Grand Strategies of Cost Leadership Differentiation and Focus Description of the grand strategies of cost leadership differentiation and focus.
The aim of this essay is to demonstrate understanding key concepts in strategic management and capacity to craft a professional document.
Strategies of Cost Leadership Differentiation and Focus Essay Requirements
You are asked to:
First part
. choose a concept/model in strategic management. Examples of concepts are: core competencies, generic strategies, mergers and acquisitions, alliances, CSR, blue ocean strategy, etc…
. define this concept
. present the history of the concept: when was it discussed first, how did it evolve?
. discuss how/if the concept is relevant or not to today’s business challenges.
The first part should include a minimum of 10 academic references: books and/or articles from academic journals. It excludes textbooks and articles from business magazines that you can use also if needed.
All sources should be adequately referenced as for any professional academic document.
In the second part, you are asked to:
. present a real life application of the concept. You can use your own company or a company of your choice. This section should be like a mini-case study where you will present the situation of a company, the issues faced and how the concept was used to solve the issues and raise the general performance of the firm.
Approximately 2000 words should be dedicated to the first part and 1000 words to the second part.
Do not use external sources without referencing them. Do not cut and paste!
SAMPLE ANSWER
PART I
Strategies of Cost Leadership Differentiation and Focus Introduction
All commercial enterprises face competition for customers and raw materials from other firms operating in the same industry. A firm’s profitability is primarily determined by the attractiveness of the industry it operates in but its secondary determinant is its strategic position in the industry (PERUCIC and RAGUZ 2012). A company can report superior performance even in low growth industries if its positioning strategy is superior to its competitors. In order to survive in any industry each firm must therefore formulate and implement a strong business strategy that would enable it to generate a distinct competitive advantage (BORDEAN, BORZA and GLASER-SEGURA 2011). A strong business strategy is formulated after a firm undertakes an analysis of its strengths, weaknesses, opportunities and threats (SWOT) and factors in the external environment that have a potential to shape its business strategy. Factors in the external environment that have a bearing on a firm’s business strategy are categorized into political, economic, social, technological, ecological and legal factors. Firms carry out a SWOT analysis that enable them to identify resources and competences that they can use to respond to the external environment (BORDEAN, BORZA and GLASER-SEGURA 2011). A Harvard University professor, Michael Porter, published an article in the Harvard Business Review in which he postulated three generic strategies of cost leadership, differentiation and focus some thirty years ago. He noted that any firm that pursues any of the three strategies can obtain competitive advantage to survive. The three strategies were referred to as “generic” because they could be applied in any firm, can be used as standalone strategies or as a combination with other business strategies. Many strategic analysts have noted that firms that pursue any of these strategies are able to beat their competitors in the market place. The generic strategies are not industry or firm dependent as they can be applied to firms in each industry in an economy (PERUCIC and RAGUZ 2012).
Description of the strategies of cost leadership differentiation and focus
Cost leadership is a generic strategy that, for a given quality of a product or service, achieves the lowest cost in production. The firm can then sell its products below the average market price to get a higher market share or sell at average market price to generate more profits. A firm pursuing cost leadership can report some profits even if a price war erupts between firms in the industry (PERUCIC and RAGUZ 2012). Even when the industry matures and prices go down, a firm pursuing cost leadership will remain profitable for a while. This strategy is most suited for products that aim at serving the mass market. A firm can achieve cost leadership in many ways. One of the methods that a firm can use is by improving efficiency in its internal processes in totality (PERUCIC and RAGUZ 2012). A firm pursuing this strategy could achieve it by improving its production processes thus eliminating wastages and saving money. A firm could also carry out value chain analysis to eliminate processes that do not add value from input stage, production stage to the marketing stage (PERUCIC and RAGUZ 2012). Another method that firms use to achieve cost leadership is by gaining access to large cheaper sources of inputs. This ensures that a company is able to reduce the unit cost of production. A firm could also achieve cost leadership by making optimal vertical integration or outsourcing decisions. A firm that makes optimal outsourcing decisions is able to reduce it costs by outsourcing costly processes to more efficient suppliers. In the case of vertical integration, a firm can reduce costs by either producing its raw materials and or participating actively in the distribution of the products to the end users. Application of either or all of these methods could yield cost leadership for a firm in a given industry. The cost leadership strategy generates competitive advantage is competing firms are unable to lower costs with similar margins as the company pursuing this generic strategy (PERUCIC and RAGUZ 2012).
