1. A low-cost strategy means reducing
the number of managers in the hierarchy and the rigorous use of budgets to
control production and selling costs. The main goal here is to reduce the operating
costs of the manufacturing and materials-management functions. One of the major
sources of cost savings is to choose an organizational structure and culture to
implement this strategy in the most cost-efficient way.
Differentiation is the process of designing products to satisfy
customers’ needs. A company should manufacture products and sell them according
to the needs of the customers. Differentiation allows the company to satisfy
customer needs and increase profitability.
If managers strategize their business model to increase profitabuilty as
well as to increase efficiency then they should offer customers a low price
product, Sometimes this may lead to price wars but offering a good price and quality
product to the customer increases profitability in the long run. Also with this
strategy the company will not be investing their resources in bringing new
innovations or uniqueness to the product for which a premium price can be
2. Aside from low-cost strategy,
businesses can differentiate their products by providing something unique with
innovation, excellent quality, or responsiveness to the customers. This
uniqueness of the products can be achieved in different ways. It can be from
the physical characteristics of a product, resulting from the new innovations
or, quality of the features which appeal to the customers’ psychological needs,
such as a personal need for prestige and status or to declare a particular
For example – Godiva chocolates, which retail for about $26 a pound— cost
much more than a box of Hershey bars. Here the product is differentiated by the
excellent quality and the customers comfort needs.
1. Describe how businesses approach
segmenting the market, and why market segmentation could be an attractive
business strategy. Why do businesses segment the market? What approaches can be
used to segment the market? How can this lead to competitive advantage?
Companies group the
customers based on the important differences in their needs or preferences.
Market segmentation is an attractive strategy because grouping the customers
according to the similarities or differences in their needs help the companies
discover what kinds of products to develop for different kinds of customers.
For example, a car with high luxury features may not be purchased by the
customers whose need is basic transportation.
By using market segmentation
the companies can understand the needs of all customers groups and create
products basing this information.
Three main approaches
toward market segmentation in devising a business model.
1. First, a company might
choose not to recognize that different market segments exist and make a product
targeted at the average or typical customer. In this case, customer
responsiveness is at a minimum, and competitive advantage is achieved through
low price, not differentiation.
2. Second, a company can
choose to recognize the differences between customer groups and make a product
targeted toward most or all of the different market segments. In this case,
customer responsiveness is high and products are being customized to meet the
specific needs of customers in each group, so competitive advantage is obtained
through differentiation, not low price.
3. Third, a company might
choose to target just one or two market segments and devote its resources to
developing products for customers in just these segments. In this case, it may
be highly responsive to the needs of customers in only these segments, or it
may offer a bare-bones product to undercut the prices charged by companies who
do focus on differentiation. So, competitive advantage may be obtained through a
focus on low price or differentiation.
Chapter 6 questions
1. Define fragmented and consolidated
industries. What are the differences between these two types of industries?
A fragmented industry is one composed of a large number of small and medium sized companies,
for example, the dry cleaning, restaurants.
A consolidated industry is dominated by a small number of large companies (an
oligopoly) or, in extreme cases, by just one company (a monopoly), and
companies often are in a position to determine industry prices. For example the
aerospace, soft drink and stockbrokerage.
Companies search for a business model and strategies that will allow them
to consolidate a fragmented industry to obtain the above average profitability possible
in a consolidated industry.
a. Fragmented industries are characterized
by low entry barriers and commodity-type products that are hard to
differentiate, which is the same with the consolidated industries.
b. Fragmented industries has boom-and-bust
cycles as industry profits rise and fall. Consolidated industries are more
stable in this aspect.
2. What opportunities and advantages do
consolidated industries offer that fragmented industries do not?
Consolidation offers a relative price advantage whereas fragmented
industry has a lot of constraints. With consolidated industries the customer
has access to wide range of options in products with easy access, which may not
be the case for fragmented industries, as the supply chain differs.
Consolidated industry products may be considered as differentiated
products due to the good reputation or unique operation strategies, which may
not be the same with fragmented industries.
3. Describe horizontal and vertical
integration. Why do businesses leverage these vehicles for growth, and how can
they aid in gaining competitive advantage?
Horizontal integration – means a strategy where a company just stays in one
industry and acquires companies that are in same industry to expand its reach
horizontally. This allows the company to be focused on what it know best to
produce and merging with the same industry company gives a competitive edge to
the company because both the companies are competitors and they can become a
string company for other competitors.
Vertical integration – Vertical integration is based on a company entering
industries that add value to its core products meaning acquiring companies that
produces the raw materials for its products or the distributors of the product
in the market. This helps in tightening the current product and increasing profitability
in the long run.
References: Strategic Management: An Integrated
Approach. 2017, 12th edition. South-Western Cengage Learning.
Charles W. L. Hill and Gareth R. Jones