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MGCR 423 (9)
Midterm

StudyGroup-OP-Midterm.docx

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Department
Management Core
Course Code
MGCR 423
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ilyapoletaev

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Chapter 1 Concepts: Strategic competitiveness: is achieved when a firm successfully formulates and implements a value-creating strategy. Strategy: is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. The firm’s choice of strategy decides how they will pursue strategic competitiveness.Achosen strategy indicates both what the firm will do and not do at the same time. Competitive advantage: when a firm implements a strategy that creates superior value for customers and its competitors are unable to duplicate or find too costly to imitate. None is ever lasting. Above average returns; risk; average returns (self-explanatory concepts) Strategic management process: commitments, decisions, actions which lead to firm’s strategic competitiveness and above average returns. Hypercompetition: market is inherently instable and changing – due to globalization: which is driven by global economy and technology. Global economy: goods, people skills and ideas move freely across borders, relatively unaffected by artificial constraints - tariffs etc., brings opportunities and challenges. Firms competing here must have cultural sensitive considerations/decisions. Globalization: the increasing economic interdependence among countries and their organizations as reflected in the flow of goods, services, financial capital, knowledge etc. Technology diffusion: Rate of tech diffusion is the speed at which new technology become available and used (adapted) Perpetual innovation: how rapid and consistently new information-intensive technology replace older ones Disruptive technologies: destroy value of existing technology and create new markets. (IPod, Ipad vs phone and computer) Resources: inputs into a firm’s production process (physical, human, organization capital/ tangible/intangible) Capacity: ability of resources to perform a task or an activity in an integrative manner. Core competency: resources/capabilities that serve as a source of competitive advantage for a firm over its rivals. Example (Apple R&D) Theory: *Strategies should focus on flexibility, speed, innovation, integration and facing challenges from changing conditions. *In the long run inability to earn at least average returns will lead to decline and eventually failure. *Effective use of strategic management reduces likelihood of failure. *Boundaries of an industry is increasingly hard to define due to partnerships and integration across industries. Thus the landscape is competitive, especially due to 2 things: 1. Globalization, 2. Technology. *Globalization lead to higher performance standards in many competitive dimensions, including quality, cost, productivity, product intro time, and operational efficiency, thus a firm needs to at least meet global standards to be competitive. *Highly globalized companies must consider the increasing complexity in their operations, and the related operational issues. Risks of globalization: Liability of foreignness: 1. Time required learning the new markets. Firm’s performance suffers till knowledgeable (developed locally, or transferred from “home”) about new market is obtained 2. Might over globalized (diversification) and result in “beyond their capabilities to operate and control”. Technology Trends in 3 general categories 1. technology diffusion and disruptive technology a. Shorter product life cycle allows for a competitive premium on being able to innovate and introduce new goods to the market (example:Apple) b. Firms need to innovate in terms of the use of the new technology c. Technology diffusion allows for firms’competitive advantage to be imitated really fast and effectively (reduced competitive advantage of patents) d. Apple is an entrepreneurship through technology emergence cross multiple industries. 2. information age a. the increasingly easy to use and implement trend, internet accessibility 3. increasing knowledge intensity a. Knowledge is an intangible resource - an increasingly large part of shareholder value (internally developed, or externally acquired) b. Probability of achieving strategic competitiveness is enhanced from the firm’s ability to capture intelligence and transform it into usable knowledge. c. Vast knowledge base precedes innovation. d. Learning is continuous since spillover to competitors is common, thus must move quickly to use the knowledge before spillover happens. *Strategic flexibility a set of capabilities use to respond to various demands and opportunities in a dynamic and uncertain market. (developed in operations) firm’s focus on past core competencies might slow change and reduce strategic flexibility.The Industrial/Organization model of above average returns Based on belief: Industry determine performance more than do manager’s actions. Determinates of industry: Economies of scale barriers to entry, diversification, product differentiation, degree of concentration of firms Assumptions: 1. external environment imposes pressures and constraints on strategy implementation 2. most firms compete within the industry control similar strategic resources, and use them in the same way 3. resources used to implement strategies are highly mobile across firms - resource difference across firms are short lived 4. Organization decision makers are rational and committed to firm best interest. Five forces model is used here. Resource base model of above average returns Assumes each organization is a collection of unique resources and capabilities. Uniqueness is the basis of a firm’s strategy and its ability to succeed. Individual resources