BUSINESS STRATEGY
Instructions:-
Question 1
Is it possible for a company to be the lowest cost producer in its industry and simultaneously have an output that is most valued by customers?
Question 2
What do you think are the sources of sustained superior profitability?
Question 3
What role can top management play in helping a company achieve superior efficiency, quality, innovation, and responsiveness to customers?
Question 4
What are the strengths of formal strategic planning? What are its weaknesses?
Question 5
Why is it important to understand the drivers of profitability, as measured by the return on invested capital?
Question 6
From what perspective might innovation be called the single most important building block of competitive advantage?
Question 7
Under what environmental conditions are price wars most likely to occur in an industry? What are the implications of price wars for a company? How should a company try to deal with the threat of a price war?
Question 8
Which is more important in explaining the success and failure of companies: strategizing or luck?
Question 9
When is a company’s competitive advantage most likely to endure over time?
Question 10
Evaluate the accuracy of the following statement: Formal strategic planning systems are irrelevant for firms competing in high-technology industries where the pace of change is so rapid that plans are routinely made obsolete by unforeseen events.
Solution
BUSINESS STRATEGY
- It is possible for a company to be the lowest cost producer in its industry and simultaneously have an output that is the most valued by customers. Discuss this statement.
Introduction:
Yes, this is certainly attainable, and it can happen as the results of options of the merchandise itself, or as a result of the low cost of the assembly method. For example, Swatch watches area unit created of cheap plastic elements, but command premium costs as compared to watches created of additional sturdy, traditional materials. Consumers area unit paying for options of the product apart from quality, including styling, fashion, and so on. Other merchandise that area unit valued by customers however area unit comparatively low value to turn out embrace the new Volkswagen Beetle and designer article of clothing like Ralph Lauren’s costly cotton shirts. Other firm’s area unit in a position to have low prices and still be valued by customers owing to having a coffee value production method. Wal-Mart is a example. They have a awfully low-cost operation, and yet, because of the variability of things they sell in one location, are additionally most well-liked by customers. Another example is a maker of above-ground pools, whose products area unit cheaper to turn out than area unit in-ground pools, yet area unit most well-liked by several customers owing to the convenience and speed of installation.
A low-cost producer is a company that can provide goods or services at a low cost. In general, low-cost producers utilize economies of scale in order to execute their strategy of low prices. Consumers that are sensitive to price changes will more likely shop at the stores that offer the lowest prices, if the good or service is relatively homogeneous. Alternatively, low-cost producers could even price the goods or services at the same level as their competitors and maintain a wider margin.
A low-cost producer is capable of making a substitute good or providing a substitute service for a lower cost than other companies. Usually, these goods or services are consumer staples which are in high demand with readily available substitutes provided by many competitors in the marketplace. Specialty goods generally do not have low-cost producers. Becoming a low-cost producer requires enough capital to achieve economies of scale large enough to provide a distinct price advantage over competitors. This requirement is one reason why many companies are not able to be low-cost producers. Wal-Mart is likely the best example of a low-cost producer with massive economies of scale.
Competitive Advantage , Value creation and Profitablity
The profitability of a company depends on three main factors:
- Value customers place on your products
- Price at which the product is sold by the company
- Cost of creating the products
Business begins with value creation. It is the purpose of the institution: to create and deliver value in an efficient enough way that it will generate profit after cost. When a customer is happy with your product and is coming back to it again and again means that value has been created.
Profitability is important, but it’s not everything. For example, if you managed to source a special toothbrush for $0.10 per item, and you were selling it for $1.10, that’s a good profit margin.
However, you’d have to sell a lot of toothbrushes to make a good income.
That’s why your price point is important. The retail price sweet spot is between $15 and $200. Anything less than $15 and you might be struggling to make enough money. Anything over $200 is harder to sell (buyers have to think more about expensive purchases).
I’d recommend going somewhere in the middle – around the $50 mark sounds about perfect. That gives you plenty of room to absorb all of the additional expenses you have to cover, especially if you can source your product for a good price. And buyers don’t have to think too much about handing over
Let us now consider the example of McDonald’s as the example for being the lowest cost producer and yet having a strong consumer base .
