Low-cost strategyReference: ERP Resource PlanningLow-cost strategies – IntroductionLow cost strategy is one of three gener...
Cost leadership strategy generally requires an enterprise to be the cost leader, as opposedto one of a number of vendors c...
When implementing low cost strategy, the enterprise must also have the following skillsand resources:(1) Way of continuing...
Mention the “cost”, and most managers will naturally think of the production. However,total cost, if not most of, forms a ...
reduce fees in the same proportion, regardless if some departments need to improve thecost so that it may reduce the total...
Jump to: navigation, search       It has been suggested that this article or section be merged with Differentiation       ...
•   Ignorance of buyers regarding the essential characteristics and qualities of goods       they are purchasing   •   Sal...
Cost Leadership StrategyThis strategy involves the organisation aiming to be the lowest cost producer and/ordistributor wi...
functionality, customer support and product quality. For example Brompton foldingbicycles when folded are more compact tha...
Clowns to the left of me,Jokers to the right, here I am,Stuck in the middle with you.– “Stuck in the Middle with You” a so...
Beer          Microbrewers                  Pabst, Blatz         SAB Miller, INBEV                                        ...
competitive field. Another great economist, Joseph Schumpeter, described thecompetitive turbulence of capitalism as the “g...
I agree with The Economist that the field of b-schools is in for some turbulence. And ifother industries are any guide, th...
Those two cost advantages can either be applied to the broad market or to narrow focusedor niched markets.The Generic Stra...
How Businesses Are Caught "Stuck In the Middle"It happens because the business managers don’t know that they have to choos...
What To Do If Your Business Is Stuck In the MiddleIf you think that your business is stuck in the middle – or heading in t...
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  1. 1. Low-cost strategyReference: ERP Resource PlanningLow-cost strategies – IntroductionLow cost strategy is one of three generic strategies (differentiation strategy and focusstrategy). The enterprise decides to implement low pricing to motivate demand and gainmarket share. Companies usually use this where the product has little to no competitiveadvantage.Sources of Cost Advantage Due to the Different Industrial StructureThis may include the pursuit of economies of scale, proprietary technology, preferentialtreatment of the raw materials, and other factors. For example, the television, the leadingposition on the acquisition costs need to have sufficient size CRT production facilities,low-cost design, automated assembly, and is conducive to sharing the development costof the global sales volume. While the security services and the cost advantage requiresextremely low management costs, a steady stream of cheap labor and high efficiency dueto large turnovers of personnel training program, the pursuit of the status of low-costmanufacturers not only need to move down the learning curve, they must also find andexplore all sources of cost advantage.If a business is able to achieve and maintain comprehensive cost management, then it canmake the price equal to or close to the average price level of the industry. When theleading enterprise cost their price equal to or less than its competitors, its low costposition can be transformed into high-yield. However, occupying a leading position interms of costs, companies can not ignore the basis of the unique product and cost leader.The company’s products in the customer’s eyes will not be seen as comparable with othercompeting vendors’ products, and may be accepted when forced to cut prices so muchlower than the level of their competitors to increase sales. This may offset the benefits ofits favorable cost position. Texas Instruments (Texas Instruments Watch Industry) andNorthwest Airlines (Northwest Airlines, Air transport) are two low-cost manufacturerscaught in this dilemma. The former due to their inability to overcome the disadvantagesof its unique products, outside the watch industry; the latter due to the timely detection ofproblems and started efforts to improve marketing, passenger services and the servicesprovided by travel agencies, while furthering its services to keep pace with competitors.A cost leader in enterprise is dependent on its leading position in order to gain acompetitive advantage. Being above-average, the product must be compared to itscompetitors based on position of equal or similar value. Decrease the value of the productcost based on approximate means necessary to achieve satisfactory market share, whilenot writing off the value of the cost advantage of leading companies. Thus, cost-leadingcompanies can earn above-average income.
