ch12-15 - STRATEGY More efficient production processes...

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S TRATEGY Actions that mangers must take to attain the goals of the firm. Goal – maximize the value of the firm for its owners, shareholders. By – increasing the profitability of the enterprise and its rate of profit growth over time. Profitability (high, good) Rate of return that the firm makes on its invested capital (ROIC), Net profit after tax / Capital Profit growth (high, good) Measured by the percentage increase in net profits over. Value creation The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products. More the value that consumers place on a firm’s product, the higher the price the firm can charge for those products. However, the price a firm charges for a good or service is typically less than the value placed on the good or service by the customer. consumer surplus (the firm is competing w/ other firms for the customer’s business -> charge a lower price) customer’s reservation price (individual’s assessment of value of a product) (impossible to segment the market to charge a price that reflects CRP) A firm has high profits when it creates more value for its customers and does so at a lower cost. Michael Porter 2 basic strategies for creating value and attaining a competitive advantage in an industry. Low cost strategy Lowing the production costs, C Differentiation strategy Making the product more attractive through superior design, styling, functionality, features, reliability, after- sales service, etc < V ^ -> willing to pay a higher price, P ^> Superior profitability goes to those firms that can create superior value, and the way to create superior value is to drive down the cost structure of the business and/or differentiate the product in some way so that consumers value it more and are prepared to pay a premium price. Superior value creation relative to rivals does not necessarily require a firm to have the lowest cost structure in an industry, or to create the most valuable product in the eyes of consumers. Gap b/t V and C > competitors’ Strategic positioning Porter: v. important for management to decide where the company wants to be positioned w/ regard to V and C, to configure operations according, and to manage them efficiently to make sure the firm is operating on the efficiency frontier. A central tenet of the basic strategy paradigm To maximize its profitability, 1. Pick a position on the efficiency frontier that is viable in the sense that there is enough demand to support that choice 2. Configure internal operations (manufacturing, marketing, logistics, information systems, human resources) so that they support that position 3. Make sure that the firm has the right organization structure in place to execute its strategy Strategy, operations, and organization of the firm must all be consistent w/ each other if it is to attain a competitive advantage and garner superior profitability. Operations: the firm as a value chain
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ch12-15 - STRATEGY More efficient production processes...

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