Firm Enjoys A Differentiation Strategy essay example
These factors could include type of industry, cost of raw materials, type of labour skills required, technology, governmental factors, consumers and many more such factors. We will now look at the three generic business-level strategies in greater detail and find out how these strategies work. The textbook, Management - A Pacific Rim focus, defines cost-leadership, the first of the three strategies we will be looking at, as a, "strategy... emphasising organizational efficiency so overall cost of providing products and services are lower than that of the competitors". This strategy called cost-leadership, involves the very delicate process of being able to produce or be able to deliver goods or services that are of standards acceptable to customers at a cost that is considered to be the lowest among all the competitors in the given market. This does not however, imply that the good that the cost-leader sells or that the service you provide is in any way an inferior good when it is compared to a competitors product but, a product or service that is of the same or of comparable quality that is cheaper than the rest of the rival's products. If a good is deemed to be of inferior quality when compared to a competitor's then, the customer will decide to go with the good or service that is of a higher quality because he perceives this good to be of better value than the cheap good or service that the cost-leader is producing.
The implementation of this strategy by a firm will also imply that this firm has to be an industry leader in terms of volume sold because, for the firm to be able to make an above average profits, it has to sell very high quantities because the profits that the cost-leader makes on a single unit is negligible because of the strategy that the firm has decided to implement. There are various ways for a firm to go about implementing a strategy such as cost-leadership. The firm has to analyse its situation, its resources and then decide on which course to take in order for it to become a cost-leader in its market. The first and most important way that a firm can become a cost leader is through the process known as economies of scale. Economies of scale is defined as the process whereby, the mass production of the good in large quantities reduces the per unit price of producing the good. Thus, by being able to produce the good at a low price, the firm is able to sell its product in the market at the cheapest price thus, establishing itself in the market as a cost-leader.
The second way to achieve cost-leadership is through the cutting down or the trimming of unnecessary costs such as overhead, administrative as well as other costs that have the potential to increase the per unit cost of the product. Such a move has to also include cutting of costs in major areas such as promotions and advertising. This is done because, cost that are involved with promotions and advertising are always passed to the customer and since, the firm wants to be a price-leader in its market, it has to streamline its costs and not add on unnecessary costs that have the potential to increase the per unit cost of the good and thus, risk the firm losing its cost-leader status in the industry. The learning curve effect also plays a very important role in the reduction of the per unit cost of the product. The learning curve effect is defined as the "percentage decrease in additional labour cost each time output doubles". It is a proven fact that every time the output doubles, the labour costs that arise from the production of additional units usually declines by 80%.
A figure is attached in appendix section labelled Appendix 1 which shows a learning curve that adheres to this 80 percent rule. Technology plays a very pivotal role in the reduction of the per unit costs of the product. Better technology will ensure that the products are produced at a cheaper price than compared to before then new technology was adopted. Better technology will also ensure that there is a decrease in the number of defects that is produced and thus, the unit cost of the good will be lower than compared to before the adoption of new technology. The reduction of defects will also help to keep the unit cost of the product down. Finally, the cost-leader needs to have a very good logistics network to supplement its production capabilities.
The logistics network should encompass both the input as well as the output parts of the operations. A good logistics network ensures that the company saves warehousing costs for both its raw materials as well as its finished goods. The other plus factor about having a good transportation network is that, you can transport your goods where you want and when you want without any hassles. This will ensure that the consumer always has access to your products and does not have to settle for a substitute. A firm that aims to be the cost-leader in its market displays a few characteristics that are similar to all cost-leaders regardless of what market it is in or what good it produces.
One such characteristic is the fact that this firm has to follow a policy that makes it very capital intensive when it comes to the manufacturing or the production of the good. This is because to cut costs related to labour, the firm has to invest heavily in new technology as well as new machines that will reduce its reliance on the labour force and thus in the long run cut costs that have the potential to be passed on to the consumers. The second strategy, that was formulated by Porter, which we have to look at, is called differentiation. The textbook defines this business-strategy as the, "strategy... involving attempting to develop products or services viewed as being unique to the industry". This is the process whereby firms, that follow this strategy, produce or deliver services that the consumer feels is of use to him and there is no other product in the market meets his or her criteria's for buying the good or service. These products are unique when compared to the goods or services produced by the competitors because, they have features or special aspects that cause this particular product to differ from the other existing products.
