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STRATEGIC MANAGEMENT ASSIGNMENT 3

GIMPA EVENING MBA, 2ND BATCH

NAME : EMMANUEL BOTCHWAY BOADI

CLASS: HUMAN RESOURCES MANAGEMENT

INDEX NO: MBAE08090057

LECTURER : DR SAMUEL ADAMS


Q 1.

BRIEFLY DESCRIBE THE THREE GENERIC STRATEGIES

Michael Porter presented three generic strategies that a firm can apply or use to
achieve competitive advantage. Each of the strategies has the potential to allow a firm
to perform better than its rivals in the industry. These generic strategies are:

 Overall Cost leadership


 Differentiation
 Focus

1. Overall cost leadership.

It is a firm’s generic strategy based on appeal to the industry wide market using a
competitive advantage based on low cost or creating low cost position. With cost
leadership, a firm must manage the relationships throughout the value chain and
lower cost throughout the entire chain.
This requires a tight set of interrelated tactics that include:

 Aggressive construction of efficient scale facilities

 Vigorous pursuit of cost reduction

 Tight cost and overhead control

 Avoidance of marginal customer accounts

 Cost minimization in all activities in the firm’s value chain such as research and
development service, sales force and advertising

To generate above average performance, a firm following an overall cost leadership


position must attain competitive parity, that is, a firm’s achievement of similarity or
being “on par” with competitors with respect to low cost, differentiation or strategic
product characteristics.

Advantages

 An overall cost position enables a firm to achieve above average returns despite
strong competition.

 It protects a firm against rivalry from competitors because lower costs allow a firm
to earn returns even if its competitors eroded their profits through intense rivalry.

 It protects firms against powerful buyers. Buyers can exert power to drive down
prices only to the level of the next most efficient producer.
 It provides more flexibility to cope with demands from powerful suppliers for input
cost increases.

 The factors that lead to low cost position also provide substantial entry barriers
from economies of scale and cost advantages.

 Finally, a low cost position puts the firm in a favourable position with respect to
substitute products introduced by new and existing competitors.

Pitfalls

 There is too much focus on one or few value chain activities. Firms need to pay
attention to all activities in the value chain.

 All rivals share a common input or raw materials. Here, firms are vulnerable to
price increases in the factors of production. Since they are competing on cost, they
are less able to pass on price increases, because customers can take their
businesses to rivals who have lower prices.

 When the pricing information available to customers increases, there is always


erosion of cost advantages.

2. Differentiation

This is a firm’s generic strategy based on creating differences in the firm’s product or
services offering by creating something that is perceived industrywide as unique and
valued by customers.
Differentiation can take many forms and it includes

 Prestige or brand image


 Technology
 Innovation
 Features
 Dealer Network

Advantages

 Differentiation provides protection against rivalry since brand loyalty lowers


customer sensitivity to price and raises customer switching cost.

 By increasing a firm’s margins differentiation also avoids the need for low cost
position.

 Higher entry barriers result because of customer loyalty and the firm’s ability to
provide uniqueness in its products and services.

 It also provides higher margins that enables the firm to deal with supplier power.
 It reduces buyer power because buyers lack comparable alternatives and are
therefore less price sensitive.

 Supplier power is also decreased. There is a certain amount of prestige associated


with being a supplier to a producer of highly differentiated products and services.

 Finally, it enhances consumer loyalty, thus reducing the threats from substitutes.

Pitfalls

 Uniqueness that is not valuable. A differentiated strategy must provide unique


bundles of products and /or services that customers value highly. It is not enough
just to be different.

 Too much differentiation. Firms may strive for quality or service that is higher
than customers desire. Thus, they become vulnerable to competitors who provide
an appropriate level of quality at a lower price.

 Too high price premium. Customers may desire the product but they are repelled
by the price premium.

 Differentiation that is easily imitated. Resources that are easily imitated can not
lead to sustainable advantages.

 Dilution of brand identification through product line extension. Firms may


erode their quality brand image by adding products or services with lower prices
and less quality.

 Perceptions of differentiation may vary between buyers and sellers.


Companies must realize that although they may perceive their products and
services as differentiated, their customers may view them as commodities. Thus, a
firm could overprice its offering and lose margin altogether if it has to lower prices
to reflect market realities.

Focus

it is a firm’s generic strategy based on appeal to a narrow market segment within an


industry. A firm following this strategy selects a segment or group of segments and
tailors its strategy to serve them. The essence of focus is the exploitation of a
particular market niche.

Focus has two variants – cost focus and differentiated focus. In cost focus, a firm
strives to create a cost advantage in its target segment. In a differentiation focus, a
firm seeks to differentiate in its target market.

