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Generic strategy options to gain competitive advantage , Generic Strategic…
Generic strategy options to gain competitive advantage
Porter (2004)
argues that there are three fundamental methods for an organisation to achieve competitive advantage and that these require the organisation to take either offensive or defensive action to create a defendable strategic position
It has to either have structurally lower costs than its competitors or will be able to demonstrate to its customer base that its products or services are differentiated from those of its competition (in a positive way) - in the latter case this will allow the charging of a higher price to represent the added value created for the customer by the differentiation while maintaining the same cost base
Porter suggests that the business is able to focus its business and choose the scope of customers that it wishes to serve, this could be a particularly narrow segment where the strategic intention is to skim the top layer off a wider market or it could be a strategy to dominate a particular segment of a market
Sustaining competitive advantage
The gaining of competitive advantage through any reason can take significant organisational time and effort
A core part of the strategic choice being made by directors and managers must be to find a means to achieve a sustainable competitive advantage
While it might be relatively straightforward to outwit the competition on a particular project or opportunity, it is strategically important to build a sustainable competitive position
The method required to build such sustainability will differ slightly depending on which of Porter's generic choices are chosen. There are many different tools available that an organisation is able to employ to help the process
Cost leadership can be monitored and controlled through the effective and ongoing use of a robust value-chain analysis
Differentiation can be monitored and controlled through a close understanding of different stakeholder expectations
Focus can be monitored and controlled through a robust understanding of the different options that are available to customers and that might act in competition to the organisation, through the effective and ongoing use of a model such as the five forces model
Business process re-engineering
Having taken the strategic choice recommended by Porter and decided how the organisation, or maintain, its competitive advantage within the marketplace, the management focus must be on how to design and implement the strategy to achieve the required objectives
BPR requires a fundamental reconsideration in a radical redesign of organisational processes with the aim of achieving significant improvement in operation to enable the achievement of a particular set of strategic objectives. The ultimate aim is to increase efficiency within the organisation, and this could include all or one of: cost control, product differentiation or specific customer focus
The principles of BPR are underpinned by five rules
Strategy must be determined before any redesign takes place
The existing process-flow should be used as the basis for the redesign
The use of information technology should be optimised
The governance, culture and organisational structures must be aligned with the process flow
People across the business need to understand and participate in the redesign - this is not just a top down or bottom up approach but requires a whole-business involvement to ensure buy-in
Generic Strategic Choices
Cost leadership
There can only be one cost leader in any industry or sector and the intent when pursuing this as a strategic choice is to become the lowest cost organisation within a particular area of activity while maintaining quality, It will require an aligned set of interrelated tactics including
A detailed understanding of all actual costs associated with the provision of a product or service - this will include the direct costs of production, but also a realistic assessment of the level of overhead cost that is absorbed in the production
A focus on cost reduction based upon historic performance within the organisation aligned with an understanding of the cost options aviliable
The removal of unnecessary activities within the value chain
A focus on customers who will fund the supply chain on time and in full
A focus on quality of product or service to ensure a right first delivery
lower cost/broad target
Johnson (2017)
suggests that there are four key cost drivers that need to be taken into consideration
Input costs
In particular, by minimising the cost of labour and raw materials, cost advantage can be gained
This can be driven by ensuring that wherever possible the source of raw materials is located in close proximity to the point of production
The outsourcing of labour-intensive operations to countries with low labour costs can significantly reduce the input cost to a particular operation
Economies of scale
If high fixed costs are required to enable production to commence, the strategic choice must be to ensure the spreading of such costs across time and the maximum number of potential output units, rather than absorbing a disproportionate cost in the early stages of production
Economies of scale can also be achieved by having control over a critical mass of raw material suppliers within a particular market segment and therefore creating bulk purchasing power
Experience
Is often a highly significant source of cost efficiency.
The cumulative experience and knowledge of the people within the organisation can ensure efficiency within the production process
A person who knows what they are doing and has already been through the learning curve will operate more effectively and more efficiently
Design
A rational strategic approach can ensure efficiency is built into the core design of the product or process
This will require research and an understanding of the range of alternative materials that might be used to create the desired output; increasingly an enhanced use of technology is likely to enable much greater cost efficiency
There are risks in pursuing such a focused strategy and there are a number of areas where cost leadership can fail
Unjustifiedfocus on the direct cost of one or more specific value-chain activities while ignoring or not realising the true underlying cost of other activities
A restricted and insufficient supply base needing to be shared between all competitors
Easy imitation or replication of the cost strategy by competitors
Reductions being made in cost, by using cheaper supplies to the detriment of quality
Differentiation
The principle that underpins a differentiation strategy requires the development of one or more aspects of the product or service that are either unique or perceived by customers as being unique
This will enable the organisation to charge a price premium for the provision of that product or service
Johnson (2017)
argues that there are three primary drivers of differentiation which an organisation ought to consider when pursuing this strategy - these can work in isolation or on a combined basis
Product and service attributes
The possibilities are vrirtually endless and only limited by the creativity of an organisation with the objective to appeal to different consumer preference
This could be based around colour, design, size, speed, style, taste etc
Customer relationships
The manner in which the organisation deals with its customer, which could include availiability, speed of distribution, methods of payment or after sales service
Complements
The perceived or actual receipt of additional products or services online, to enhance the value of the core purchase
Eg. the inclusion of software with certain phones and computers, differentiating them from less expensive alternatives
Garvin (1987)
identified eight dimensions of differentiation quality
Performance
is it better than the competition?
Features
does it have unique or unusual additional aspects?
Reliability
will it outperform the competition?
Conformance
does it comply with the law or required standards?
Durability
will it last?
Serviceability
if it breaks can it be repaired?
Aesthetics
does it look, sound or feel better?
Perceived quality
does the customer achieve a sense of satisfaction by acquiring this product or service?
There are natural dangers in pursuing a very focused strategy of differentiation. These might include
Too much differentiation causing confusion for the customer
Too high a price premium
Easy imitation by competitors leading to dilution of brand value
Differing perceptions of the meaning of quality between buyers and sellers
Striving for uniqueness that fails to bring sufficient added value
Differentiation/broad target
Organisational focus
Alongside cost leadership and differentiation, Porter identified organisational focus as the third choice of generic strategy that is available to an organisation
His concept of focus assumes that the target within the scope is more defined, and narrower.
An organisation will tailor its product or service to one or more specific needs of the perceived customer
Johnson (2017)
gives useful examples of the two different types of focus strategy identified by Porter
Cost focus strategy
Ryanair, which targets price-conscious travellers with no need for a connecting flight
Differentiation-focus strategy
Ecover, which gains a price premium by targeting its ecological cleaning products at environmentally conscious consumers
The choice of strategic focus requires an organisation to dedicate itself to achieving competitive edge by giving a better service to its target customers than that which is achieved by its competitors who are aiming for a broader customer base
Often an organisation following strategic focus is able to identify niche opportunities that have been left open by the breadth of coverage from its wider target competitors
Johnson argues that a successful focus strategy depends upon at least one of the following three key factors
Identification of a distinct segment need
- is the perceived need genuine or imagined?
Identification of a distinct segment value chains
- will the value chain that leads to the focused product or service prevent easy imitation?
Identification of a viable market segment
- are there sufficient customers to justify the strategy?
Porter is clear in his views that under normal operating circumstances, an organisation should have clarity in the strategic choice that it makes between generic strategies. He suggests that
A cost leader will only add cost if it attempts to also differentiate its product or service
A differentiator will lose its point of difference if it fails to have clarity as to why its product or service is different
A focus strategy can find its customer base eroded by being perceived as having lost its dedication or speciality