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Topic 4: Strategic Management
Contents: Business Strategy and Competitive Advantage
The Strategic Planning Process
Strategy formulation: Mission and Vision
Environment analysis: S.W.O.T. techniques
Porters Five Forces Model Corporate Strategy
Generic Strategies
Firm growth and development
Differentiation Strategies
Vertical Integration Globalization
Primary Reference:Robert M Grant, Contemporary Strategy Analysis, 3rd Edition, BlackwellPublishers.
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What is Strategy?
Strategy has its origins in warfare.
Strategy is the overall plan for deploying resources to establish a
favourable position.
Tactics:
A tactic is a scheme for a specific action.
Tactics are concerned with maneuvers necessary to win battles
whereas strategy is concerned with winning the war.
Sun Tzu (Art of War, 500 B.C.)
Know the other and know yourself: Triumph without peril.
Know Nature and know the Situation: Triumph completely.
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Some definitions of Strategy
Strategy is a detailed plan for achieving success in situations such as war,politics, business, industry or sport, or the skill of planning for such situations
(Cambridge Dictionary)
Strategy. The art of war, especially the planning of movements of troops and
ships etc., into favourable positions;plan of action or policyin business or
politics, etc. (Oxford Pocket Dictionary) The determination of the long-run goals and objectives of an enterprise, and
the adoption ofcourses of action and the allocation of resources necessary
for carrying out these goals. (Alfred Chandler, Strategy and Structure)
What business strategy is all about is, in a word, competitive advantage The
sole purpose of strategic planning is to enable a company to gain, aseffectively as possible, a sustainable edge over its competitors. Corporate
strategy thus implies an attempt to alter a companys strength relative to
that of its competitors in the most efficient way. (Kenichi Ohmae, The Mind
of the Strategist)
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In the business world, a Company MUST design an appropriatestrategy to win battles against its competitors and eventually
achieve final victory in the war.
Outdoing the competitors means:
More business volume higher profits and returns
more market share
better image or reputation
ubiquitous brand names
& in general .. more SUCCESS !!!
Some definitions of Strategy
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Strategic decisions are important.They define the path the company will take in the future.
Strategic decisions involve a significant
commitment of resources.They are not easily reversible.
Hence, it is very important to get the strategy right.
Nature of Strategic Decisions
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Common elements of Successful Strategy
Goals that are simple, consistent andlong-term
A strategy is formulated for the long-
term and not the short-term
Profound understanding of the
competitive environment. Understanding the business in which
the company is, its competitors,
industry structure, etc.
Objective appraisal of resources
Knowing the strengths andweaknesses and how to fill the
required gaps.
Effective Implementation
Most critical.
Successful
Strategy
Effective Implementation
Simple,
consistent and
long-term
objectives
Profound
Understanding of
the competitive
environment
Objective
appraisal of
resources
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A firm/company embodies three sets of key characteristics:
Its goals and values
Its resources and capabilities
Its organizational structure and systems
External environment
Comprises the whole range of economic, social, political and
technological factors that influence a firms decision and its performance.
For most strategy decisions, the core of the firms external environmentis the industry
Relationships with customers, competitors and suppliers.
Analyzing Business Strategy
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Most strategy frameworks consider strategy as the linkbetween the firm and the external environment
Analyzing Business Strategy
THE FIRM
Goals and Values
Resources and
Capabilities
Structure andSystems
THE INDUSTRY
ENVIRONMENT
Competitors
Customers
Suppliers
STRATEGY
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Competitive Strategy, Competitive Advantage
Competitive Strategy: The planning and implementation of
utilization of scarce resources of a company (both financial andhuman), in order to obtain results that are superior to those of
competitors.
Competitive advantage: The distinguishing feature of acompany that differentiates it from its competitors and allows itto reach a position ofsustainable superiority in the market.
In order to maintain that competitive advantage, the company needs tocontinuously review its strategy in order to adapt it to the changing
environment. Hence the importance of studying the environment.
The ultimate goal of any Corporate Strategy is the achievementof a Competitive Advantage that is sustainable over time.
