Strategic Management and Competitive Advantage Concepts and Cases

Transcription

1 GLOBAL EDITION Strategic Management and Competitive Advantage Concepts and Cases FIFTH EDITION Jay B. Barney William S. Hesterly

2 What s Out? Models, concepts, and topics that don t pass a simple test: Does this help students analyze cases and real business situations? What s In? VRIO an integrative framework (see next page for details). Broad enough to apply in analyzing a variety of cases and real business settings. Simple enough to understand and teach. The Results? Provides students with the tools they need to do strategic analysis. Nothing more. Nothing less.

3 2Part BuSineSS-level STrATegieS

4 Cha Pter 4 Cost leadership Learning Obje Ctives After reading this chapter, you should be able to: 1. Define cost leadership. 2. Identify six reasons firms can differ in their costs. 3. Identify four reasons economies of scale can exist and four reasons diseconomies of scale can exist. 4. Explain the relationship between cost advantages due to learning-curve economies and a firm s market share, as well as the limitations of this logic. 5. Identify how cost leadership helps neutralize each of the major threats in an industry. 6. Identify the bases of cost leadership that are more likely to be rare and costly to imitate. 7. Explain how firms use a functional organizational structure to implement business-level strategies, such as cost leadership. 8. Describe the formal and informal management controls and compensation policies firms use to implement cost leadership strategies. MyManagementLab improve Your grade! Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems. 122 t he World s Lowest-Cost a irline Everyone s heard of lo w-cost airlines Southwest, EasyJet, and JetBlue, for example. But ha ve you heard of the w orld s lowest-cost airline? This airline currently gives 25 per cent of its sea ts away for free. Its goal is t o double tha t within a c ouple of y ears. And yet, in 2013, this air line announced record annual profits of 569 million, up 13 percent; an increase in passenger traffic of 5 percent (from 75.8 million t o 79.3 million); and an incr ease in r evenues of 13 per cent (fr om 4325 million t o 4884 million). And this in spite of continued increases in jet fuel prices during this same time period! The name of this air line is R yanair. Headquartered in D ublin, Ireland, Ryanair flies shor t flights throughout Western Europe. In 1985, R yanair s founders started a small air line to fly bet ween Ireland and England. For six years, this airline barely broke even. Then, in 1991, Michael O Leary current CEO at Ryanair was brought on boar d. O Leary traveled to the Unit ed States and studied the most suc - cessful low-cost airline in the world at that time: Southwest Airlines. O Leary became convinced that, once European airspace was deregulated, an air line that adopted Southwest s model of quick tur n- arounds, no frills, no business class, flying into smaller regional airports, and using only a single kind of aircraft could be extremely successful. Prices in the European air market were fully deregulated in Since then, Ryanair has become an even lower-cost airline than Southwest. Indeed, it calls itself the only ultra-low cost carrier. For example, like S outhwest, Ryanair only flies a single t ype of air craft a Boeing However, to save on the cost of its airplanes, Ryanair orders them without window shades and with

5 seats that do not r ecline. This saves several hundred thousand dollars per plane and also r educes ongoing maintenance costs. Both Southwest and R yanair try to make it easy f or consumers to order tickets online, thereby avoiding the costs of call centers and travel agents. However, just 59 percent of Southwest s tickets are sold online; 98 percent of Ryanair s tickets are sold online. This focus on low costs allows Ryanair to have the lowest prices possible for a seat on its airplanes. The a verage fare on Southwest is $92; the average fare on Ryanair is $53. But, even at those low prices, Ryanair is still able to earn comfortable margins. However, those net margins don t come just from Ryanair s low costs. They also reflect the fact that the fare you pay Ryanair includes only the seat and virtually no other services. If you want any other services, you have to pay extra for them. For example, you want to check bags? It will cost $9.95 per bag. You want a snack on the airplane? It will cost you $5.50. For that, you get a not-very-tasty hot dog. You want a bottle of water? It will cost you $3.50. You want a blanket or pillow they cost $2.50 each. In addition, flight attendants will sell y ou all sor ts of extras to keep you occupied during your flight. These include scratch-card games, perfume, digital cameras ($137.50), and MP3 players ($165). During 2007, Ryanair began offering in-flight mobile telephone service. Not only did this enable pas - sengers to call their friends and family, Ryanair also used this service to introduce mobile gambling on its planes. Now, on your way from London to Paris, you can play blackjack, poker, and slot machines. Finally, to further increase revenues, Ryanair sells space on its planes t o advertisers. When your seat tray is up, you may see an ad for a cell phone from Vodaphone. When the tray is down, you may see an ad from Hertz. All of these ac tions enable R yanair to keep its pr ofits up while keeping its far es as lo w as possible. And the results of this str ategy have been impressive from near bank ruptcy in 1991, Ryanair is now among the largest international airlines in the world. Of course, this suc cess did not happen without some c ontroversy. For example, in O ctober 2006, Ryanair was chosen as the most disliked E uropean airline in a poll of some 4,000 r eaders of TripAdvisor, a British Web site for frequent travelers. Ryanair s response: These frequent travelers usually have their companies pay for their travel. If they had to pay for their own tickets, they would prefer Ryanair. Also, Ryanair s strong anti-union stance has caused it political pr oblems in man y of the union-dominated countries where it flies. Finally, Ryanair has been criticized for some of its lax security and safety procedures, for how it treats disabled passengers, and for the cleanliness of its planes. However, if you want to fly from London to Barcelona for $49 round trip, it s hard to beat Ryanair. Source: K. Capell (2006). Wal-Mart with wings. BusinessWeek, November 27, pp ; www//en.wikipedia.org/wiki/ryanair; and Peter Arnold, Inc. imagebroker/alamy 123

