Chapter 6 Business Strategy Differentiation Cost Leadership and
Chapter 6: Business Strategy: Differentiation, Cost Leadership, and Blue Oceans
2 Chapter 6: Case Highlight jet. Blue: En Route to a New Blue Ocean? • jet. Blue Airways became the sixth largest airline in the United States in 2019, following the “big four” (American, Delta, Southwest, and United) and Alaska Airlines, which beat out jet. Blue in acquiring Virgin America in 2016. • jet. Blue offers approximately 1, 000 flight daily; employs 22, 000 crew members, and services 42 million customers annually. Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3 Chapter 6: Case Highlight jet. Blue: En Route to a New Blue Ocean? • jet. Blue founded in 1998 – Initial strategy: low-cost airfare, great service & amenities – Copied/improved on Southwest’s business model – Flew longer distances; transported more passengers • This move drove down costs in their point-to-point service • Seeking to drive up its perceived value – – Leather seats, free movie programming Friendly, attentive service Private suites, personal screens, Wi-Fi Remote employees take reservations Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 6: Case Highlight jet. Blue: Stuck in the Middle? • jet. Blue is not without challenges in its history. For example, there have been several incidents that have damaged customer service record: – Passengers kept on the tarmac for 9 hours during a snowstorm – “Snowmaggedon” – Flight attendant insulted passengers before deploying the emergency escape chute – Issue of pilot’s mental health – Removed leg room – Poor on-time record in 2017 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Business Strategy and Competitive Advantage • A business-level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and to gain a competitive advantage by utilizing core competencies in specific individual product markets. 6– 5
Industry and Firm Effects Jointly Determine Competitive Advantage Exhibit 6. 1 © Mc. Graw Hill
Business Strategy and Competitive Advantage • Two fundamental questions: Ø How do you generate advantage? Ø How do you sustain advantage? • Key idea for sustainability is barriers to imitation. Ø How long will it be before the first rival imitates the first mover? Ø How fast does new imitation occur once it starts? v These two factors determine appropriability.
Business Strategy and Competitive Advantage • Does market share generate competitive advantage? Ø The computer industry is an excellent example of the lack of correspondence between market share and profit rates. IBM was a clear market leader in terms of market share but had only mediocre economic performance relative to its rivals. Ø High market share is no guarantee of high rates of profitability.
Business Strategy and Competitive Advantage • Does market share generate competitive advantage? Ø Perhaps high market share causes high profit rates. Ø But it could equally well be that there is a third factor (e. g. , good service capabilities, such as those of Caterpillar), either not considered or unobserved by us, that causes both high profitability and high market share. v In this case, we would see a correlation between profitability and market share but there is no causal explanation.
Business Strategy and Competitive Advantage • When can market share work to generate and sustain an advantage? Ø Scale economies (to generate cost leadership advantage) combined with high exit costs (to sustain the advantage) may make market share a defensible advantage.
Sustainable Competitive Advantage • Costly Duplication due to: Ø Historical Conditions; Ø Uncertainty; Ø Social Complexity; and Ø Property Rights Protection.
Business Strategy and Competitive Advantage • An organization’s knowledge or expertise can lead to sustainable advantage if: Ø The knowledge is tacit rather than articulable; Tacit Knowledge: “We know more than we can tell. ” v Tacit Skills: Riding a bike, swimming, “learning by doing, ” which is critical for maintaining a manufacturing base v Ø The knowledge is not observable in use; Ø The knowledge is (socially) complex, rather than simple.
Forms of Competitive Advantage Cost Advantage Competitive Advantage Similar Product At Lower Cost Price Premium From Unique Product Differentiation Advantage
15 Strategic Position and Competitive Scope: Generic Business Strategies Exhibit 6. 2 SOURCE: Adapted from M. E. Porter (1980), Competitive Strategy. Techniques for Analyzing Industries and Competitors (New York: Free Press). Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
16 Three Drivers That Can Increase Value • Product features (e. g. , through strong R&D capabilities) • Customer service (e. g. , Zappos) • Complements (e. g. , Example: AT&T U-verse) – Bundles Internet access, phone, and TV services Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Differentiation Advantage • Differentiation Advantage: a concept developed by economist Joan Robinson, occurs when a firm is able to obtain from its differentiation a price premium in the market which exceeds the cost of providing differentiation. • E. g. , the revenue gained from an advertising campaign exceeds the costs of the advertising, thus leading to a differentiation advantage.
