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Strategy
Internal Consistency External Consistency
Definition of Strategy
Strategy: A firm’s theory about how to gaincompetitive advantages
Mission Objectives
ExternalAnalysis
InternalAnalysis
StrategicChoice
StrategyImplementation
CompetitiveAdvantage
The Strategic Management Process
The Strategic Management Process
Objectives:• specific, measurable targets
• the things a firm needs to ‘do’ to achieveits mission
• should influence other elements in the strategicmanagement process
The Strategic Management ProcessCompetitive Advantage
Definition: the ability to create more economic valuethan competitors
• all other elements of the strategic managementprocess are aimed at achieving competitive advantage
Mission Objectives
ExternalAnalysis
InternalAnalysis
StrategicChoice
StrategyImplementation
CompetitiveAdvantage
Competitive AdvantageTemporary & Sustainable
• competition limits the duration of competitiveadvantage in most cases
• profits attract competition
• competitive advantage typically results in high profits
Therefore,
• most competitive advantage is temporary
• competitors imitate the advantage or offersomething better
Competitive AdvantageTemporary & Sustainable
Some competitive advantages are sustainable if:
• competitors are unable to imitate the sourceof advantage
• no one conceives of a better offering
Of course,
• in time, even sustainable competitive advantagemay be lost
Competitive Advantage
Competitive Advantage
Disadvantage
Parity
Advantage
Below Normal
Normal
Above Normal
Economic Returns
• exceeding expectations
• meeting expectations
• failing expectations
Pricing Strategies
You don’t sell through price. You sell the price.
The Learning Objectives
Setting Pricing Policy Price-adjustment Strategies Price changes
1.Pricing objectives
Survival Maximum current profit Maximum market share Maximum market skimming Product-quality leadership
Setting Pricing Policy
1. Selecting the pricingobjective
2. Determining demand
3. Estimating costs
4. Analyzing competitors’costs, prices, and offers
5. Selecting a pricingmethod
6. Selecting final price
Types of Costs
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Total CostsSum of the Fixed and Variable Costs for a Given
Level of Production
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Fixed Costs(Overhead)
Costs that don’tvary with sales or production levels.
Variable Costs
Costs that do varydirectly with the
level of production.
Variable Costs
Costs that do varydirectly with the
level of production.
The Three C’s Modelfor Price Setting
Costs Competitors’prices andprices ofsubstitutes
Customers’assessmentof uniqueproductfeatures
Low Price
No possibleprofit at
this price
High Price
No possibledemand atthis price
Some important pricing definitions
Utility: The attribute that makes it capable of want satisfaction
Value: The worth in terms of other products
Price: The monetary medium of exchange.
Examples: new-product pricing
Market-skimming pricing Market-penetration pricing
Market-skimming pricing
Setting a high price for a new product to skim maximum revenues layer by layer from the segments willing to pay the high price: the company makes fewer but more profitable sales.
The conditions:
1. A sufficient number of buyers have a high current demand;
2. The unit costs of producing a small volume are not so high that they cancel the advantage of charging what the traffic will bear;
3. The high initial price does not attract more competitors to market;
4. The high price communicates the image of a superior product.
Market-penetration pricing
Setting a low price for a new product in order to attract a large number of buyers and a large market share.
The conditions:
1. The market is highly price sensitive,and a low price stimulates market growth;
2. Production and distribution costs fall with accumulated production experience;
3. A low price discourages actual and potential competition.
Pricing changing
Initiating price cuts Initiating price increases
Discussion
Please explain the reasons for price cuts. Please explain the reasons for price increases. Please describe the advantage and
disadvantage of price cuts and increases.
The reasons for price cuts
Excess capacity Price competition
The reasons for price increases
Cost inflation overdemand
Reactions to price changes
Customers’ reactions Competitor’s reactions
Responding to competitors’ price changes
Maintain price Maintain price and add value Reduce price Increase price and improve quality Launch a low-price fighter line
Competitive Advantage & The Strategic Management Process
Emergent vs. Intended Strategies• the strategic management process leads managers
to intended strategies
However,
• conditions often change or new informationbecomes available
• managers respond and adopt emergent strategies
Example: Honda Motorcycles
The Strategic Management Process
Summary
Firms could achieve competitive parity and survive
• they would face a flat demand curve
• their cost structure would be the industry average
• they would need to adapt their strategy overtime just to survive
• they would fail if they didn’t adapt their strategy
The Strategic Management Process
Summary
This course is not about mere survival, it is aboutthriving—achieving competitive advantage
• the strategic management process helps managersachieve competitive advantage
• competitive advantage depends on differences
• strategy is about discovering and exploiting these differences
The Strategic Management ProcessApplying Strategy to Your Career
• a solid understanding of strategy concepts willhelp set you apart from other job candidates
• you can use the process to identify andexploit difference between you and others
• you can use the process to determine if youwant to stay with a company
The Strategic Management Process& Competitive Advantage
Strategy Matters!
• success and failure, between mediocrity and excellence
Strategy is often the difference between:
• a great manager and average managers
• stumbling through life and moving ahead with purpose