Both variants of the focus strategy rely on providing better service than broad based
competitors who are trying to serve the focuser’s target segment. Cost focus exploits
differences in cost behavior in some segments while differentiation focus exploits the
special needs of buyers in other segments.

Focus requires that a firm either have a low-cost position with its strategic target, high
differentiation or both. As earlier noted, with cost and differentiation strategies, these
positions provide defenses against each competitive force. Focus is also used to
select niches that are least vulnerable to substitutes or where competitors are
weakest.

Pitfalls

 Erosion of cost advantages within the narrow segment. The advantages of cost
focus strategy may be fleeting if the cost advantages are eroded overtime.

 Even product and service offerings which are highly focused are subject to
competition from new entrants and from imitations. Some firms adopting a focus
strategy may enjoy temporary advantages because they select a small niche with
few rivals. However, their advantages may be short-lived.

 Focusers can become too focused to satisfy buyer needs. Some firms attempting
to attain competitive advantages through a focus strategy may have too narrow
product or service.

Q 2.

EXPLAIN THE RELATIONSHIP BETWEEN THE THREE GENERIC STRATEGIES


AND PORTER’S FIVE FORCES THAT DETERMINE THE ABOVE AVERAGE
PROFITABILITY WITHIN AN INDUSTRY

Low-cost Position

An overall low-cost position enables a firm to achieve above average returns despite
strong competition. It protects a firm against rivalry from competitors, because lower
costs allow a firm to earn returns even if its competitors eroded their profits through
intense rivalry.

A low-cost position also protects firms against powerful buyers. Buyers can exert
power to drive down prices only to a level of the next most efficient producer. Also a
low-cost position provides more flexibility to cope with demands from powerful
suppliers for input cost increases.

The factors that lead to a low-cost position also provide substantial entry barriers from
economies of scale and cost advantages. Finally, a low-cost position puts the firm in a
favourable position with respect to substitute products introduced by new and existing
competitors.
Differentiation

Differentiation provides protection against rivalry since brand loyalty lowers customer
sensitivity to price and raises customer switching costs. By increasing a firm’s margin,
differentiation avoids the need for a low-cost position. Higher entry barrier results
because of customer loyalty and the firm’s ability to provide uniqueness in its products
and services.

Differentiation provides higher margins that enable a firm to deal with supplier power.
It also reduces buyer power because buyers lack comparable alternatives and are
therefore fewer prices sensitive. Supplier power is also decreased because there is a
certain amount of prestige associated with being a supplier to a producer of a highly
differentiated products and services. Lastly differentiation enhances customer loyalty,
thus reducing the threat from substitutes.

Focus

Focus requires that a firm either have low-cost position with its strategic target, high
differentiation or both. As noted earlier with regard to cost and differentiation
strategies, these positions provide defenses against each competitive force. Focus is
used to select niches that are least vulnerable to substitutes and where competitors
are weakest.

Focus strategy experiences less rivalry and lower buyer bargaining power by providing
products and services to a targeted market segment. New rivals have difficulty
attracting customers based only on lower prices. Additionally, brand image and quality
heightens rival entry barriers. Again, focus strategy enjoys some protection against
substitute products and services because of their relatively high reputation, brand
image and customer loyalty.

Q3

WHAT ARE SOME OF THE WAYS IN WHICH A FIRM CAN ATTAIN A


SUCCESSFUL TURNAROUND STRATEGY?

A turnaround strategy involves reversing a firm’s decline in performance and re-


invigorating it back to growth and profitability. A need for turnaround may occur at any
stage in the product life cycle. However, it is more likely to occur during the maturity or
decline stages.

Most turnarounds require a firm to carefully analyze the external and internal
environments. The external analysis leads to identification of market segments or
customer groups that may still find the product attractive. Internal analysis results in
actions aimed at reduced costs and higher efficiency. Typically, a firm needs to
undertake a mix of both internally and externally oriented actions to effect a
turnaround.

Three strategies are identified for a successful turnaround.


• Assets and cost surgery. In most cases, mature firms tend to have assets that do
not produce any returns. Outright sale or sale and leaseback free up considerable
cash and improve returns. Investment in new plants and equipment can be
deferred. Firms in turnaround situations try to cut administrative expenses and
inventories and speed up collection of receivables. Costs can also be reduced by
outsourcing production of various inputs for which market prices may be cheaper
than in-house production costs.

• Selective product and market pruning. Most mature or declining firms have
many product lines that are losing money or are only marginally profitable. One
strategy is to discontinue these product lines and focus all resources on a few core
profitable areas.

