Download - Week 9 - 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
Focus:Differentiation
Differentiation
Focus:Cost Leadership
Cost Leadership
Uniqueness Low Cost
Broad
Narrow
Strategic Advantage
Targ
et
Mark
et
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
Key Stages in Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES
STAGE 2. ALLOCATE TOTAL COSTS
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES &
MKTG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
Applying the Value Chain to Cost Analysis (continued)
Applying the Value Chain to Cost Analysis (continued)
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES&
MKTG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
--Plant scale for each -- Level of quality targets -- No. of dealers component -- Frequency of defects -- Sales / dealer-- Process technology -- Level of dealer-- Plant location support-- Run length -- Frequency of defects-- Capaciity utilization under warranty
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 plant -- Customers’ willingness to wait
-- Purchases per models -- Degree of
supplier -- Sales / model automation
-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization
STAGE 3. IDENTIFY COST DRIVERS
Applying the Value Chain to Cost Analysis (continued)
Applying the Value Chain to Cost Analysis (continued)
PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
Consolidation of orders to increasediscounts, increase inventories
Designing different models aroundcommon components and platforms
reduces manufacturing costs
Higher quality parts and materialsreduces costs of defects
at later stages
Higher quality in manufacturingreduces warranty costs
STAGE 5. RECOMMENDATIONS FOR COST REDUCTION
STAGE 4. IDENTIFY LINKAGES
Drivers of Cost AdvantageDrivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONALEFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack
• Ratio of fixed to variable costs• Costs of installing and closing capacity
• Location advantages• Ownership of low-cost inputs • Bargaining power• Supplier cooperation
• Design for automation• Designs to economize on materials
• Mechanization and automation• Efficient utilization of materials• Increased precision
• Increased dexterity• Improved coordination/ organization
• Indivisibilities• Specialization and division of labor
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
Using the Value Chain to Identify Differentiation Potential on the Supply Side
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
MIS that supports fast response capabilities
Training to support customer service
excellence
Unique product features. Fast new product
development
Quality of components &
materials
Defect free products.
Wide variety
Fast delivery. Efficient order
processing
Building brand reputation
Customer technical support. Consumer credit. Availability of
spares
Identifying Differentiation Opportunities through Linking the Value Chains of the
Firm and its Customers: Can Manufacture
Identifying Differentiation Opportunities through Linking the Value Chains of the
Firm and its Customers: Can Manufacture
1. Distinctive can design can assist canners’ marketing activities.
2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.
3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers’ ordering costs.
5. Competent technical support can increase canner’s efficiency of plant utilization.
Sup
plies of steel
& alum
inum
Service &
technical support
Sale
s
Distribu
tion
Inventory holding
Manufactu
ring
Design
Eng
ineering
Inventory holding
Purcha
sing
Distribu
tion
Marketing
Canning
Processing
Inventory holding
Purcha
sing
CANNER CAN MAKER
1
2 4
53
The Nature of DifferentiationThe Nature of Differentiation
TOTAL CUSTOMER RESPONSIVENESSdifferentiation not just about the product, it embraces the whole relationship between the supplier and the customer.
INTANGIBLE DIFFERENTATIONUnobservable and subjectivecharacteristics relating to image,status, exclusivity, identity
TANGIBLE DIFFERENTATIONObservable product characteristics
• size, color, materials, etc.• performance• packaging• complementary services
DEFINITION: Providing something unique that is valuable to thebuyer beyond simply offering a low price. (M. Porter)
THE KEY IS CREATING VALUE FOR THE CUSTOMER
Differentiation and SegmentationDifferentiation 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: Appealing to what is in common between different customers
(McDonalds hamburgers, Honda cars, Sears)
FOCUSED DIFFERENTIATION: Appealing to what distinguishes different customer
groups (BMW, Doc Marten footwear)
Identifying Differentiation Potential: The Demand Side
Identifying Differentiation Potential: The Demand Side
THE PRODUCT
THE CUSTOMER
What needs does it satisfy?
By what criteria do
they choose?
What motivates
them?
What are key attributes?
Relate patterns of customer
preferences to product attributes
What price premiums do
product attributes command?
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.