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The strategic management process: planning
Mission &
Objectives
of the firm
External
Analysis
Internal
Analysis
Design of
Strategic
Options
Evaluation
& Selection of
Appropriate
Strategy
Implementation
In
Practice
Control
Basic
orientation
of the firm
STRATEGIC ANALYSIS STRATEGY STRATEGY IMPLEMENTATION
FORMULATION
Diagnosis:
Weaknesses,
Strengths,Threats and
Opportunities
Corporate
And Competitive
Strategies
Adequacy,
feasibility,
acceptability
Support,
Planning &
Functional
strategies
Review of
strategy
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Corporate Mission & Objectives
Mission: Strategic vision of what the organization intends to do and
become in the long term. Must be consistent with the culture (values ) of the company.
Core purpose is the reason that the firm exists, an idealistic
reason for being
What do we do?
Where do we go from here?
Binds the various activities of the firm
The mission & purpose are specific in the short to medium term.
Objectives & Goals: commitments of efforts made by management
in order to achieve concrete results in a bounded time period. This
is communicated to all levels of the firm.
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Strategic Analysis Tools:
1. SWOT Analysis Simple but very useful and effective method to choose the best strategy and action
plans of the company. Introspective (internal) analysis of strengths and weaknesses within the company.
Externally, analysis of threats and opportunities presented by the market &environment
How is it done?: For internal analysis, it is necessary to know the resourcesand capabilities of the company
STRENGTHS
OPPORTUNITIES THREATS
WEAKNESSES
PatentsStrong brand namesGood reputationProprietary know-howFavorable access to distribution networks
Unfulfilled customer needsArrival of new technologyLoosening of regulationsRemoval of international trade barriers
Shifts in consumer tastes from the firm productsEmergence of substitute productsNew regulationsIncreased trade barriers
Poor brandsBad distributionLack of skillsLow customer loyaltyCustomer claims: High levelPoor management
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2. Business Portfolio Analysis Tool
BCG Growth-Share Matrix
Graphically depicts the situation of need (cash/fundsrequirement) versus generation of resources (funds, cash-flow) by different products or business portfolios in thecompany
Model developed by The Boston Consulting Group to analyze themanagement of a portfolio of different strategic business units (SBU)or major product lines
The products may change their position in accordance with thebusiness life cycle
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2. BCG Growth-Share Matrix
STARSHIGH
LOW
MARKETGROWTHRATE
(CashUsage)
HIGH
QUESTIONMARKS
CASH COWS
DOGS
LOW
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Type of Business/Product
Cash Cow Business Unit (BU) or product with large Market Share (MS) in a mature,
slow growing industry
that requires little investmentand
generates cash that can be investedin other BUs
Star
BU or product with large MS in afast growing industry.
Will a Star generate cash?
It may generate cash but, because of the market growth, it requiresinvestmentto maintain a leading position.
Eventually, it will become a cash cow.
2. BCG Growth-Share Matrix
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Type of Business/Product
Question Mark BU or product with small MS in a high growth market.
It requires resources to grow MS but the outcome is uncertain as it maybecome either a star or a dog depending on other factors.
Dog
BU or product with small MS in a mature industry.
It may not require substantial cash but it ties up capitalthat could bedeployed elsewhere.
It should be liquidated unless it serves some other strategic purpose.
2. BCG Growth-Share Matrix
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3. Analysis tools for specific industry environment: The five
competitive forces model (Porter)
Perfect competition model implies that risk-adjusted rates of return should be
constant across firms and industries. In reality, different industries can sustain
different levels of profitability, partly explained by industry structure.
Porters 5 forces model helps in the analysis of an industry in order to know
the potential benefit in the industry in terms of profitability in the medium
and long terms.
Can be considered as a basic instrument to analyze the threats and
opportunities present in the sector in which the company is located.
The interaction of the 5 forces determines the profitability of the industry and
the distribution of value creation between the different actors.