  2. 2. Cost leadership strategy generally requires an enterprise to be the cost leader, as opposedto one of a number of vendors competing for this position. Many manufacturers havefailed to recognize this, which is a big mistake in strategy. Aspiring to be the cost leaderin the manufacturing industry is an intense competition because every one percentagepoint of market share is considered essential. Unless there is a major technologicalchange, an enterprise should be able to completely change its cost position; otherwise, thesmall cost leadership relies on a strategy that is pre-emptive.A successful low-cost strategy depends on the enterprise’s ability to implement thestrategic skills on a daily basis. The cost does not automatically or accidentally drop. It isthe result of hard work, perseverance, and attention to costing. Therefore, to improve therelative cost position, there is not so much need to make major changes in strategy, as theneed to manage attention and execution.The Main Types of Low-Cost StrategyDepending on the cost advantage, the low-cost strategy is summarized by Zhang Tan asfollows:(1) To simplify the product-type is a low-cost strategy; it is simplistic, and the abolitionof all upcoming products or services is added to the pattern.(2) Improve the design of low-cost strategies(3) Material-saving low-cost strategy(4) The cost of labor; reduce the type of low-cost strategy(5) Innovation and automation low-cost strategyApplicable Conditions of Organizational Low-Cost Strategy(1) The existing competition between enterprises; pricing is very competitive(2) The products of the enterprises in which the industry is a standardization orhomogenization(3) The way of product differentiation is small(4) The majority of customers use the product(5) Low switching costs for consumers(6) Consumer price reduction negotiationsLow-Cost Strategy – with Conditions
  3. 3. When implementing low cost strategy, the enterprise must also have the following skillsand resources:(1) Way of continuing capital investment and access to capital(2) Production and processing skills(3) Serious labor supervision(4) Design easy to manufacture products(5) Low-cost distribution systemLow-Cost Strategy Benefits(1) Withstand the confrontation of the existing competitors(2) To resist the bargaining power of buyers(3) More flexibility in the higher price of the supplier(4) Formation of barriers to enter(5) Establish alternative competitive advantageLow-Cost Strategy Risks(1) Price reduction caused by excessive profit margins(2) New entrants are likely to come from behind(3) Loss of ability to foresee changes in the market(4) Technological changes reduce the effectiveness of corporate resources(5) Vulnerable to the impact of the external environmentLow-cost strategies – Common ErrorsFrom a strategic perspective, many companies miss fully understanding their costbehavior, and are then unable to take advantage of the opportunity to improve its relativecost position. Enterprises are guilty of some of the most common mistakes which include:(1) Most managers only think of the cost of production activities
  4. 4. Mention the “cost”, and most managers will naturally think of the production. However,total cost, if not most of, forms a large part of the produce marketing, marketing, service,technology development and infrastructure activities. Most managers think only of thecost of production activities, and cost analysis often attracts little attention to review theentire value chain. This often comes to relatively simple steps that can greatly reducecosts. For example, in recent years, the cost of computer and computer-aided designprogress on the research work is convincing.(2) Ignoring procurementMany companies are preoccupied with reducing labor costs of purchased inputs thatprocurement has almost been entirely ignored. They tend to purchase as a secondarysupport function, and management usually pays no attention. Analysis of procurementdepartments are often too focused on the purchase price of key raw materials. Companiesoften allow reduction of costs when neither have the expertise nor the enthusiasm topurchase necessities. For many businesses, the procurement methods’ little changes willproduce significant benefits in cost.(3) Ignore indirect or small-scale activitiesReducing the cost of planning is usually focused on a large scale. The cost of activitiesand (or) direct activities such as component production and assembly, is a small part ofthe total cost of activities. Indirect activities such as maintenance and routine costs areoften ignored.(4) Lack of awareness on the cost driversBusinesses often misjudged their cost drivers. For example, the largest national marketshare may have the lowest cost, but may incorrectly be thought of as a national marketshare to promote cost. Cost leadership, however, may actually be the region frombusinesses operated by the larger regional market share. Companies do not understandthat the source of its cost advantage may encourage attempts to reduce costs in order toimprove the national market share. As a result, it may be weakened by a regional focus todestroy their cost position. It may also focus its defense strategy on the nationalcompetitors, while ignoring the greater threat caused by strong regional competitors.(5) Inability to use contactFew companies recognize the impact of cost between the relationship with suppliers anda variety of activities, such as quality assurance, inspection and services. The ability touse contact is fundamental to the success of many Japanese companies. An instance isPanasonic (Matsushita) and Canon’s awareness and use of contact, even if their policiesare in contradiction with the traditional production and procurement methods. Notrecognizing the contact can lead to several errors, such as requiring each department to
