MADM 760 - Module 5

5 Ways a Business Can Pursue a Low-Cost- Differentiation Strategy: 1 &2

#1: Commitment to Quality • Commitment to quality not only improves outputs but also reduces costs involved in scrap, warranty, and service after the sale. • Building quality into a product can reduce the costs of rework, scrap, and servicing the product after the sale; the business benefits from increased customer satisfaction and repeat sales, which can improve economies of scale. #2: Differentiation on the Basis of Low Costs • Many firms that achieve low-cost positions also lower their prices because many of their competitors may not be able to afford to match their price level.

5 Ways a Business Can Pursue a Low-Cost- Differentiation Strategy: 3 & 4

#3: Process innovations • Improvements aimed at lowering costs • Process innovations increase the efficiency of operations and distribution. • Although these improvements are normally thought of as lowering costs, they can also enhance product or service differentiation. #4: Product Innovations • Improvements aimed at enhancing differentiation • Product innovations are typically presumed to enhance differentiation but can also lower costs. • Example: Adding filters to cigarettes not only helped differentiate one brand from another, but it also reduced production costs.

II. What Are the Six Functional Strategies?

1) Marketing Strategy 2) Financial Strategy 3) Production Strategy 4) Purchasing Strategy 5) Human Resources Strategy 6) Information Systems Management Strategy

After selecting a generic strategy,

Once a firm selects a generic strategy, the strategy should be fine-tuned to accentuate the organization's unique set of resource strengths

2) Focus-Low-Cost Strategy

• Emphasizes low costs while serving a narrow segment of the market, producing no-frills products or services for price-sensitive customers in a market niche. • Compete only in a niche where cost advantages relative to large competitors can be enjoyed. • Vulnerable to intense price competition. • Example: Aldi minimizes costs and offers low prices, targeting low-income consumers.

7) Multiple Strategies

• Employ more than one strategy simultaneously, each tailored to the needs of a distinct market or class of customers. • "Multiple strategies" is not synonymous with the "combination strategy." A common example in airlines offering both firstclass and coach seating.

5 Ways a Business Can Pursue a Low-Cost- Differentiation Strategy: #5

#5: Value innovations • Improvements aimed at modifying products, services, and activities in order to maximize the value delivered to customers. • Differentiate products and services only when associated cost hikes can be justified by increases in overall value and by pursuing cost reductions that result in minimal, if any, reductions in value.

2) Financial Strategy

- Cost of Capital& Competitive advantage - Debt leverage -Diversification (related-equity, unrelated-debt) -Leveraged buyouts -Shareholder return (stock appreciation, dividends, and stock buy backs)

III. What Is Miles & Snow Strategy? 4 Business strategy options. #3 &4

3. Analyzers - • They represent a middle ground between prospectors and defenders and emphasize flexibility and second mover advantages. 4. Reactors - • They typically do not have an appropriate set of response mechanisms with which to confront environmental change. • They lack consistency in strategic choice and perform poorly.

Chapter 7 - I. What Is the Business unit Strategy?

Business Unit (Competitive) Strategy - • Business unit strategy is the middle level of decision formulated by the middle level of management team (Business unit managers) of the company. • Business Unit: An organizational entity with its own mission, set of competitors, and industry.

Example: Disney Corporation

Business Unit (Competitive) Strategy Business Unit Managers ask questions such as: • How individual business units compete & win in their own individual markets?

III. Functional Strategies and Industry Life Cycle

Certain strategic capabilities tend to become more valuable in firms as their industries progress through different life cycle stages: 1) Introduction stage- emphasis on R&D 2) Growth stage- emphasis on marketing 3) Maturity stage- emphasis on production 4) Decline stage- emphasis on finance • The HR function is important but not dominant in all stages.

III. What Is Miles & Snow Strategy? 4 Business strategy options. #1 &2

Four business strategy options: 1. Prospectors, Defenders, Analyzers, and Reactors. 1) Prospectors - They seek first mover advantages by introducing new products and services. 2) Defenders - They perceive the environment to be stable and certain. • They seek stability and control in their operations to achieve maximum efficiency. • They only compete in a predictable segment of the market.

Example: Disney Corporation

Functional (Operational) Strategy Operational Managers ask questions such as • How to improve the effectiveness and efficiencies of operations?

5) Human Resources Strategy-Contd.

Knowledge and Competitive Advantage • Knowledge can be a source of competitive advantage regardless of the choice of generic strategy. • When employees are viewed as expenses, organizations tend to minimize their costs. When they are viewed as investments, organizations tend to maximize their value. • Human capital is the sum of the capabilities of individuals in an organization, and is a source of competitive advantage. According to the knowledge management perspective, people and their skills and abilities represent the only resource that cannot readily be reproduced by a firm's competitors.

