The author of the method of strategic choice based on the concept of rivalry is Harvard Business School professor M. Porter, who proposed a set of standard strategies based on the idea that each of them is based on a competitive advantage and the company must achieve it by choosing its own strategy.
It must decide what type of competitive advantage it wants and in what area.
Thus, the first component of strategic choice according to this model is competitive advantage, which is divided into two main types: lower costs and product differentiation.
Low costs reflect a firm's ability to develop, produce, and sell a comparable product at a lower cost than its competitors. By selling a product at the same (or approximately the same) price as its competitors, the company in this case receives a greater profit.
true story. Thus, Korean firms producing steel and semiconductor devices defeated foreign competitors in this way. They produce comparable products at very low costs, using low-paid but highly productive labor and modern technology and equipment purchased abroad or manufactured under license.
Differentiation is the ability to provide the buyer with unique and greater value in the form of new product quality, special consumer properties or after-sales service. Thus, German machine tool firms compete using differentiation based on high product performance, reliability and fast maintenance. Differentiation allows the firm to dictate high prices, which, while costs are equal to competitors, provides greater profits.
The second component of strategic choice is the area of competition that the company focuses on within its industry. One reason competition is important is that industries are segmented. Almost every industry has clearly defined product types, multiple distribution and sales channels, and multiple types of buyers. Basically, the choice in this component is as follows: either compete on a “broad front” or target one sector of the market. For example, in the automotive industry, leading American and Japanese companies produce a whole range of cars of different classes, while BMW and Daimler-Benz (Germany) primarily produce powerful, high-speed and expensive high-class cars and sports cars, and Korean companies Hyundai and Daewoo focused on small and ultra-small class cars.
M. Porter combines the type of competitive advantage and the area in which it is achieved in the concept of typical strategies, which are shown in Fig. 4.3.
For example, in shipbuilding, Japanese firms have adopted a differentiation strategy and offer a wide range of high-quality ships at high prices. Korean shipbuilding firms have chosen a cost leadership strategy and offer a variety of types of good quality ships, but the cost of Korean ships is lower than Japanese ones. The strategy of successful Scandinavian shipyards is focused differentiation. They produce specialized types of ships, such as icebreakers or cruise ships, in the manufacture of which they use specialized
4.3. Typical competitive strategies according to M. Porter
new technologies. These vessels are sold at a very high price to justify the cost of labor, which is expensive in the Scandinavian countries. Finally, Chinese shipbuilders, who have recently begun to actively compete in the global market, offer relatively simple and standard ships with even lower costs and at lower prices than Korean ones (strategy - focusing on the cost level).
An example of competitive strategies in the automotive industry is given by J. Thompson.
For example, the Toyota company is known all over the world for the low cost of its cars while maintaining a certain, fairly high level of quality.
Fig.4.4. M. Porter's model of competitive strategies regarding the global auto industry (situation at the end of the 80s - early 90s)
In turn, General Motors, competing with Toyota in the same market segments, focused on differentiating its products by a variety of colors and specifications. Thus, in 1988, 105 Vauxhalls car models were offered on the UK market at prices ranging from £4,800 to £20,500.
Hyundai is known all over the world for producing small cars at low cost (Pony 1.3 and Pony 1.6).
The strategy of BMW and Mercedes is designed to produce high-quality cars for a certain, wealthy segment of the population. At the same time, the difference in the type of additional specifications makes it possible to achieve exclusivity of the car being sold for a specific buyer’s order, and the high image of the companies themselves allows them to occupy a stable market share.
Thus, the underlying concept of generic strategies is the idea that every strategy is based on competitive advantage and that in order to achieve it, a firm must justify and select its strategy.
The scheme for making a profit by a company, depending on the chosen standard strategy, can be presented as follows (Fig. 4.5).
When it comes to cost leadership strategy, there are many ways to reduce costs while maintaining industry average quality. However, some ways to reduce costs involve moving along the experience curve, increasing the scale of production to achieve maximum savings.
In Fig. Figure 4.6 shows an example of an experience curve. Lower cost levels are achieved as production volumes increase.