This model can be used by business managers to: Better understand the industry context in which the firm operates to try and
develop an edge over competitors
Analyze attractiveness of other industries when searching for new business
opportunities
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Competitive Analysis: Porters five forces Model
POTENTIAL
COMPETITORS
SUPPLIERS BUYERS/
CONSUMERS
SUSTITUTES
EXISTING
COMPETITION INTHE SECTOR
Intensity of Rivalry
Threat of substitutes
Products or Services
Bargaining power of
Buyers/consumers
Bargaining power
of Suppliers
Existence of barriers
to entry
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Analysis of the five competitive forces
a) Intensity of Existing Competition:
It is one of the most important of the five forces and isdetermined by the following factors:
Growth Rate of Industry: A slow market growth causes firm to fight for
market share
Extent of fixed costs in the total value of business : Highfixed cost
produce economies of scale and more rivalry Degree of product differentiation: Low product differentiation increases
the intensity of rivalry
Concentration and balance among competitors: A large number of firms
increases rivalry, as they compete for the same customers and resources.
Product characteristics: Highly perishable products intensify competition
for customers and increases rivalry
Supplier switching costs: Low costs increase intensity of rivalry. The
contrary happens with brand identity.
Exit barriers: High exit barriers increases the intensity of existing
competition.
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b) Potential Competition: Threat of Entry
The entry of new firms in the industry creates changes in supplier capacity,
market shares, changes in profit margins, etc ...The degree of threat depends on entry barriers.
For their part, companies that are within the industry will react to theirdefense.
The existence of barriers to entry defines the possibility of high profits
TYPES OF BARRIERS TO ENTRY
Economies of scale
Experience and learning effect
Customer Loyalty Need for specific technologies
Capital requirements
Access to distribution channels
Government Policies
Tariffs and trade restrictions
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b) Potential Competition: Threat of Entry (continuation)
Barriers, that can be created or exploited to enhance a firm
position of advantage, arise from several different sources: Government regulatory actions: utilities, telecommunications
Patents and proprietary knowledge: pharmaceutical industry
Specificity of capital assets
Large investment in highly specialized plants and equipment is needed
Aircraft manufacturing
Existence of economies of scale: MES (minimum efficient scale) ofproduction is high. Unit cost decreases with volume until such highlevels that deter the entry of small, start-up business
Cost Advantages:
Established firms have cost advantages simply because they haveentered earlier,
cost of learning
access to cheap raw materials
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b) Potential Competition: Threat of Entry (continuation)
Barriers, that can be created or exploited to enhance a firm position ofadvantage, arise from several different sources:
Product differentiation Advantages of brand recognition and customer loyalty
New entrants have to spend heavily on advertising, building awareness, etc.
Access to channels of distribution Limited capacity within distribution channels (lack of shelf space)
Retailers who are risk averse
Fixed costs associated with carrying an additional product
Retaliation Entrants expectations as to possible retaliation by established firms
Aggressive price cutting
Increased advertising and sales promotion and litigation
The likelihood of retaliation is also influenced by the scale of entry
Barriers to entry may not work with firms that are diversifying and thosethat have access to lot of resources and that use different strategies.
Dell computers (direct access to customers).
Barriers to exit work similarly to barriers to entry, though the impact isopposite
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b) Potential Competition: Threat of Entry
(continuation)
TYPES OF REACTION OF BUSINESS TO A NEW COMPETITOR
Faced with the threat of a new competitor a firm can react to preserve itscompetitive position in the following ways:
Passively: no reaction, the company expects and see what happens in theindustry before starting a particular action.
Threatening Moves: taking steps that threaten the consolidation of thenew competitor, as lower prices or improve products and services.
Defensive Moves: from an established position, increased advertising, etc.
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c) Threat of Substitute Products
Substitutes are those products/services in different industries that perform a similarfunction or satisfy the same needs
Car, train, airplane transportation, Iberia Shuttle and AVE between Madrid / Barcelona
Aluminum cans, glass bottles and plastic containers
Traditional versus on-line encyclopedia
The intensity of the threat depends on the price relative to the benefits and costs of
change:
Consumers compare prices and services, changes may be favorable to the new product.
Switching costs may come from the necessary training, acquisition of additional
equipment, technology costs, sociological and time.
The threat of substitutes exist when
Switching cost are low
Buyer inclination to substitute is high Price-performance trade-off of substitutes is similar
The extent of substitution on the basis of price differences will be lower if:
Complex needs are being fulfilled
Difficult to discern performance differences.
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d) Bargaining Power of Buyers
If buyers enjoy significant bargaining power in the industry, they canforce down prices or demand better quality services.
