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M m w W A a h e J j i l O o c R r h , i T n t E d h C u e a H

FREE online courses on Business Strategies - Business Strategy -Integrated Cost Leadership - Differentiation Strategy
This new, hybrid strategy may become even more important--and more popular--as global competition increases. Compared to companies relying on a single generic strategy, companies that integrate the generic strategies may position themselves to improve their ability to adapt quickly to environmental changes and learn new skills and technologies. This would more effectively leverage core competencies across business units and product lines and would also help produce products with differentiated features or characteristics thatcustomers value and provide these differentiated products at a low cost, compared to competitors' products. This is because of the multiple, additive benefits of successfully pursuing the cost leadership and differentiation strategies simultaneously. Differentiation enables the company to charge premium prices and Cost leadershipenables the company to charge the lowest competitive price. Thus, the company is able to achieve a competitive advantage by delivering value to customers based on both product features and low price. Products available from companies following an integrated cost leadership/ differentiation strategy are less differentiated than products offered by differentiators, and costs are not as low as those of the lowcost leader(that produces standardised products).

Figure: Integrative Cost Leadership/ Differentiation Strategies A variety of other factors also may enable companies to gain a competitive advantage and earn above-average returns from an integrated cost leadership/differentiation strategy.

1.Flexible Manufacturing Systems A flexible manufacturing system is a computer-controlled process used

to produce a variety of products in moderate, flexible quantities. It enables companies to achieve the flexibility necessary to simultaneously respond to changes in customer needs and preferences while maintaining the low-cost advantages of large-scale manufacturing. This increases a company's ability to engage in an integrated low-cost/ differentiation strategy.

2.Information Networks across Companies Information networks enable a company to co-ordinate

interdependencies between internally- and externally performed value-creating activities to increase flexibility and responsiveness. Examples include real-time linkages between manufacturers and suppliers or subcontractors, or between retailers and suppliers. These linkages can improve time-to-market of new products by co-ordinating design and production activities and reduce out-of-stock occurrences by shortening the order-restock cycle.

3.Total Quality Management Systems These systems have been established to improve product quality
(from a customer perspective) and to improve productivity in the performance of the internal value-creating activities. Improving product quality focuses the attention of customers on product reliability, performance and utility, and enables the company to differentiate its products and charge higher prices, while lowering the costs of manufacturing and service. Key assumptions upon which total quality management (TQM) systems are based are as follows: The costs of poor quality exceed the costs of developing processes that produce high quality products and services (in other words, it is less costly to do things right the first time). Employees care about their work and will take the initiative to improve it (but, only if the company provides the resources, tools, and training necessary and management listens to their ideas). Since companies are systems of highly interdependent parts, decision processes must be integrated and include participation from all affected functional areas. Responsibility for effective TQM rests with top-level managers who must support TQM processes and appropriately design the company so that employees can function effectively. The risk facing the company that chooses to implement an integrated cost leadership/differentiation strategy is that it must simultaneously be capable of: focusing on consistently reducing costs adding differentiated features that customers value and for which they are willing to pay a higher price avoiding becoming "stuck-in-the-middle" by failing to consistently pay attention to the competitive requirements of either or both generic strategies Being "stuck-in-the-middle" implies that the company will not be able to manage successfully the five competitive forces and will not achieve strategic competitiveness. In fact, these companies can only earn average profits when industry structure is favourable or when other companies in the industry also are "stuck-in-the-middle." Type of Feature Low-Cost Leadership Broad Differentiation Best-Cost Provider Focused Low-Cost and Focused Differentiation

Strategic target A broad cross- A broad cross-section of Value-conscious A narrow market niche where section of the the market. buyers. buyer needs and preferences market. are distinctively different from the rest of the market. Basis of competitive advantage Lower costs than competitors. An ability to offer buyers Give customers Lower cost in serving the something different from more value for niche or an ability to offer competitors. the money niche buyers something customised to their requirements and tastes. Many productvariatio Good-toexcellent ns, wide selection, strong emphasis on the attributes, Customised to fit the specialised needs of the target segment.

Product line

A good basic product with few frills

(acceptable quality and limited selection). Production emphasis

chosen differentiating features.

several-to-many upscale features. Incorporate Tailor-made for the niche. upscale features and attributes at low cost.

