Strategic Management 3e Instructor Manual
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Walmart by building similar skills in efficient logistics. Target almost achieves cost parity with Walmart. At the same time,
Target outdoes Walmart in product selection, merchandising, and store layout so that its stores offer a higher-quality
shopping experience for the customer. Target creates significantly more value in the minds of customers than does Walmart
with its no-frills approach. If Target is successful with its blue ocean strategy, it achieves the highest economic value.
POWERPOINT SLIDE 40
Examples of ways in which firms can simultaneously add value and lower cost: Through techniques such as total quality
management, companies design and build products with quality in mind, while increasing their differentiated appeal. By
building in better quality, companies lower the cost of both production and after-sale service requirements. From the
customer’s perspective, the product has increased value because it reduces the total cost of ownership. Advances in
manufacturing and information technology have made feasible mass customization—the manufacture of a large variety of
customized products or services done at a relatively low unit cost. In the car industry, Toyota was the first to introduce lean
manufacturing, allowing it to mass customize vehicles and produce higher quality at a lower per-unit cost. Other companies
are able to conquer this trade-off by using the Internet. You can design your own T-shirts at threadless.com or create
customized sneakers at nike.com.
POWERPOINT SLIDE 40
Amazon is using “gig workers” to deliver packages in Seattle. They are taking advantage of the availability of low-cost part-
time independent contractors to deliver an enhanced customer service (delivery times as fast as one hour) at low cost. (See
“Amazon Taps ‘On-Demand’ Workers for One-Hour Deliveries” G Bensinger 9/29/15 The Wall Street Journal.)
POWERPOINT SLIDE 41
The startup Leopard Cycles, founded in 2004, shows how to address the necessary trade-offs inherent in a blue ocean
strategy. A customized road-race bicycle like those ridden by professionals such as Lance Armstrong, Alberto Contador, or
Meredith Miller was once an expensive proposition that could cost up to $20,000.
Combining the latest flexible-
manufacturing techniques with Internet-enabled technologies, Leopard Cycles offers mass-customized race bicycles built
with advanced materials such as carbon fiber. Leopard Cycles describes how it addresses the trade-off between value and cost
as follows: “Being the low-cost producer is mutually exclusive with exotic materials; however, we’re a firm believer that you
don’t have to be the most expensive to be the best.” This position implies that an integration of low cost and product
differentiation enables companies to increase the perceived value of their products, while keeping the cost increase in check.
Leopard Cycles prices its customized road-race bikes between $1,500 and $2,500, much less than what one would have paid
for such a specialized bicycle just a few years before.
POWERPOINT SLIDE 41
Avon has been able to raise the perceived value of its products while lowering its production costs. Under the leadership of
its CEO, Andrea Jung, it began to pursue a blue ocean strategy in 2002 by investing over $100m in R&D and building a new
research facility. Avon’s R&D investments were intended to increase the perceived value of its products, by developing
cosmetics that look good and are good for the skin. In the same year, she began to lower Avon’s cost structure by investing
more than $50m into optimizing its supply chain.
Avon’s shift from a differentiation strategy to an integration strategy
seemed to be successful initially, but the firm has struggled since the 2008 recession.
Electrolux, the world’s number 2 appliance manufacturer, entered China with a cost-leadership strategy. What they learned
was that they did not have the operating cost structure or the scale to compete effectively with the Chinese domestic
manufacturers as a cost leader. They closed most of their Chinese manufacturing capacity in 2013 and formulated a strategy
to change to a differentiated position with imported products. Ask students to estimate the locations for both strategies on the
productivity frontier. Electrolux plans increases in R&D from 2 percent of sales to 3 percent of sales. What other steps will
they need to take to be successful as a differentiator in China? (See “Wash, rinse, rebrand: Electrolux spiffs up appliances in
China” The Wall Street Journal 9/20/13.) AACSB 2015 Standard 9 Managing in a global context
Toyota introduced lean manufacturing to resolve the trade-off between quality and cost. This process innovation allowed
Toyota to produce higher-quality cars at a lower unit cost, and to perfect the mass customization of cars. Lean manufacturing,
over time, has become a necessary but not sufficient condition for competitive advantage in the auto industry. Today, if a
carmaker can’t produce high-quality, mass-customized cars at low cost, it is not even in the game. More recently, Toyota
stumbled as questions arose whether the company could maintain its stellar quality record while growing so fast. Korea’s
Hyundai stepped into this void, offering cars that surpass Toyota in quality while attempting to provide luxury similar to
Lexus vehicles. Hyundai’s managers carved out a strong strategic position for the company by focusing on resolving the
trade-offs between luxury, quality, and cost. The ups and downs in the car industry clearly show that competitive advantage
is transitory. It is a difficult quest to gain competitive advantage; it is even more difficult to sustain it. The tools of strategic
management aid managers in this important challenge.