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Lecture 04: Cost Leadership Niels-Erik Wergin Strategic Management
Strategic Management © Niels Wergin MissionObjectives External Analysis Internal Analysis Strategic Choice Strategy Implementation Competitive Advantage Business Level Strategy Corporate Level Strategy How to Position a Business in the Market? Which Businesses to Enter? The Strategic Management Process
Strategic Management © Niels Wergin Two Generic Business Level Strategies Cost Leadership (this week): generate economic value by having lower costs than competitors Product Differentiation (next week): generate economic value by offering higher quality (or more service) than competitors Example: Asda Example: Waitrose Business-Level Strategies
Strategic Management © Niels Wergin Managers need to understand who has the cost advantage in their market it could be the focal firm it could be a competitor develop a strategy to exploit the advantage develop a strategy to either capture the advantage or compete on some other basis Understanding Cost Advantage
Strategic Management © Niels Wergin 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 Sources of Cost Advantage Example: Computers, Cars, Clothes
Strategic Management © Niels Wergin Learning Curve Economies a firm gets more efficient at a process with experience the more complicated/technical the process, the greater the experience advantage Example: Computers international expansion may propel a firm down the experience curve because of higher volumes Sources of Cost Advantage
Strategic Management © Niels Wergin Policy Choices firms get to choose how they will serve the market we’ll offer level of quality that is inexpensive to produce firms can make policy choices that give people incentives to reduce cost at every opportunity Example: Ryanair, EasJet Sources of Cost Advantage
Strategic Management © Niels Wergin The Strategy Clock
Strategic Management © Niels Wergin Route 1: No Frills Strategy Low price combined with low perceived product benefits focusing on price-sensitive market segments Commodity markets Price-sensitive customers High power, low switching costs among buyers Opportunity to avoid major competitors
Strategic Management © Niels Wergin Route 2: Low-Price Strategy Lower price than competitors while offering similar product benefits Pitfalls Margin reductions Inability to reinvest
Strategic Management © Niels Wergin Route 3: Hybrid Strategy Seeks to simultaneously achieve differentiation and low price relative to competitors Advantageous when Greater volumes can be achieved Cost reductions outside differentiated activities are available Used as an entry strategy
Strategic Management © Niels Wergin Route 4: Differentiation Strategy Seeks to provide products that offer benefits that differ from those offered by competitors Dependent upon Identifying and understanding strategic customer needs Identifying key competitors’ strategies
Strategic Management © Niels Wergin Route 5: Focused Differentiation Seeks to provide high perceived product benefits, justifying price premiums Key issues Choice between focus strategy and broad differentiation Tensions between focus strategy and other strategies Market changes
Strategic Management © Niels Wergin Routes 6-8: Failure Strategies 6 – Increase prices without increasing service/product benefits 7 – Reduction in product/service benefits with increase in relative price 8 – Reduction in benefits whilst maintaining price
Strategic Management © Niels Wergin Achieving Low Prices Operate with lower margins Develop a unique cost structure Create efficiency in organisational capabilities Focus on market segments with low expectations
Strategic Management © Niels Wergin Dangers of Low Price Strategies Competitors might follow suit Customers associate low price with low benefits (e.g. Ryanair) or quality Cost reductions may result in inability to pursue differentiation strategy
Strategic Management © Niels Wergin Summary The bases of competitive strategy include no frills, low-price, differentiation, hybrid, and focused differentiation strategies Managers must consider the bases upon which price-based or differentiation strategies can be sustained on strategic capabilities Sustainable competitive advantage is difficult to achieve in hypercompetitive conditions Strategies of collaboration may offer alternatives to or complement competitive strategies
Strategic Management © Niels Wergin Key Debate: To be Different or the Same ? To what extent do universities compete by being different or the same? Car manufacturers? Considering the nature of their industries and key players within them, why might these organisations adopt these approaches to conformity or differentiation?
Strategic Management © Niels Wergin Case: Ryanair’s No Frills Strategy What are the elements of Ryanair’s ‘no frills’ strategy? How easy would it be for larger airlines such as BA to imitate the strategy? On what bases could other low-price airlines compete with Ryanair?
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