Chapter 5questions.1. A low-cost strategy means reducingthe number of managers in the hierarchy and the rigorous use of budgets tocontrol production and selling costs. The main goal here is to reduce the operatingcosts of the manufacturing and materials-management functions. One of the majorsources of cost savings is to choose an organizational structure and culture toimplement this strategy in the most cost-efficient way. Differentiation is the process of designing products to satisfycustomers’ needs.
A company should manufacture products and sell them accordingto the needs of the customers. Differentiation allows the company to satisfycustomer needs and increase profitability. If managers strategize their business model to increase profitabuilty aswell as to increase efficiency then they should offer customers a low priceproduct, Sometimes this may lead to price wars but offering a good price and qualityproduct to the customer increases profitability in the long run. Also with thisstrategy the company will not be investing their resources in bringing newinnovations or uniqueness to the product for which a premium price can becharged. 2. Aside from low-cost strategy,businesses can differentiate their products by providing something unique withinnovation, excellent quality, or responsiveness to the customers.
Thisuniqueness of the products can be achieved in different ways. It can be fromthe physical characteristics of a product, resulting from the new innovationsor, quality of the features which appeal to the customers’ psychological needs,such as a personal need for prestige and status or to declare a particularlifestyle. For example – Godiva chocolates, which retail for about $26 a pound— costmuch more than a box of Hershey bars. Here the product is differentiated by theexcellent quality and the customers comfort needs. 1.
Describe how businesses approachsegmenting the market, and why market segmentation could be an attractivebusiness strategy. Why do businesses segment the market? What approaches can beused to segment the market? How can this lead to competitive advantage? Companies group thecustomers based on the important differences in their needs or preferences.Market segmentation is an attractive strategy because grouping the customersaccording to the similarities or differences in their needs help the companiesdiscover what kinds of products to develop for different kinds of customers.For example, a car with high luxury features may not be purchased by thecustomers whose need is basic transportation.
By using market segmentationthe companies can understand the needs of all customers groups and createproducts basing this information. Three main approachestoward market segmentation in devising a business model. 1. First, a company mightchoose not to recognize that different market segments exist and make a producttargeted at the average or typical customer. In this case, customerresponsiveness is at a minimum, and competitive advantage is achieved throughlow price, not differentiation.2. Second, a company canchoose to recognize the differences between customer groups and make a producttargeted toward most or all of the different market segments.
In this case,customer responsiveness is high and products are being customized to meet thespecific needs of customers in each group, so competitive advantage is obtainedthrough differentiation, not low price.3. Third, a company mightchoose to target just one or two market segments and devote its resources todeveloping products for customers in just these segments. In this case, it maybe highly responsive to the needs of customers in only these segments, or itmay offer a bare-bones product to undercut the prices charged by companies whodo focus on differentiation. So, competitive advantage may be obtained through afocus on low price or differentiation. Chapter 6 questions 1. Define fragmented and consolidatedindustries. 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 (anoligopoly) or, in extreme cases, by just one company (a monopoly), andcompanies often are in a position to determine industry prices. For example theaerospace, soft drink and stockbrokerage. Companies search for a business model and strategies that will allow themto consolidate a fragmented industry to obtain the above average profitability possiblein a consolidated industry. a. Fragmented industries are characterizedby low entry barriers and commodity-type products that are hard todifferentiate, which is the same with the consolidated industries. b. Fragmented industries has boom-and-bustcycles as industry profits rise and fall. Consolidated industries are morestable in this aspect.
2. What opportunities and advantages doconsolidated industries offer that fragmented industries do not? Consolidation offers a relative price advantage whereas fragmentedindustry has a lot of constraints. With consolidated industries the customerhas access to wide range of options in products with easy access, which may notbe the case for fragmented industries, as the supply chain differs.Consolidated industry products may be considered as differentiatedproducts due to the good reputation or unique operation strategies, which maynot be the same with fragmented industries.
3. Describe horizontal and verticalintegration. Why do businesses leverage these vehicles for growth, and how canthey aid in gaining competitive advantage?Horizontal integration – means a strategy where a company just stays in oneindustry and acquires companies that are in same industry to expand its reachhorizontally. This allows the company to be focused on what it know best toproduce and merging with the same industry company gives a competitive edge tothe company because both the companies are competitors and they can become astring company for other competitors.Vertical integration – Vertical integration is based on a company enteringindustries that add value to its core products meaning acquiring companies thatproduces the raw materials for its products or the distributors of the productin the market.
This helps in tightening the current product and increasing profitabilityin the long run.References: Strategic Management: An IntegratedApproach. 2017, 12th edition.
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