Rice. 4.5. Typical strategies and profitability
Rice. 4.6. Experience curve
production, i.e. repeated production of the same type of product will lead to finding a more efficient method of its production.
The philosophy of economies of scale is based on the so-called experience curve. It was proposed in 1926 when, through empirical analysis, it was discovered that unit production costs fell by 20% whenever production doubled. This theory emphasizes increasing a company's market share because it allows it to increase production and move down the curve toward lower production costs. This is how you can achieve a higher level of income and profit margins and, consequently, greater competitiveness of the enterprise in the market.
In turn, the transfer of production skills and the distribution of areas of activity allows a diversifying enterprise to receive higher profits from joint activities than those that would be received by independently operating industries. In this case, economies of scale in production arise when it becomes possible to reduce the costs of managing disparate productions through centralized management, as well as to reduce costs at any link in the production process due to existing internal relationships. Although this strategic fit can occur at any point in the production process, it is most often viewed in three main ways.
In Fig. Figure 4.7 shows economies of scale in industry.
Unit costs
Rice. 4.7. Economies of scale
If the volume of production on this curve corresponds to point X, then in terms of the cost of production you are inferior to the company whose position corresponds to point Y on the graph.
The main idea behind these two effects is that they imply that sales volume is an important prerequisite for achieving low production costs. This path to achieving better results involves capturing and maintaining a large market share. As a result, when multiple firms are involved, competition for market share can greatly undermine any low-cost advantage if prices are driven down by firms seeking to achieve specific sales volumes (Figure 4.8).
Rice. 4.8. Cost reduction and price reduction
How does low cost give a firm a competitive advantage if its products are essentially the same as those of other manufacturers in the industry? Low cost can allow a company to:
First, conduct price competition if necessary;
Secondly, to accumulate profits that can be reinvested in production to improve the quality of products, while the price of these products will correspond to the average price in the industry.
Thus, it is not low cost itself that creates competitive advantages, but the opportunities that it provides for improving the competitiveness of products.
There are several types of risks associated with a cost leadership strategy.
First, an overemphasis on efficiency can cause a firm to become unresponsive to changing customer demands. In particular, in many industries, consumer demands have become more modern and individualized. A low-cost manufacturer who produces a standard, unbranded product may one day find that its customer base is being squeezed out by competitors who are tweaking and improving their products to suit the times.
Second, if the industry is truly a consumer goods industry, then the risk of a low-cost strategy is significantly higher. This is because in this case there can only be one cost leader, and if firms compete exclusively on price, then being second and third in cost provides only minor advantages.
Third, many ways to achieve low costs can be easily copied. Competitors, for example, may acquire the plant with the most efficient scale of production, and as the industry matures, the effect of the experience curve will be negated, since most firms will already have the full benefits of accumulated experience at their disposal. But perhaps the greatest threat comes from competitors who are able to price at the industry's marginal cost because they have other, more profitable product lines that more than cover their fixed production costs.
If we talk about a differentiation strategy, it means that it is necessary to be different from others in some way. The key to success in differentiation is uniqueness, which is valued by customers. If customers are willing to pay a premium for these unique features, and if costs are controlled by the firm, then the price premium will lead to greater profitability.
Central to this strategy is understanding the buyer's needs. The company needs to know what is valued by customers, provide exactly the required set of qualities and, accordingly, set the price. If the company has achieved success, then a certain group of buyers in this market segment will not consider products offered by other companies as substitutes for its products. The company thus creates a group of regular customers, almost a mini-monopoly.
A successful differentiation strategy reduces the intensity of competition that often occurs in consumer goods industries. If suppliers raise prices, “loyal” buyers, with little price sensitivity, are likely to accept the eventual price increase proposed by the manufacturer of the exclusive product. Moreover, customer commitment acts as a kind of barrier to new manufacturers entering this market and replacing this product with other similar products.
However, a differentiation strategy is not a risk-free strategy.