And, it is because of this very difference in features that the consumer perceives that the differentiated product as important enough to buy. Customer perception is very important when you employ a business strategy such as differentiation. Only if a customer is able to perceive that the good that the firm is selling is of a higher quality will he buy the good or service. The other reason why some firms opt to choose a strategy such as differentiation is because, that with the differentiation of products, the firm will have the option to serve a much bigger segment of the market if it chooses to.
They can do this by gearing different products i.e. the same product with varying features to serve different segments whose needs and requirements will be different. How many segments a firm should opt to target depends completely upon the company and its capabilities. Should it have the resources and the capital, it will be a very good move to target every segment is the market so as to capture a chunk of business from every segment thus, becoming a major market player. There are various methods that a firm can employ so as to differentiate it products from the rest of the products that are in the market. How you differentiate is not very important. But, when the differentiation is done, the features or designs employed must be visible enough for the consumer who is about to buy the product to perceive it as important enough to buy.
As I have mentioned before, the perception that the consumer has, is an important determinant is to how well the product sells in the market segment. The simplest way that a firm can go about differentiating a product is by changing its features. The firm should be able to provide features and designs that consumers see the need for. To succeed in doing this, you need to be aware of the changing needs of the consumer. This is usually done through conducting market surveys and using other channels and means through which a firm is able to get inputs from the consumer as to what features or designs they prefer. This way, the firm will have the ability anticipate what the consumer demands and also stay ahead of the competition by giving what the consumer demands.
Another method that firms use to pursue their differentiation strategy is through the use of a very large product mix. This, simply explained, implies that the firm does not have to product one product with all the features and designs loaded into it but, they can create a spectrum of products with varying features and designs. This will also ensure that the firm produces goods, for the same market, that are unique. This is also a very useful method that firms employ to cater to more than one segment of the market.
The use of a product mix also ensures that the products or services that you produce or deliver are made from similar raw materials as only their features and designs differ. This also helps the firm save some costs involved with the stocking and sourcing of different raw materials. By having the same materials for the different products and services, the firm ensures that the processes for the manufacture of the good is relatively the same and thus, this ensures that money is saved as no retooling has to be done to produce different goods. This cost saving can in turn be passed on to the consumer thus, giving the consumer an added incentive to buy the product over the firms competitors.
A firm enjoys a differentiation strategy when it is the first firm in a new industry. This is a process known as the first mover advantage. This simply implies that since the firm is the first one in the market, the product or service that the firm puts out to the consumer is the only one in the market and thus, it enjoys the benefits of the differentiation strategy because it is a new product that no consumer has seen before and thus, it is different in all aspects. But, as new entrants begin to trickle into the industry, the first mover needs to begin the process of true differentiation by implementing one of the many methods that are available to it.
This will ensure that the firm does not lose ground to the new rivals and stays on top. This has to be done if the new mover wants to still be able to enjoy above average economic profits that it enjoyed as a new firm in a new market. Brands and firms that are well known in a particular industry also use the differentiation strategy. They like to differentiate themselves from the rest of the products or services in the market by banking on the fact that people will recognize their brand and know that it stands for good quality, design or features. This type of brand differentiation always depends on the perception of the consumers.
If the consumers perceive that a known brand to be of a higher quality, then they will buy the product or service. This is where tools like promotion and advertising come in where the firm tries to inform the consumers of the difference between its products and the other products that exist in the market. Firms that decide to adopt this strategy need to keep improving and updating their products to prevent the competition from reaching the standards that the firm has set. To do this, the firm needs to invest heavily in research and development to ensure that they have access to the latest breakthroughs first.
To be profitable using this strategy, the firm has to be able to hire, train and retain high skilled workers, unlike the cost-leadership strategy which makes use of low-skilled labour, to produce their high end products. Since the product is of high quality, unique and now mass produced, it requires the skills of highly qualified workers to produce and deliver them. Last but not least, there as to be a high level of coordination between the various departments of the firm such as marketing, management, research and development. This is done to ensure that the operation of the firm is a smooth one and also to make sure that the customers needs are received, manufactured and put out into the market before the competition has a chance to deliver the product. This will ensure that a company following this strategy will make profits that are above average. The last of Porter's generic business strategies that we look at is called focus.
