Exam 2 lovett

What is the cost-leadership strategy?

It's a strategy where a company's goal is to outperform competitors by doing everything it can to produce goods or services at a cost lower than those of competitors.

What are the product and market choices for a cost leader?

A cost leader chooses a low level of product differentiation and normally ignores different market segments, positioning its product to appeal to the "average customer".

What is the distinctive competence of a cost leader?

The overriding goal is to increase its efficiency and lower its costs compared with its rivals, so the company develops distinctive competences in manufacturing and materials management.

What are the advantages of a cost-leadership strategy?

The cost leader is protected from industry competitors by its cost advantage. It is less affected by powerful suppliers (can absorb price increases) and powerful buyers (can drop its price). It also constitutes a barrier to entry for new competitors.

What are the risks of cost leadership?

Competitors may find ways to produce at a lower cost, such as through new technology, or they may imitate the cost leader's methods. The cost leader might also lose sight of changes in customers' tastes in its single-minded desire to reduce costs.

What is the differentiation strategy?

It is a strategy to achieve a competitive advantage by creating a product that is perceived by customers to be unique in some important way.

What is the main advantage of a differentiation strategy?

The differentiated product's ability to satisfy a customer's need in a way competitors cannot means the company can charge a premium price—a price considerably above the industry average.

What are the sources of differentiation?

Sources include quality, innovation, and responsiveness to customers. A product's appeal to customers' psychological desires, such as prestige, can also be a source.

What are the product and market choices for a differentiator?

A differentiator chooses a high level of product differentiation and generally chooses to segment its market into many niches.

What is the distinctive competence of a differentiator?

A differentiated company concentrates on the organizational function that provides the sources of its differentiation advantage, such as R&D (for innovation), sales, or marketing.

What are the advantages of a differentiation strategy?

It safeguards a company against competitors to the degree that customers develop brand loyalty for its products.

What is brand loyalty and why is it valuable?

Brand loyalty is a customer's preference for a particular brand. It is valuable because it protects the company on all fronts: against competitors, powerful buyers, and new entrants.

What are the risks of a differentiation strategy?

The main problem is the long-term ability to maintain its perceived uniqueness in customers' eyes, as competitors move to imitate and copy successful differentiators.

What is the focus strategy?

It is a strategy directed toward serving the needs of a limited customer group or segment, also known as a market niche.

What are the two types of focus strategy?

Once it has chosen its market segment, a company pursues a focus strategy through either a differentiation or a low-cost approach. This results in a focused cost-leadership strategy or a focused differentiation strategy.

What are the advantages of a focus strategy?

A focused company's competitive advantages stem from its distinctive competence. It is protected from rivals to the extent it can provide a good or service that they cannot. This ability also gives the focuser power over its buyers. A focus strategy also permits a company to stay close to its customers and to respond to their changing needs.

What are the disadvantages of a focus strategy?

A focused company is at a disadvantage with powerful suppliers because it buys inputs in small volume. Its production costs may also exceed those of a low-cost company. Finally, a focuser is vulnerable to attack from broad differentiators who may compete for its niche.

Where do new product ideas come from?

New product ideas come from many sources, including internal R&D efforts, collaborating with other firms, licensing technology, brainstorming, researching competitors' products, and conducting consumer research. Ideas also come from employees, customers, and suppliers.

What are lead users?

They are innovative product users who modify existing products according to their own ideas to suit their specific needs.

What is reverse engineering?

It’s the process of taking apart a competitor's product, analyzing it, and creating an improved product that does not infringe on the competitor's patents, if any exist.

Why is customer input valuable in product development?

Listening to the customer is essential for successful idea generation. Customers provide real-world needs and feedback, and their input can significantly increase the probability that the customer eventually will buy the new product.

What is a product prototype?

A prototype is the first physical form or service description of a new product, still in rough or tentative form. Concepts that seem promising are developed into prototypes, which are often handmade.

What is alpha testing?

This is an attempt by the firm to determine whether the product will perform according to its design and whether it satisfies the need for which it was intended; alpha tests occur in the firm's R&D department.

What is beta testing?

This uses potential consumers, who examine the product prototype in a "real use" setting to determine its functionality, performance, potential problems, and other issues specific to its use.

What is market testing?

This introduces a new product or service to a limited geographical area (usually a few cities) prior to a national launch. Successful prototypes are manufactured and tested in a few markets.

What is a product launch?

If market testing is successful, the product may be introduced to the entire market. This is the full-scale commercialization of the product.

What is a risk of test marketing?

It lets competitors know about the product, and they may be developing new products as well or even pre-emptively launch their own competing products.

What is the first-mover advantage?

It’s the benefit of being the first to market with a new product, allowing the firm to set the standard, build brand loyalty, and develop production processes before competitors.

What are the advantages of being a second mover?

A second mover can take advantage of markets developed by the first mover, learn from the first mover’s mistakes, and adopt newer technology.

What are the main international entry strategies?

The four different modes of international market entry are (1) exporting, (2) licensing and franchising, (3) joint ventures and alliances, and (4) wholly owned subsidiaries.

How are these entry modes related to risk and control?

