Student Learning Notes
MCR008 – Corporate Strategy
Student Learning Notes
Topic 5: Business-Level Strategies
(Chapter 7 – Business-level strategies)
1. What are the main cost drivers and how do they create cost advantage?
The main cost drivers include the following: economies of scale, economies of learning, process
technology and process design.
The predominance of large corporations in most manufacturing and service industries is a
consequence of economies of scale. Economies of scale exist wherever proportionate increases in the
amounts of inputs employed in a production process result in lower unit costs. Economies of scale
have been conventionally associated with manufacturing. Economies of scale are also important in
nonmanufacturing operations such as purchasing, research and development (R&D), distribution and
advertising.
The economies of learning is associated with the experience curve and is based primarily on learningby-doing on the part of individuals and organisations. Economies of learning are the costs savings
attributed to cost reductions as result of fewer mistakes and improvement in problem solving by
repetition of operations. Learning occurs both at the individual level through improvements in
dexterity and problem solving, and at the group level through the development and refinement of
organisational routines.
For most goods and services, alternative process technologies exist. Process technology and process
designs are cost savings attributed to improved efficiency via innovation of the production process. A
process is technically superior to another when, for each unit of output, it uses less of one input
without using more of any other input. Where a production method uses more of some inputs but less
of others then cost efficiency depends on the relative prices of the inputs.
2. What is the relationship between economies of scale and the minimum efficient plant size?
Economies of scale exist wherever increases in the amounts of inputs in the production process result
in lower unit costs. The point at which most scale economies are exploited is the minimum efficient
plant size (MEPS) – this indicates the minimum efficient plant size in which economies of scale can be
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achieved; a plant smaller than this size will not generate economies of scale and neither does a plant
larger than this size which can result in higher costs associated with managing larger scale production.
3. How do companies achieve economies of learning?
Companies can achieve economies of learning by repetition of operations to have fewer mistakes and
improve their problem solving. Repetition develops both individual skills and organisational routines.
Learning occurs both at the individual level through improvements in dexterity and problem solving,
and at the group level through the development and refinement of organisational routines. LG and
Samsung have positioned themsleves and achieve economies of learning as a result of volume-based
learning resulting in exceptionally high yields and lower rate of failures of products.
4. Why is it important to analyse differentiation from both perspectives — the demand and supply
sides?
The demand side of analysis of differentiation assists companies in gaining the understanding of
customers’ willingness to pay whereas the supply side of analysis of differentiation assists companies
in understanding of its ability to create and supply differentiation.
Analysing customer demand enables an organisation to determine which product characteristics
have the potential to create value for customers, customers’ willingness to pay for differentiation, and
a company’s optimal competitive positioning in terms of differentiation variables. Analysing demand
begins with understanding why customers buy a product or service. For example, what are the needs
and requirements of a person who is purchasing a personal computer? What is motivating a company
when it hires management consultants? Market research systematically explores customer
preferences and customer perceptions of existing products. However, the key to successful
differentiation is to understand customers. In gaining insight into customer requirements and
preferences, simple, direct questions about the purpose of a product and its performance attributes
can often be far more illuminating than objective market research data obtained from large samples of
actual and potential customers.
Demand analysis identifies customers’ demands for differentiation and their willingness to pay for it,
but creating differentiation advantage also depends on a company’s ability to offer differentiation. To
identify the company’s potential to supply differentiation, it is necessary to examine the activities the
company performs and the resources it commands.
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5. What does the expression ‘stuck in the middle’ mean? Why is it perceived to be a negative
position?
The expression ‘stuck in the middle’ means that in an attempt to create advantage via low costs and
differentiation, companies will not be able to achieve neither cost leadership nor differentiation. The
company is not able to operate in low-cost environment and therefore not able to achieve cost
leadership. At the same time, the company is not offering something unique and therefore does not
adopt a differentiation strategy. It is perceived to be a negative position because a company which is
‘stuck in the middle’ would lose its competitive advantage.
6. Why is a better understanding of the customers’ needs important for successful implementation
of the focus strategy?
Understanding of the customers’ needs is essential for the implementation of the focus strategy so
that the organisation can concentrate their resources on the chosen target market and exploit them to
their advantage. What does the customers in this identified target market want? If they want
something quirky, you would want to provide something quirky for them. If they want something of
low cost, you provide them with such. If they want something that is different, for example only
buying products that are made in Australia, then you do the same. Only when customers’ needs in the
target market are identified can a company can succcesfully implement a focus strategy.
7. What are the roles of social and psychological factors in the ability of companies to differentiate
their products and services?
The problem with analysing product differentiation in terms of measurable performance attributes is
that it does not delve very far into customers’ underlying motivations. Very few goods or services are
acquired to satisfy basic needs for survival; most buying reflects social goals and values in terms of the
desire to find community with others, to establish one’s own identity, and to make sense of what is
happening in the world. Most suppliers of branded goods recognise that their brand equities have
much more to do with status and conformity than to survival or security. What is so different about
Louis Vuitton’s popular, much-copied brown and black tote? What is so different in the commonly
recognised designs of Gucci handbags? These customers are willing to pay a premium price for these
branded products, not just for the physical features of these products, but also for intangible
differentiation of self-identity and social affiliation . Indeed, the value conferred by leading consumer
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brands such as Louis Vuitton, Gucci, Coca-Cola, Harley-Davidson, Mercedes-Benz and Virgin is less a
warranty of the reliability and more an embodiment of identity and lifestyle. For these brands,
advertising and promotion have long been the primary means of influencing and reinforcing customer
perceptions. Increasingly, consumer goods companies are seeking new approaches to brand
development that focus less on product characteristics and more on ‘brand experience’, ‘shared
values’ and ‘emotional dialogue’.