The textbook defines focus strategy as the, "strategy outlined by Porter entailing specialising a position of overall cost leadership, differentiating or both, but only within a particular portion or segment, of am entire market". The use of such a strategy ensures that you try to integrate a set of actions, from both the differentiation as well as the cost-leadership strategies to produce goods that only cater to one small segment of the market as a whole. The segment that you choose to concentrate on depends on where you feel that you can make the highest profits. Within the focus strategy itself, a firm can opt to choose one of two more specific strategies that suit the firm best. Focused cost-leadership strategy, a strategy which offers low priced products to customers in only one segment of the market, is one of these strategies. The other one being focused differentiation strategy which offers unique or varied products to customers in more than one segment of the market.
The second option is usually chosen if the firm wants to be able to compete in more than one segment thus, increasing its overall profits. The advantages of adopting a focus strategy are many. There are also some disadvantages to being too focused. We will look at these advantages and disadvantages in more detail. One very important advantage of adopting a focus strategy is the ability of the firms to be able to quickly change or adapt to an ever changing environment. This is possible because of the smaller size of the companies when compared to a cost-leader or a firm that practices differentiation.
This is very advantageous because, an every changing environment can help or hinder the firm from making profits. Thus, to counter the effect of an ever changing environment, the firm needs to react quickly and change with it or risk getting left behind. Again, because of the size of the firm and the vast resources available to it, a firm can use this to its advantage and be able to embrace new technologies and processes that become available to the firm. This is also helped by the fact that a firm that follows this strategy, has to employ a highly skilled workforce and such a workforce, will be able to change faster. By moving quickly to adopt such new technologies and processes, the firm can further cut costs and produce higher quality products that will appeal more to the consumer. By cutting costs, they can also to aim to compete in the focused cost-leadership strategy where they can maximise profits by selling cheaper than rivals.
The last advantage that I will list in this paper for the focus strategy is about the advantage the a firm that practices the focus strategy has over its rivals because of the knowledge and experience that this firm possesses in areas dealing with its core competencies. It is always an acknowledged fact that, for a firm to compete against its rivals, it had to use the experience is specific core areas that the firm is better at than the rival firms. This is how focus strategy based companies compete. They focus on areas they are experienced in and it is in these areas that rivals cannot compete with these firms because of their prior experience and strong brand presence that has already been established because of it reputation in that particular segment. One major disadvantage for a focus strategy based company when the firm becomes too focus in such a way that it serves consumers in one small sector of one segment. If environmental changes were to cause a decline or a full termination of the population in the niche segment that the firm is competing in, the firm will have no more consumers on whom to bank so it has put itself in a corner.
Thus, to prevent a situation like this from taking place, the firm should recognise from the start that the focus segment should not be one that is too narrow and it must give itself some room to move and make changes as necessary when there is a change in the environment. It is because of this, that companies in this segment need to constantly be performing an activity known as environment scanning. This is to ensure that they can anticipate future trends, changes and designs and make changes to be prepared for the environment change when it occurs. This way, the firm does not lose out when there is a shift in trends or fashions. One final disadvantage is that, if a particular firm who follows a strategy such as cost-leadership or differentiation, decides to supply products that also appeal to your niche market and, because of the strategy that they adhere to, their costs will be very much cheaper when compared to a firm that follows the focus strategy. The problem arises when consumers of this niche segment, that the focus strategy based firm is targeting, choose products that are from these other firms.
The focus strategy based firm is unable to fight back because it is simply not geared to counter firms that can produce numerous unique products or products that are very much cheaper. Thus, a firm that wants to adopt a strategy such as focus, has to assess the risks of potential entrants to the niche segment, that may arise before embarking on such a strategy and make arrangements to counter such a move should the scenario come true. I will now look at the automotive industry to illustrate with examples as to how the different firms with the industry adopted and worked with the three generic strategies that were described in great detail in the first part of this answer. Everyone is familiar with the famous words by Henry Ford, "You can have any colour as long as it is black". This very clearly illustrated how convinced Henry Ford was with the cost-leadership model.
