MMVA ZG512 Manufacturing

Strategy
Rajiv Gupta
BITS Pilani
Session 4
 Session 4
• Module 1
– Recap of Session 3
• Module 2
– Generic Strategies
• Module 3
– Discussion of the Generic Strategies
• Module 4
– Choice of Strategy
• Module 5
– Summary and Wrap-up

2
 Session 4
• Begin Module 1
– Recap of Session 3

3
 Recap of Session 3
• In Session 3, we continued the discussion on
Michael Porter’s 5 Competitive Forces
• We saw how the threat of substitute products
can provide a competitive challenge to even
large organizations
• We also saw the bargaining power that buyers
and sellers can exert depending on their
strengths relative to a particular company.
Factors such as size, criticality, options, and the
threat of forward/backward integration were
discussed. 4
 Recap of Session 3
• Once we have established the structure of
the competitive forces, we can assess our
strengths and weaknesses vis a vis the
general market
• We can choose to adopt an aggressive,
offensive approach or a defensive
approach to deal with the competition.

5
 Session 4
• End of module 1

6
 Session 4
• Begin Module 2
– Generic Strategies

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 Generic Strategies
• Overall Cost Leadership
• Differentiation
• Focus

• Each successful company tends to pursue

one
• It is difficult to pursue more than one strategy
as each strategy requires complete
management focus
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 Overall Cost Leadership
• Overall cost leadership requires a tight control
on all costs
• Companies tend to have large scale facilities for
low per unit costs
• Companies pursue low cost of purchased parts
• Companies may look to eliminate marginal
customer accounts
• Companies reduce unnecessary overhead costs

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 Overall Cost Leadership
• Companies exploit experience curves to drive
down the cost of operations
• Management focus is on eliminating all sources
of avoidable costs
• At the same time care has to be taken to ensure
quality and service so that market share is not
reduced

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 Overall Cost Leadership
• With cost leadership
– You can earn a good return even after the existing
competitors have brought down prices
– You create a barrier to entry for new entrants
– You can ward off the threat of substitute products and
services
– The bargaining power of buyers is limited up to the
price of the next most efficient competitor
– The power of sellers is mitigated by greater flexibility
in absorbing increases in input costs

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 Overall Cost Leadership
• Overall cost leadership could require
– Large market share to gain scale advantages
– Favorable access to raw materials, tax benefits,
location
– Design of products for ease of manufacturing
– Higher up front capital investment in more efficient
equipment
– Aggressive pricing and higher start-up losses to build
market share

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 Differentiation
• Differentiation is the creation of something
unique about the product or service
• Differentiation may be achieved by:
– Brand image
– Design
– Technology
– Features
– Dealer network
– After sales service

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 Differentiation
• With differentiation you can
– Insulate against existing competitors by creating a
brand loyalty
– Create barriers to entry by providing uniqueness of
product or service
– Guard against substitute products by being not easily
substituted
– Fight buyers’ bargaining power as their choices are
limited and due to high switching costs
– Provide safety against sellers’ power due to inability
of the sellers to forward integrate
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 Differentiation
• With differentiation you
– Generally have higher margins as customers may be
willing to pay a premium price for the uniqueness.
However, although your product may be recognized
as unique, not all customers will be willing to pay a
premium price for it
– Trade off uniqueness against higher market share. A
highly differentiated product will have the image of
exclusivity.
– May have to trade-off with cost leadership position as
you incur costs to differentiate the product or service
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 Differentiation
• However, with differentiation
– You trade off uniqueness against higher market
share. A highly differentiated product will have the
image of exclusivity.
– Often the trade-off is with cost leadership position as
you incur costs to differentiate the product or service
– Although your product may be recognized as unique,
not all customers will be willing to pay a premium
price for it

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 Focus
• With a focus strategy, a company targets a
segment of the market for dominance
• The limited segment could be a buyer
group or industry, or a geographic region,
or for a particular product line
• The focus strategy allows a company to
serve the needs of the focus group better
than the competition
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 Focus
• Typically the focus could be either cost
leadership in the segment or differentiation in
the segment
• It is also possible to achieve both cost
leadership and differentiation, but only in the
limited segment
• Although the company may not have the
dominant position in the entire industry, it will
enjoy leadership position in the specific market
segment
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 Focus
• As in the case of overall cost leadership and
differentiation strategies, the focus strategy
provides strategic benefits against the 5
competitive forces
• The focus strategy allows the company to have
higher margins in the focused segment
• The company may use this approach to target
weak areas of the competition or to create a
position of strength for itself

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 Generic Strategies
Low Cost Position Uniqueness