8. What advice would you offer a full-service airline company operating in South-East Asia
regarding how it should maintain (or possibly adjust) its business-level strategy in conditions of
growing competition from budget airlines? What challenges are budget airlines eventually face
in this environment?
A full-service airline company such as Singapore Airlines implements differentiation strategy for many
years. Singapore Airlines is differentiated from its competitors in a number of ways:
– Human resources from the CEO to the stewards/stewardess who are exceptional in terms of
their quality service;
– Financial resources with strong backings from investors;
– Aircraft as their resources (their planes are new, they are owned and not leased; the aircrafts
are generally replaced every 4-5 years);
– They have the latest technological products and services that enabled them to be connected to
the global aviation network;
– Changi airport is another differentiating factor – this is the home of Singapore Airlines, it is one
of the best airports in the world and the most popular hub in Asia;
– The lounge facilities of Singapore Airlines in Singapore and other destinations are second-tonone (the best);
– Extensive international routes, within South East Asia, Asia Pacific and other international
destinations.
In comparison to the budget airlines, a full-service airline company needs to ask themselves if their
differentiation initiatives can meet the market demand. A critical question for the established airlines
is whether any differentiation characteristics are capable of creating more value for customers than
their costs to the airline.
Full-service airlines can compete on the following aspects:
 Concentrate the resources on a specific or exclusive market segment (e.g. business class) or a
limited number of geographic destinations.
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 Appeal to business travellers by providing valued differentiation by providing high quality
services (e.g. faster and more reliable reservations and check-in systems, frequent flier
schemes) and flight schedule
 Turn to the more profitable long haul market where there is no need to face direct competition
from budget airlines. Most budget airlines are operating point-to-point, short-haul routes, with
quick turnaround times between flights.
 Launch a low cost airline to fight with budget airlines. For example, Singapore Airlines
launched a low cost airline subsidiary, Tiger Airways, in the second half of 2003, and recently
Scoot Airlines.
9. To what extent do providers of tablet computers compete by being ‘different’ or the same?
Explain.
All providers of tablet computers have to be ‘the same’ in terms of technical standards, the quality of
the products, e.g. touch capability, availability of wireless connections, the size of the tablet computers
etc. However, the providers can be ‘different’ in terms of marketing and sales, e.g. special additional
service packages for customers, promotional tariffs,and even the points of distribution – for example,
Apple has successfully created a retail concept, the Apple Store, to sell their products including their
tablet computers.
10. How would centralisation or decentralisation of decision making within a company impact upon
the achievement of cost leadership? (Hint: centralisation might lead to streaming of operations
and, thus, to cost reduction; on the other hand, decentralisation allows more employees to
exercise more initiative, which might also lead to costs savings). Under which
circumstances/industry conditions would centralisation be the preferred option?
The centralisation of decision making enables quick decisions to be made, leaders decide on what is
best considering all options for the organisation. Cost savings can be achieved due to the streamlining
of operations, flexibility and quick responsiveness of production, and made quick improvement to
capacity utilitisation through plant rationalisation.
The decentralisation of decision making leads to cost savings as this strategy enables employees at all
levels to make quick decisions that are best suited to the environment without having to wait from the
decision makers at the top.
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Centralisation would be the preferred option when the external environment is rather stable.
Decentralisation of decision making, on the other hand, would be the preferred option when the
external environment changes very quickly. When things are quickly changing and if employees
consult their top leaders all the time for simple matters that they can decide for themselves, this
strategy will be expensive in the long run to actually run the organisation in terms of time, efforts and
money wasted.
11. What would you recommend executives at Myer do to further broaden the company’s consumer
base?
One solution to bring a broader range of customers in stores would be broadening product offerings.
Myer should offer a full range of merchandise to attract both an affluent demographic and average
shoppers. Another approach is to make stores more entertaining and appealing to customers. The idea
is to create a special atmosphere in stores so customers would be willing to spend their time there.
Such special feeling and experience in stores will contribute into encouragement of customers to come
back to stores and do repeated business. The company’s current strategy of reinvesting savings into
stores, merchandise, systems and customer loyalty programs are also aimed at generating higher
sales, increasing market share and earning better returns to shareholders.
12. Discuss how understanding of consumer behaviour could be used to increase sales in the fast
food sector of the hospitality industry.
Understanding of consumer behavior can help to increase the sales of the fast food sector by helping
to differentiate their offerings. In particular, to understand customer demand and identify profitable
differentiation opportunities requires not only an analysis of the product and its characteristics, but
also of customers, their lifestyles and aspirations, and the relationship of the product to these
lifestyles and aspirations. Market research that looks behind the product and explores the
demographic (e.g. age, gender, race, location), socioeconomic (e.g. income, education), and
psychographic (e.g. lifestyle, personality type) characteristics of potential customers may be of some
value. However, effective differentiation is likely to depend on an understanding of what customers
want and how they behave rather than the results of statistical market research. Many fast food
restaurants recognise the trend of eating healthily. As a result of this, they provide information about
the calories consumed when eating their burgers etc (these are displayed on the board and sometimes
on the wrapper), and they also offer choices of healthy meals such as low-calories ice cream etc. The
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various ways in which they offer the numerous choices of food as a result of understanding consumer
behaviour, will only increase the sales of their product offerings.