The circumstances that make buyers into a powerful group with muchbargaining power are:
High concentration DOD & Defense contractors
When there is no differentiation between products & volume purchasedby the buyer is high Coca-Cola and bottle manufactures
Low switching costs for changing supplier
Real threat of backward integration of the buyer Large automobile companies and tire manufacturers
Availability of reliable and complete information (about the market andsuppliers)
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e) Bargaining power of suppliers
Factors that contribute to strengthen the suppliers:
The customers that they serve are numerous and loosely organized collectively
They are concentrated Chip manufactures vs. PC manufacturers/ assemblers
Sell their products to different sectors
They provide an essential product, with no replacement
Offer differentiated products
High costs of switching
Microsoft relationship with PC manufacturers
Threat of forward integration by suppliers
Suppliers are weak if:
Product is standardized: many competitive suppliers and commodity products
Credible backward integration threat by purchasers Timber producers relationship to paper companies
Purchasers are concentrated or purchase in high volumes House appliances manufacturers and Corte Ingls
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Criticisms of Porter's five forces model
There are substantial differences in the level of profitability ofcompeting firms in a given industry. Porter's analysis is based onindustry structure
The industry structure analysis also needs to be complemented withcapacity of each company to allocate its resources and develop its skills.
All industries are not alike. Different forces have different levels ofimpact and importance depending on the industry. To apply themodel appropriately, one has to take into account the importancethat each of the five forces has for a particular industry. This cannotbe done mechanically.
It is not enough to perform a static analysis, because the verystructure of any industry is dynamic in nature.
Needs to be complemented with estimates of trends.
h f i l l
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The management function: management levels
: Who decides on the strategy to adopt?
STRATEGIC
LEVEL
TACTICAL LEVEL
MIDDLE-LEVEL
MANAGEMENT
OPERATIONAL LEVEL
Responsible for guiding the
company, setting targets and
the main strategies
Senior & middle management
related to supervision of
operational level
Are in direct contact with
workers doing the productive
work of the company
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The management function: types ofdecisions
STRATEGIC
DECISIONS
TACTICAL OR
STRUCTURAL DECISIONS
OPERATIONAL
DECISIONS
Senior management of the company
High degree of Uncertainty
Long-term effects
Affects the basic objectives of the company
Middle-level management and staffdepartments
Less uncertainty than strategic decisions
Long-term and medium term
Affects the means of achieving the basic
objectives of the company
Supervisors of line functions
Low uncertainty- routine decisions
Short-term and medium term impact
Affects the day-to-day use of the means to
achieve business objectives
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The strategy: levels of implementation
The business strategy should be based on the resources and
capabilities of the company. Implementation is at three levels:1. Corporate strategy (business development strategy): The business that a
firm should be in and its objectives identifies the Strategic Business Units (SBUs)
analyzes and evaluates the business portfolio, and opportunities
the ultimate goal is to maximize the value of the whole firm
2. Business strategy (strategy and competitive advantage): how a particularfirm competes within a particular industry or market analysis of the company's competitive position
how to achieve sustainable competitive advantages in the industry
1. Functional Strategies: a level of individual business functions (Sales,Production, Information Systems, HR, R&D, ....) that supports theachievement of competitive advantages for the business unit, the companyetc.
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Corporate and Business Strategy
How can a firm make profits?
Select an industry wherefavourable industry conditions result in the industry earning arate of return above the competitive level.
Within an industry, attain a position of advantage over the rivals so as to make above
average profits in the industry.
RATE OF PROFITS
ABOVE COMPETITIVE
LEVEL
How do we makemoney?
INDUSTRY
ATTRACTIVENESS
Which industries should we
be in?
COMPETITIVE ADVANTAGE
How should we compete?
CORPORATESTRATEGY
BUSINESS
STRATEGY
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Strategic Levels in a Diversified and Complex Firm
Functions
Division CDivision BDivision A
Divisin CDivisin BStrategic BusinessUnits
Divisin CDivisin BStrategic BusinessUnits
Divisin CDivisin BStrategic BusinessUnits
Functions Functions
Level 1
Level 2
Level 3
Level 4
CorporateCorporate Strategies
BusinessStrategies
FunctionalStrategies
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Strategic Options
Corporate Strategy (Strategy for the development of
business):
Diversification: Related and Vertical Integration
Geographical growth / globalization (internationalization)
Possible realization of the development strategies through partnerships
Business Strategy (Strategy and Competitive Advantage): Cost Leadership
Differentiation
Maybe applied to the whole market or to just specific business segments
Functional Strategies:
Commercial (leader, challenger, follower)
Production
Information Systems
HR, etc.
