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Objectives. Introduce the concept of generic business strategies: Cost leadership. Differentiation. Focus. Describe the organizational resources and capabilities associated with these strategies.

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Objectives
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
Exhibit: Generic Business Strategies

Target Market


Generic business strategies cont
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 cont1
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 cont2
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 cont3
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

R&D

DESIGN

ENGNRNG

TESTING,

QUALITY

CONTROL

GOODS

INVEN-

TORIES

SALES

&

MKTG

DEALER &

CUSTOMER

SUPPORT

PARTS

INVEN-

TORIES

DISTRI-

BUTION

PURCH-

ASING

COMPONENT

MFR

ASSEMBLY

STAGE 2. ALLOCATE TOTAL COSTS


Applying the value chain to cost analysis continued
Applying the Value Chain to Cost Analysis (continued) Case of Automobile Manufacture

--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

STAGE 3.

IDENTIFY

COST

DRIVERS

PARTS

INVEN-

TORIES

R&D

DESIGN

ENGNRNG

TESTING,

QUALITY

CONTROL

GOODS

INVEN-

TORIES

PURCH-

ASING

COMPONENT

MFR

SALES

&

MKTG

ASSEMBLY

DISTRI-

BUTION

DEALER &

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 plant -- Customers’ willingness to wait

-- Purchases per models -- Degree of

supplier -- Sales / model automation

-- Bargaining power -- Wage levels

-- Supplier location -- Capacity utilization


Applying the value chain to cost analysis continued1
Applying the Value Chain to Cost Analysis (continued) Case of Automobile Manufacture

STAGE 4. IDENTIFY LINKAGES

PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR

INVNTRS DESIGN MFR QUALITY INV MKTG CTMR

Designing different models around

common components and platforms

reduces manufacturing costs

Consolidation of orders to increase

discounts, increase inventories

Higher quality parts and materials

reduces costs of defects

at later stages

Higher quality in manufacturing

reduces warranty costs

STAGE 5. RECOMMENDATIONS FOR COST REDUCTION


Drivers of cost advantage
Drivers of Cost Advantage Case of Automobile Manufacture

  • Indivisibilities

  • Specialization and division of labor

ECONOMIES OF SCALE

  • Increased dexterity

  • Improved coordination/ organization

ECONOMIES OF LEARNING

  • Mechanization and automation

  • Efficient utilization of materials

  • Increased precision

PRODUCTION TECHNIQUES

  • Design for automation

  • Designs to economize on materials

PRODUCT DESIGN

  • Location advantages

  • Ownership of low-cost inputs

  • Bargaining power

  • Supplier cooperation

INPUT COSTS

CAPACITY UTILIZATION

  • Ratio of fixed to variable costs

  • Costs of installing and closing capacity

MANAGERIAL/ ORGANIZATIONAL

EFFICIENCY

  • Organizational slack


Generic business strategies cont4
Generic Business Strategies Case of Automobile Manufacture(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 cont5
Generic Business Strategies Case of Automobile Manufacture(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 cont6
Generic Business Strategies Case of Automobile Manufacture(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

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 OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

Customer technical support. Consumer credit. Availability of spares

Quality of components & materials

Defect free products. Wide variety

Fast delivery. Efficient order processing

Building brand reputation


Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture

1

Service & technical support

Sales

Distribution

Inventory holding

Manufacturing

Design Engineering

Inventory holding

Purchasing

5

2

3

4

Distribution

Marketing

Canning

Processing

Inventory holding

Purchasing

Supplies of steel

& aluminum

CAN MAKER

CANNER

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.


The nature of differentiation
The Nature of Differentiation the Value Chains of the Firm and its Customers: Can Manufacture

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 and Segmentation the Value Chains of the Firm and its Customers: Can Manufacture

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 Value Chains of the Firm and its Customers: Can Manufacture

What needs does it satisfy?

THE PRODUCT

What are key attributes?

  • 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

Relate patterns of customer preferences to product attributes

By what criteria do they choose?

THE CUSTOMER

What price premiums do product attributes command?

What motivates them?

What are demographic, sociological, psychological correlates of customer behavior?


Generic business strategies cont7
Generic Business Strategies the Value Chains of the Firm and its Customers: Can Manufacture(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
Illustrations of Generic Business Strategies the Value Chains of the Firm and its Customers: Can Manufacture

  • 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
Limits of Differentiation the Value Chains of the Firm and its Customers: Can Manufacture(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
Limits of Differentiation the Value Chains of the Firm and its Customers: Can Manufacture

  • 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
Pursuit of Differentiation and Cost Leadership Strategies the Value Chains of the Firm and its Customers: Can Manufacture

  • 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 strategies1
Pursuit of Differentiation and Cost Leadership Strategies the Value Chains of the Firm and its Customers: Can Manufacture

  • While most managers today emphasize one of the generic strategies, their firms always face competition on both cost and differentiation dimensions.


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