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.


• 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.


• 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.


• 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)


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



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


• 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.


• 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.


• 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


• 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.

Documents

Week 9 - Generic Business Strategies