• Piecemeal productivity improvement. There are hundreds of ways in which a


firm can eliminate costs and improve productivity. Although individually these are
small gains, they cumulate over a period of time to substantial gains. Improving
business processes by re-engineering them, benchmarking specific activities
against industry leaders, encouraging employee input to identify activities against
industry leaders, encouraging employee input to identify excess costs, reducing
research and development and marketing expenses, increasing capacity utilization
and improving employee productivity lead to a significant overall gain.

Q. 4

WHAT ARE THE LIMITATIONS OF THE EXPERIENCE CURVE?

The experience curve, developed by the Boston Consulting Group in 1968, is a way of
looking at efficiencies developed through a firm’s cumulative experience. In its basic
form, experience curve relates production costs to production output. As output
doubles, costs decline by 10 percent to 3 percent. For example, if it costs GH¢1.00
per unit to produce 100 units, the per unit cost will decline to between 70 to 90 Ghana
pesewas as output increases to 200 units.

The factors that account for this increased efficiency include the following.

 The success of an experience curve strategy depends on the industry life cycle for
the product. Early stages of a product’s life cycle are typically characterized by
rapid gains in technological advances in production efficiency. Most experience
curve gains come early in the product life cycle.

 The inherent technology of the product offers opportunities for enhancement


through gained experience. As technology is developed, “value engineering” of
innovative production processes is implemented, driving down the per unit cost of
production.

 A product’s sensitivity to price strongly affects a firm’s ability to exploit the


experience curve. Cutting the price of a product with high demand elasticity –
where demand increases when price decreases – rapidly creates consumer
purchases of the new product. By cutting prices, a firm can increase demand for its
product. The increase in demand in turn increases product manufacture, thus
increasing the firm’s experience in the manufacturing process. So by decreasing
price and increasing demand, a firm gains manufacturing experience in that
particular product which drives down per unit production costs.

 If a company is the first to market with the product and has good financial backing,
an experience curve strategy may be successful.

Limitations

 If other competitors are well positioned in the market, have strong capital
resources, and are known to promote their products lines aggressively to gain
market share, an experience curve strategy may lead to nothing more than price
war between two or more strong competitors.

 Whether or not to base strategy on the experience curve depends on what


specifically causes the decline costs. For example if costs drop from efficient
production facilities and not necessarily from experience, the experience curve is
not helpful.

 The experience curve has lost favour as a strategic tool because it combines
several sources of cost reduction (learning, scale, process innovation etc) that can
be better understood individually.

 It has also lost favour because of the realization that cost reductions from
experience are not automatic – they must be managed.

The diagram below illustrates the experience curve situation.


Q. 5

WHAT IS MEANT BY THE TERM CREATIVE DESTRUCTION?

Creative Destruction is an economic theory of innovations and progress introduced by


German Sociologist Wermmer Sombart and elaborated and popularized by an
Australian Economist Joseph Shumpeter.

It refers to a dynamic process of competition and monopoly in markets under


capitalism. It occurs when something new kills something older. An example is the
Personal Computer industry. The industry led by Microsoft and Intel destroyed many
mainframe computer companies but in doing so entrepreneurs created one of the
most important inventions of the century.

The main idea of this principle is that innovation (creation) encourages economic
growth but innovation by one company also leads to destruction of complacent firm’s
monopoly market share. Companies that once dominated markets lose their
dominance and shrink in profitability and importance.

Creative Destruction refers to the fact that new ways of organizing production or
distribution while being creative (having benefits) also are destructive (having costs).
Many assume that the benefits exceed the costs, but there is no reason why this
should always be so.

There are several kinds of innovations and among them are:

• New ways to organize production often using new equipment

• New methods of inventory management

• New products

• New methods of advertisements and marketing

• New ways to transport production

• New methods of communication, example the internet

• New management techniques

• New source of labour and raw materials

• New financial investment


Many of these innovations can contribute to growth while often leading to the (gradual)
death of old ways of production and ways of life. However, some of these innovations
are not necessarily positive in their impact.

Q. 6

WHAT IS THE SIGNIFICANT OF THE INDUSTRY LIFE CYCLE?


IDENTIFY ONE MAIN LIMITATION OF THE INDUSTRY LIFE CYCLE.

Industry life cycle refers to the stages of introduction, growth, maturity and decline that
occur over the life of an industry.

• The first stage of the industry life cycle is the introduction stage. This stage is
characterized by :

 new products that are not known to customers


 poorly defined market segments
 unspecified product features
 low sales growth
 rapid technological change
 operating losses
 a need for financial support.