A continuous Invent ways to create search for cost value for buyers; strive reduction for product superiority. without sacrificing acceptable quality and essential features. Try to make a virtue out of product features that lead to low cost. Build in whatever features buyers are willing to pay for. Charge a premium price to cover the extra costs of differentiating features.

Marketing emphasis

Under price rival brands with comparable features.

Communicate the focuser's unique ability to satisfy the buyer's specialised requirements.

Economical Communicate the points Unique prices/ good of difference in credible expertise in value. ways. managing costs All elements of Stress constant down and strategy aim at improvement and use product/ service contributing to innovation to stay ahead calibre up a sustainable of imitative competitors. simultaneously. cost advantage Concentrate on a few the key is to key-differentiating manage costs features; tout them to down, year create a reputation and after year, in brand image. every area of the business. Table : Distinctive Features of the Generic Competitive Strategies

Sustaining the strategy

Remain totally dedicated to serving the niche better than other competitors; don't blunt the company's image and efforts by entering other segments or adding other product categories to widen market appeal.

Cost Leadership Strategy

This strategy involves the firm winning market share by appealing to cost-conscious or pricesensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what customers receive). To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals. There are three main ways to achieve this. The first approach is achieving a high asset turnover. In service industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. In manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.e. the firm hopes to take advantage of economies of scale and experience curve effects. For industrial firms, mass production becomes both a strategy and an end in itself. Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firms low costs and prices.

The second dimension is achieving low direct and indirect operating costs. This is achieved by offering high volumes of standardizedproducts, offering basic no-frills products and limiting customization and personalization of service. Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs. Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business. This will include outsourcing, controlling production costs, increasing asset capacity utilization, and minimizing other costs including distribution, R&D and advertising. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features. The third dimension is control over the supply/procurement chain to ensure low costs. This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contracts, working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory. Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. Dell Computer initially achieved market share by keeping inventories low and only building computers to order. Other procurement advantages could come from preferential access to raw materials, or backward integration. Some writers posit that cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes. However, this takes a limited industrial view of strategy. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs. For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wage. Innovation of products or processes may also enable a startup or small company to offer a cheaper product or service where incumbents' costs and prices have become too high. An example is the success of low-cost budget airlines who despite having fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those of the larger incumbents. A cost leadership strategy may have the disadvantage of lower customer loyalty, as price-sensitive customers will switch once a lower-priced substitute is available. A reputation as a cost leader may also result in a reputation for low quality, which may make it difficult for a firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in future. [edit]Differentiation


Differentiate the products in some way in order to compete successfully. Examples of the successful use of a differentiation strategy are Hero Honda, Asian Paints, HLL, Nike athletic shoes, Perstorp BioProducts, Apple Computer, and Mercedes-Benz automobiles. A differentiation strategy is appropriate where the target customer segment is not price-sensitive, the market is competitive or saturated, customers have very specific needs which are possibly under-served, and the firm has unique resources and capabilities which enable it to satisfy these needs in ways that are difficult to copy. These could include patents or other Intellectual Property (IP), unique technical expertise (e.g. Apple's design skills or Pixar's animation prowess), talented personnel (e.g. a sports team's star players or a brokerage firm's star traders), or innovative processes. Successful brand management also results in perceived uniqueness even when the physical product is the same as competitors. This way, Chiquita was able to brand bananas,

Starbucks could brand coffee, and Nike could brand sneakers. Fashion brands rely heavily on this form of image differentiation. [edit]Variants

on the Differentiation Strategy

The shareholder value model holds that the timing of the use of specialized knowledge can create a differentiation advantage as long as the knowledge remains unique.[2] This model suggests that customers buy products or services from an organization to have access to its unique knowledge. The advantage is static, rather than dynamic, because the purchase is a onetime event. The unlimited resources model utilizes a large base of resources that allows an organization to outlast competitors by practicing a differentiation strategy. An organization with greater resources can manage risk and sustain profits more easily than one with fewer resources. This deep-pocket strategy provides a short-term advantage only. If a firm lacks the capacity for continual innovation, it will not sustain its competitive position over time. [edit]Focus

