assignment_sm_module_5_for 2nd test.doc

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Strategic Management

Assignment for Module 5 (for 2nd

test)1. When does differentiation strategy work best and what are its pitfalls? (7 marks)

Differentiation strategy works best when:

a. There are many ways to differentiate the product or service and many buyers

perceive these differences as having value

b. Buyer needs and users are drivers. The more diverse buyer preferences are,

the more room firms have to pursue different approaches to differentiate.

c. Few rival firms are following similar differentiation approach. Each of the

companies are pursuing their own differentiation path with less overlapping.

d. Technological change is fast-paced and competition revolves around rapidly

evolving product features. Frequent introductions of next-version products

help maintain buyer interest and provide space for companies to pursue

separate differentiating paths.

Pitfalls of differential strategy are:

a. No guarantee that differentiation will produce a meaningful competitive

advantage

b. Buyers may see little value in the unique attributes or capabilities of a product

c. Competitors can copy the differentiating features

d. It is very time consuming to come up with genuine differentiators which would

be difficult to copy

e. Adding features that do not reduce the buyer's cost or enhance a buyer's

well-being, as perceived by the buyer

f. Over differentiating so that the product quality or service level exceeds

buyer's needs



g. Trying to charge too high a premium. It may give an opportunity for buyers to

switch to a lower cost product.

h. Not striving to fill the real gaps in quality or performance or service of the rival

firms. Tiny difference between product offerings may not be important for the

buyers.

2. In what situations does a low-cost strategy work best? (7 marks)

Low-cost strategy works best when:

a. Price competition among rival sellers is especially vigorous

b. The products of rival sellers are essentially identical and supplies are readily

available from any of several eager sellers

c. There are few ways to achieve product differentiation that have value to

buyers

d. Most buyers use the product in the same ways

e. Buyers incur low costs in switching their purchases from one seller to another.

f. Buyers are large and have significant power to bargain down prices

g. Industry newcomers use introductory low prices to attract buyers and build a

customer base

3. What is a differentiation strategy and what are the organizational skills needed

for this? (7 marks)

Differentiation is a strategy where an organization will add new features to their

products/services in order to differentiate them from the other existing

products/services. The focus here is on ensuring that the customer likes the

differentiation and is ready to pay a premium for the differentiation.

The organizational skills needed for following differentiation strategy are:

a. Ability to understand the type of features needed by the customers

b. Ability to add the new features without compromising on the other features



c. Ability to add the new features at the cost which the customers can afford

d. Ability to add a truly differentiating feature

e. Continuous focus on adding new features

f. Continuous focus on cost cutting

g. Spending on R&D

h. Focus on continuous customer research to understand the new requirements

4. Explain the significant differentiation strategies with examples. (10 marks)

a. Unique taste. E.g. MTR

b. Multiple features. E.g. Microsoft office

c. Wide selection and one-stop shopping E.g. Big Bazaar, Wal-Mart

d. Superior service E.g. FedEx

e. Spare part availability E.g. Caterpillar

f. Engineering design and performances E.g. Mercedes Benz

g. Prestige and distinctiveness E.g. Rolex watches

h. Product reliability E.g. Jhonson & Jhonson in baby products

i. Quality manufacture E.g. Toyota

j. Technology leadership E.g. 3M in bonding and coating products, Intel in

microprocessors

k. A full range of services E.g. ICICI bank

l. A complete line of products E.g. Samsung

m. Top-of-the-line image and reputation E.g. Oberoi hotels

5. Explain the nine major cost drivers in strategic management. (10 marks)

a. Economics or diseconomies of scale.



Economics of scale arise when activities can be performed more cheaply

at larger volumes than smaller volumes and from ability to spread out

certain costs like R&D and advertising over a greater sale volume.

b. Learning curve effects

It is the effect when the cost of performing an activity declines over time as

the experience of the company personnel builds.

It can stem from debugging and mastering newly introduced technologies,

finding ways to improve plant layout and work flows, making product

design modifications that streamline the assembly process.

It is important to keep the learning proprietary to whatever possible extent.

c. The cost of key resource inputs

How well a company manages the costs of acquiring key resource inputs

is often a big driver of costs.

The input costs are affected by four factors

i. Union versus nonunion labor

Union labor increases cost of production as more facilities are

demanded and there are lot of resistance to increasing

productivity.

ii. Bargaining power vis-a-vis suppliers

Purchasing in large numbers helps in bring down the cost.

iii. Location variables

Location costs like tax, transport, shipping, wage tax, energy

costs play a major role in input costs.

iv. Supply chain management expertise

Partnerships with suppliers, e-procurement lower the cost of supply logistics.

d. Links with other activities in the company or industry value chain



When the cost of one activity is affected by how other activities are

performed, costs can be reduced by ensuring that the linked activities are

performed in a cooperative and coordinated fashion.

e. Sharing opportunities with other organizational or business units within the

enterprise

f. The benefits of vertical integration versus outsourcing

Vertical integration ( expanding backwards into source of supply, forward

towards the user, or both) helps when buyers or suppliers have bargaining

powers.

In majority of the cases outsourcing is always helpful as it brings expertise

and economics of scale.

g. The percentage of capacity utilization

Capacity utilization for activities with substantial fixed cost.

It helps in lowering the fixed costs per unit.

It is important for capital intensive businesses.

Operating close to full capacity for most of the time is an important source

of cost advantage.

h. First-mover advantages and disadvantages

The first mover has the advantage of establishing a brand name at very

low cost.

Competitors have to spend considerable money to compete against these

first mover brands.

When technology is fast developing the later entrants have the advantage

of using better technology at a lower price.

Companies that follow product development often study the existing

products and avoid mistakes made by the first mover products

i. Strategic choices and operating decisions

The following managerial decisions impact the cost

Adding/cutting the services provided to buyers



Incorporating more/fewer performance and quality features into the

product.

Increasing/decreasing the number of different channels utilized in

distributing the firm's product

Lengthening/shortening delivery times to customers

Putting more/less emphasis than rivals on the use of incentive

compensation, wage increases and fringe benefits to motivate employees

and boost worker productivity.

Raising/lowering the specifications for purchased materials

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