alone may not yield a competitive advantage. Resource are formed into a capability. Thesis: differences in firm’s performances across time are due primarily to unique resources and capabilities rather than industry structure. Assumes firms acquire/develop resources based on ability to combine and integrate. Resources and capabilities are not highly mobile across firms, and are the basis of competitive advantage; harder to imitate as more one firm is more mature in utilization. I/O used to identify the attractive industry, resource based model allows it to used competitive advantages in the attractive industry. Valuable resources: when they allow firm to take advantage of opportunities or neutralize threats in its external environment. Rare resources: when possessed by few. Costly to imitate: cannot obtain by a competitor at a cost effective way Nonsubstitutable: when no structural equivalents Resources + capabilities = core competencies Decision criteria: Vision: a picture of what the firm wants to be/ultimately achieve Mission: the industry/business where the firm intends to compete and customers it intends to serve. Stakeholders: individuals, groups, organizations who can affect the vision and mission, and are affected by the strategic outcomes, and have enforceable claims on the firm’s performance. Capital market, product market, and internal organization stakeholders Might be confusing so: 1. Indentify relevant parties 2.proiritize (using power, urgency in satisfying, and degree of importance) Strategic leader: people in different areas of a firm who use strategic management process. Organizational culture: complex set of ideologies, symbols core values which are shared throughout the firm and influences how the firm conducts business. Industry profit pool: total profits in an industry at all points along the value chain. Process to determine profit pool: 1. identify boundaries of the pool 2. estimate overall size 3. estimate size of value chain activity in the pool 4. Reconcile calculations. Chapter 2: External environment: opportunities, threats, industry competition, and competitor analysis A firm’s external environment creates both opportunities and threats. Collectively, opportunities and threats affect a firm’s strategic actions. Firms’ external environment is filled with uncertainty and to deal with it, achieve strategic competitiveness and succeed, companies must know the different segments of their external environment. A firm’s strategic actions are influenced by the conditions in three parts (the general, industry and competitor) of it’s external environment. The analysis: ● Identifying opportunities and threats ○ Opportunity: condition in the general environment that if exploited effectively, helps a company achieve strategic competitiveness ○ Threat: condition in the general environment that may hinder a company’s efforts to achieve strategic competitiveness ● Firms use a variety of sources for their analysis, from print material, trade shows and suppliers, employees of public-sector organizations ● Scanning ○ Highly important for firms in volatile environments ○ Software assisted to detect news as fast as possible ● Monitoring ○ Highly important when there is high technological uncertainty ● Forecasting ○ Important for consumer goods producers to forecast economic situation ● Assessing ○ A firm could have a lot of information, but unable to interpret it 1) The general environment: Conditions that the firm can’t change, but can adapt to (pretty much everything is in the picture really, it’s straightforward. Basically the text assesses how change in each category affects the market for different industries) ● Focus on environmental trends ● What are the major trends? ● Historical evolution of these trends ● What is the rate of change? ● Which strategies maximize benefits / minimize costs associated with these trends? 2) Industry environment = Porter’s 5 forces -Industry = group of firms producing products that are close substitutes ● Threats to new entrants (fight it with Barriers to entry): ○ Economies of scale: incremental efficiency improvements through experience as a firm grow larger. Can be developed in most business functions (marketing, manufacturing, R&D). Enhances a firm’s flexibility. Fight it by customization which reduces economies of scale required and improves the reaction to customer’s need. ○ Product differentiation: uniqueness of a product, loyalty to it. Fight it by lowering prices ○ Capital requirements: resources to invest ○ Switching costs: when buying from somebody else ○ Access to distribution channels: strong relationship with supplier may alter him from leaving you to somebody else. Fight it by lowering prices and having comparative advertising allowances. ○ Cost disadvantages independent of scale: ex: patents, rare raw materials, location. ○ Government policy: where government govern the entry through licensing, permit requirements. ○ Expected retaliation: reaction of firms in the industry (intense or not, fast or not). Avoid by finding niche markets. ● Bargaining power of suppliers (a supplier group is powerful when...:) ○ Few large companies and concentrated ○ No substitutes ○ Industry firms not significant customer for supplier ○ Supplier’s goods are critical for industry ○ High Switching costs ● Bargaining power of buyers ○ Purchase large amount of supplier’s output ○ Low switching costs ○ Undifferentiated or standardized products ○ Customers have more and more information about the costs of the suppliers ● Threat of substitute products ○ Occur when low switching costs ● Intensity of rivalry among customers ○ Numerous or equally balanced competitors ○ Slow industry growth ○ High fixed costs or high storage costs ○ Lack of differentiation or low switching costs ○ High strategic stakes ○ High exit barriers: Interpreting