Di ersification Strategies Choice of the B siness
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Diversification Strategies: Choice of the Business
Portfolio
The company produces new products and / or enters new
markets other than its own. Expands its portfolio of businesses Types of diversification
Related: horizontal (common technology, market, etc.) and vertical
Unrelated
Why diversify? Strengthen competitive position (by exploiting resources and capabilities of
the company)
search for synergies (economies of scope)
economies of scale
Reduce overall risk for the firm Traditional market saturation (growth possible in other markets)
Invest surplus funds or seeking attractive investment opportunities
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Ovens CookersMarine/Boats
Engines Lawn Mowers
Electric saws
Electrical
Energy
Air
Transport
Fertilizers
MarketTechnology
Toys Childrensclothing
Baby
Strollers
Example of related and unrelated diversification
Dish-washers
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Strategy for related diversification
The company enters into a new business related to those that it
already has
Types of related diversification
Horizontal
Vertical (vertical integration)
Horizontal diversification Enters into complementary products or services or substitutes
May use the same distribution channels, profitable new brand
Ex 1: Grupo Pascual (initially: dairy products, at present, increased revenue
by: juices, cereals, mineral water, pasteurized eggs, ...)
Ex 2: Grupo Planeta (first was Editorial Planeta. Today, also in business of
communication (Antena 3, Onda Cero), produces TV serials, training ...)
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Entry of a company in new activities that are related to its own value
chain (production / marketing of products or services), thus performingthe function previously performed by its supplier or customer
Types of vertical integration
Backward or upstream (assuming the activity of your supplier.)
Forward or downstream (assuming the activity of the customer)
Advantages of vertical integration:a) Control inputs and / or distribution, b) increased profitability by reducing
transaction costs, taxes, etc. c) greater independence from market fluctuations,
d)improvement in competitive position, e) protection of confidential information
Disadvantages:
a) Increased global risk, b) loss of flexibility, c) loss of benefits of specialization,Vertically adjacent activities are in very different types of industries: manufacturing
and retailing, d) increased administrative costs, e) diverts attention, developing
new competencies may compromise existing ones.
Vertical Integration Strategy
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Vertical Integration Strategy
Raw Materials
IntermediateManufacturing
Assembly
Distribution
End Customer
Raw Materials
IntermediateManufacturing
Assembly
Distribution
End Customer
BackwardsIntegration
Raw Materials
IntermediateManufacturing
Assembly
Distribution
End Customer
ForwardIntegration
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Strategies for Globalization
The internationalization strategy leads the company to enter
into a product market for customers in a foreign country
Two types of international businesses:
Exporting company
Production in the home country
Only marketing may be internationalized, but may be done from homecountry
possibility of exporting through another organization
Multinational Company
Direct presence and investment in the country of destination
Control of business through affiliates or subsidiaries that may be
engaged in marketing, manufacturing or R & D
Subsidiaries: can be created by the firm or by acquisition of existing
companies
B i St t F l ti
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Business strategies based on Competitive Advantage
Search for leadership on the market two ways:
Offering lower prices: cost leadership
Better meet customer needs: DifferentiationIn addition, the ability to maintain this position over time (sustainable
competitive advantage)
Two types of Strategies:1. Cost Leadership Strategy: based on competitive cost advantage.Production occurs at lower costs, higher efficiency, firm can sell at equal or
lower prices as compared to competition, and can have higher margin
2. Product differentiation strategy:based on the competitive
advantage of differentiation: to better meet customer needs, it can be
successful only if the firm achieves perceptible product differentiation.
The two strategies can be applied to an entire market, or may focus on a
particular market segment created by applying market segmentation
strategy.
