable competitive edge.

Trivial differences between rivals’ product offerings may not be visible or important to buyers. If a company wants to generate the fiercely loyal customer following needed to earn superior profits and open up a differentiation-based competitive advantage over rivals, then its strategy must result in strong rather than weak product differentiation.

A focused strategy aimed at securing a competitive edge based on differentiation becomes increasingly attractive when the target market niche is big enough to be profitable and offers good growth potential.

What sets focused strategies apart from low-cost provider and broad differentiation strategies is concentrated attention on a narrow piece of the total market. The target segment, or niche, can be in the form of a geographic segment, or a customer segment, or a product segment (such as a class of models or some version of the overall product type).

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

A focused strategy based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and lower price than those of rival competitors. This strategy has considerable attraction when a firm can lower costs significantly by limiting its customer base to a well-defined buyer segment.

Outsourcing the performance of certain value chain activities can be more economical than performing them in-house if outside specialists, by virtue of their expertise and volume, can perform the activities at lower cost.

There can be times when integrating into the activities of either suppliers or distribution-channel allies can lower costs through greater production efficiencies, reduced transaction costs, or a better bargaining position.

A risk of employing a focused strategy is the potential for the preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. An erosion of the differences across buyer segments lowers entry barriers into a focuser’s market niche and provides an open invitation for rivals in adjacent segments to begin competing for the focuser’s customers.

A risk of employing a focused strategy is that the segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and splintering segment profits.

Best-cost provider strategies are a hybrid of low-cost provider and differentiation strategies that aim at providing more desirable attributes (quality, features, performance, service) while beating rivals on price.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

Best-cost strategies create competitive advantage by giving buyers more value for the money—delivering superior quality, features, performance, and/or service attributes while also beating customer expectations on price. To profitably employ a best-cost provider strategy, a company must have the capability to incorporate attractive or upscale attributes at a lower cost than rivals.

To profitably employ a best-cost provider strategy, a company must have the capability to incorporate upscale attributes into its product offering at a lower cost than rivals. When a company can incorporate more appealing features, good to excellent product performance or quality, or more satisfying customer service into its product offering at a lower cost than rivals, then it enjoys “best-cost” status—it is the low-cost provider of a product or service with upscale attributes.

The target market for a best-cost provider is value-conscious buyers—buyers who are looking for appealing extras and functionality at a comparatively low price. Value-hunting buyers (as distinct from price-conscious buyers looking for a basic product at a bargain-basement price) often constitute a very sizable part of the overall market for a product or service.

A best-cost provider strategy works best in markets where product differentiation is the norm and an attractively large number of value-conscious buyers can be induced to purchase midrange products rather than cheap, basic products or expensive, top-of-the-line products. A best-cost provider needs to position itself near the middle of the market with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price.

A company’s biggest vulnerability in employing a best-cost provider strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. Low-cost providers may be able to siphon customers away with the appeal of a lower price (despite less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of better product attributes (even though their products carry a higher price tag).

A company’s biggest vulnerability in employing a best-cost provider strategy is getting squeezed between the strategies of firms using low-cost and high-end differentiation strategies. Low-cost providers may be able to siphon customers away with the appeal of a lower price (despite less appealing product attributes). High-end differentiators may be able to steal customers away with the appeal of better product attributes (even though their products carry a higher price tag).

To be successful, a best-cost provider must achieve significantly lower costs in providing upscale features so that it can out-compete high-end differentiators on the basis of a significantly lower price. Likewise, it must offer buyers significantly better product attributes to justify a price above what low-cost leaders are charging. In other words, it must offer buyers a more attractive customer value proposition.