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 Target Market

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 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 18

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 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 19

Applying the Value Chain to Cost Analysis (continued) 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 20

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 13

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 FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES Unique product features. Fast new product development 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 35

Service & technical support Identifying Differentiation Opportunities through Linking the Value Chains of the Firm and its Customers: Can Manufacture 1 Inventory holding Service & technical support Manufacturing Purchasing Design Engineering Distribution Sales 5 2 3 4 Inventory holding Purchasing Processing Marketing Distribution Canning 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. 36

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. 24

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) 25

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? 29

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.