Based upon chapters 4,5, and 6 summaries, Please provide no less than a page and a half summary of your understanding of the practical implications of these chapters and how are they going to help you improve your understanding of how businesses/firms/organizations operate, compete, and create advantage and maintain it. If you can bring in an example of a situation you have experienced before in a work setting and then apply what you have learned in these chapters in a way that would help you better handle this situation/decision, this would be even better to support your arguments.

Chapter 4 summary

• Companies that consistently offer lower prices due to lower costs rely on one or more of five primary sources of cost advantage: economies of scale or scope, learning and experience, proprietary knowledge, low cost inputs, or a different business model.
• Economies of scale produce cost advantages by allowing firms to: (a) better spread the fixed costs of production across more units, (b) spread nonfixed costs across more units, and/or (c) invest in the specialization of machines and employees that lower the per-unit costs of production.
• Learning produces cost advantages by improving employees’ efficiency and effectiveness. A learning curve shows reductions in labor costs per unit as cumulative volumes of production increase. A similar analysis that considers all costs produces an experience curve.
• A scale curve shows how cost per unit decreases with increases in volume of production. An experience curve shows how cost per unit decreases with increases in cumulative volume of production. Scale and experience curve analysis are useful for:
  • making investment/growth decisions,
  • making pricing decisions,
  • analyzing a company’s relative cost position and looking for opportunities to reduce costs, and
  • making acquisition decisions.
• To a strategist, experience-curve logic suggests that the company with the highest share of an industry’s cumulated output will also be the lowest-cost producer. However, a strategy to simply buy market share, or grow volume, through increases in advertising or lowering prices does not typically result in higher profits. The correlation between high market share and high profitability is the result of some underlying factor, such as low-cost production methods or an innovative product that causes both to grow simultaneously.
• Even when producing similar volumes, some companies are able to achieve a cost advantage as a result of proprietary knowledge about how to produce a product or service.
• Lower input costs are possible due to: (a) bargaining power over suppliers or labor, (b) superior cooperation with suppliers, (c) sourcing from low-cost locations, or (d) preferred access to inputs (e.g., ownership of key raw materials).
• Some firms achieve a cost advantage by deploying a different business model, meaning that they either eliminate activities or steps in the value chain, or they deliver their product or service using entirely different activities than competitors.

Chapter 5 summary

• In this chapter, we examined differentiation as an alternative to low cost as a way to offer unique value to a customer. Product differentiation is a strategy whereby companies attempt to gain competitive advantage by offering value that is not available in other products or services.
• Companies have four main options for creating product differentiation:
  • Different features. The product does a better job on features available in other products, does more “jobs” than other products, or does a “unique job” not done by any other product.
  • Quality or reliability. The product does the same job as other products, but does it for longer.
  • Convenience. The product is easily available when the customer needs or wants it.
  • Brand image. The product gives customers a certain feeling or idea.
• Strategists often use two tools to discover differentiation opportunities: customer segmentation and mapping the consumption chain. Customer segmentation is a process used to segment the market into customer groups who share similar needs. The consumption chain is the set of activities a customer goes through in the process of realizing a need and then acting on it to purchase a product or service. Each step in the chain can present ways to differentiate a product or service.
• Discovering sources of differentiation is just one half of the equation. In order for a differentiation strategy to be successful, a company must then develop or acquire the resources and capabilities to deliver that unique value better than competitors.
• The net promoter score is a tool that can be used to assess how well a differentiation strategy is working to turn customers into promoters of a company’s offering.

Chapter 6 summary

• Diversification creates value when firms exploit or enhance their resource base by entering a new line of business, market, or industry. Managers should ask two questions when considering entering a new line of business: (1) Why will the existing businesses be more valuable because we’ve entered an adjacent business? and (2) Why will the new business activity be more valuable inside our corporation than operating alone? When managers choose to diversify, they face a choice about whether to enter a new line of business through greenfield entry or through acquisition. Greenfield entry proves a preferred strategy when the firm can readily exploit its existing resources and capabilities, is not pressed for speed, and can enter a new line of business at a small or moderate scale. Diversification through acquisition becomes the preferred strategy when firms must expand their resources and capabilities to compete effectively, enter a market quickly, or operate at large scale.
• Successful diversification relies on one of the Eight Ss to create value:
  • managerial slack—the ability of managers to handle more work effectively over time
  • synergy—the combination of two businesses creates more value than either could separately
  • shared knowledge—diversification allows valuable knowledge and skill to be shared between business units
  • business models—when business unit success depends on common characteristics, such as knowledge management, or scale economies
  • spreading capital—the headquarters of the corporation quickly allocates capital and other resources to their best use among business units
  • a stepping stone to new markets—where a firm moves to a new industry through a set of small jumps and each jump allows the acquisition of key resources and skills
  • stopping (or slowing competitors)—pre–emptively moving into a new market space, or acquiring another firm, to deny a competitor access to that space
  • staying ahead of technology—expanding into a new technology arena, or buying a company in that arena, in order to learn about new technologies
• When done poorly, diversification destroys value through
  • excessive pride or hubris—making diversification decisions based on biased thinking or emotional reasoning rather than facts and data
  • sunk cost fallacy—focusing on past resources expended, which cannot be recovered, as a criteria for decision making
  • imitative diversification—choosing to copy a competitor’s moves rather than having a compelling strategic logic
  • poor governance and incentives—simply running the new business poorly or failing to incentivize managers to attend to the business
  • the lack of resource commonality between the lines of business—moving into lines of business that fail to create value based on any of the eight
• Successful integration ensures that acquisitions add value to the organization. The four Bs provide a template for thinking about how a firm should integrate an acquisition:
  • bury—completely absorb the acquired company into the acquirer
  • blend—retaining and combining the best elements of both companies to compete more effectively
  • build—craft an entirely new organization
  • bolt on—run the acquired company independently of the acquiring company