Differentiation Strategy: Competitive Advantage Exhibit 6. 3 © Mc. Graw Hill Achieving
Cost-Leadership Strategy: Achieving Competitive Advantage Exhibit 6. 4 © Mc. Graw Hill
Economies of Scale, Minimum Efficient Scale, Diseconomies of Scale Exhibit 6. 5 © Mc. Graw Hill and
Tesla’s Learning Curve Producing the Model S Exhibit 6. 6 Source: Depiction of functional relationship estimated in J. Dyer and H. Gregersen (2016, Aug. 24), “Tesla’s innovations are transforming the auto industry, ” Forbes © Mc. Graw Hill
Learning Curve • The following discussion and applications focus on direct labor hours per unit, although we could as easily have used costs. In developing a learning curve, we make these assumptions: Ø Direct labor requirements will decrease at a declining rate as cumulative production increases. Ø The reduction in time will follow an exponential curve. In other words, the production time per unit is reduced by a fixed percentage each time production is doubled. We can use a logarithmic model to draw a learning curve. The direct labor required for the nth unit, kn, is • kn = k 1 nb where • k 1 = direct labor hours for the first unit • n = cumulative number of units produced • b = log r/log 2 • r = learning rate
Learning Curve • Example: The Bellweather Company has a contract for 60 portable electric generators. The labor-hour requirement for manufacturing the first unit is 100. With that as given, Bellweather planners develop an aggregate capacity plan using learning-curve calculations. They use a 90 percent learning curve, based on previous experience with generator contracts. • The labor requirement for the second generator is: • k 2 = k 1 nb • = 100 (2)log 0. 9/log 2 • = 100 (2)-. 152 • = 100 (. 9) = 90 hours • This result for the second unit, 90, is expected, since for a 90% learning curve there is a 10% learning between doubled quantities.
Learning Curve • Example: The Bellweather Company v For v= the 8 th unit, 100 (8)-. 152 = 100 (0. 729) = 72. 9 hours v This result is also obtained by 100 (. 9) = 72. 9 hours. • Learning curves can be used for: Ø Bid Preparation Ø Financial Planning Ø Production Scheduling
Limits of “Learning Curve” Advantages Ø Copying and reverse engineering of products; Ø Hiring a competitor’s employees; Ø Purchasing the know-how from consultants; Ø Obtaining the know-how from customers; Ø Experience advantages are often nullified by product obsolences and innovations.
Strategy Highlight 6. 1 Dr. Shetty: “The Henry Ford of Heart Surgery” • Trained as a heart surgeon in London • Conducted open-heart surgery on Mother Teresa • Goal: drive down costs through process innovation –$100, 000 for difficult heart surgeries in the United States –$2, 000 heart surgery in India • Applies learning curves to his work – They work six days per week – Their skills improve quicker than their U. S. counterparts Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 26
Strategy Highlight 6. 1 Dr. Shetty: “The Henry Ford of Heart Surgery” • Achieves economies of scale: – Fixed costs spread over larger volume – They can employ more specialized equipment – They share common services with the clinic – Data suggest higher volume does not compromise quality – Mortality rate lower with this approach . Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 27
28 What Is A Blue Ocean Strategy? • Successfully combining differentiation and cost-leadership activities • Uses value innovation to reconcile trade-offs • The metaphor of blue ocean means: – Untapped market space – The creation of additional demand – The opportunity for highly profitable growth Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
29 Example of a Successful Blue Ocean Strategy: Trader Joe’s • A regional grocer • Offers high value and health conscious foods • Offers much lower costs than Whole Foods Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
30 Blue Ocean: How IKEA Did It • Eliminate – Sales people – After sales service • Reduce – Warranties • Raise – Offers tens of thousands of home furnishing items • Create – New way to shop for furniture Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
31 A Blue Ocean Strategy is Difficult to Implement Exhibit 6. 10 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
32 How JCPenney Sailed Deeper into the Red Ocean • Results: – – – Sales dropped by 25%. Their stock was dropped from the S&P 500 index. CEO Ron Johnson was fired. His predecessor came out of retirement to step in Experienced a sustained competitive disadvantage, as they were “stuck in the middle. ” Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Strategy Highlight 6. 2 Cirque du Soleil: Finding a New Blue Ocean? • Blue Ocean strategy and value innovation through: – Eliminating several traditional circus elements. – Reducing slapstick clown humor. – Raising the quality of events through aerobatic and aerial acts. – Combining traditional circus with storytelling, ballet, and theater (in Montreal, Canada, where founded, and elsewhere). Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 33
Strategy Highlight 6. 2 Cirque du Soleil: Stuck in the Middle? • A perfect storm: – Lack of differentiation, resulting in lower sales. – Acrobat safety concerns after performer deaths in 2013, 2016, and 2018. Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 34
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