  5. 5. reduce fees in the same proportion, regardless if some departments need to improve thecost so that it may reduce the total expense.(6) Reduce the cost of the conflictingCompanies often attempt to contradict each other in various ways to reduce costs. Theytry to increase market share and benefit from economies of scale and diversificationmodel to offset the economies of scale. Factories are located close to the customers inorder to save transportation costs, but also stress that the development of new productswill reduce burden. The cost drivers are sometimes contrary; companies must takeseriously the trade-offs between them.(7) Unintentional cross-subsidizationWhen enterprises fail to recognize the existence of cost performance for each differentpart of the market, they often do not know not to get involved in cross-subsidization. Thetraditional accounting system rarely measures these products, and the cost differencebetween customers, sales channels, or geographic regions. Companies may on certainprice too high, but given consideration of the price subsidies on other products orcustomers. White wine for example, has low variable requirements, therefore will need tobe a barrel cheaper than red wine. Wine makers develop the same price for red and whitewines based on the average cost and low-cost white wine prices to subsidize the price ofred wine. Competitors can take advantage of unintentional cross-subsidization, and oftenthose who know the value of cost advantage will undercut in order to improve theirmarket position.(8) Value-added considerationsThe efforts made for lower cost is often to secure added value to improve, rather thanseeking ways to reconfigure the existing chain. Value-added improvement may reach thepoint of diminishing returns, and reconfigure the value chain will be able to access a newstage of the cost.(9) Damage the image of the uniqueReducing costs for customers, in consideration of unique characteristics of the productfor customers, may impair its distinctive image. Although this may be strategicallydesirable, this should be a result of conscious choices. Efforts to reduce costs shouldfocus primarily on the benefits of the enterprise’s unique activities. In addition, theleading provider need not spend a lot of money to improve efficiency, create a uniqueimage and work hard to do so.Product differentiationFrom Wikipedia, the free encyclopedia
  6. 6. Jump to: navigation, search It has been suggested that this article or section be merged with Differentiation (economics). (Discuss) Proposed since January 2012.In economics and marketing, product differentiation (also known simply as"differentiation") is the process of distinguishing a product or offering from others, tomake it more attractive to a particular target market. This involves differentiating it fromcompetitors products as well as a firms own product offerings. The concept wasproposed by Edward Chamberlin in his 1933 Theory of Monopolistic Competition.Contents • 1 Rationale • 2 Ethical concerns • 3 See also • 4 References • 5 External linksRationaleDifferentiation can be a source of competitive advantage. Although research in a nichemarket may result in changing a product in order to improve differentiation, the changesthemselves are not differentiation. Marketing or product differentiation is the process ofdescribing the differences between products or services, or the resulting list ofdifferences. This is done in order to demonstrate the unique aspects of a firms productand create a sense of value. Marketing textbooks are firm on the point that anydifferentiation must be valued by buyers (e.g.[1]). The term unique selling propositionrefers to advertising to communicate a products differentiation.[2]In economics, successful product differentiation leads to monopolistic competition and isinconsistent with the conditions for perfect competition, which include the requirementthat the products of competing firms should be perfect substitutes. There are three typesof product differentiation: 1. Simple: based on a variety of characteristics 2. Horizontal :based on a single characteristic but consumers are not clear on quality 3. Vertical : basedon a single characteristic and consumers are clear on its quality [3]The brand differences are usually minor; they can be merely a difference in packaging oran advertising theme. The physical product need not change, but it could. Differentiationis due to buyers perceiving a difference; hence, causes of differentiation may befunctional aspects of the product or service, how it is distributed and marketed, or whobuys it. The major sources of product differentiation are as follows. • Differences in quality which are usually accompanied by differences in price • Differences in functional features or design