or Strategic Scope

This dimension is not a separate strategy per se, but describes the scope over which the company should compete based on cost leadership or differentiation. The firm can choose to compete in the mass market (like Wal-Mart) with a broad scope, or in a defined, focused market segment with a narrow scope. In either case, the basis of competition will still be either cost leadership or differentiation. In adopting a narrow focus, the company ideally focuses on a few target markets (also called a segmentation strategy or niche strategy). These should be distinct groups with specialized needs. The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any company. A focused strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment. Examples of firm using a focus strategy include Southwest Airlines, which provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers, and Family Dollar. In adopting a broad focus scope, the principle is the same: the firm must ascertain the needs and wants of the mass market, and compete either on price (low cost) or differentiation (quality, brand and customization) depending on its resources and capabilities. Wal Mart has a broad scope and adopts a cost leadership strategy in the mass market. Pixar also targets the mass market with its movies, but adopts a differentiation strategy, using its unique capabilities in story-telling and animation to produce signature animated movies that are hard to copy, and for which customers are willing to pay to see and own. Apple also targets the mass market with its iPhone and iPod products, but combines this broad scope with a differentiation strategy based on design, branding and user experience that enables it to charge a price premium due to the perceived unavailability of close substitutes.



Michael Treacy and Fred Wiersema (1993) in their book The Discipline of Market Leaders have modified Porter's three strategies to describe three basic "value disciplines" that can create customer value and provide a competitive advantage. They are operational excellence, product leadership, and customer intimacy. [edit]Criticisms

of generic strategies

Several commentators have questioned the use of generic strategies claiming they lack specificity, lack flexibility, and are limiting. In particular, Miller (1992) questions the notion of being "caught in the middle". He claims that there is a viable middle ground between strategies. Many companies, for example, have entered a market as a niche player and gradually expanded. According to Baden-Fuller and Stopford (1992) the most successful companies are the ones that can resolve what they call "the dilemma of opposites". A popular post-Porter model was presented by W. Chan Kim and Rene Mauborgne in their 1999 Harvard Business Review article "Creating New Market Space". In this article they described a "value innovation" model in which companies must look outside their present paradigms to find new value propositions. Their approach fundamentally goes against Porter's concept that a firm must focus either on cost leadership or on differentiation. They later went on to publish their ideas in the book Blue Ocean Strategy. An up-to-date critique of generic strategies and their limitations, including Porter, appears in Bowman, C. (2008) Generic strategies: a substitute for thinking? [1]

2.6]2)b Employee Downsizing

Employee Downsizing S.Vijay KumarAsst.Professor HR& OBGITAM Institute of Management ,GITAM University "Next to the death of a relative or friend, there's nothing more traumatic than losing a job.Corporate cutbacks threaten the security and self-esteem of survivors and victims alike. Theycause turmoil and shatter morale inside organizations and they confirm the view that profitsalways come before people." - Laura Rubach, Industry Analyst, in 1994. "The market is going to determine where we stop with the layoffs." - Tom Ryan, a Boeing spokesman, in August 2002.Downsizing Blues All Over the World The job markets across the world looked very gloomy in the early 21 st century, withmany companies having downsized a considerable part of their employee base andmany more revealing plans to do so in the near future.

Companies on the Forbes 500and Forbes International 800 lists had laid off over 460,000 employees' altogether,during early 2001 itself This trend created havoc in the lives of millions of employees across the world,Many people lost their jobs at a very short or no advance notice, and many otherslived in a state of uncertainty regarding their jobs. Companies claimed thatworldwide economic slowdown during the late-1990s had had forced them todownsize, cut costs, optimize resources and survive the slump. Though the conceptof downsizing had existed for a long time, its use had increased only recently, sincethe late-1990s. (Refer Table I for information on downsizing by major companies).Analysts commented that downsizing did more damage than good to the companiesas it resulted in low morale of retained employees, loss of employee loyalty and lossof expertise as key personnel/experts left to find more secure jobs. Moreover, theuncertain job environment created by downsizing negatively effected the quality ofthe work produced. Analysts also felt that most companies adopted downsizing justa s a ' m e too' strategy even when it was n o t r e q u i r e d . H o w e v e r , d e s p i t e t h e s e concerns, the number of companies that chose to downsize their employee baseincreased in the early 21 st century. Downsizing strategy was adopted by almost all