Cost leadership strategy is possible for firms that possess several unique strengths. The first strength is that such firms must be able to access adequate financial resources to invest in enhancing their production capacities to ensure they are able to supply the mass market (BORDEAN, BORZA and GLASER-SEGURA 2011). This is because cost leadership is a strategy that is suited for the large market and small segments of the market. The enhanced production capacity and related assets provides a huge barrier to entry that new entrants into the industry find hard to overcome to join the industry and compete. Firms that are able to achieve cost leadership in this manner are able to generate sustainable competitive advantage as long as competitors cannot access similar financial resources to enhance their production capacities to supply the mass market at similar costs (BORDEAN, BORZA and GLASER-SEGURA 2011).
The second strength that a firm wishing to pursue cost leadership must possess is unique skills to design products for efficient manufacturing to cut unit costs. The firm must be able to design new products that can be produced in large quantities at lower unit costs that what the competitors are able to achieve. This skill must be valuable, rare, inimitable and substitutable to assist in achieving the cost leadership strategy (PERUCIC and RAGUZ 2012). The skill must be valuable in enhancing efficiency in production or in creating new high quality products than what competitors are able to achieve. The skill must also be rare in that competitors in the industry must be unable to access such a skill to design products for efficient products. It the skill is not rare then the competitors will quickly design products for efficient manufacturing and wipe out the competitive advantage created (PERUCIC and RAGUZ 2012). The skill must be inimitable and not substitutable for it to achieve cost leadership that generates sustainable competitive advantage. A firm that possesses high level expertise in manufacturing process reengineering can implement cost leadership strategy (PERUCIC and RAGUZ 2012). This is because such a firm can reengineer its manufacturing processes to eliminate wastage, enhance production efficiency or produce high quality products at relatively lower cost than competitors. A firm that possesses efficient distribution channels can also become a cost leader. This is because the firm is able to cut costs of distribution of its products into the market (NIE and KOSAKA 2014).
Cost leadership is a strategy that has a certain risks. A firm’s competitors, due to the fast changing nature of technology, could access the latest technology that could enhance their production efficiencies and achieve low unit production costs (PERUCIC and RAGUZ 2012). This eventuality would wipe out the competitive advantage created by the cost leadership strategy implemented by a firm. Additionally firms pursuing focus strategy could achieve cost leadership due to inherent efficiencies thus wiping out any competitive advantage that a company possesses (MONAHAN and RAHMAN 2011). Differentiation is a generic strategy that is able to create sustainable competitive advantage for a firm. A firm pursuing differentiation strategy manufactures products with certain attributes valued by customers and customers perceive the products as more valuable or different from what competitors offer. In this strategy a firm charges a premium price due to the value added attributes in the product or service. The premium price should be enough to compensate for the extra costs that the firm incurs for the additional attributes added to the product or service. Even if firms’ suppliers increase the prices for the various products or services, the firms can easily pass the costs to consumers since the products or services cannot be easily substituted (NANDAKUMAR, GHOBADIAN and O’REGAN 2011).
