© R.Kernochan, 2002 The Strategic Gestalt S STRATEGY F FIRM E ENVIRONMENT or MARKET

2 Principal Types of Strategic Gestalts Cost Leadership –competitive advantage from lower costs Differentiation –competitive advantage from valued features Other related strategies –Focus strategies: narrow competitive scope –Integrated: combined CL & differentiation

© R.Kernochan, 2002 The Strategic Gestalt S COST LEADERSHIP STRATEGY F FIRM E ENVIRONMENT or MARKET

4 Cost Leadership Strategy It is: a business-level generic strategy It is: a cost advantage over the competition For the firm, it means: –Focus on realizing a (sustainable) cost advantage over the competition –Often standardized products Economies of scale, learning curve Feature proximity (  know this) It is not: lower prices than competitors

5 Generic Strategies & the Concept of Proximity In a given market, Cost Leader firms compete with Differentiators & vice-versa. There is a limit to –how much extra consumers will pay for valued features, or –how many features they will give up. Hence concept of proximity or closeness.

6 Proximity Generic StrategyType of Proximity Cost LeadershipFeature DifferentiationCost

7 Core Question: If all firms focus on costs to some degree, how do I tell which ones are following a cost leadership strategy? how do I tell which one have a cost leadership competitive advantage?

8 Some Clues: what will I see? (1) Above average returns (no CA without AAR) Standardized products –where standardization = cost efficiency –with feature proximity Dominant cultural values concern efficiency, cost control –may espouse centralized or empowered model Vision of Ideal Model of Efficiency –machine efficiency, –organizational efficiency : simple reliable orgs. –or both

9 Some Clues: what will I see? (2) Firm Actions –Resource Investments/Commitments: value chain efficiencies. Examples –Vertical integration, mergers –More efficient production facilities –Quality that reduces value chain costs –Actions Pay for productivity improvements Integration, productivity emphases: more for less

10 How do firms gain a Cost Advantage? Value Chain (Porter) –Primary Activities (5) –Support Activities (4) Each Value Activity is affected by Cost Drivers

11 Cost Drivers Porter (1985): 10 (generic) cost drivers Economies of ScaleIntegration LearningTiming Pattern of capacity utilization Discretionary policies LinkagesLocation InterrelationshipsInstitutional Factors