Business Strategy Formulation
Cost leadership strategy: sources of cost
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Cost leadership strategy: sources of cost
advantage
1. Economies of ScaleIn an industry there exists economies of scale when the production costs
decreases with an increase in the volume produced. The origin of
economies of scale can be:1.1. Technology
1.2 High fixed costs: cost-sharing
1.3 Specialization and division of labor
2. The experience curve
The unit costs decreases for any process in proportion to the production
experience. In general, it has been estimated that the costs reduce by
between 15 to 35 % for every doubling of the production volume. The main
causes may be:
2.1 Increased skills in routine tasks
2.2 Increased capacity of coordination
2.3 Improvement in administrative organization
Cost Leadership Strategy: Sources of Cost
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Cost Leadership Strategy: Sources of Cost
Advantage (II)
3. Production Techniques
Production techniques employed in a company can generate cost
advantages. Its origin can be due to:
3.1 Mechanization, Automation
3.2 Greater efficiency in the use of raw materials
3.3 Achieve a reduction in product defects, increase in quality and
production accuracy ... ..
4. Product Design (Design for Manufacture)
The design cost advantages can come from:
4.1 Design that facilitates mechanization and automation
4.2 Design that allows for economic use of materials
C L d hi S i Th U d l i
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Cost Leadership Strategies: The Underlying
Threats
Focus on cost reduction may induce certain risks:
1. Less focus on the product quality
2. A misperception of the sources of cost advantage.
3. Focus on only production and neglecting other important activities. 4. Offer an inadequate product or poor service.
5. Imitation by competitors.
6. Stiffness or lack of flexibility induced by economies of scale.
7. Drastic changes in the market.
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The Strategy of Differentiation
Actions carried out by a firm to design and implement a set of
significant product or service features such that the market
perceives it differently from those of the competitors
Competitive Advantage Competitive advantage due to differentiation lies in:
Tangible or intangible characteristics of the product
And / or characteristics of the company that manufactures or distributes
the product
The best differentiation : to exceed client expectations.
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Differentiation Strategy: requirements
1. Select those needs that buyers value the most
2. Meet the requirements better than competition by having clearpriorities and adding appropriate characteristics to the firms
product / service
3. The customer must perceive the difference between before and
after the strategy has been implemented
4. The added cost for the differentiation must be less than theincrease in customer value, which the customer is willing to pay
The importance of perceived value (is the one that meet expectations)
VALUE RECEIVED: set of benefits received by customers when buying a productor service
PERCEIVED VALUE: A set of benefits that the customer perceives when he/she
purchases a product or service
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Types of Differentiation
A) By Product:
Price format, presentation, style, design
Additional features
Quality level: low, medium, high,higher
Uniformity, durability, reliability,
repairability
B) By Service: Delivery and installation
Initial training and / or after salesconsulting services
Post-sale repair Financing, payment
Distribution, sales channels
C) By the employees of the
company:
Competent, courteous
Credible, honest, responsible
Communicative, helpful
D) By the image (of the product orthose associated with the firm):
Logos, colors, symbols of the company
and its products
Newspaper ads, TV, cinema, radio,
posters ...
Atmosphere /environment of sales or
production
Sponsored events
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Introduction to Engineering Management
Business Creation: Steps
1. From a business idea
Observe unmet needs or business opportunities Source of Information
Close business circles
Specialized sources
Existing businesses (transfers, franchisees ...)
2. Develop business plan
Analyze feasibility of the business idea
Analyze environment, stage of market, demand for the product
Create implementation plan
Marketing Plan: range, price, distribution channels
Production plan: investment required
HR Plan: Number of employees, profiles, training, compensation
Financial Plan: Capital needs and availability
Choice of the legal form
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Introduction to Engineering Management
Creation of a Business (II): steps
3. Obtain Funds If equity funding is insufficient then apply for loans or grants.
4. Legal Proceedings
Enrollment with the Companies Registry
Treasury: Request for CIF
Deposit appropriate capital in bank
Sign notarized deed of incorporation
Settle the taxes for transfer of property
Register at the Treasury
C ti f B i (III)
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Creation of a Business (III):
Factors of success and Failures
Business factors Business Strategy & Direction
Personal factors Motivation:
Desire for independence or self-improvement Search social recognition
Self-employment
Attributes: Psychological: self-confidence, risk, creativity, innovation
Skills and Abilities: motivation, organization, negotiation
Institutional factors Business incubators (state schools of promotion of business)