  7. 7. • Ignorance of buyers regarding the essential characteristics and qualities of goods they are purchasing • Sales promotion activities of sellers and, in particular, advertising • Differences in availability (e.g. timing and location).The objective of differentiation is to develop a position that potential customers see asunique. The term is used frequently when dealing with freemium business models, inwhich businesses market a free and paid version of a given product. Given they target asame group of customers, it is imperative that free and paid versions be effectivelydifferentiated.Differentiation primarily impacts performance through reducing directness ofcompetition: As the product becomes more different, categorization becomes moredifficult and hence draws fewer comparisons with its competition. A successful productdifferentiation strategy will move your product from competing based primarily on priceto competing on non-price factors (such as product characteristics, distribution strategy,or promotional variables).Most people would say that the implication of differentiation is the possibility ofcharging a price premium; however, this is a gross simplification. If customers value thefirms offer, they will be less sensitive to aspects of competing offers; price may not beone of these aspects. Differentiation makes customers in a given segment have a lowersensitivity to other features (non-price) of the product.[4]Ethical concernsSome product differentiation approaches raise ethical concerns. These include techniquesbased on customers ignorance, rebranding existing products to sell them as new orintroducing anti-features that create artificial limitations to otherwise fully functionalgoods.GENERIC (COMPETITIVE) STRATEGIESMICHAEL PORTERIntroductionMichael Porter suggested that businesses can secure a sustainable competitive advantageby adopting one of three generic strategies. He also identified a fourth strategy "middle ofthe road" strategy, which although adopted by some businesses, is unlikely to create acompetitive advantage. Each of the four strategies are discussed below.
  8. 8. Cost Leadership StrategyThis strategy involves the organisation aiming to be the lowest cost producer and/ordistributor within their industry. The organisation aims to drive cost down for allproduction elements from the sourcing of materials, to labour costs. To achieve costleadership a business will usually need large scale production so that they can benefitfrom "economies of scale". Large scale production means that the business will need toappeal to a broad part of the market. For this reason a cost leadership strategy is a broadscope strategy. A cost leadership business can create a competitive advantage:- by reducing production costs and therefore increasing the amount of profit made oneach sale as the business believes that its brand can command a premium price or- by reducing production costs and passing on the cost saving to customers in the hopethat it will increase sales and market shareLow cost producers include Easy Group, Ryan Air, and Walmart.Differentiation StrategyTo be different, is what organisations strive for; companies and product ranges thatappeal to customers and "stand out from the crowd" have a competitive advantage. Porterasserts that businesses can stand out from their competitors by developing adifferentiation strategy. With a differentiation strategy the business develops product orservice features which are different from competitors and appeal to customers including
  9. 9. functionality, customer support and product quality. For example Brompton foldingbicycles when folded are more compact than other folding bikes. Folding bikes areusually purchased by people with limited storage space at home or on the move; acompact bike is therefore a valued product feature and differentiates Brompton bicyclesfrom other folding bicycles. A differentiation strategy is known as a broad scope strategybecause the business is hoping that their business differentiation strategy, will appeal to abroad section of the market. New concepts which allow for differentiation can beprotected through patents and other intellectual property rights, however patents have acertain life span and organisation always face the danger that their idea which gives thema competitive advantage will be copied in one form or another.Focus (Niche) StrategyUnder a focus strategy a business focuses its effort on one particular segment of themarket and aims to become well known for providing products/services for that segment.They form a competitive advantage by catering for the specific needs and wants of theirniche market. Examples include Roll Royce, Bentley and Saga a UK company cateringfor the needs of people over the age of 50. Once a firm has decided which marketsegment they will aim their products at, Porter said they have the option to pursue a costleadership strategy or a differentiation strategy to suit that segment. A focus strategy isknown as a narrow scope strategy because the business is focusing on a narrow (specific)segment of the market.Are You "Stuck In The Middle"Some businesses will attempt to adopt all three strategies; cost leadership, differentiationand niche (focus). A business adopting all three strategies is known as "stuck in themiddle". They have no clear business strategy and are attempting to be everything toeveryone. This is likely to increase running costs and cause confusion, as it is difficult toplease all sectors of the market. Middle of the road businesses usually do the worst intheir industry because they are not concentrating on one business strength.ConclusionTo create a competitive advantage businesses should review their strengths and pick themost appropriate strategy cost leadership, differentiation or focus. Although each of thesestrategies are known as generic strategies (because they can be applied to every industry)they will not suit every business. For example small businesses may find it difficult togenerate the economies of scale needed for broad scope cost leadership but a smallercustomer base may enable them to offer a personalized service through a narrow scopefocus strategy. Conversely a larger business may not be able to generate sufficientrevenue through a focus strategy but be able to pursue aggressive broad scope costleadership because of the size of the business. Whatever strategy a business decides toadopt they should make sure that it isnt middle of the road because one business can notdo everything well.