First, if the basis of differentiation, that is, the way a firm wants to be different from others, can be easily copied, other firms will be perceived as offering the same product or service. Then competition in this industry will most likely turn into price competition.
Second, firms that focus on broad differentiation may be marginalized by companies that focus on only one specific segment.
Third, if the strategy is based on a process of continuous product improvement (with the goal of always being one step ahead of its competitors), then the firm risks simply being at a disadvantage, since it will incur maximum costs for research and new development, while competitors will use the results of its activities to their advantage.
Fourth, if the firm ignores the costs of differentiation, then raising the price will not lead to higher profits.
The term differentiation is widely used in both strategic planning and marketing. However, it can also be used in a narrower sense when determining a firm's position in an industry. In most industries, companies do not offer products that are exactly the same as their competitors. For example, they may differ in style, in the distribution network used, in the level of after-sales service. If such differences lead to the fact that the company can charge a higher price than the existing average price in the industry, then the company can be considered to be differentiating, to use M. Porter's terminology. However, in most cases, such differences only give us an idea of the position in the industry of a particular company.
Because there are only a small number of industries that produce a product in its “pure form,” most firms in the industry inevitably have to offer something slightly different to stay in the game. Such firms will therefore not be differentiators unless they can charge a higher price.
A focus strategy involves selecting a narrow segment or group of segments in an industry and serving the needs of that segment more effectively than competitors serving a broader market segment can. The focus strategy can be used either by a cost leader that serves a given segment or by a differentiator that meets the special requirements of a market segment in a way that allows it to charge a high price. So firms can compete on a broad front (serving multiple segments) or focus on a narrow area (targeted action). Both focus strategies are based on the differences between the target segments and the rest of the industry. It is these differences that can be called the reason for the formation of a segment that is poorly served by competitors who operate on a large scale and do not have the ability to adapt to the specific needs of this segment. A cost-focused firm can outperform broad-based firms because of its ability to eliminate excesses that are not valued by that segment.
Moreover, broad differentiation and focused differentiation are often confused. The main difference between the two is that a broad differentiation company bases its strategy on widely valued differentiators (e.g., IBM in computers), while a focused manufacturer seeks out and satisfies a segment with specific needs. much better.
The obvious danger of the focusing strategy is that the target segment may disappear for some reason. In addition, some other companies will enter this segment, surpassing this company in focus, and lure away customers, or for some reason (for example, tastes will change, demographic changes will occur) the segment will shrink.
However, there is a certain appeal in the idea of focusing on a narrow target market segment and being able to tailor your product to the needs of specific consumers. If a company understands this correctly, it can benefit significantly. But if a firm was once a manufacturer of a large number of different products for a wide range of consumers and decided to focus its efforts on the high-income segment using a strategy of focused differentiation, then this may lead to unfavorable consequences in the future.
If a firm discovered an opportunity to make a profit by selling a product at a higher price to certain consumers, then you can be sure that other firms were also able to consider this option. Before the firm realizes it, price-sensitive consumers will have a huge number of firms to choose from, thereby ending the firm's ability to charge a higher price. In addition to price pressure, there is another problem related to the level of costs. A firm's transfer of interest from a broad market to a limited segment usually means a sharp reduction in production volumes. In turn, this can lead to extremely high unit costs unless the firm has reduced overhead costs, which must accommodate lower production volumes and are driven by a narrower customer base. Thus, a firm can terminate its operations using both price and cost pressures.
The biggest strategic mistake, according to M. Porter, is the desire to chase all the rabbits, that is, to use all competitive strategies at the same time. In other words, according to M. Porter, a company that has not made a choice between strategies - to be a cost leader or to engage in differentiation - risks being stuck halfway. Such companies try to achieve advantages based on both low cost and differentiation, but actually gain nothing. Poor performance results from the fact that a cost leader, a differentiator, or a firm with a focused strategy will be in a better market position to compete in any segment. The firm stuck in the middle will receive a significant share of the profits only if the industry situation is extremely favorable or if all other firms are in a similar position. Rapid growth in the early stages of an industry's life cycle may allow such firms to generate good returns on their investments, but as the industry matures and as competition becomes more intense, firms that have not made a choice between existing alternative strategies , risk being forced out of the market.
