Business Strategy
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<< Chapter 9
The Value Chain and Generic Strategies : Chapter 10
SUMMARY:
Cost advantage is one of the two types of competitive advantage a firm may possess. It is the result of minimizing the expenditure on a firm’s activities, providing quality products and service to the buyer, and reducing the buyer’s cost. The value chain is a series of value activities the firm performs for competing in an industry. Therefore, a meaningful cost analysis examines costs within these activities and not the cost of a firm as a whole. Cost analysis of the firm’s value chain begins with assigning operating costs and assets to value activities.
Next come the cost drivers which can combine to determine the cost of a given activity. These cost drivers differ from firm to firm in the same industry, if different value chains are employed. There are ten major cost drivers that determine the cost behavior of value activities.
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In addition to analyzing cost behavior at a point in time, a firm must consider how the absolute and relative cost of value activities will change over time for a given strategy. The cost dynamics explain the change of cost drivers of value activities and the increase or decrease in absolute or relative cost importance of these activities. The basic tool for determining competitor costs is the value chain. The initial step used to determine the competitor’s cost is to identify competitor value chains and the way in which the activities are performed by them.
The buyer value chain also consists of activities they perform just as in the case of the firm. The buyers also perform some activities that will help them in knowing the value a firm creates for them. Similarly, a firm should create a valuable product for a buyer by lowering buyer cost and by raising buyer performance. Therefore, it becomes mandatory for a firm to perform its activities efficiently to attract new customers and retain old customers.
The Value Chain and Generic Strategies- An Overview
The Value Chain and Cost Analysis
Defining the Value Chain for Cost Analysis
Assigning Costs and Assets
First Cut Analysis of Costs
Cost Behavior
Cost Drivers
Economies or Diseconomies of Scale
Learning and Spillovers
Pattern of Capacity Utilization
Linkages
Linkages within the Value Chain
Vertical Linkages
Interrelationships
Institutional Factors
The Cost of Purchased Inputs
Segment Cost Behavior
Cost Dynamics
Industry Real Growth
Differential Scale Sensitivity
Cost Advantage
Determining the Relative Cost of Competitors
Gaining Cost Advantage
Implementation and Cost Advantage
Pitfalls in Cost Leadership Strategies
Exclusive Focus on the Cost of Manufacturing Activities
Ignoring Procurement
Overlooking Indirect or Small Activities
False Perception of Cost Drivers
Failure to Exploit Linkages
Contradictory Cost Reduction
Unwitting Cross-subsidy
Thinking Incrementally
Undermining Differentiation
Differentiation Strategies
Differentiation and Value Chain
Drivers of Uniqueness
Policy Choices
Linkages
Linkages within the Value Chain
Supplier Linkages
Channel Linkages
Buyer Value and Differentiation
Buyer Value
The Value Chain and Buyer Value
Lowering of Buyer Cost
Raising Buyer Performance
Buyer Perception of Value
Buyer Value and the Real Buyer
Buyer Purchase Criteria
Identifying Purchase Criteria
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