Industry Analysis The higher the forces, the lower the profit potential. Firms need to analyse on a global scale. Strategic groups: set of firms that emphasize similar strategic dimensions and use a similar strategy. High mobility barriers, high rivalry and low resources among the firms within an industry limit the formation of strategic groups. High rivalry within strategic groups, and therefore high threat to profitability. Strength of the 5 forces differ across strategic groups. High rivalry between groups with similar strategies. Complementor analysis Information needed to prepare an anticipated response profile for each competitor: his future objectives, his current strategy, his assumptptions, his strengths and weaknesses. This forms what we call competitor intelligence, which is the set of data and information the firm gathers to better understand and better anticipate competitors’ objectives, strategies, assumptions, and capabilities. Sometimes seen as corporate espionage. Those are parts of the ethical considerations firms must follow (as law and regulation) when conduction competitor intelligence. Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages. A key takeaway from this chapter is that firms achieve strategic competitiveness and earn above-average returns by acquiring, building, and leveraging their resources for the purpose of taking advantage of opportunities in the external environment in many ways that create value for customers. 3.1 Analyzing the Internal Organization The Context of Internal Analysis - Analyzing a firm’s internal organization has become increasingly important. With globalization, some of the resources used by firms in the past to create advantages are less likely to become core competencies and competitive advantages. - More and more firms are using their core competencies to successfully implement an international strategy and overcome advantages created by more traditional resources. - Ex: Volkswagen has established an international strategy using its resources to form technological and innovation capabilities. - Due to globalization, firm’s should keep a global mind-set to analyze their firm’s international organization. - A Global Mind-Set is the ability to analyze, understand, and manage an international organization in ways that are not dependent on the assumptions of a single country, culture or context. - Using a global mind set in internal analysis can potentially help a firm in its efforts to outperform its rivals. - A key part of internal analysis is analyzing the entire portfolio of a firm’s resources and capabilities. - Resources are the source of capabilities, some of which lead to a competitive advantage for the firm. - See page 74. Figure 3.1 for a visual of the components of an internal analysis. Creating Value - Firms use their resources as the foundation for creating value for their customers. - Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay. - Firms with a competitive advantage create more value than their competitors. Ex. Walmart uses its “everyday low prices” approach to doing business to create value for those seeking to buy products at low price. - Example: E.S Kluft & Company creates value for customers interested in buying what the firm says are the “best mattress in the world”. Human capital is a core competency for this firm since each mattress is handmade by skilled craftsmen and this may also be a competitive advantage. - Creating value is the source of above-average returns for a firm. - Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage. The Challenge of Analyzing the Internal Organization - To prove that analyzing the Internal Organization is hard we must only realize that one-half of organizational decisions fail. - Managers might believe they have a core competency when in fact they do not and therefore their strategy will be flawed from the start. Managers must catch onto this and make corrective actions. - Uncertainty, complexity and Intraorganizational Conflicts are all conditions that affect managerial decisions. - Uncertainty – exists about the characteristics of the firm’s general and industry environments and customers’ needs. - Complexity – results from the interrelationships among conditions shaping a firm. - Intraorganizational Conflicts – may exist among managers making decisions as well as among those affected by the decisions. - Example: Peabody, the world’s largest private-sector coal company, faces uncertainty with respect to how its resources will be used in the future. To cope with uncertainty, they will build a “clean” coal-fired plant and has signed agreements to develop clean coal in China. These decisions are very complex. Lastly, intraorganizational conflicts may occur about the degree to which resources and capabilities should be used to form core competencies to support current coal technologies relative to the building of core competencies to support newer “clean technologies”. - Judgment – is capability of making successful decision when there is no obvious solution. - Individuals who have good judgment and make key decisions are called strategic leaders. 