Following one or another standard strategy makes it necessary for the company to have certain restrictions (barriers) that would make it difficult for competitors to imitate (copy) its chosen strategies. Because these barriers are not insurmountable, a firm usually needs to offer its competitors a changing goal through constant investment and renewal.
With all the distinctness and diversity of M. Porter’s typical strategies, they nevertheless have common elements: both strategies require entrepreneurs to pay great attention to both product quality and cost control. Therefore, it is very important to consider these two strategies not as mutually exclusive alternatives, but as orientations (Figure 4.9).
Rice. 4.9. Differentiation and efficiency
From Fig. Figure 4.9 shows that a firm at position A on the graph would undoubtedly seek to pursue a strategy aimed at differentiation by serving a specific market segment, offering a product with a unique combination of properties, and would be able to charge a higher price.
The firm in position B is pursuing a purely efficient strategy. Efforts are aimed at reducing costs at all stages of work. The main profit is obtained due to low costs at average prices for the industry.
The firm in position C is pursuing neither strategy. As M. Porter puts it, this company is “stuck in the middle.” Lack of differentiation means an inability to raise prices above the industry average, and efficiency leads to higher costs.
A firm in position D is in an advantageous position because it has advantages in both strategies. A firm's ability to differentiate leads to the ability to charge a higher price, while at the same time efficiency provides cost advantages. At the same time, it is quite difficult for a company to take advantage of two strategies simultaneously. This is explained by the fact that differentiation usually leads to the need to improve products, which in turn leads to increased costs. Conversely, achieving the lowest cost in an industry usually involves the firm being required to move away from differentiation due to product standardization. But most often, significant difficulties arise due to the incompatibility, and even contradiction, of the requirements for organizing production, which each strategy implies.
F. Kotler offers his own classification of competitive strategies based on the market share owned by the enterprise (firm).
1. “Leader” strategy. The “leader” company in the product market occupies a dominant position, and its competitors also recognize this. The leading firm has a whole range of strategic alternatives at its disposal:
Expansion of primary demand, aimed at finding new consumers of the product, expanding the scope of its use, increasing the one-time use of the product, which is usually advisable to apply at the initial stages of the product’s life cycle;
A defensive strategy adopted by an innovating firm to protect its market share from its most dangerous competitors;
An offensive strategy, most often consisting of increasing profitability by maximizing the use of the experience effect. However, as practice shows, there is a certain limit, beyond which further increase in market share becomes unprofitable;
A demarketing strategy that involves reducing one's market share to avoid accusations of monopoly.
2. The “challenger” strategy. A firm that does not occupy a dominant position can attack the leader, that is, challenge him. The goal of this strategy is to take the place of leader. In this case, the key becomes the solution of two important tasks: choosing a springboard for carrying out an attack on the leader and assessing the possibilities of his reaction and defense.
3. “follow the leader” strategy. A “follower” is a competitor with a small market share that chooses adaptive behavior by aligning its decisions with those of competitors. This strategy is most typical for small businesses, so let’s take a closer look at possible strategic alternatives that provide small businesses with the most acceptable level of profitability.
Creative market segmentation. A small firm should focus only on certain market segments in which it can better exercise its competence or has greater agility in order to avoid clashes with leading competitors.
Use R&D effectively. Since small businesses cannot compete with large firms in basic research, they must focus R&D on improving technology to reduce costs.
Stay small. Successful small businesses focus on profit rather than increasing sales or market share, and they strive for specialization rather than diversification.
A strong leader. The influence of the leader in such firms extends beyond the formulation of strategy and communication of it to employees, also covering the management of the day-to-day activities of the company.
4. Specialist strategy. The “Specialist” focuses primarily on only one or several market segments, i.e., he is more interested in the qualitative side of the market share. It seems that this strategy is most closely associated with M. Porter's focusing strategy. Moreover, despite the fact that the “specialist” firm dominates in a certain way in its market niche, from the point of view of the market for a given product (in the broad sense) as a whole, it must simultaneously implement a “following the leader” strategy.
