Strategic Management (MGMT 2301) 2012

Generic strategies The Cost Leadership Strategy Porter's generic strategies are ways of gaining competitive advantage that gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost Leadership strategy: Increasing profits by reducing costs, while charging industry-average prices. Increasing market share through charging lower prices, while still making a reasonable profit on each sale because you've reduced costs. Cost Leadership is about minimizing the cost to the organization of delivering products and services. The Cost Leadership strategy is exactly that it involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low cost producers who may undercut your prices and therefore block your attempts to increase market share. You therefore need to be confident that you can achieve and maintain the number one position before choosing the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have: Access to the capital needed to invest in technology that will bring costs down. Very efficient logistics. A low cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other competitors. The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you, and that other competitors copy your cost reduction strategies. This is why it's important to continuously find ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizenphilosophy of "continuous improvement".

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DUSMAHOMED Goolamally (DTM/11A/PT/110520)

Strategic Management (MGMT 2301) 2012

The Differentiation Strategy Differentiation involves making your products or services different from and more attractive those of your competitors. How you do this depends on the exact nature of your industry and of the products and services themselves, but will typically involve features, functionality, durability, support and also brand image that your customers value. To make a success of a Differentiation strategy, organizations need: Good research, development and innovation. The ability to deliver high-quality products or services. Effective sales and marketing, so that the market understands the benefits offered by the differentiated offerings. Large organizations pursuing a differentiation strategy need to stay agile with their new product development processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in different market segments. The Focus Strategy Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics of that market and the unique needs of customers within it, develop uniquely low cost or well-specified products for the market. Be cause they serve customers in their market uniquely well, they tend to build strong brand loyalty amongst their customers. This makes their particular market segment less attractive to competitors. As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its own.

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DUSMAHOMED Goolamally (DTM/11A/PT/110520)

Strategic Management (MGMT 2301) 2012

But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is to ensure that you are adding something extra as a result of serving only that market niche. It's simply not enough to focus on only one market segment because your organization is too small to serve a broader market (if you do, you risk competing against better-resourced broad market companies' offerings.) The "something extra" that you add can contribute to reducing costs (perhaps through your knowledge of specialist suppliers) or to increasing differentiation (though your deep understanding of customers' needs). Generic strategies apply to not-for-profit organizations too. A not-for-profit can use a Cost Leadership strategy to minimize the cost of getting donations and achieving more for their income, while one with pursing a Differentiation strategy will be committed to the very best outcomes, even if the volume of work they do as a result is lower. Local charities are great examples of organizations using Focus strategies to get donations and contribute to their communities. Boston consulting group matrix Boston Consulting Group Matrix is a four celled matrix developed by BCG, USA. It is the most renowned corporate portfolio analysis tool. It provides a graphic representation for an organization to examine different businesses in its portfolio on the basis of their related market share and industry growth rates. It is a comparative analysis of business potential and the evaluation of environment. BCG matrix has four cells, with the horizontal axis representing relative market share and the vertical axis denoting market growth rate. The four cells of this matrix have been called as stars, cash cows, question marks and dogs. Each of these cells represents a particular type of business.

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DUSMAHOMED Goolamally (DTM/11A/PT/110520)

Strategic Management (MGMT 2301) 2012

Stars represent business units having large market share in a fast growing industry. They may generate cash but because of fast growing market, stars require huge investments to maintain their lead. Net cash flow is usually modest. SBUs located in this cell are attractive as they are located in a robust industry and these business units are highly competitive in the industry. If successful, a star will become a cash cow when the industry matures.

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DUSMAHOMED Goolamally (DTM/11A/PT/110520)

Strategic Management (MGMT 2301) 2012

Cash Cows represent business units having a large market share in a mature, slow growing industry. Cash cows require little investment and generate cash that can be utilized for investment in other business units. These SBUs are the corporations key source of cash, and are specifically the core business. They are the base of an organization. These businesses usually follow stability strategies. When cash cows lose their appeal and move towards deterioration, then a retrenchment policy may be pursued. Question marks represent business units having low relative market share and located in a high growth industry. They require huge amount of cash to maintain or gain market share. They require attention to determine if the venture can be viable. Question marks are generally new goods and services which have a good commercial prospective. There is no specific strategy which can be adopted. If the firm thinks it has dominant market share, then it can adopt expansion strategy, else retrenchment strategy can be adopted. Most businesses start as question marks as the company tries to enter a high growth market in which there is already a market-share. If ignored, then question marks may become dogs, while if huge investment is made, and then they have potential of becoming stars. Dogs represent businesses having weak market shares in low-growth markets. They neither generate cash nor require huge amount of cash. Due to low market share, these business units face cost disadvantages. Generally retrenchment strategies are adopted because these firms can gain market share only at the expense of competitors/rival firms. These business firms have weak market share because of high costs, poor quality, ineffective marketing, etc. Unless a dog has some other strategic aim, it should be liquidated if there is fewer prospects for it to gain market share. Number of dogs should be avoided and minimized in an organization.

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DUSMAHOMED Goolamally (DTM/11A/PT/110520)

Strategic Management (MGMT 2301) 2012

When should I use the BCG matrix model? Each product has its product life cycle, and each stage in product's life-cycle represents a different profile of risk and return. In general, a company should maintain a balanced portfolio of products. Having a balanced product portfolio includes both high-growth products as well as low-growth products. A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. An example of this product would be an iPod. A low-growth product is for example an established product known by the market. Characteristics of this product do not change much, customers know what they are getting, and the price does not change much either. This product has only limited budget for marketing. The is the milking cow that brings in the constant flow of cash. An example of this product would be regular Colgate toothpaste. But the question is, how do we exactly find out what phase our product is in, and how do we classify what we sell? Furthermore, we also ask, where does each of our products fit into our product mix? Should we promote one product more than the other one? The BCG matrix can help with this. The BCG matrix reaches further behind product mix. Knowing what we are selling helps managers to make decisions about what priorities to assign to not only products but also company departments and business units.

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DUSMAHOMED Goolamally (DTM/11A/PT/110520)

Strategic Management (MGMT 2301) 2012

Limitations of BCG Matrix The BCG Matrix produces a framework for allocating resources among different business units and makes it possible to compare many business units at a glance. But BCG Matrix is not free from limitations, such as BCG matrix classifies businesses as low and high, but generally businesses can be medium also. Thus, the true nature of business may not be reflected. Market is not clearly defined in this model. High market share does not always leads to high profits. There are high costs also involved with high market share. Growth rate and relative market share are not the only indicators of profitability. This model ignores and overlooks other indicators of profitability. At times, dogs may help other businesses in gaining competitive advantage. They can earn even more than cash cows sometimes. This four-celled approach is considered as to be too simplistic. Are there any problems with the BCG matrix model? Some limitations of the BCG matrix model include: The first problem can be how we define market and how we get data about market share A high market share does not necessarily lead to profitability at all times The model employs only two dimensions market share and product or service growth rate Low share or niche businesses can be profitable too (some Dogs can be more profitable than cash Cows) The model does not reflect growth rates of the overall market The model neglects the effects of synergy between business units Market growth is not the only indicator for attractiveness of a market There are probably even more aspects that need to be considered in a particular use of the BCG model.
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