Firms that implement differentiation strategy successfully possess certain internal strengths. Such firms possess scientific research capabilities to design and produce new products with unique attributes. The firms have a well established research and development department to spearhead development of new products and services that are better than what competitors have (PERUCIC and RAGUZ 2012). Even if a firm does not possess scientific research capabilities it should be able to access such capabilities. This will ensure the company is constantly designing new products and services with unique attributes that customers value and which makes its products better than what competitors are able to offer. Firms that pursue differentiation strategy to create competitive advantage must have an innovative and creative team of professionals. These employees constantly research and design new products and services with enhanced attributes that customer’s value (FENECH 2013). Firms pursuing this generic strategy must have as its strength an internal sales team that is able to effectively communicate the enhanced product or service attributes to customers to ensure they understand them well. This enables customers to fully appreciate the enhanced attributes of the firm’s products and differentiate them from those offered by competitors (FENECH 2013). A firm pursuing this strategy must also have a corporate reputation for innovation and producing high quality products and services. This is because the perception that customers have for the firm’s products and services is very important. The company’s positioning is very important in ensuring that the company achieves this generic strategy (FENECH 2013). However, differentiation strategy is very risky since competitors may find it easy to imitate to create similar products that would effectively compete with the firm’s products. Customer tastes and preferences might change rendering the generic strategy useless. If customer tastes and preferences change, the firm will find itself holding products that customers do not want. This will make the strategy to fail. Firms pursuing this strategy must constantly monitor the environment to identify threats to its strategic positioning and develop mitigating strategies for any threats to its strategic positioning (AGYAPONG and BOAMAH 2013).
The last generic strategy that firms use to create sustainable competitive advantage is focus. Focus is a generic strategy that concentrates on serving a narrow segment of a larger market segment through cost leadership or differentiation strategic positioning. Focus strategy is of the assumption that the needs of a particular segment of customers are best met by focusing on the segment to the exclusion of the wider market (FENECH 2013). Customers are discouraged from venturing into the segment because focus strategy achieves high levels of customer satisfaction and creates customer loyalty. In this strategy customers are offered individualized service from firm’s employees. Firms pursuing such strategies have less bargaining power from supplies since they push lesser products as compared to firm’s pursuing cost leadership. In this generic strategy firms are able to modify their products and services to meet the needs of a smaller market that they understand very well. Changes in the target market such as changing consumer needs might easily render the generic strategy useless (FENECH 2013). Imitation is another threat to this strategy since firms that are able to effectively imitate a firm’s products could focus on the same narrow segment and wipe out the firm’s competitive advantage. The other disadvantage of this strategy is that it tends to limit a firm’s ability to grow since it focuses on just a small section of a large market. A competitor pursuing cost leadership and with amble resources can easily outperform the firm in its chosen market (FENECH 2013).
The generic strategies are not necessarily compatible with one another as the implementation of one strategy may easily make the other one impractical to pursue. If for instance a company is pursuing cost leadership it may find it difficult to implement differentiation strategy since the strategy will involve incurring more costs to enhance product attributes (LEITNER and GÜLDENBERG 2010). In order to achieve sustainable competitive advantage a firm should seek to pursue one of these strategies as pursuing multiple generic strategies could confuse customers and make the strategy unworkable (AGYAPONG and BOAMAH 2013).
Historical evolution of the generic strategies and Strategies of Cost Leadership Differentiation and Focus
In the 1970’s the dominant view on strategy was pursuit of market share in terms of size and scale which was a view the experience curve held sway over. Research showed that firms with high and low market share could still be profitable. However firms with moderate market share were not successful because they did not have a strategy that they pursued (PERUCIC and RAGUZ 2012). Michael Porter, a Harvard professor postulated the three generic strategies in an influential article that he wrote in the Harvard Business Review in 1980. The article explained the reason why firms with a high or low market shares were profitable and why firms with a moderate market share were not profitable (JARADAT, ALMOMANI and BATAINEH 2013). Michael Porter noted that forms with a high market share pursued cost leadership and hence were successful. Firms with a moderate market share were unprofitable because they were stuck in the middle that is they were not pursuing any particular generic strategy. However firms with a low market share were profitable because they pursued focus or differentiation strategies. The only combination that is viable is combining market segmentation or focus strategy with differentiation strategy. The potential conflict of additional cost of value-added differentiation and cost minimization in cost leadership made it hard to combine cost leadership and differentiation strategy. Analysts have argued that cost leadership is a strategy that is not viable to implement because it leads to price wars (PERUCIC and RAGUZ 2012). These analysts urge the best cost strategy be considered over cost leadership. Best cost strategy urge firms provide best value for best relatively low price which will not result in price wars (PERUCIC and RAGUZ 2012). Recent developments have seen new strategic thinkers modify or enhance the generic strategies. Some analysts have modified the strategies to operational excellence, customer intimacy and product leadership as strategies to achieving sustainable competitive advantage. Other advancements were proposed by W.Chan Kim who proposed that firms should look outside of themselves using the blue ocean strategy to find new value propositions that could generate competitive advantage (LO 2012).
