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.
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Objectives Introduce the concept of generic business strategies: –Cost leadership. –Differentiation. –Focus. Describe the organizational resources and.
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Objectives• Introduce the concept of generic business
• 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
Focus:Differentiation
Differentiation
Focus:Cost Leadership
Cost Leadership
Uniqueness Low Cost
Broad
Narrow
Strategic Advantage
Targ
et
Mark
et
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
Key Stages in Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture
STAGE 1. IDENTIFY THE PRINCIPAL ACTIVITIES
STAGE 2. ALLOCATE TOTAL COSTS
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES &
MKTG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
Applying the Value Chain to Cost Analysis (continued)
Applying the Value Chain to Cost Analysis (continued)
PURCH-ASING
PARTSINVEN-TORIES
R&DDESIGN
ENGNRNG
COMPONENTMFR
ASSEMBLYTESTING,QUALITY
CONTROL
GOODSINVEN-TORIES
SALES&
MKTG
DISTRI-BUTION
DEALER &CUSTOMERSUPPORT
--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
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
STAGE 3. IDENTIFY COST DRIVERS
Applying the Value Chain to Cost Analysis (continued)
Applying the Value Chain to Cost Analysis (continued)
PRCHSNG PARTS R&D COMPONENT ASSMBY TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR QUALITY INV MKTG CTMR
Consolidation of orders to increasediscounts, increase inventories
Designing different models aroundcommon components and platforms
reduces manufacturing costs
Higher quality parts and materialsreduces costs of defects
at later stages
Higher quality in manufacturingreduces warranty costs
STAGE 5. RECOMMENDATIONS FOR COST REDUCTION
STAGE 4. IDENTIFY LINKAGES
Drivers of Cost AdvantageDrivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONALEFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
• Organizational slack
• Ratio of fixed to variable costs• Costs of installing and closing capacity