Since the mid-90s of the last century, the theory of “core competencies of a corporation” by G. Hamel and K. K. Prokholad has become a popular concept for developing strategies. The main ideas of this direction in the field of strategic management were published in the well-known book in the West by these authors, “Competing for the Future,” published in 1994 and translated into Russian.
Managers who preach this theory see further than traditional business administrators. They use the power of imagination to create products, services and even industries that do not yet exist, and then turn their dreams into reality. In this way, they create a new market space in which they can dominate the competition, since this market space was invented by them.
To do this, as G. Hamel and K. K. Prokholad believe, managers should perceive their company not as a set of enterprises, but as a combination of key basic components, that is, a combination of skills, abilities and technologies that allow them to provide benefits to consumers. To go not from the market to the product produced by the company, but from the product to the market, even a completely new one - this is the essence of the theory of core competencies. G. Hamel and K. K. Prahalad write: “Diversified companies are like a tree, the trunk and largest branches of which are the core products, the other branches are the divisions, and the leaves, flowers and fruits are the final products. The root system, which provides nutrition, support and stability to the tree, forms key competencies. When analyzing competitive products, don't lose sight of the forces behind them. Yes, the crown is the decoration of trees, but we should not forget about the roots.”
The key components are the “form of existence”, the result of the collective experience of the organization as a whole, especially when it comes to coordination
Rice. 4.10. Competencies as the roots of competitiveness
dynamization of actions for the production of a wide range of products and integration of various technological areas.
Thus, what makes it difficult for companies to predict their competitive future is that management looks forward through the narrow prism of the markets they exist and serve. But any company, according to G. Hamel and K. K. Prahalad, can be looked at from different points of view, for example, the Honda company.
Do Honda's managers view their company only as a motorcycle manufacturer or as a company with unique capabilities in the design and production of engines and electric trains? The view expressed in the first part of each of these questions is limited and tends to make future products and services appear very similar to those produced and supplied in the past. For example, the opinion “Honda only makes motorcycles” leads to the conclusion that the company should focus on producing more modern motorcycles.
The second point of view is liberating and suggests a wide range of future products and services, that is, it encourages the company to develop, produce and sell cars, lawn mowers, mini tractors, marine engines and generators in addition to motorcycles.
Immediately after publication, the concept of G. Hamel and K. K. Prahalad was criticized. The main “thesis against” was very reminiscent of the criticism of strategic planning in the early seventies of the last century: the main thing is not to develop a system of key competencies and even to have them, but the main thing is to implement them. Examples of Microsoft, which took advantage of the development of Apple, General Motors, whose “strategic architecture” led to a decrease in market share from 46 to 35%, confirmed this position. Core competencies are only part of competitive success. We need more compelling arguments. In 1995, they were proposed by M. Tracey and F. Wiersema in their book “The Discipline of Market Leaders,” which was only 208 pages long. They presented three value disciplines, or ways of delivering value to the consumer - operational excellence, product leadership and customer intimacy. Companies that want to gain a competitive advantage and dominate the market must choose only one of these disciplines and achieve excellence in it.
1. Operational Excellence. Examples of companies with such value discipline are AT&T, McDonald's, General Electric. They deliver to their consumers a combination of quality, price and ease of purchase that no one else in the market can match. These companies do not offer new products or services and They do not cultivate special, non-traditional relationships with their consumers. They guarantee low prices or unconditional service upon request.
The main emphasis is on the optimization and rationalization of production processes, strict management, the development of close and unhindered relationships with suppliers, intolerance of losses and rewarding efficiency, provision of standard basic services without disputes with the consumer and at his first request.
2. Product leadership. Examples of companies with such value discipline are Microsoft, Motorola, Reebok, Revlon. Companies of this type focus their efforts on offering goods and services that push the existing boundaries of efficiency and quality and introduce fundamentally new consumer properties to their products. The main emphasis is on invention, product development and market exploitation, decentralized management, exceptional creativity and speed of commercialization of ideas, speed of decision-making and appropriate organization of production processes.
