Download Generic Business Strategies

Objectives
• Introduce the concept of generic business
strategies:
– Cost leadership.
– Differentiation.
– Focus.
• Describe the organizational resources and
capabilities associated with these strategies.
– Suggest how managers can identify opportunities
for reducing costs and differentiating their
businesses.
Exhibit: Generic Business Strategies
Strategic Advantage
Uniqueness
Low Cost
Broad
Differentiation
Cost Leadership
Narrow
Focus:
Differentiation
Focus:
Cost Leadership
Generic Business Strategies (cont.)
• Cost Leadership (cont.)
– Probably most effective in industries or markets
where price is most important factor (over
service, technology, or product characteristics).
– Successful cost leaders develop competitive
advantage by offering products and services of
comparable quality at lower prices than most
industry competitors.
• Not the same as selling cheap merchandise or
products perceived as inferior.
Generic Business Strategies (cont.)
• Cost Leadership (cont.)
– Successful cost leader does not always have to
offer lowest prices.
• Customer perception of low prices is most important
factor.
– Firms following this strategy will seek to
maximize market share.
Generic Business Strategies (cont.)
• Cost leadership strategies are characterized by:
– Capital-intensive manufacturing or production
processes that reduce labor costs;
– Process engineering skills that are aimed at lowering
production costs; and
– Products designed to be manufactured easily and
products which share many common components.
• Leaders have developed sophisticated materials
procurement and inventory management systems.
• Leaders usually have low-cost distribution systems.
Generic Business Strategies (cont.)
• Firms that wish to pursue cost leadership
strategies should emphasize;
– Close supervision of labor;
– Tight cost controls; and
– Incentives based on cost and quantitative
targets.
• Value chain concept is useful tool for
managers using this strategy.
Key Stages in Applying the Value
Chain to Cost Analysis: The Case of
Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES
PURCHASING
PARTS
INVENTORIES
R&D
TESTING,
COMPONENT
ASSEMBLY
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL
GOODS
INVENTORIES
SALES DISTRI- DEALER &
&
BUTION CUSTOMER
MKTG
SUPPORT
STAGE 2. ALLOCATE TOTAL COSTS
Applying the Value Chain to Cost Analysis
(continued)
--Plant scale for each
component
-- Process technology
-- Plant location
-- Run length
-- Capaciity utilization
STAGE 3.
IDENTIFY
COST
DRIVERS
PURCHASING
PARTS
INVENTORIES
-- Level of quality targets
-- Frequency of defects
R&D
COMPONENT ASSEMBLY TESTING,
DESIGN
QUALITY
MFR
ENGNRNG
CONTROL
GOODS
INVENTORIES
-- No. of dealers
-- Sales / dealer
-- Level of dealer
support
-- Frequency of defects
under warranty
SALES
&
MKTG
DISTRI- DEALER &
BUTION CUSTOMER
SUPPORT
Prices paid depends -- Size of commitment
-- Plant scale
-- Cyclicality / predictability of sales
on:
-- Productivity of R&D/design
-- No. of models per
-- Flexibility of production
-- Order size
-- No. & frequency of new
-- Purchases per
supplier
models
-- Sales / model
plant
-- Degree of
automation
-- Bargaining power
-- Wage levels
-- Supplier location
-- Capacity utilization
-- Customers’ willingness to wait
Applying the Value Chain to Cost Analysis
(continued)
STAGE 4. IDENTIFY LINKAGES
Consolidation of orders to increase
discounts, increase inventories
PRCHSNG
PARTS
INVNTRS
R&D
DESIGN
Designing different models around
common components and platforms
reduces manufacturing costs
COMPONENT
MFR
Higher quality parts and materials
reduces costs of defects
at later stages
ASSMBY TESTING GOODS
QUALITY
INV
SALES DSTRBTN DLR
MKTG
CTMR
Higher quality in manufacturing
reduces warranty costs
STAGE 5. RECOMMENDATIONS FOR COST REDUCTION
Drivers of Cost Advantage
ECONOMIES OF SCALE
ECONOMIES OF LEARNING
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONAL
EFFICIENCY
• Indivisibilities
• Specialization and division of labor
• Increased dexterity
• Improved coordination/ organization
• Mechanization and automation
• Efficient utilization of materials
• Increased precision
• Design for automation
• Designs to economize on materials
• Location advantages
• Ownership of low-cost inputs
• Bargaining power
• Supplier cooperation
• Ratio of fixed to variable costs
• Costs of installing and closing capacity
• Organizational slack
Generic Business Strategies (cont.)
• Differentiation strategy
– These firms aim to serve broad segment of
market by offering products/services that are
perceived as unique.
• Likely to work best with products/services that lend
themselves well to differentiation.
– Even commodities can be differentiated: Morton salt.
Generic Business Strategies (cont.)
• Differentiation strategy (cont.)
– It is the perception of differences that is most
important -- not just the actual characteristics of
competing products.
• Customer perceptions can be fragile and short-lived.