Success requires an emphasis on research and development and marketing activities


to enhance awareness.

• Growth stage is the second of the product life cycle and it is characterized by:

 strong increases in sales


 growing competition
 developing brand recognition
 a need for financial complementary value chain activities such as marketing, sales,
customer service and research and development

Revenue in the growth stage increases at an accelerated rate because; new


consumers are trying the product and also a growing proportion of satisfied
consumers are making repeat purchases.

In general, as the product moves through its life cycle, the proportion of repeat buyers
to new purchases increases.

• Maturity stage, being the third stage of the industry life cycle is characterized by
the following:

 slowing demand growth


 saturated market
 direct competition
 price competition
 strategic emphasis on efficient operations

Since markets are becoming saturated, there are few opportunities to attract new
adopters. It’s no longer possible to grow around competition so direct competition
becomes predominant. With few attractive prospects, marginal competitors begin to
exit the market. At the same time rivalry among existing rivals intensifies because
there is often fierce price competition at the same time that expenses associated with
attracting new buyers are rising.

• Decline stage occurs when industry sales and profits begin to fall. This stage is
characterized by:

 falling sales and profits


 increasing price competition
 industry consolidation

Changes in consumer tastes or a technological innovation can push a product to


decline. When a product enters the decline stage, it often consumes a large share of
management time and financial resources relative to its potential worth.

At the decline stage, a firm’s strategic options become dependent on the actions of
rivals. If many competitors decide to leave the market, sales and profit opportunities
increase. On the other hand prospects are limited if all competitors remain.

The diagram below is an illustration of the industry life cycle


Significance of the Industry Life Cycle

The importance of considering the industry life cycle is to determine a firm’s business
level strategy and its relative emphasis on functional area strategies and value
creating activities. Managers must become even more aware of their firm’s strengths
and weaknesses in many areas to attain competitive advantages. For example, firms
depend on the Research and Development activities in the introductory stage of the
life cycle. Research and Development is the source of new products and features that
everyone hopes will appeal to customers.

Firms develop products and services to stimulate customer demand. Later, during the
maturity stage, the functions of the products have been defined, more competitors
have entered the market and competition is intense, managers then place greater
emphasis on production efficiencies and process engineering in order to lower
manufacturing costs. This helps to protect the firm’s market position and to extend the
product life cycle because the firm’s lower costs can be passed on to consumers in
the form of lower prices and price sensitive customers will find the product more
appealing.

Limitation

While the life cycle idea is analogous to a living organism (ie. birth, growth, maturity
and death) the comparison does have limitations. Products and services go through
many cycles of innovation and renewal. For most part, only fad products have a single
life cycle. Maturity stages of an industry can be transformed or followed by a stage of
rapid growth if consumer tastes change, technological innovations take place or new
developments occur in the general environment.

Q. 7
WHAT IS MEANT BY BEING “STUCK IN THE MIDDLE”? IS IT A BENEFIT OR A
PROBLEM?

The three Porter’s generic competitive strategies are alternative, viable approaches to
dealing with the competitive forces. When a firm fails to develop its strategy in at least
one of these three directions, the firm is said to be “stuck in the middle” and it is an
extremely poor strategic situation.

This firm lacks the market share, capital investment and resolve to play the low cost
game, the industry wide differentiation necessary to obviate the need for low cost
position or the focus to create differentiation or a low-cost position in a more limited
sphere.
The firm stuck in the middle is almost guaranteed low productivity and profitability. It
either loses the high volume customers who demand low prices or must bid away from
low cost firms. It also loses high margin business.

The firm stuck in the middle also probably suffers from a blurred corporate culture and
a conflicting set of organizational arrangements and motivation system. The above
discussion clearly shows that a firm stuck in the middle is a problem and not a benefit.

The diagram below shows a situation where a firm is stuck in the middle.

The firm stuck in the middle must make a fundamental strategic decision. Either it
must take steps necessary to achieve cost leadership or at least cost parity, which
usually involves aggressive investments to modernize and perhaps the necessity to
buy market share or it must orient itself to a particular target (focus) or achieve some
uniqueness (differentiation). The latter two options may well involve shrinking in
market share and even in absolute sales. The choice among these options is
necessary based on the firm’s capabilities and limitations.
More importantly, when a firm is stuck in the middle, it usually takes time and
sustained efforts to extricate the firm from this unenviable position. Yet there seems to
be a tendency for firms in difficulty to flip back and forth over time among the generic
strategies. Given the potential inconsistencies involved in pursuing these three
strategies, such an approach is almost always doomed to failure.