  10. 10. Clowns to the left of me,Jokers to the right, here I am,Stuck in the middle with you.– “Stuck in the Middle with You” a song by Stealers WheelThe “middle” seems to be what every executive wants to avoid these days. There isample research on business strategy that suggests the middle is to be avoided for fear ofbeing stuck in it. The conventional view is to see the “middle” as the problem. I seethings slightly differently: the problem is not the middle; it is allowing your firm to getstuck at all. How you see the problem has big implications for taking action.Closer to home, a recent article, “Trouble in the Middle,” which appeared recently in TheEconomist, suggested that time may be running out for business schools that “aren’t quiteelite.” The Economist uses its rankings to segment the market (readers of this blog will befamiliar with my reservations about rankings.) The author argued that the valueproposition of mid-ranked schools has worsened and presages a “shakeout…which couldbe nasty.” Thus, the problem of the middle is relevant beyond the boundaries of the for-profit sector.Michael Porter of Harvard Business School originally discussed the problem of “stuck inthe middle.” He said that the profitability of firms depends not only on the typical rates ofreturn in an industry. It depends more importantly on the firm’s position and competitiveadvantage in that industry. And he argued that competitive advantage derives from one oftwo strategies: cost leadership or differentiation of products or services. Across mostindustries you can find firms and products that aim for advantage based on either cost ordifferentiation.The problem, Porter said, was in trying to do both and thus doing neither very well. Heseemed to be saying, “find what you are good at and stick to it.” This focus oncompetencies is very sound. Porter wrote, “The firm stuck in the middle is almostguaranteed low profitability. It either loses the high-volume customers who demand lowprices or must bid away its profits to get this business away from low-cost firms. Yet italso loses high-margin businesses — the cream — to the firms who are focused on high-margin targets or have achieved differentiation overall. The firm stuck in the middle alsoprobably suffers from a blurred corporate culture and a conflicting set of organizationalarrangements and motivation system.” (Competitive Strategy, p. 41-42)The following table gives some examples from various industries. The firms in “themiddle” have felt or are feeling a severe contraction. Differentiators The Middle Cost Leaders Nordstrom, Banana K-Mart, Sears, Retailing WalMart, Target Republic, J. Crew Woolworth
  11. 11. Beer Microbrewers Pabst, Blatz SAB Miller, INBEV SouthWest, Peoples Airlines Singapore, Cathay Pacific American Express Commodity Cellphones Apple, Google Nokia Manufacturers Japanese Auto Autos BMW, Mercedes Chrysler, GM Manufacturers Soft Drinks Coke, PepsiCo Dr. Pepper Private labels Orange Juice Tropicana, Minute Maid 100 small brands Private labels White Goods Sub-Zero, Viking Maytag, Whirlpool Korean Manufacturers Motor Aprilia Piaggio Honda, Yamaha ScootersAmerican Airlines recently filed for bankruptcy. Chrysler and GM required a governmentbailout in 2009. Piaggio acquired its way into the differentiated end of the market bybuying Aprilia. Dr. Pepper was acquired by Cadbury Schweppes. As these examplesseem to suggest, the middle is not a place to become stuck.Porter’s characterization eventually spawned opposition, arguing that the middle may notbe all that bad or that it may be entirely sensible for managers to test the middle for thesake of discovering possible new segments of demand. After all, demand can be definedon numerous dimensions, well beyond cost and difference, such as convenience, style,and location. Then too, there is the pesky problem that consumer demand keeps changingover time, which necessitates constant experimentation by firms