MGMT 490 Lecture Notes - Lecture 3: Product Differentiation, Walmart, Nouse
Lecture note 3 MGMT 490:
• A business level strategy intended to:
• increase the perceived value of the focal firm's products and/or services relative to the
value of competitor's products and/or services
• create a customer preference for the focal firm's products and/or services
• Two Generic Business Level Strategies-How to Position a
• Business in the Market?
• Cost Leadership
• Product Differentiation
• Cost Leadership:
• generate economic value by having lower costs than competitors
• Example: Wal-Mart
• Cost Advantage
• Managers need to understand who has the cost advantage in their market:
• it could be the focal firm-
• develop a strategy to exploit the advantage
• it could be a competitor-
• develop a strategy to either capture the advantage or compete on some other basis
• Sources of Cost Advantage
• Economies of Scale
• Dis economies of Scale
• Learning Curve Economies
• Differential Low-Cost Access to Productive Inputs
• Technology Independent of
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• Scale
• Policy Choices
• Economies of Scale
• average cost per unit falls as quantity increases
• -until the minimum efficient scale is reached
• are a cost advantage because competitors may not be able to match the scale because
of capital requirements (barrier to entry)
• international expansion may allow a firm to have
• enough sales to justify investing in additional capacity to capture economies of scale
• Dis economies of Scale
• are an advantage for those who do not have diseconomies of scale
• occur when firms become too large and bureaucratic
• are a risk of international expansion
• Learning Curve Economies
• a firm gets more efficient at a process with experience
• the more complicated/technical the process, the greater the experience advantage
• international expansion may propel a firm down the experience curve because of
higher volumes
• Differential Low-Cost Access to Productive Inputs
• may result from:
• history—being in the right place at the right time
• being first into a market—esp. foreign markets
• natural endowment—owning a mineral deposit
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• locking up a source—buying all of its output
• Technology Independent of Scale
• may allow small firms to become cost competitive
• advantage typically accrues to the 'owner' of the technology—may or may not be the
ones who actually
• use the technology
• size of the advantage depends both on how valuable and protect-able the technology
is
• Policy Choices
• firms get to choose how they will serve the market
• will offer level of quality that is inexpensive to produce
• firms can make policy choices that give people incentives to reduce cost at every
opportunity
• A source of cost advantage will lead to competitive advantage if that source is:
• Valuable
• Rare
• Costly to Imitate
• Organized
• Value of a Cost Advantage
• Entry:increases capital requirements for entrants
• Substitutes: limits attractiveness
• of substitutes
• Rivalry: competitors rationally avoid price competition
• Buyers: lowers incentives for buyers to vertically integrate
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Document Summary
Informal: culture, attitudes leadership styles stock options, compensation policies, bonuses based on: Exploiting relationships with customers: firm customer relationships, firm linkages. Imitability of product differentiation: logic of costs of imitation if imitators face a cost disadvantage of imitation, they will rationally choose not to imitate, sources of costs of imitation, historical uniqueness, causal ambiguity social complexity. Cost reduction revenue enhancement the focal firm is able to capture above normal economic returns (avoid perfect competition: value of vertical integration, market vs. Imitability of vertical integration-form vs. function: the form is usually not costly to imitate, the value-producing function may be costly if the integrated firm possesses resource combinations that are a result of, historical uniqueness, causal ambiguity, social complexity. Managers" efforts to achieve the desired value chain economies. Cooperation and competition among and between functions the integration of new businesses into the existing business time horizon of managers: budgets: separating strategic and operational budgets strategic: inputs & outputs.