The relevance of the generic strategies to today’s business challenges in relation to Strategies of Cost Leadership Differentiation and Focus
The generic strategies still offer valuable solutions to today’s challenges facing firms. The current operating environment is characterized by a turbulent environment characterized by fast changing technology, increased competition, homogeneous consumer tastes and preferences etc. In developing and emerging economies cost leadership is a strategy that could easily create sustainable competitive advantage (CHUN and LEE 2013). These economies are characterized by high unemployment rates, falling consumer purchasing power, a growing middle class and high incidences of absolute poverty. Cost leadership which ensures products and services are offered at relatively affordable prices will create sustainable competitive advantage (ADINOLFI, DE ROSA and TRABALZI 2011). This strategy may however not be applicable in first world countries that are looking for high quality products with price not taking informing the decision but the quality. In such an operating environment differentiation could work well (CHUN and LEE 2013). The strategies could also be applicable depending on the target market, their tastes and preferences and income brackets. Luxurious products targeting high income consumers are more likely to use differentiation and focus strategies whereas products targeting low income consumers prefer cost leadership (CHUN and LEE 2013).
PART II
Application of cost leadership strategy by Wal-Mart and Strategies of Cost Leadership Differentiation and Focus
Wal-Mart is one multinational corporation that has made use of cost leadership to generate sustainable competitive advantage and achieve a leadership position in its industry. Wal-Mart Stores, Inc is a multinational retail corporation based in the United States of America. The corporation operates a large chain of ware house stores and discount department stores. The corporation has its headquarters in Bentonville in Arkansas (http://help.walmart.com/app/answers/detail/a_id/6). The corporation currently has over 11,000 stores spread in about 27 countries of the world. The corporation operates under different brand names in different countries. The corporation is the world largest by revenues according to Fortune Global 500 list. It is also the largest employer in the world with over two million employees. The multinational corporation has managed grown to the giant it is now by applying cost leadership generic strategy that has enabled it to generate competitive advantage (http://help.walmart.com/app/answers/detail/a_id/6).
The company’s motto “Save money. Live better” says it all. The corporation ensures that it maintains its prices lower than those of any other stores in the areas it operates. The company has been able to achieve this cost leadership strategy by ensuring that it is efficient in the management of its supply chain (SCHIFF and SCHIFF 2009). The corporation applies a reliable and efficient supply chain management system which ensures product data is tracked from the store shelf, warehouse and manufacturer which ensures product losses from inefficient product management are completely eliminated (SCHIFF and SCHIFF 2009). The corporation ensures that its distribution and operation strategies are as efficient as they can get (AGYAPONG and BOAMAH 2013). The corporation clusters stores in small areas to cut on distribution costs. The corporation ensures that its operations are as efficient as possible to cut costs which enable it to cut the prices of its goods. The corporation also ensures that it obtains its products from manufacturers at the lowest possible cost achievable. The corporation buys in bulk or makes high volume purchases to benefit from huge discounts which it passes to consumers in terms of low prices (SCHIFF and SCHIFF 2009). The bargaining power of suppliers is weak because they depend on the discount retailer to make most of their sales. Wal-Mart is therefore able to push for low prices for the products that they buy from them. The purchasing power of buyers is also weak since the corporation is able to attract a large number of customers due to its distribution network and good reputation (PERUCIC and RAGUZ 2012).
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