Exporting involves the least risk and least control. Licensing and franchising also have low risk and low control. Alliances and joint ventures have medium risk and medium control. Wholly owned subsidiaries require the most investment and create the most risk, but offer the most control.

What is the difference between licensing and franchising?

Licensing is for manufacturers and involves granting another business the permission (a license) to use or sell a firm's product, technology, or process. Franchising is for service businesses and is a special form of licensing that allows a franchisee to use your trademark and business system.

What are the advantages and disadvantages of licensing or franchising?

The main advantages are that they require less investment (low cost), are low risk, and lend themselves to fast expansion. The disadvantages are that you get royalties only, you don’t have complete control (least amount of control), and your partner may become your competitor.

What are wholly owned subsidiaries?

A wholly owned subsidiary is a unit in a foreign country that is wholly owned (100%) by the parent company. This is also known as decentralized production.

What are the advantages of a wholly owned subsidiary?

This mode offers the firm the most control over what its local subsidiary does. They also allow a firm to learn about the local market and government regulations.

What are the disadvantages of a wholly owned subsidiary?

This type of entry requires the most investment and creates the most risk, as the firm has to put up all of the capital itself.

What is a Greenfield investment?

A greenfield investment is a wholly owned subsidiary in which the firm involved builds the facility from the ground up.

What is an acquisition, in the context of market entry?

This is when a firm buys an existing local business to establish a wholly owned subsidiary.

How does a Greenfield investment differ from an acquisition?

Greenfield investments are slower but give the firm the greatest amount of control. Acquisitions are faster and allow the firm to acquire local resources and knowledge, but they typically involve paying a price premium and can be notoriously difficult to integrate.

What is diversification?

Diversification is when a company expands into a new industry, selling new products to new customers.

How does diversification affect performance?

There is an inverted curvilinear (an upside-down, U-shaped) relationship between corporate diversification and profitability. Companies with moderate or related diversification tend to outperform both companies with no diversification and companies with extreme (unrelated) diversification.

What is a conglomerate?

This is another term for an unrelated diversified firm.

How are conglomerates defined?

They are firms that compete in product categories and markets with few, if any, commonalities or links between them.

What are the risks of over-diversification?

Companies can become too diversified, and it can prove too much for them to manage, which leads to lower levels of performance.

How can a company reduce over-diversification?

A company can divest (sell the business), spin off (make the business independent), or liquidate (close the business and sell the assets).

What is a disintermediation strategy?

An innovative strategy where an entrepreneur finds some way to skip one link in the value chain.

What is the most typical pattern of disintermediation?

The most typical pattern is to eliminate a step in the path from production to customer, such as eliminating a store, which also eliminates the need for salespeople and inventory.

What is a modern example of disintermediation?

In 1994, Jeffery Bezos began selling books on-line out of his garage, bypassing retailers. Amazon used this approach—selling books over the Internet—to offer books at lower cost than Barnes & Noble.

What is a low-end disruption strategy?

A new entrant begins selling products at the low end of a market, leveraging new technologies to launch a product for the most price-sensitive segment.

How do incumbent competitors typically react to low-end disruption at first?

The new entrant is largely ignored by high-end competitors, who see little to gain by selling what they view as an inferior, inexpensive product to a price-sensitive niche market.

What does the low-end disrupter do over time?

The new entrant gains experience and builds core competencies and moves up. As the product or service improves its technology and processes, it gradually moves upmarket as it improves its technology and processes.

What is a classic example of low-end disruption?

In the 1950s, Honda entered the U.S. market to sell small, cheap motorcycles, a market Harley-Davidson wasn't interested in. Honda then moved up into larger, more expensive motorcycles and eventually entered the superheavyweight categories.

What is a merger?

A merger describes the joining of two independent companies to form a combined entity. Mergers tend to be friendly and between two equal-sized companies.

What is an acquisition?

An acquisition describes the purchase or takeover of one company by another.

What is a hostile takeover?

A hostile takeover is an acquisition in which the target firm does not want to be acquired.

What is horizontal integration?

This is the term used for mergers or acquisitions between similar firms, or competitors, at the same stage of the industry value chain.

When should a firm go ahead with an acquisition?

M&As make sense only when the combined company is more valuable than the sum of the values of the separate companies. A firm should go ahead if the target firm is more valuable inside the acquiring firm than as a continued standalone company.

What is the simple formula for this concept?

The combined company must be more valuable than the sum of its parts, or 1+1>2.

Do mergers and acquisitions create shareholder value?

No, in most cases they do not. Research has shown that on average they destroy rather than create value for the shareholders.

If value is created in an M&A deal, who does it generally go to?

If shareholder value is created, it generally accrues to the shareholders of the firm that was taken over (the acquiree).

Why does value go to the target firm's shareholders?

This is because acquirers often pay a premium when buying the target company. For a publicly traded company, this premium might be 20%.

What are common reasons for acquisitions?

Firms acquire other firms to (1) access to new markets and distribution channels, (2) access to new capabilities or competencies, or (3) for strategic preemption.

What is profitability adjusted for size?

It’s measured by net income divided by average total assets.

What is the formula for growth?

It's measured by sales change divided by sales at the start of the period.

What is the formula for leverage?

It's measured by total liabilities divided by total asse