major industries such as banking, automobiles, chemical, information technology,fabrics, FMCG, air transportation and petroleum.I n m i d 2002, some of the major companies that announced downsizing pl a n s involving a large number of employees included Jaguar (UK), Boeing (US), CharlesSchwab (US), Alactel (France), Dresdner (Germany), Lucent Techno logies (US),C i e n a C o r p . ( U S ) a n d G o l d m a n S a c h s G r o u p ( U S ) . E v e n i n c o m p a n i e s ' developingcountries such as India, Indonesia, Thailand, Malaysia and South Koreawere going in for downsizing Downsizing as a management tool was first introduced in the US during the mid20th century. It refers to the process of reducing the number of employees on theoperating payroll by way of terminations, retirements or spin-offs. The processessentially involves the dismissal of a large portion of a company's workforce withina very short span of time. From the management's point of view, downsizing can bedefined as 'a set of organizational activities undertaken by the management ,designed to improve organizational efficiency, productivity, and/orcompetitive ness.'This definition places downsizing in the category of management tools such asreengineering and rightsizing. Downsizing is not the same as

traditional layoffs. Intraditional layoffs, employees are asked to leave temporarily and return when themarket situation improves. But in downsizing, employees are asked to leav epermanently

Both strategi es share one common fea ture: employ ees are dism issed not fori ncompetenc

e but because managemen t decided to reduce the overall work force. Inlate 1990s

and early 20 00s, differen t organizatio ns adopted d ifferent kinds ofdownsizing techniques and

strategies (Refer Table II)

world. - Involuntary Separation/Layoff: A layoff may be defined as the separation of anemployee from service for involuntary reasons other than resignation, not reflectingany discredit on the employee. It was also defined as termination of an employee'semployment for reasons beyond the control of an employee and which do notreflect discredit on the employee. - Leave without pay: Leave without pay is granted to employees with reducedbenefits, but with the guarantee of job when they return at the end of their leaveperiod. This strategy was useful for firms, which downsized to cut costs rather thanto reduce the workforce by a certain number.Source: www.govinfo.library.unt.eduIn the 1980s, downsizing was mostly resorted to by weak companies facing highd e m a n d e r o s i o n f o r t h e i r p r o d u c t s o r f a c i n g s e v e r e c o m p e t i t i o n f r o m o t h e r companies. Due to these factors, these companies found it unviable to maintain ah u g e w o r k f o r c e a n d h e n c e d o w n s i z e d a l a r g e n u m b e r o f e m p l o y e e s . S o o n , downsizing came to be seen as a tool adopted by weak companies, and investorsbegan selling stocks of such companies in anticipation of their decreased futureprofitability. However, by the 1990s, as even financially sound companies begandownsizing, investors began considering the practice as a means to reduce costs,improve productivity and increase profitability. This new development went againstc o n v e n t i o n a l m i c r o e c o n o m i c t h e o r y , a c c o r d i n g t o w h i c h a w e a k f i r m l a i d o f f workers in anticipation of a slump in demand, and a strong

firm hired more workersto increase production anticipating an increase in demand.In the 1990s, most firms were downsizing in spite of an economic boom; labor costswere not rising in relation to productivity and the companies anticipated greaterd e m a n d f o r t h e i r p r o d u c t s . H o w e v e r , t h i s p h e n o m e n o n i s n o t v e r y d i f f i c u l t t o understand

During the early 1990s, organization s resorted to downsizing on account

of variousreaso ns: to eliminate duplication of work after mergers and acquisitions

(M&As), tooptimize resources and cut costs, and to increase productivity and

efficiency byeliminatin g unnecessary intermediary channels.Co mpanies expected the

productivity of employees remaining after downsizing toincrease as they

thought it would be easier to train and manage a smaller workforce

However, according to Hickok, an industry analyst, downsizing resulted in vastcultural changes (mostly negative) in the organization instead of an increase in costsavings or productivity. Hickok observed the following changes in organizationalc u l t u r e a f t e r d o w n s i z i n g : p o w e r s h i f t f r