If in the first case, with production excellence, the key to success is the skillful interweaving of unique knowledge, the use of technology and strict management, then in this case it is overcoming constant tension, ensuring an optimal balance between the modernization of old products and the development of a new generation product.
3. Proximity to the consumer. Examples of such companies with this value discipline are IBM, Cannon, Airbone Express. They deliver value through proximity to the consumer, delivering not what the market wants, but what the specific consumer requires, constantly adapting their products and services to the needs of the consumer at a reasonable price. The main emphasis is on developing long-term relationships with consumers, adapting products and services to customer requirements, and delegating responsibility to employees who work directly with customers. The key to the success of such companies is the combination of skilled workers, the use of modern methods of implementing a wide network of capacities to provide products and services.
Just like M. Porter with his competitive strategies, M. Tracy and F. Wiersema firmly argue that for successful competition, a company must choose one of the value disciplines, and not scatter forces and resources, causing tension, confusion and death. However, the choice itself is one of the central points of the concept and, according to the authors, is divided into three rounds.
Round 1: Understanding the Status Quo
During this round, top management must find out what the current position of the company is, that is, determine it from the standpoint of the realities of the external business environment and the resource potential of the company.
Round 2: Discuss realistic options
In this round, senior management moves from analyzing the current situation to discussing options for the future. Managers identify opportunities (for each option) of value disciplines and estimate the approximate costs of their implementation.
Round 3. Development of specific projects and decision making
At this stage, senior management transfers their plans to special teams who translate the main ideas into specific projects, and senior management is given the right to make the final decision - the choice of a specific value discipline that will provide the firm with market dominance through appropriate competitive advantages.
The views of M. Tracy and F. Wiersema turned out to be the seeds that fell on fertile soil, since they returned entrepreneurs to the traditional, understandable concept of competition as a head-to-head battle on the principle “my win is your loss.” However, modern trends in the global economy have turned out to be more complex and multifaceted. That is why neither the concept of G. Hamel and K. K. Prahalad, nor the views of M. Tracy and F. Wiersema could provide universal recipes for all occasions.
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M. Porter identified three main strategies that are universal and applicable to any competitive force. This - cost advantage, differentiation and focus.
Cost advantage creates greater freedom of choice of actions both in pricing policy and in determining the level of profitability of the product. The cost reduction strategy was widely used in the late 19th and early 20th centuries. Today it is gaining new popularity due to the fact that developed market economies have entered the so-called “era of deflation” (due to the saturation of markets), meaning a general decline in prices and incomes of the population. The main disadvantage of the strategy: due to cost reduction, there is often an unjustified decrease in the quality of the product produced.
Differentiation means the creation by a company of a product or service with unique properties, which are most often secured by a trademark. When the uniqueness of a product is secured by a simple declaration, then they talk about imaginary differentiation. This strategy became widespread in developed economies in the second half of the 20th century. due to saturation and individualization of consumer demand. The main disadvantage of the strategy: significant investments are often required in R&D and innovation processes.
Focusing- this is the concentration of attention on one of the market segments: a special group of buyers, goods or a limited geographical region of their distribution. Its main disadvantage is the requirement for accurate results of marketing research, which is not always possible.
Each of these strategies requires the necessary resources, skills and correct management actions of managers.
As a result, in our time, five options for approaches to a company’s competition strategy have been formed, namely:
1. Cost leadership strategy provides for a reduction in the total cost of production of a product or service, which attracts a large number of buyers.
2. Broad differentiation strategy is aimed at giving the company's products specific features that distinguish them from the products of competing companies, which helps attract more customers.
3. Optimal cost strategy enables customers to get more value for their money through a combination of low costs and broad product differentiation. The goal is to provide optimal (lowest) costs and prices relative to manufacturers of products with similar features and quality.
4. Focused strategy, or market niche strategy based on low costs, is aimed at a narrow segment of buyers, where the company is ahead of its competitors due to lower production costs.