to discover where thenew demand is. Today’s single-minded focus on cost or difference may be tomorrow’sbusiness graveyard.I was a student of Porter’s in the 1970’s when his iconic treatise, Competitive Strategy,hit the business world. I recall that his readers quickly absorbed his thinking aboutcompetitive positioning and generic strategies. But it struck me that they often ignoredanother aspect of Porter’s work, the dynamic “jockeying for position” among firms.Firms and markets are not static. They continually change as firms try to best oneanother. And periodically, new technologies come along that completely upset the
  12. 12. competitive field. Another great economist, Joseph Schumpeter, described thecompetitive turbulence of capitalism as the “gale of creative destruction.”Being stuck in an unattractive business without a viable exit is one of the worst situationsfor a firm. For instance, a diversified firm that I studied owned a coal tar refinery that hadoperated for over 100 years. The facility was inherited in an acquisition many yearsearlier. The plant was antiquated and inefficient. Furthermore, the market had turnedhighly competitive, making the refinery very unprofitable. The firm wanted to exit thebusiness, but couldn’t, because doing so would trigger environmental clean-upobligations from chemical leakage over the years. Eventually, the company appointed anew manager who immediately opened negotiations with the environmental authorities,and eventually negotiated a “workout” program in which the refinery would be closedimmediately and environmental remediation would be conducted over time, rather thanall at once. This was an enormous success for the company and the manager, whorecognized that not only was the company stuck, but so were the environmentalauthorities, who had been stymied by the inaction of the company.Nuclear power plants, petrochemical plants, and many manufacturing plants face exitcosts that can ruin the economics of a business as it approaches its end. Another exampleof being “stuck” is encountered by a minority investor in an underperforming private firm—even if a minority investor wanted to exit, his or her investment could be stranded ifthe securities are illiquid. Such would be the case until the majority investor decides tosell the entire firm. An airline can become stuck by virtue of an aging fleet of airplanes,uneconomic union contracts, and/or landing rights that don’t fit the more profitablesegments of demand. Retailers can become stuck by virtue of stores planted inneighborhoods with the wrong demographic trends. A technology company can becomestuck because of a commitment to obsolete technology.Irreversible strategic positions entail commitments that expose the firm to risks. Incontrast, flexible positions can be altered as conditions change. You can think offlexibility as a call option on an alternative strategy–it is enabled, for instance, by holdingexcess manufacturing capacity, excess inventory, or excess cash. Management techniquessuch as lean manufacturing grant strategic flexibility.An illustration of the creation of flexibility is apparent in the trend toward“modularization” of manufacturing. Complex business processes and products can beorganized into sub-units, called “modules,” that permit specialization, encourage greaterinnovation, and promote efficiency. The innards of any personal computer and thesuccess of Dell Computer illustrate the fruits of modularity: architectural flexibility pays.Too often, MBA students and executives think that “risk management” means the activeavoidance of risks. But societies need business managers to take sensible risks—to seekrisk—because that’s where opportunities lie. The best executives understand that thegreat sin has less to do with risk-taking (such as exploring the “middle” of a market) andinstead has to do with failing to develop flexibility—such as a sensible “Plan B”—if thedice turn against you.
