Competitive Strategy
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Competitive Strategy

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Competitive Strategy Competitive Strategy Document Transcript

  • The Strategist’s Choice Competitive Strategy And the question of HOW TO Cost Leadership COMPETE A cost leadership strategy seeks to achieve the position of least-cost producer in the industry Competitive strategy provides a company with as a whole. By producing at the lowest cost, the actions to create offensive or defensive the manufacturer can compete on price with positions in an industry and thereby yield a every other produce in the industry, and earn superior return on investment. higher unit profits, if the manufacturer so chooses. According to Michael Porter a business should adopt a competitive strategy to secure a How to Achieve Overall Cost Leadership competitive advantage. 1. Set up production facilities to obtain Competitive advantage is anything which gives economies of scale. one organisation an edge over its rivals in the 2. Use the latest technology to reduce products it sells or the services it offers. costs and/or enhance productivity (or use cheap labour if available). Firms have discovered many different 3. In high technology industries, and in approaches to this end, and the best strategy industries depending on labour skills for a given firm is ultimately a distinctive for product design and production creation reflecting its particular circumstances. methods, exploit the learning curve effect. By The Choice of producing Competitive more than any Strategy other There are three competitor, a generic strategies firm can for competitive benefit more advantage; cost from the leadership, learning curve, differentiation and and achieve segmentation (or lower average focus) strategy. costs. (Porter, 4. Concentrate on Competitive improving Advantage, 1988) productivity. 5. Minimise overhead costs. The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 1
  • The Strategist’s Choice 6. Get favourable access to sources of competition, perhaps at a much supply. lower price. 7. Relocate to cheaper areas. 2. Improved products which are not radically different from their The Case of IKEA competition but are obviously superior in terms of better More and more, for manufactured goods, cost performance for a similar price. advantage is based on cheap labour in the developing world. An example is IKEA's 3. Competitive products which derive expansion of manufacturing in Vietnam, from their appeal from a particular where it sourced more than £70 million in compromise of cost and performance. products in 2003. It calculated that its For example, cars are not all sold at Vietnamese business would triple in value rock-bottom prices, nor do they all within four years. provide immaculate comfort and performance. They compete with Such trade speeds development and growth in each other by trying to offer a more less developed countries, allowing them to attractive compromise than rival make use of their main source of economic models. advantage, and provides cheap labour in IKEA's case. It expects to work closely with its How to Differentiate Vietnamese partners, providing advice on 1. Build up a brand image. purchasing, productivity and expansion. 2. Give the product special features to Despite some privatisation, the market-based make it stand out. approach to production is not widely 3. Exploit other activities in the value understood in this still largely planned chain. economy. Reaching Differentiation with Soya Beans! Differentiation is the exploitation of a product or service which the industry as a whole We all know about branding and product believes to be unique goods to consumers in modification in food. Organic food is increasing more developed countries. in popularity, as it is differentiated on the basis of: Differentiation  Possible health benefits (disputed by some A differentiation strategy assumes that nutritionists) competitive advantage can be gained through  Kindliness to the environment (and to particular characteristics of a firm's products. animals) Products may be categorised as: The end product may be the same (e.g. pasta) 1. Breakthrough products offering a but the ingredients and process by which it is radical performance advantage over made are a source of differentiation. Retailers The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 2
  • The Strategist’s Choice and manufacturers of branded goods charge 2. The firm does not spread itself too more for organic variants of standard products. thinly. The Economist (21 April 2001) reported that Drawbacks of a focus strategy Japanese buyers of American soya beans 'are 1. The firm sacrifices economies of scale willing to pay a premium for quality - and for which would be gained by serving a knowing exactly where their food came from. wider market. By preserving [the] crop's identity [farmers] can 2. Competitors can move into the fetch over 25% more per bushel.' segment, with increased resources Ultimately this is about differentiating a (e.g. the Japanese moved into the US commodity - in short, decommoditising it. The luxury car market, to compete with advantage for retailers is that, with tens of Mercedes and BMW). thousands of new food products introduced to 3. The segment's needs may eventually supermarkets each year, the right agricultural become less distinct from the main pedigree provides further differentiation. market. Focus (or niche) Strategy The Case of Tyrrells' Potato Crisps In a focus strategy, a firm concentrates its William Chase, owner of Tyrrells' Potato Crisps, attention on one or more particular segments a niche manufacturer of crisps, set up in part to or niches of the market, and avoids serving an escape from dependence on the major entire market with a single product – or service. supermarkets and in part to add extra value to his basic product, potatoes. Thus Tyrrells' A cost-focus strategy aims to be a cost leader strategy, to sell through small retailers at the for a particular segment. This type of strategy upper end of the grocery and catering markets, is often found in the printing, clothes may be summarised under six key success manufacture, food and drink production and factors: car repair industries.  