3.2 Resources, Capabilities, and Core Competencies Resources - Resources can be tangible or intangible. - Alone, resources do not allow firms to create value for customers as the foundation for earning above-average returns. - Resources must be combined in ways to create capabilities and then be created into core competencies. - Tangible resources are assets that can observed/quantified such as production equipment manufacturing facilities, distribution centers etc. - Intangible resources are a superior source of capabilities and subsequently, core competencies. - This is because intangible resources are harder to understand, purchase, imitate, or substitute so firms rely on them to create capabilities. - A well-known brand is a specific reputational resource that can also be a competitive advantage is some instances. Capabilities - The firm combines tangible and intangible resources to create capabilities. - As a foundation for building core competencies and hopefully competitive advantages, capabilities are often based on developing, carrying and exchanging information and knowledge through the firm’s human capital. - See Table 3.3 on page 82 for an in-depth visual of capabilities. Core Competencies - Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals. - They are the operations or activities that a firm does particularly well compared to its competitors and where they create unique value to their goods or services. - Example – Apple’s core competency is thought to be innovation. (R&D is the capability which is the source of this competency) - Another of their core competencies is customer service at their retails stores. In this case, tangible resources such as the unique apple stores combined with knowledgeable and skilled employees (intangible resource) provide unique value in their service. The procedures that are capabilities include: intensive control of how employees react with customers, training, and the consideration of having every store detailed down to the pre-loaded photos and music on the devices. Building Core Competencies - There are two tools that help identify core competencies. The first consists of the four specific criteria of sustainable competitive advantage and the second is value chain analysis. The Four Criteria of Sustainable Competitive Advantage - For a capability to be a core competency it must be valuable and unique from a customer’s point of view. - For a core competency to be a sustainable source of competitive advantage, it must be inimitable and non-substitutable by competitors. Example: both Target and Wal-Mart are using its resources and capabilities for the purposing of forming a “green” core competence. Thus, either Walmart or Target would know that it has a core competence and possibly a competitive advantage in terms of green practices if the way the firm uses its resources to complete these practices satisfies the four criteria. Valuable - Valuable capabilities allow the firm to exploit opportunities or neutralize threats in its external environment to create value. - Example – Penguin Group, a large publishing firm, sees using the internet to sell directly to customers as an opportunity to create value for customers. It is taking advantage of digital technologies to transform its business and neutralize the possibility/threat of lower sales revenues from traditional channels. Rare - Rare capabilities are capabilities that few, if any, competitor posses. - A key question to ask when evaluation this criterion is, “How many rival firms possess these valuable capabilities?” - Competitive advantage only results when firms develop and exploit valuable capabilities that become core competencies and that differ from those shared by competitors. - It’s possible both Walmart and Target might reach competitive parity since their capabilities used to becomes green are valuable but may not be rare. Costly to Imitate / Inimitability - Costly-to-imitate capabilities are capabilities that other firms cannot easily develop. - These capabilities can be created because of one or a combination of three reasons: 1- Unique historical conditions often play a part. 2- Unique and valuable organizational culture can be extremely valuable when employees are held together by a certain set of values. Example: McDonald’s culture of cleanliness, customer service, and training reinforces the value of these characteristics and can be a core competence and a competitive advantage. 3- Social complexity is the third reason that capabilities can be costly to imitate. The complex interrelationship the culture and human capital such as for Southwest Airlines, help to create value for customers. Nonsubstitutable - Nonsubstitutable capabilities are capabilities that do not have strategic equivalents. - In general, the strategic value of capabilities increases as they become more difficult to substitute. In summary, only using valuable, rare, costly-to-imitate and nonsubstituable capabilities has the potential for the firm to create sustainable competitive advantages. See Table 3.5 on page 87 for some outcomes from combinations of the criteria for sustainable competitive advantage. Value Chain Analysis - Value chain analysis allows the firm to understand the parts of its operations that create value and those that do not. Understanding these issues is important because the firms earn above- average returns only when the value it creates exceeds the costs of doing so. - A firm’s value chain is divided into value chain activities and support functions. - Value chain activities are activities or tasks the firm completes in order to produce products then sell, distribute and service those products in ways that create value for customers. - Support functions include the activities or tasks the firm completes in order to support the work being done to produce, sell, distribute, and service the products the firm is producing. - To become a core competence and a source of competitive advantage, a capability must allow the firm to (1) perform an activity in a manner that provides value superior that provided by competitors, or (2) to perform a value creating activity that competitors cannot perform. - We can think of WalMart’s strong relationships with suppliers and bargaining power over them as creating value from the value chain activities (Supply-chain management). - Judgment is necessary when using value chain analysis since there is no obvious correct model. - See figure 3.3 on page 88 for A model of the Value Chain Creating Value through Value Chain Activities – Figure 3.4 Page 88 - Firms can create value through the value chain through, Operations, Marketing, Distribution, Follow-up Service, Supply-Chain Management. Creating Value through Support Function – Figure 3.5 Page 89 - Firms can create value through support function through the Finance, HR and management information systems departments. Outsourcing - Outsourcing is the purchase of a value-creating activity or a support function activity from an external supplier. - Firms who effectively outsource increase their flexibility, mitigate risks, and reduce their capital investments. - By outsourcing activities in which firms lack competence allows the firm to concentrate on those areas in which it can create value. - Consequences include the internal loss of jobs as well as the potential loss of innovation for a firm. Thus innovation and technological uncertainty are important in the outsourcing decision. Chapter 4: Business-Level Strategy - The fundamental objective of using any type of strategy is to gain strategic competitiveness and earn above-average returns. - Business-level strategy is an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. - Business level strategy indicates the choices the firm has made about how it intends to compete in individual product markets. - It is the core strategy that the firm forms to describe how it intends to compete in a product market. - To examine business-level strategies, we start with determining the customers; (1) who will be served, (2) what needs those target consumers have and (3) how these needs will be satisfied. 4.1 Customers: Their Relationship with Business-Level Strategies. - A key reason firms must satisfy customers with their business-level strategy is that returns earned from relationships with customers are the lifeblood of all organizations. Effectively Managing Relationships with Customers - The firm’s relationship with customers is strengthened when it delivers superior value to them. - For example: Amazon is widely known for the information it stores on its customers, given them unique recommendations, anticipating consumer’s demands. Reach, Richness and Affiliation (Dimensions of Customer Relationships) - The reach dimension of relationships is concerned with the firm’s access and connection to customers. In general, firms seek to extend their reach, adding customers in the process of doing so. - This is especially important for social networking sites such as Facebook. - The richness dimension of customer relationships is concerned with the depth and detail of the two-way flow of information between the firm and customer. - Better and deeper information-based exchanges can lead to competitive advantages as firms will have an in-depth understanding of their customer. - The affiliation dimension is concerned with facilitating useful interactions with the customers. - Viewing the world through customer’s eyes and constantly seeking ways to create value for customers creates positive effects in terms of affiliation. As we discuss next, effectively managing customer relationships among the three dimensions helps to firm answer questions related to the issues of who, what and how. Who: Determining the Customers to Serve - Deciding who the target customers are for the firm is an important decision. - Firms divide customers into market segments, which is a process that clusters people with similar needs into individual and identifiable groups. - Consumers can be segmented into consumer markets and industrial markets. - Consumer markets include – Demographics, socioeconomic factors, geographic factors, psychological factors (lifestyle, personality), consumption patterns (heavy, moderate, light users) and perceptual factors (benefit segmentation, perceptual mapping) - Industrial markets include end-use segments (identified by SIC code), product segments ( based on tech differences or production economics), geographic segments, common buying factor segments and customer size segments. What: Determining which Customer Needs to Satisfy - After the firm decides who it will serve, it must identify the targeted customer group’s needs that its goods or services can satisfy. - Successful firms figure out how to deliver on customer needs whenever they want it. - Having close and frequent encounters with the customer helps the firm indentify the current and future needs of the customers. - One example could be from Hyundai who offered a service to their customers allowing them to return their car if they lose their jobs within 12 months of the purchase thereby addressing a need of financial security for customers. - The most effective firms continuously strive to anticipate changes in customer needs. How: Determining Core Competencies Necessary to Satisfy Customer Needs - After determining who the customers are and what their specific needs are we are now able to determine how to use capabilities and competencies to develop products that can satisfy the needs of its target customers. - Companies draw from a wide range of core competencies to produce goods and services that can satisfy customer’ needs and must continuously upgrade these competencies to keep up with changing customer needs/demands. - Example: Merick, a large pharmaceutical firm, well-known for its R&D capabilities, has been continuously investing in research to identify drugs that are intended to meet customer needs and to sustain their competitive advantage in the industry. - Sometimes firms may find it necessary to use their core competencies as the foundation for producing new goods or services for new customers. 