  13. 13. I agree with The Economist that the field of b-schools is in for some turbulence. And ifother industries are any guide, the turbulence could hit the middle hardest. But TheEconomist says little about the possible ingenuity of leaders of those schools or of theagility those schools might show. The next few years will be very interesting. As YogiBerra said, “It ain’t over ‘till it’s over.”Stealers Wheel characterize “stuck in the middle” as being caught between clowns andjokers. These may be weak competitors to your firm and therefore may present a greatopportunity to serve markets and create value. If so, is the middle that bad? Yes it is, ifyou are stuck in some important way. The inability to respond flexibly and appropriatelyto new competitive conditions is the grave threat.Stuck In The Middle Of Porter’s Generic Strategiesby Paul Simister on February 14, 2011Harvard professor and world famous business strategist Michael Porter has a simple viewto business and how you can generate superior returns from your business – the genericstrategies - but you can get stuck in the middle, not one thing or the other.These ideas were introduced in the book Competitive Strategy by Michael Porter.The Keys To Successful Competitive StrategyEither: 1. Work in a business which is an attractive industry – this is a business that is well positioned against the five competitive forces that Porter identified (threat of new entrants, threat of substitutes, buyer power, supplier power and intensity of competition). . 2. Have a competitive advantage.Michael Porter & The Generic StrategiesAnd when it comes to competitive advantage, Porter was equally simple because yourcompetitive advantage can either be: 1. From being the lowest cost operator supplier acceptable goods and services at a reasonable price (and having the ability to beat anyone else on price if necessary) . 2. From winning buyer preferences based on providing a product or service which is differentiated.
  14. 14. Those two cost advantages can either be applied to the broad market or to narrow focusedor niched markets.The Generic Strategies For Competitive Advantage (Competitive Strategy by MichaelPorter)The Danger Of Being Stuck In The MiddleUnfortunately many businesses fall into the trap of being “stuck in the middle” of thegeneric strategies of differentiation and cost leadership.They don’t offer the high value for money and distinctive product or service that you getfrom a differentiated business.And they don’t offer the low prices that can come from buying from the cost leader.
  15. 15. How Businesses Are Caught "Stuck In the Middle"It happens because the business managers don’t know that they have to choose or thinkthat they can be both.Effectively being stuck in the middle comes from trying to compromise and it creates amuddle.A muddle for your customers who don’t really know what you stand for or what to expectfrom you.And a muddle for your employee who don’t understand the priorities of their workperformance.Other Stuck In The Middle ConceptsStuck in the middle in this strategic context does not mean: • Being in the middle of a value chain from raw material supplier at one end to end user of final product at the other. It can be uncomfortable being squeezed by big suppliers and big buyers but that’s even more reason to follow a cost leadership or differentiation strategy. . • Nor does it mean being stuck in mid market between the premium priced luxury products and the low priced economy brands although that can also be uncomfortable if it’s not clear what your business stands for. This mid market position is sometimes combined with Porter’s stuck in the middle concept but it is a big simplification of what he’s trying to say. There’s is no reason why a business can’t have a very distinct and differentiated product offering and charge mid market prices for example in cars, think of the Mazda MX5 sports car.How A Business Gets Stuck In The MiddleA stuck in the middle position happens when a business designed to be low cost startsadding little extra frills which don’t add a corresponding amount to the customer value ofa product.The business suffers the cost, the customer doesn’t get the benefit.Or when a differentiated business comes under pressure on prices – perhaps there hasbeen a market disruption from new technology or an ultra low priced competitor fromoverseas – and starts cutting costs in areas which damage the differentiation advantage.
  16. 16. What To Do If Your Business Is Stuck In the MiddleIf you think that your business is stuck in the middle – or heading in that direction – thenyou need to get to grips with your business strategy.You need to decide what your business is and isn’t.You need to decide who your business will sell to and who it won’t.You need to decide what your business will sell and what it won’t.Strategy is about making wise choices and then having the courage and conviction tofollow through and commit to turning words and ideas into action.The Role Of The Value Chain In Creating Competitive AdvantageIn his follow up book, Competitive Advantage, Michael Porter introduced the concept ofvalue chain analysis to help you to analyse, understand and create competitive advantageso that a business isn’t stuck in the middle.The value chain is an important technique which helps you to focus on advantage basedon differentiation or cost leadership.Paul Simister is a differentiation business coach who helps small business owners in theUK to profit from differentiating their businesses, being distinctive in the eyes of theircustomers and standing out in a crowded marketplace.You too can move past your profit tipping point by answering the seven big questions ofbusiness success.