Brand. Marketing taps into the public's A differentiation-focus strategy pursues enthusiasm for 'authenticity' telling the differentiation for a chosen segment. Luxury story of Tyrrells' from 'seed to chip'. goods are the prime example of such a  Quality. Crisps are made from traditional strategy. varieties of potato and ‘hand-fried' in small batches. Advantages of a focus strategy  Distribution. Concentrates on direct sales to 1. A niche may be more secure and if so 80 per cent of its retail stockists. Students a business can insulate itself from from a local agricultural college are competition. employed to trawl through directories and identify fine-food shops to target with The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 3
  • The Strategist’s Choice samples. After winning their business, and perceived added value in the eyes of the Tyrrells' develops the relationship though customer. personal contact.  Diffusion. Sales to What are the competitive the most exclusive strategy issues raised in the shop creates a story below? showcase to target The Case of Hermes consumers Telecommunications Plc insensitive to price, so allowing the Hermes has invested a great business to grow deal of money in establishing a profitably. network which competes with  New product that of Telecom UK, a recently development. New privatised utility. Initially flavours and Hermes concentrated its products are efforts on business customers continuously sought in SE England, especially the and produced in sample runs and given City of London, where it offered a lower cost free to shops to test with customers. service to that supplied by Telecom UK. Which strategy? Recently, Hermes has approached the residential market (i.e. domestic telephone What is important though is to pursue one users) offering a lower cost service on long- generic strategy. distance calls. Technological developments A stuck-in-the-middle strategy is almost certain have resulted in the possibility of a cheap to return low profits. This firm lacks the market mobile telecommunication network, using share, capital investment and resolve to play microwave radio links. the low-cost game, the industry-wide The franchise for this service has been awarded differentiation necessary to obviate the need to Gerbil phone, which is installing transmitters for a low-cost position, or the focus to create in town centres and stations etc. differentiation or a low-cost position in a more limited sphere.' Like anything, it’s rarely straightforward to draw hard and fast distinctions between each But guess what! Getting 'stuck-in-the-middle' generic strategy simply because there are is what many companies actually do – and conceptual problems underlying them. Let’s believe it or not - quite successfully too! take a look at some of them here starting with In the end any number of strategies can be cost leadership. pursued, with different approaches to price Cost leadership The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 4
  • The Strategist’s Choice 1. The focus for strategy is an internal Focus one. Strategists pursue internal There are probably fewer difficulties tied up measures, rather than the market with this strategy, as it ties in very neatly with methods to gain market share. And ideas of market segmentation. In practice most herein lies the point; it is market companies pursue this strategy to some extent, share which is important, not cost by designing products/services to meet the leadership as such. needs of particular target markets. 2. Only one firm will pursue cost leadership strategies successfully Best wishes, across the whole industry, 3. A cost leader can choose to invest higher margins in differentiation, R & D or marketing. Thus operating with Andrew Pearson low costs does not mean you have to Managing Director Unique Business Strategies charge lower prices or compete on price. Being a cost leader gives *********************** producers more freedom to choose This is one of a series of articles published by other competitive strategies. UBS Unique Business Strategies. Differentiation If you want to read more on business strategy visit Unique Business Strategies and chose from 1. It doesn’t necessarily follow that a wide range of articles, white papers and books differentiated product may be sold at on for example Business Strategy, Marketing, a higher price; it may sell at prices Management and Operations similar to competing products to Popular reads include; increase market share. 2. An important issue is to differentiate  How to Create and Exploit a UNIQUE away from competitors. We’ll cover STRATEGIC POSITION for Your Business this later but for now let us remember  The Vital Importance of Creative Insight  The Purpose Driven Management System that differentiation is a MAJOR  Capabilities and Competencies challenge and requires a large amount of thought on positioning and  Market Standing targeting.  How to Locate and Utilize Three 3. The source of differentiation may Differentiating Capabilities include many or all attributes of a company’s offer. Restaurants aim to *********************** create an atmosphere or 'ambience', as well as serving food of good quality. To find out more please write to The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 5
  • The Strategist’s Choice andrew@uniquebusinessstrategies.co.uk visit my blog www.uniquebusinessstrategies.co.uk ********************************** The Strategist’s Choice Unique Business Strategies Making Good Businesses Better T + 44 (0) 1280 844966 Page 6