Mc Donald’s Competitive Advantage:
Mc Donald’s was started off in 1955 when Ray Croc decided to franchise with McDonald brothers’ fast food concept. Today , McDonald’s has almost 32,000 stores across 120 countries.
The success mantra of McD was a simple formula :Offer something of value to the customers , quick service , clean and hygienic environment and they will come back again and again.
To achieve this , they started standardizing the process of order taking , making food and service. They had tie upss with wholesalers and food producers and hence, managed to recue the cost of their supply chains. As McDonalds started expanding, the buying power enabled it to realize economies of scale in purchasing and to pass on cost savings to customers in the form of low priced meals , which drove forward demand. Wherever people went , they found that there was consistent experience and low prices that drove the brand loyalty.
Now even the outlets have a facility of free WIFI and hence , a lot of people prefer spending their time.
What do you think are the sources of sustained superior profitability?
Sustained superior profitability results when a company is able to increase profits, either by increasing revenues or decreasing expenses or both, and when that ability is difficult or impossible for competitors to imitate. Sustained superior profitability is most likely to occur when the advantages are intangible, such as management insight, disciplined cost cutting by employees, or a culture that nourishes creativity. Intangible resources are much more difficult to imitate than tangible ones, and thus provide a sustainable advantage. However, no firm can sustain an advantage forever. The advantage itself will tend to weaken over time and competitors will learn to imitate that advantage or develop other advantages of their own that will counteract the power of the original advantage.
What role can top management play in helping a company achieve superior efficiency, quality, innovation, and responsiveness to customers?
Overall Management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable and should be eliminated. Quality of supervisors should be improved by allowing more time for supervisors to work with employees and giving them appropriate skills for the job. Management should create an environment in which employees will not fear reporting problems or recommending improvements. Work standards should not only be defined as numbers or quotas but also include some notion of quality to promote the production of defect-free output. Management is responsible for training employees in new skills to keep pace with changes in the workplace. Achieving better quality requires the commitment of everyone in the company. Management should set goals and create incentives for employees to work in the company.
What are the strengths of formal strategic planning? What are its weaknesses?
The strengths of formal strategic planning are that it helps managers make better strategic decisions and it sets clear goals for them to follow to implement and follow ideals of the company. Strategic planning also allows for collaboration within to implement a certain idea. Weaknesses of strategic planning are that the future is not certain and even with the best plans put forth something can happen to cause them to fail. Another weakness can come into play when companies elect to leave planning in the hands of top level management who may be disconnected from things such as operating realities.
DRIVERS OF PROFITABILITY:
There are four major profit drivers:
- Price
- Variable costs (i.e. those costs that vary in direct proportion to revenue, typically represented by cost of sales),
- Fixed costs
- Sales volume
These are the underlying issues that directly determine your company’s financial performance. If you want to increase profitability, then you have to work on these areas.
RETURN ON INVESTED CAPITAL (ROIC)
- ROIC is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments.
- The ROIC ratio gives a sense of how well a company is using its money to generate returns.
- Comparing a company’s return on invested capital with its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively.
Business strategy
IMPORTANCE OF DRIVERS OF PROFITABILITY AS MEASURED BY THE RETURN ON INVESTED CAPITAL
It is important understanding the driver of profitability in order to identify the performance of the company, its strengths and weakness and compare the performance against competitors, as well as against the historic performance of the company. This should allow the companies to determine their financial position against the companies (whether they are more or less profitable) whether they are improving or deteriorating; whether the company strategies are bringing the desired result; whether their cost structure reflect the industry standards and whether they are using their resources effectively. ROIC is believed to be the best measure of the profitability since it measure the effectiveness with which a company is using the capital funds that is has available for investment.
Other factors of success such as motivated employees, innovative products, and satisfied customers are secondary profitability measures as they are not the absolute means of the firm’s survival.
From what perspective might innovation be called the single most important building block of competitive advantage?
