Illusions in Vertical Integration Decisions

There are some common misperceptions about the benefits of vertical integration that must be guarded against: A strong market position in one stage can automatically be extended to the other. It is often said that the firm with a strong position in its base business can integrate into a more competitive adjacent business and

Elements of the Capacity Expansion Decision

The mechanics of making a capacity expansion decision in the traditional capital budgeting sense are quite straightforward—any finance textbook will supply the details. Future cash flows resulting from the new capacity are forecasted and discounted to weigh them against the cash outflows required for the investment. The resulting net present value ranks the capacity

Causes of Overbuilding Capacity Preemptive Strategies

One approach to capacity expansion in a growing market is the preemptive strategy, in which the firm seeks to lock up a major por-tion of the market to discourage its competitors from expanding and to deter entry. If future demand is known with certainty, for exam-ple, and a firm can build enough capacity to

Entry through Internal Development Entry through Acquisition

Entry through internal development involves the creation of a new business entity in an industry, including new production capa-city, distribution relationships, sales force, and so on. Joint ventures raise essentially the same economic issues because they are also new-ly started entities, although they create complicated questions about the division of efforts among the partners

Sequenced Entry into new businesses

Any decision to enter an industry must include a target strategic group. However, the discussion in Chapter 7 combined with the analysis earlier in this chapter suggests that a firm can adopt a se-quential strategy of entry involving initial entry into one group and subsequent mobility from group to group. For example, Procter and

Portfolio techniques in competitor analysis

Since the late 1960s a number of techniques have been developed for displaying a diversified firm‘s operations as a “portfolio” of busi-nesses. These techniques provide simple frameworks for charting or categorizing the different businesses in a firm‘s portfolio and deter-mining the implications for resource allocation. Techniques for portfolio analysis have their greatest applicability in

How to conduct an industry analysis

How should one go about analyzing an industry and competi–tors? What types of data does one look for and how can they be or-ganized? Where does one look for these data? This appendix deals with these questions and some of the other practical problems in-volved in conducting an industry analysis. There are basically two

The Value Chain and Competitive Advantage of the firm

Every firm is a collection of activities that are performed to design, produce, market,  deliver, and support its product.  All these activities can be represented using a value chain, shown in Figure 2-2. A firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach 

Linkages within The Value Chain of the firm

1. Linkages within the Value Chain Although value activities are the building blocks of competitive advantage, the value chain is not  a collection of independent  activities but  a system   of interdependent  activities.   Value activities are related by linkages within the value chain. Linkages are relationships between the way one value activity   is performed  and  

Competitive scope and the value chain of the firm

Competitive scope can have a powerful effect on competitive ad­ vantage, because it shapes the   configuration  and   economics   of the value chain. There are four dimensions of scope that affect the value chain:8 Segment Scope. The product varieties produced and buyers served. Vertical Scope. The extent to which activities are performed in-house instead of by

The value chain and organizational structure

The value chain is a basic tool for diagnosing competitive advan­ tage and finding ways to create and sustain  it, the subject that will dominate the chapters that follow. However,  the value chain  can also play a valuable role in designing organizational  structure.  Organiza­ tional structure groups certain activities together under organizational units such

The value chain and cost analysis

The behavior of a firm’s costs and  its relative cost position stem from the value activities the firm performs in competing in an industry. A meaningful cost analysis, therefore,  examines costs within these activities and not the costs of the firm as a whole. Each  value activity has its own cost structure and the

Cost Drivers of the firm

Ten m ajor cost drivers determine the cost behavior of value activi­ ties: economies of scale, learning, the pattern  of capacity utilization, linkages, interrelationships, integration, timing, discretionary policies, location, and institutional factors. Cost drivers are the structural causes of the cost of an activity and  can be more  or less under  a firm’s control.

The Cost of Purchased Inputs in firm

Procurement  has strategic significance in almost  every industry, but rarely has sufficient stature in firms. Every value activity employs purchased inputs of some kind, ranging from raw materials used in component fabrication to professional services, office space, and capital goods. Purchased inputs divide into purchased operating inputs and purchased  assets. The  total cost of

Segment Cost Behavior of the firm

Thus  far I   have described   how   to   analyze  the cost behavior  of a business unit as a whole. In practice, however, a business unit usually produces a number of different product varieties and sells them to a number of different buyers. It may also employ a number of different distribution channels. For example, a

Cost Dynamics in firm

In addition to analyzing cost behavior at a point in time, a firm must consider how   the   absolute   and   relative cost of value   activities will change over time independent of its strategy. I term this cost dynamics.   An   analysis of cost dynamics  enables a firm   to   forecast how the cost drivers of value activities

Determining the Relative Cost of Competitors

The value chain is the basic tool for determining competitor costs. The first step in determining competitor costs is to identify competitor value chains and  how activities are   performed  by   them.   The   process is the same as that employed by a firm to analyze its own value chain. In practice it is often extremely

Gaining Cost Advantage

There are two m ajor ways that a firm can gain a cost advantage: Control cost drivers. A firm can gain an advantage with respect to the cost drivers of value activities representing a significant proportion of total costs. Reconfigure the value A firm can adopt a different and more efficient way to design,  

Sustainability of Cost Advantage

Cost advantage  will result in above-average performance only if the firm can sustain it. Improving relative cost position in unsustainable ways may allow a firm to   maintain  cost parity   or   proximity, but a firm attempting to achieve cost leadership strategy must also develop sustainable sources of cost advantage. Cost advantage is sustainable if there

Implementation and Cost Advantage

This chapter has focused on how to achieve a cost advantage through changes in strategy and the way activities are performed. However, the success of cost leadership hinges on a firm’s skills in actually implementing it on a day to day basis. Costs do not go down automatically or by accident but rather as