The Ford motor company was formed in 1903 by Henry Ford whose aim was to provide the people with a cheap and affordable car that any middle class employed person could own. Henry Ford's firm produced low cost standardised products and, consumers had to substitute low cost for features. He achieved this with his very famous car the Model T. He became the first person to use the cost-leadership strategy with the implementation of a process that we today term as mass production. He established assembly lines through which he maximised his outputs. To become an even greater cost-leader, Ford motor company also practiced vertical integration when the started to produce many of the production line machines in firms that Ford owned. This was also done because at this early stage in the automotive market, there were no machines that were available to this industry thus, Ford had to make their own machines and with this, they effectively saved costs in the long run.
With the establishment of such a system, he was also able to employ low skilled workers who were given specific jobs, like tire fitting, on the assembly lines. He took the cost-leadership model a step further by standard ising even the colour of the cars that his firm produced. All these factors made his firm a highly effective cost-leader in the automotive field. But, as we will see later, this very strategy was what caused his company to lose ground in the market to other companies such as General Motor Company.
With the use of this strategy, Henry Ford emphasized innovation more in the field of process improvement i.e. how to better improve the production so as to cut more costs. By doing this, he effectively ignored the demand for innovation in the field of design and improvement of the Model T. This was the one disadvantage in his cost-leader strategy that cost the company dearly when new entrants saw the flaw in his strategy and exploited thus, eroding his market share. Appendix 2 will show you how dramatic the loss in market share was when new entrants came and filled the void that Ford had left by now being an innovator. General Motor Company did not always start out as a company that practised differentiation for its business strategy. Before it became an industry leader using the differentiation strategy, it had a very relaxed wait and see approach that would have bankrupted the company had the management not realized this and changed its business strategy to one of differentiation. General Motors Company (GM) was founded in 1908 by William Durant, a carriage merchant, as Buick Motor Company.
From 1908 to 1911 he consolidated major car companies such as Oldsmobile, Cadillac and Oakland (Pontiac) and called the consolidated company GM. In 1915, he added the Chevrolet, the crown jewel to his already full stable of car makes at GM. Though he acquired all these companies, Durant had no idea how to truly consolidate these companies and how to standardize the flow of information and what the management structure of the company was going to be like. He also had no effective financial or cost controls over the whole organization.
This was because he was unable to decide on what the structure of the company was going to be like and what kind of a business strategy he wanted to adopt. In the early, 1920's a person by the name of Alfred Sloan took over the management of GM and immediately set about restructuring the company. He adopted the model that Dupont was using, the multi divisional strategy for the way the company was to be structured. Along with this, he also imposed divisional, administrative, cost and financial costs in order to standardise the flow of information to one format that all divisions could decipher. The most important thing he did after he took over was to restructure the product lines by divisions so as to gear up for a very "aggressive" differentiation in which, every division would have a part to play to kill the competition. His differentiation strategy consisted of two parts.
The first part would be to use his flagship division, Chevrolet, to directly compete with Ford's Model T and work to steal business from Ford. This would cut Ford's market share and thus, it would lose its position as a market leader. His second part of the differentiation strategy was to use the rest of the car divisions he had at GM to effectively cover all the different price ranges that existed within the market so as to prevent any new entrants from venturing into the market and also to compete with the small player that existed within these price divisions. All these changes made GM an industry leader within 10 years of the strategy of differentiation being implemented. With this strategy, Alfred Sloan effectively lowered the costs of his cars by using economies of scale when he standardised the core structure and workings of the car and only changing designs and features according to the divisions. He was also effective in targeting all the different users that existed in the different price ranges and segments.
His divisions were also instructed to carry out continuous innovations both in the process as well as the design and features areas unlike Henry Ford who only concentrated with innovation that dealt with process improvement. GM also carried out innovation in all different market segments and not just one segment thus, making sure again that all they remained market leaders. In contrast, Rolls Royce, is a company that was founded in the early 1900 too, is an exclusive.