Innovation can be the most important source of competitive advantage. This is because innovation can result in new products that better satisfy customer needs, can improve the quality of existing products, or can reduce the costs of making products. Innovation can allow a company to differentiate its products and charge a premium price, and/or lower its cost structure below that of its rivals. Competitors, however, can imitate successful innovations. Therefore maintaining a competitive edge requires a continuing commitment to innovation.
Under what environmental conditions are price wars most likely to occur in an industry? What are the implications of price wars for a company? How should a company try to deal with the threat of a price war?
Price wars are most likely to occur when the following conditions are present in an industry: The product is a commodity, exit barriers are substantial, excess capacity exists, the industry is consolidated, and demand is declining.
Price wars are most likely to occur after the industry experiences its growth stage. When it enters the shakeout stage, the demand growth slows while capacity continues to grow. This is called industry shakeout. When there is a gap between capacity and demand, companies often cut prices. The result can be a price war which drives many of the most inefficient companies into bankruptcy. Price war also can also exist in mature industries when growth is slow and competition for market share develops. In order to survive the price war, companies begin to focus on minimizing costs and building brand loyalty. Because these factors constitute a significant barrier to entry, the threat of entry by potential competitors is often greatly diminished.
Although companies that have survived the shakeout often consolidate and become oligopolies, there is always the threat of further price wars. Mature industries tend to recognize their interdependence and enter into price-leadership agreements. However, when an industry faces declining demand, agreements break down, rivalry increases, and prices and profits fall. When the exit barriers of a declining industry are high, the harder it is for companies to reduce capacity and the greater the threat of severe price war, forcing some companies to experience huge losses or even bankruptcy.
Which is more important in explaining the success and failure of companies: strategizing or luck?
Both are important in explaining the success and failure of a company. However, although luck may explain a company’s success in particular cases it is an unconvincing explanation for a company’s consistent success over a long period of time. Keep in mind also that completion is a process in which companies seek to try to be the standard bearer in the industry with their ability to achieve high productivity, quality, innovation and customer responsiveness. Given this although one may imagine a company getting lucky and coming into possession of resources that allow it to achieve excellence in one or more of these dimensions it is difficult to conceive how sustained excellence in any of these four dimensions could be the product of anything other than conscious effort that is of strategy.
When is a company’s competitive advantage most likely to endure over time?
The durability of competitive advantage is a function of three main factors—the height of barriers to imitation, the capability of competitors, and the dynamism of the environment. It follows that a competitive advantage is more durable when barriers to imitation are high, the company lacks capable competitors, and the environment in which it is based is not very dynamic. One should also note that barriers to imitation will be higher when a company’s distinctive competencies, and hence competitive advantage, are based on capabilities as opposed to resources. Barriers to imitation will be lowest, and competitive advantage most fleeting, when distinctive competencies are based on tangible resources.
Evaluate the accuracy of the following statement: Formal strategic planning systems are irrelevant for firms competing in high-technology industries where the pace of change is so rapid that plans are routinely made obsolete by unforeseen events.
With the statement “Formal strategic planning systems are irrelevant for firms competing in high-technology industries where the pace of change is so rapid that plans are routinely made obsolete by unforeseen events” accuracy seems to be true. When there is a change that is unpredictable or a situation that is rapid, the planning systems might not work properly. Because the planning systems are time consuming, it tends to slow down and not display answers in a timely manner. There are times when formal strategic planning systems can be helpful. That is when plans are more suitable to an environment that is hastily changing. Formal strategic planning systems are not at their best in situations with rapid and unpredictable change. Formal systems are time-consuming, and may not be able to provide answers quickly enough when time is very short.
Also, formal systems depend upon detailed estimates and forecasts, which are very difficult to do well when conditions are chaotic. Nevertheless, formal systems may still be useful in some ways, even in these challenging environments. For example, formal systems are often associated with detailed and directive plans, but they may also be used to prepare flexible, open-ended plans that are more appropriate for rapidly changing environments. Also, the activities of formal planning—gathering data, preparing forecasts, generating and considering multiple alternatives, and so on—are themselves good preparation for making strategic choices, and thus could be useful in any type of environment.