4.2 The Purpose of Business-Level Strategy - The purpose of a business-level strategy is to create differences between the firm’s position and those of its competitors. To position itself differently from competitors, a firm must decided whether it intends to perform activities differently or perform different activities. - Successful use of a business-level strategy results from the firm learning how to integrate the activities it performs in ways that create superior value for customers. See figure 4.1 on page 108 for Southwest Airlines activity map – showing exactly how their activities make it possible for their strategy to come to life. - Strategic fit among the activities a firm performs is critical for competitive advantage. It is more difficult for a competitor to match a configuration of integrated activities than a particular activity. Types of Business-Level Strategies – Figure 4.2 Page 109 - Firms choose from among five business-level strategies to establish and defend their desired strategic position against competitors: cost leadership, differentiation, focused cost leadership, focused differentiation and integrated cost leadership/differentiation. - When selecting a business-level strategy, firms evaluate two types of potential competitive advantages: lower cost than rivals, or the ability to differentiate and command a premium price that exceeds the cost of doing so. - The two types of target markets are broad market and narrow market segments. - Firms serving a broad market seek to use their capabilities to create value for customers on an industry-wide basis. Whereas a narrow segment means that the firm intends to serve the needs of a narrow customer group. - For each strategy we will review the five forces to show how a firms’ strategy can protect them against industry threats. Cost-Leadership Strategy - The cost-leadership strategy is an integrated set of actions taken to produce foods or services with features that are acceptable to customers at the lowest cost, relative to those of competitors. - Process innovations such as newly designed production processes and distribution methods are critical techniques that allow the firm to operate more efficiently, are critical to successful use of the cost leadership strategy. - Cost leaders’ goods and services must have competitive levels of differentiation that create value for customers. It is important for firms using the cost-leadership strategy to not only focus on cutting costs because it could result in producing products no one wants to purchase. - Example: Kia Motors has emphasized the design of its cars to produce low-end/inexpensive cars that don’t necessarily look low-end. - Example: cost leader Greyhound Lines inc. continuously seeks ways to reduce the costs it incurs to provide bus service while offering customers an acceptable level of differentiation. - As primary activities, inbound logistics (materials, warehousing and inventory control) and outbound logistics (collecting, storing and distribution products to customers) often account for significant portions of the total cost to produce some goods and services. - Therefore, having a competitive advantage in logistics (such as WalMart) creates more value with a cost leadership strategy than in a differentiation strategy. - Firm’s with a cost leadership often outsource production to low-cost firms who pay low-wage employees however if dependency on these firms become too great it gives the supplier power to raise prices thus harming the firm’s ability to keep a low-cost strategy. - Briefly, the firms who can derive the most value from their value chain and support functions can achieve the greatest advantage when it comes to the cost-leadership strategy see figure 4.3 on page 112. 1. Rivalry with Existing Competitors. - Having the low-cost strategy is valuable when dealing with rivals since they will hesitate to compete on the basis of price. - Example: However, when WalMart changed its strategy to also attract upscale customers (as seen in the case) its low-cost position was made vulnerable to rivals. 2. Bargaining Power of Buyers - Powerful customers can force a cost leader to reduce its prices, but not below the level at which the cost leader’s next-most-efficient industry competitor can earn average returns. - Customers also don’t want to decrease prices too much as to eliminate competition because this would lead to less firms, less competition and consequently higher prices. 3. Bargaining Power of Suppliers - The cost leader operates with larger margins than those of competitors and want to increase their margins by decreasing costs even more. - This helps when suppliers are forced to increase prices. The cost-leader will be able to absorb the price ( or in the case of Walmart dictate prices) and still be able to operate while other competitors may not be able to absorb the price increase as easily. - Some firms create dependencies on suppliers by outsourcing to lower costs but the only way that outsourcing with foreign firms can be successful is if the firm takes the time to create a strong, trusting relationship with the supplier. 4. Potential Entrants - Through continuous efforts to decrease costs firms develop a certain efficiency and economies of scale that makes it hard for new entrants to catch up to. - New entrants must earn below-average returns in the first years in order to learn how to be efficient but there is still no guarantee that they will become successful. 5. Product Substitutes - Through low prices and competitive levels of differentiation, the cost leader increases the probability that customers prefer its product rather than a substitute. Competitive risks of the cost leadership strategy - Processes to obtain cost efficiency may become obsolete due to rival’s innovations. - Too much focus on cost-reducing may occur at the expense of getting to know what the customer wants. - Example: Customers were not happy with the small amount of salesmen and cashiers in their stores which may suggest that there might
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