– Firms must develop strong marketing
capabilities and a reputation for quality or
uniqueness.
Generic Business Strategies (cont.)
• Firms pursuing differentiation must also
enhance their:
– Creativity and research capabilities;
– Coordination among R&D, marketing, and
manufacturing; and
– Ability to attract highly skilled labor, scientists,
or creative people.
• Value-chain analysis is helpful.
Using the Value Chain to Identify
Differentiation Potential on the Supply Side
MIS that supports
fast response
capabilities
Training to support
customer service
excellence
Unique product features.
Fast new product
development
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND
OPERATIONS
LOGISTICS
Quality of
components &
materials
Defect free
products.
Wide variety
OUTBOUND
MARKETING
LOGISTICS
& SALES
Fast delivery.
Efficient order
processing
Building brand
reputation
SERVICE
Customer technical
support. Consumer
credit. Availability of
spares
Identifying Differentiation Opportunities
through Linking the Value Chains of the
Firm and its Customers: Can Manufacture
1
5
2
3
4
Distribution
5. Competent technical support can increase canner’s efficiency of plant utilization.
Marketing
4. Efficient order processing system can reduce customers’ ordering costs.
Canning
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
Processing
2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.
Inventory holding
1. Distinctive can design can assist canners’ marketing activities.
Purchasing
Service &
technical support
Sales
Distribution
Inventory holding
Manufacturing
Design
Engineering
Inventory holding
Purchasing
Supplies of steel
& aluminum
CAN MAKER
CANNER
The Nature of Differentiation
DEFINITION: Providing something unique that is valuable to the
buyer beyond simply offering a low price. (M. Porter)
THE KEY IS CREATING VALUE FOR THE CUSTOMER
TANGIBLE DIFFERENTATION
Observable product characteristics
• size, color, materials, etc.
• performance
• packaging
• complementary services
INTANGIBLE DIFFERENTATION
Unobservable and subjective
characteristics relating to image,
status, exclusivity, identity
TOTAL CUSTOMER RESPONSIVENESS
differentiation not just about the product, it embraces the whole relationship
between the supplier and the customer.
Differentiation and Segmentation
DIFFERENTIATION: is concerned with how a firm competes within
a market.
SEGMENTATION: is concerned with where a firm competes
within a market.
Does differentiation imply segmentation?
Not necessarily, depends upon the differentiation strategy:
BROAD SCOPE DIFFERENTIATION:
FOCUSED DIFFERENTIATION:
Appealing to what is in common
between different customers
(McDonalds hamburgers, Honda cars,
Sears)
Appealing to what distinguishes
different customer groups (BMW, Doc
Marten footwear)
Identifying Differentiation Potential:
The Demand Side
THE PRODUCT
What needs
does it satisfy?
What are key
attributes?
By what
criteria do
they choose?
Relate patterns of
customer
preferences to
product
attributes
THE
CUSTOMER
What price
premiums do
product attributes
command?
What
motivates
them?
What are
demographic,
sociological,
psychological
correlates of
customer behavior?
FORMULATE
DIFFERENTIATION
STRATEGY
• Select product
positioning in
relation to product
attributes
• Select target
customer group
• Ensure customer /
product
compatibility
• Evaluate costs
and benefits of
differentiation
Generic Business Strategies (cont.)
• Focus strategy
– Targeted at narrow industry niche.
– These firms seek overall cost leadership or
perceived uniqueness, but they “focus” that
advantage on a particular market segment.
• Thus, there are two possible focus strategies: focus
differentiation (Rolls-Royce in ultra-luxury car market) and
focus cost leadership.
– Changes in customer demographics, competing
products, and new technologies can wipe-out a
narrow target market.
Illustrations of Generic Business
Strategies
– Cost Leader
• While the successful cost leader’s product is priced
just below industry average, its unit costs are much
lower than industry average.
– Successful differentiator
• Offers product that is perceived as unique.
– Can charge prices higher than industry average.
– May have costs higher than industry average.
Limits of Differentiation (cont.)
• Differentiation strategies can be threatened by
a number of factors:
– Private-label and store brand competition are
serious threats.
– Discounting.
– Gradual commoditization.
• Companies fail to invest in maintaining brand image.
• Companies have “crowded-out” their own products by
introducing new products.
Limits of Differentiation
• Success of this strategy depends on two
factors:
– Consumers must value the product/service
characteristics on which managers have based
their differentiation strategies.
– Key to success of any differentiation strategy is
the ability of firms to maintain the perception
of uniqueness in their products and services.
Pursuit of Differentiation and Cost
Leadership Strategies
• Porter argues that firms pursuing both
strategies will be “stuck in the middle.”
There are, however, some exceptions..
– Morton International
• Successful at both with its table salt.
– Japanese companies
• Canon and its photocopiers
• Toyota and its cars
Pursuit of Differentiation and Cost
Leadership Strategies
• While most managers today emphasize one
of the generic strategies, their firms always
face competition on both cost and
differentiation dimensions.