II. What Are Porter's Generic Strategies?

Michael Porter (1980) suggests that a firm can adopt either 1) Low-Cost (Cost Leadership) Strategy, 2) Focus-Low-Cost Strategy, 3) Differentiation Strategy, or 4) Focus-Differentiation Strategy in order to deal with competition.

3) Production Strategy-Contd.

Quality Considerations • Historically, quality was a control activity that occurred at the end of the production process. • In the 1980s, Total Quality Management (TQM) was introduced. TQM refers to the totality of features and characteristics of a product or service that bear on its ability to satisfy customer needs. • Today, quality is seen as an essential ingredient and a concern of all members of the organization.

6) Information Systems Management Strategy

• An effective information systems (IS) strategy can benefit the entire organization. A computer-based decision support system can permit each functional area to access the information it needs and to improve coordination by communicating electronically across functional departments. • Effective information systems can support all of the other functional strategies. The information system is important for all businesses, regardless of strategy

3) Production Strategy-Contd.

• Economies of scale refers to the reductions in per-unit costs as volume increases. • Capital-labor substitution refers to an organization's ability to substitute labor for capital, or vice versa as volume increases, depending on which combination minimizes costs and/or maximizes effectiveness. • Low-cost businesses emphasize cost reductions via the experience curve and often engage in business process reengineering in an effort to eliminate operations that are unnecessary or add little value to the final product

3) Production Strategy

• Experience curve is the reduction in per-unit costs that occurs as an organization gains over time. Reductions can come through organizational learning, economies of scale, or capital-labor substitutions→ 3 components of experience curve!!! • (Organizational) learning occurs when employees become more efficient when they perform the same task many times.

Chapter 8: I. What Is the Functional Strategy?

• Functional strategy is the lowest level of decision formulated by the lowest level of management team (Operational managers) of the company.

5) Low-Cost-Differentiation Strategy

• Low-cost and differentiation strategies are pursued simultaneously (emphasize both low costs and differentiation) • Combination Strategy Debate: According to Porter, low cost and differentiation are not compatible in the long run, as efforts to differentiate generally increase a business' relative cost position. Others argue that the two may be compatible, although combining strategies is usually more difficult to accomplish.

5) Human Resources Strategy

• Low-cost businesses may attempt to minimize staffing expenses, training & development, and even salaries. • Problem: It is often necessary to pay "market wages" for quality people, so HR strategies may differ little if any between low-cost and differentiated businesses.

4) Purchasing Strategy

• Low-cost businesses procure supplies and raw materials at the lowest possible price consistent with a quality standard. • Differentiated businesses may be willing to pay more for raw materials if they help differentiate the final product or service. • Just-in-time (JIT) inventory management has grown in popularity during the past two decades.

1) Marketing Strategy

• Pricing: Low-cost businesses tend to emphasize low prices. Price is less of a concern to differentiated businesses. • Promotion: Low-cost businesses spend less on promotion and often emphasize price. Differentiated businesses highlight the uniqueness of their products or services. • Product/Service: Low-cost businesses emphasize basic, no-frills products. Differentiated businesses seek to distinguish their products from the competition. • Place (Distribution): Low-cost businesses seek the most efficient means of distribution. Differentiated businesses may emphasize quality or speed of delivery

4) Focus-Differentiation Strategy

• Produce and market highly differentiated products or services for the specialized needs of a market niche. • Customers in a niche might be willing to pay higher prices for specialized products or services. • However, it is vulnerable to businesses employing multiple strategies

3) Differentiation Strategy

• Produce and market to the entire industry products or services that are readily distinguished from those of their competitors. • Emphasize scientific breakthroughs, technology, and flexibility. • Differentiation can be based on the product's physical characteristics or other factors such as quality, marketing, or service. • Examples include specialty clothing retailers.

1) Low-Cost (Cost Leadership) Strategy

• Produce basic, no-frills products and services for a mass market of price-sensitive customers. • Often (but not always) build market share through low prices. • Low initial investment and low operating costs. • Often outsource to reduce costs. • Vulnerable to price competition.

6) Focus-Low-Cost/Differentiation Strategy

• Produce highly differentiated products or services for the specialized needs of a select group of customers while keeping costs low. • This strategy combines all of the facets of low costs, differentiation, and focus.

VI. Business Size, Strategy, and Performance Business Size and Strategy

• Small businesses tend to enjoy the advantages of speed, flexibility, and lower initial investment. • Large businesses tend to enjoy benefits associated with economies of scale (relevant to cost-saving) • Mid-size businesses often (but not always) struggle in terms of performance because they may lack either set of advantages.

Functional Strategy-Contd.

• The key is integration. All functional strategies must blend together to support the business strategy. • Corporate- and business-unit strategies can only be successful if they are supported by strategies at the business unit's functional levels, such as marketing, finance, production, purchasing, human resources (HR), and information systems (IS). • Each functional area should integrate its activities with those of the other functional departments because a change in one department can affect both the manner in which other departments operate and the overall performance of the business unit.