PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALE

1
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.

2
Exhibit Generic Business Strategies
Target Market
3
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.

4
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.

5
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.

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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.

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Key Stages in Applying the Value Chain to Cost
Analysis The Case of Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES

RD 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
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Applying the Value Chain to Cost Analysis
(continued)
--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
RD 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 RD/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
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Applying the Value Chain to Cost Analysis
(continued)
STAGE 4. IDENTIFY LINKAGES

• PRCHSNG PARTS RD
  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
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Drivers of Cost Advantage

• 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

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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.

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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.

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Generic Business Strategies (cont.)

• Firms pursuing differentiation must also enhance
  their
• Creativity and research capabilities
• Coordination among RD, marketing, and
  manufacturing and
• Ability to attract highly skilled labor,
  scientists, or creative people.
• Value-chain analysis is helpful.

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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 LOG
ISTICS 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
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Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers Can Manufacture
1
Service technical support Sales Distribution Inv
entory holding Manufacturing Design
Engineering Inventory holding Purchasing
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2
3
4
Distribution Marketing Canning Processing Inventor
y holding Purchasing
Supplies of steel aluminum
CANNER
CAN MAKER
1. Distinctive can design can assist canners
marketing activities. 2. High manufacturing
tolerances can avoid breakdowns in customers
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 canners efficiency of plant
utilization.
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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
INTANGIBLE DIFFERENTATION Unobservable and
subjective characteristics relating to
image, status, exclusivity, identity

• TANGIBLE DIFFERENTATION
• Observable product characteristics
• size, color, materials, etc.
• performance
• packaging
• complementary services

TOTAL CUSTOMER RESPONSIVENESS differentiation
not just about the product, it embraces the whole
relationship between the supplier and the
customer.
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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 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)

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Identifying Differentiation Potential The Demand
Side
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?
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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.

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Illustrations of Generic Business Strategies

• Cost Leader
• While the successful cost leaders 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.

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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.

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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.

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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

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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.