6 124 part 2: Business-level Strategies ryanair has been profitable in an industry the airline industry that has historically been populated by bankrupt firms. It does this by implementing an aggressive low-cost strategy. What Is Business-Level Strategy? Part 1 of this book introduced the basic tools required to conduct a strategic analysis: tools for analyzing external threats and opportunities (in Chapter 2) and tools for analyzing internal strengths and weaknesses (in Chapter 3). Once these two analyses have been completed, it is possible to begin making strategic choices. As explained in Chapter 1, strategic choices fall into two large categories: business strategies and corporate strategies. Business-level strategies are actions firms take to gain competitive advantages in a single market or industry. Corporatelevel strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously. The two business-level strategies discussed in this book are cost leadership (this chapter) and product differentiation (Chapter 5). The importance of these two business-level strategies is so widely recognized that they are often called generic business strategies. What Is Cost Leadership? A firm that chooses a cost leadership business strategy focuses on gaining advantages by reducing its costs to below those of all its competitors. This does not mean that this firm abandons other business or corporate strategies. Indeed, a single-minded focus on just reducing costs can lead a firm to make low-cost products that no one wants to buy. However, a firm pursuing a cost leadership strategy focuses much of its effort on keeping its costs low. Numerous firms have pursued cost leadership strategies. Ryanair clearly follows this strategy in the airline industry, Timex and Casio in the watch industry, and BIC in the disposable pen and razor market. All these firms advertise their products. However, these advertisements tend to emphasize reliability and low prices the kinds of product attributes that are usually emphasized by firms pursuing cost leadership strategies. In automobiles, Fiat has implemented a cost leadership strategy with its emphasis on low-priced cars for basic transportation. Like Ryanair, Timex, Casio, and BIC, Fiat spends a significant amount of money advertising its products, but its advertisements tend to emphasize its sporty sexy styling and low price. Fiat has positioned its cars as fun and inexpensive, not a high-performance sports car or a luxurious status symbol. Fiat s ability to sell these fun and inexpensive automobiles depends on its design choices (keep it simple) and its low manufacturing costs. 1 Sources of Cost Advantages An individual firm may have a cost advantage over its competitors for a number of reasons. Cost advantages are possible even when competing firms produce similar products. Some of the most important of these sources of cost advantage are listed in Table 4.1 and discussed in this section.

7 Chapter 4: Cost leadership Size differences and economies of scale 2. Size differences and diseconomies of scale 3. Experience differences and learning-curve economies 4. Differential low-cost access to productive inputs 5. Technological advantages independent of scale 6. Policy choices TABle 4.1 Important Sources of Cost Advantages for Firms s ize Differences and economies of s cale One of the most widely cited sources of cost advantages for a firm is its size. When there are significant economies of scale in manufacturing, marketing, distribution, service, or other functions of a business, larger firms (up to some point) have a cost advantage over smaller firms. The concept of economies of scale was first defined in Chapter 2. Economies of scale are said to exist when the increase in firm size (measured in terms of volume of production) is associated with lower costs (measured in terms of average costs per unit of production), as depicted in Figure 4.1. As the volume of production in a firm increases, the average cost per unit decreases until some optimal volume of production (point X) is reached, after which the average costs per unit of production begins to rise because of diseconomies of scale (a concept discussed in more detail later in this chapter). If the relationship between volume of production and average costs per unit of production depicted in Figure 4.1 holds, and if a firm in an industry has the largest volume of production (but not greater than the optimal level, X), then that firm will have a cost advantage in that industry. Increasing the volume of production can reduce a firm s costs for several reasons. Some of the most important of these reasons are summarized in Table 4.2 and discussed in the following text. v olume of Production and s pecialized Machines. When a firm has high levels of production, it is often able to purchase and use specialized manufacturing tools that cannot be kept in operation in small firms. Manufacturing managers at BIC Figure 4.1 of Scale Economies $ Per Unit Cost of Production Low X Volume of Production High