Overall Cost
Industry wide Differentiation
Leadership

Limited market
segment
Focus

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 Session 4
• End of module 2

21
 Session 4
• Begin Module 3
– Discussion of the Generic Strategies

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 Cost Leadership Strategy
Organizational
Skills and Resources Requirements
• Substantial capital • Tight cost control
investment • Structured organizational
• Superior process responsibilities
engineering skills • Incentives for meeting
• Higher supervision targets
capabilities
• Design for manufacture
and assembly
• Low cost distribution

23
 Differentiation Strategy
Skills and Resources
• Superior marketing skills
• Strong product
engineering skills
• Strength in basic
research
• Creative flair
• Reputation for quality and
technology leadership
Organizational
Requirements
• Coordination among
marketing, R&D, and
product development
• Incentives for creativity
(more qualitative based)
• Ability to attract creative
talent from other
organizations
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 Focus Strategy
Organizational
Skills and Resources Requirements
• Combination of skills • Combination of
required for the other two requirements for the other
strategies two strategies

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 Risks of Overall Cost
Leadership
• This strategy has risks associated with reliance
on scale and experience as barriers
• New technology can nullify past experience or
investment in capital equipment
• Newcomers may be able to learn either by hiring
people away from the company, or by investing
in facilities
• Inability to see changes in the market
• Inflation can eat into the cost advantage

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 Risks of Differentiation
• When the price differential between the
company and its competitors becomes too large,
buyers begin to sacrifice features, quality, etc.
• As buyers become more educated they can
more realistically assess the benefits of the
differentiated product or service
• As the industry matures, imitators are able to
narrow the gap in differentiation making the
company lose its advantage

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 Risks of Focus
• When the cost differential between the broad
range competitors and the focused company
becomes too large, buyers see little advantage
in the focused company
• The differentiation between the focused
company product and the generically available
product is reduced or eliminated
• Competitors find niches within the focus area
and create sub-focus areas driving out the
focused company
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 Session 4
• End of module 3

29
 Session 4
• Begin Module 4
– Choice of strategy

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 Choice of Strategy
• Each generic strategy has its advantages,
requirements and risks
• No single strategy is appropriate for all
companies
• The choice of strategy depends on the
competitive structure of the market, the
company’s own strengths and weaknesses and
the management approach
• Not having a strategy is not an option

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 Choice of Strategy
• Generally speaking, a company stands to earn
above average profits if it is able to execute a
generic strategy well
• However, a company doing well may falter over
a period of time due to any of the risks
associated with the particular strategy
• A company that is “stuck in the middle” usually
earns below average profits in the industry and
is in danger of going out of business

32
 Choice of Strategy
• A classic example of companies with clear cut
generic strategies was Ford and General Motors
nearly 80-90 years ago.
• Ford had built its reputation on being a low cost
producer. This had been achieved at the cost of
having no variety.
• GM, on the other hand, changed the game by
having a larger variety of products that appealed
to the customers. Ford had failed to anticipate
this and lost ground as a result
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 Stuck in the Middle
• Chrysler, on the other hand, was not
recognized for low cost or for its styling,
etc. It did revolutionize the minivan
industry and that sustained it for a while.
But other companies caught up and
Chrysler ultimately was taken over first by
Benz, and then by Fiat
• American Motors was a similar casualty in
the 1980s
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 Stuck in the Middle
• A company stuck in the middle loses market
share to the low cost leader as it cannot offer the
low prices of the market leader
• By the same token, the company also misses
out on higher margins of a company that adopts
a differentiation strategy as it cannot command a
premium price for its product or service
• As a result, the company flounders around with
little growth prospect and limited profitability

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 Stuck in the Middle
• Companies stuck in the middle often have
a confused management that is not
committed to pursuing a single strategy
• They flip flop between the generic
strategies and have a tough time surviving

36
 Session 4
• End of module 4

37
 Session 4
• Begin Module 5
– Summary and wrap up

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 Summary
• In this class generic strategies, as defined by
Porter, were discussed
• There are three generic strategies, overall cost
leadership, differentiation, and focus
• Most successful companies attempt to excel in
any one of the three areas as pursuing each
strategy requires the total concentrated effort of
the management as well as a specific allocation
of resources

39
 Summary
• Each of the generic strategies requires a
different set of skills and organizational effort
• Each of the generic skills provides an edge to
the company in regard to the 5 competitive
forces
• Companies that are stuck in the middle typically
earn below average returns and may be at risk
of going out of business or being taken over

40
 Session 4
• End Module 5
– Summary and wrap up

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