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Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Cost LeadershipCost LeadershipChapter 4Chapter 4Cost Leadership2Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly22Mission ObjectivesExternalAnalysisInternalAnalysisStrategicChoiceStrategyImplementationCompetitiveAdvantageThe Strategic Management ProcessBusiness LevelStrategyCorporate LevelStrategyHow to Position aBusinessin the Market?Which Businessesto Enter?Cost Leadership3Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly33Business Level StrategiesTwo Generic Business Level StrategiesCost Leadership:• generate economic value by having lower coststhan competitorsProduct Differentiation:• generate economic value by offering a productthat customers prefer over competitors’ productCost Leadership4Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly44Why Cost Leadership MattersDATCindQPCompetitive MarketATCffAbove NormalEconomicReturnsCost Leadership5Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly55Understanding Cost AdvantageManagers need to understand who hasthe cost advantage in their market• it could be the focal firm• it could be a competitor• develop a strategy to exploit the advantage• develop a strategy to either capture theadvantage or compete on some other basisCost Leadership6Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly66Sources of Cost AdvantageEconomies of Scale• average cost per unit falls as quantity increases-until the minimum efficient scale is reached• are a cost advantage because competitors maynot be able to match the scale because of capitalrequirements (barrier to entry)• international expansion may allow a firm to haveenough sales to justify investing in additionalcapacity to capture economies of scaleCost Leadership7Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly77Sources of Cost AdvantageDiseconomies of Scale• are an advantage for those who do not havediseconomies of scale• occur when firms become too large and bureaucratic• are a risk of international expansionCost Leadership8Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly88Sources of Cost AdvantageLearning Curve Economies• a firm gets more efficient at a process with experience• the more complicated/technical the process,the greater the experience advantageExample: Fuel Injectors• international expansion may propel a firm down theexperience curve because of higher volumesCost Leadership9Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly99Sources of Cost AdvantageDifferential Low-Cost Access to Productive Inputs• may result from:• history—being in the right place at the right time• being first into a market—esp. foreign markets• natural endowment—owning a mineral deposit• locking up a source—buying all of its outputCost Leadership10Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly1010Sources of Cost AdvantageTechnology Independent of ScaleExample: Vegetable Inspection• may allow small firms to become cost competitive• advantage typically accrues to the ‘owner’ of thetechnology—may or may not be the ones who actuallyuse the technology• size of the advantage depends both on how valuableand protectable the technology isCost Leadership11Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly1111Sources of Cost AdvantagePolicy Choices• firms get to choose how they will serve the market• we’ll offer level of quality that is inexpensive toproduce• firms can make policy choices that give people incentives to reduce cost at every opportunityCost Leadership12Cost LeadershipCost LeadershipCopyright © 2006 Pearson Prentice Hall. All rights reserved. Copyright © 2006 Pearson Prentice Hall. All rights reserved. Strategic Management & Competitive Advantage - Barney & HesterlyStrategic Management & Competitive Advantage - Barney & Hesterly1212Cost Leadership & Competitive AdvantageA source of cost advantage will lead to competitive advantage if that source is:• Valuable• Rare• Costly to Imitate• Organized (Implemented Appropriately)Cost


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OSU BA 569 - Cost Leadership

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