o m m i d d l e m a n a g e m e n t t o t o p management/owners; shift in focus from the welfare if the individual employee tothe welfare of the organization as a whole; change in working relationships (frombeing familial to competitive); and change in employer-employee relationship (frombeing long-term and stable to being short-term and contingent).Other negative effects of downsizing included depression, anxiety, frustration, angerand bitterness in the downsized employees. The harmful effects of downsizing couldbe seen in 'survivors' as well. They experienced low morale and high stress and hadto cope with an increase in workload. In addition, they felt and downsizingsyndrome marked with frustration, anger, depression, envy and guilt. The verythought of downsizing created anxiety in both the downsized employees and thosewho survived. They were concerned about possible job loss, relations with newsuperiors, revised performance expectations and uncertainties regarding careeradvancement (Refer Exhibit I for guidelines to tide over the downsizing phase). The First Phase Till the late-1980s, the number of firms that adopted downsizing was rather limited,but the situation changed in the early-1990s. Companies such as General Electric(GE) and General Motors (GM) downsized to increase productivity and efficiency,optimize resources and survive competition and eliminate duplication of work afterM&As.Some other organizations that made major job cuts during this period were Boeing( d u e t o i t s m e r g e r w i t h M c D o n n e l l D o u g l a s ) , M o b i l ( d u e t o t h e a c q u i s i t i o n o f Exxon), Deutsche Bank (due to its merger with Bankers Trust) and Hoechst AG (duet o i t s m e r g e r w i t h R h o n e - P o u l e n c S A ) . A c c o r d i n g t o a n a l y s t s , m o s t o f t h e s e successful companies undertook downsizing as a purposeful and proactive strategy.T h e s e c o m p a n i e s n o t o n l y r e d u c e d t h e i r w o r k f o r c e , t h e y a l s o r e d e s i g n e d t h e i r organizations and implemented quality improvement programs. During the earlya n d m i d 1990s, companies across the world (and especially in the US), beg a n focusing on enhancing the value of the organization as a whole. According to Jack

Downsizing refers to a process where a company or a firm simply reduces its work force in order to cut the operating costs and improve efficiency. It has become a legitimate option for business growth strategies, especially after the 1980s. It is in fact, the most preferred option of companies to sustain operating costs and comply with the existing scope of the business. It is an important management venture and requires large assistance from the human resource management team.

There are a number of reasons why a company downsizes its employee base.

Merging of two or more firms: When a certain firm combines its operations with another firm and operates as a single entity, in order to stay in profit or expand the market reach, it is called a merger. In case of a merger, certain positions become redundant. The same work is done by two different staff members. Usually in such a case, the company cuts staff to eliminate redundancy in work. It is characterized by some employees leaving an organization voluntarily, or by lay-offs, especially in case of higher management positions.

Acquisition: If one organization purchases another one, there is a definite change in the management and the acquired company staff has to face unemployment. The reason for this is the same as the earlier case, viz to cut costs and increase the revenues.

Change in management: The change in the top brass of a company can also result in downsizing. The working methods and procedures vary with the management. Therefore, a significant change in the management roles may drastically affect the employee size to suit a particular style of working.

Economic crisis: This is the single biggest cause of downsizing. Often, it consists of huge lay-offs by a number of organizations across various domains. The recent economic recession facing the world, has triggered a number of lay-offs in many reputed and popular firms in the world. According to a survey conducted by the US Bureau of the Census, organizations consisting of higher percentage of managerial staff downsize more than the ones with higher percentage of production process employees.

Strategy changes: Some companies may reduce certain areas of operation and focus on other areas. For example, if a company is working on a project in which there are no assured returns, it may downsize it's employees working on that particular project. It focuses its resources on specific projects, which could be profitable ventures.

Excessive workforce: In a period of high growth, a company hires excess staff, to meet the needs of a growing business. However, in times of recession the business opportunities dwindle, leading to downsizing of the surplus staff that was hired.

Increase in efficient work flow and computerized services: If an organization work process is extremely fast and easily meets the requirements of the market, it may downsize some of its workforce. Similarly, if manual work can be done by a machine, in a much better and cost-efficient way, it also results in the reduction in the number of employees.

Outsourcing practice:Organizations catering to international markets require a huge and efficient employee base. If this labor can be obtained by 'exporting' the job to other countries, a huge downsizing takes place in the parent country. For instance, if a certain job can be done more effectively in India and is more viable economically there, than in the United States, the business is operated from that country.

These practices result in downsizing, which is a rampant practice prevalent these days. Efficient management of the existing skill set and constantly acquiring new skills and education is a sure way to beat the effects of downsizing.

By Prashant Magar Last Updated: 9/29/2011