5. Formulated strategy, or market niche strategy, based on product differentiation, aims to provide representatives of the selected segment with goods or services that best meet their tastes and requirements.
 |
Fig. 4.1 Five main competitive strategies
(from the book Michael E. Porter. Competitive Strategy: New York: Free Press, 1980. P.35-40)
In Fig. Figure 4.1 shows the five main approaches to competitive strategy; each of them occupies different positions in the market and provides completely different approaches to business management. In table Figure 4.1 presents the characteristic features of these competitive strategies (for simplicity, the two varieties of focused strategy are combined under one heading, since their only distinguishing feature is the basis of competitive advantage.
Table 4.1. Distinctive features of the main competitive strategies
| Characteristic | Cost leadership | Wide differentiation | Optimal costs | Focused low costs and differentiation |
| Strategic goal | Targeting the entire market | Targeting the entire market | Value-conscious buyer | A narrow market niche where consumer needs and preferences differ significantly from the rest of the market |
| The basis of competitive advantage | Production costs are lower than competitors | The ability to offer customers something different from competitors | Giving customers great value for their money | Lower costs in a niche served or the ability to offer customers something special that suits their needs and tastes |
| Assortment set | Good basic product with no frills (reasonable quality and limited choice) | Many product varieties, wide choice, strong emphasis on choice among different characteristics | Product characteristics - from good to excellent, from inherent qualities to special ones | Meeting the specific needs of the target segment |
| Production | Constant search for ways to reduce costs without loss of quality and deterioration of the main characteristics of the product | Finding ways to create value for customers; commitment to creating superior products | Introduction of special qualities and characteristics at low costs | Production of goods corresponding to a given niche |
| Marketing | Identification of those product characteristics that lead to cost reduction | Creating such product qualities for which the buyer will pay Setting an increased price to cover the additional costs of differentiation | . Offering products similar to competitors' products at lower prices | Linking focused, unique capabilities to meet specific buyer requirements |
| Strategy support | Reasonable prices/good value | Creating feature differences that people will pay for Focus on a few key differentiators; strengthening them and creating a reputation and image of the product | Individual management of cost reduction and improvement of product/service quality at the same time | Maintaining a niche service level higher than that of competitors; the task is not to reduce the company’s image and not to scatter efforts by developing other segments or adding new products to expand its presence in the market |
Typical development strategies
Existing reference (standard) organization development strategies:
· concentrated growth strategies;
· integrated growth strategies;
· diversified growth strategies;
· reduction strategies.
Let's look at each of them.
Group 1. Concentrated growth strategies:
· a strategy for strengthening the position of an already developed product in an already developed market (through marketing efforts);
· strategy for finding new markets for an already produced product;
· strategy for developing a new product in an already developed market.
Group 2. Integrated growth strategies:
· strategy reverse vertical integration(integration with suppliers);
· strategy forward integration(integration with distributors and sales organizations).
Group 3. Diversified growth strategies:
· strategy centered diversification(search for additional opportunities for the manufacture of new products based on existing old production; it remains at the center of the business);
· strategy horizontal diversification(production of new products using new technology, different from that used in an already developed market);
· strategy conglomerate diversification(the company is expanding through the production of new products that are technologically unrelated to those already produced; new products are sold in new markets; this is the most complex development strategy).
Group 4. Reduction strategies:
· business liquidation strategy;
· “harvest” strategy (reducing purchases and labor costs, obtaining maximum income in the short term from the sale of existing products);
· downsizing strategy (closing or selling divisions or businesses that do not fit well with the remaining ones);
· cost reduction strategy (development of a number of cost reduction measures).
Topic 5 SBU and identifying their capabilities:
Michael Porter identifies three basic competitive strategies for enterprises:
1. Absolute cost leadership
2. Differentiation
3. Focus
In some, although rare, cases, a firm may be able to successfully implement more than one approach.
The Low Cost Leadership strategy aims to achieve production at the lowest cost in the industry. The competitive advantage here is obvious - low costs compared to competitors allow the company to dictate the lower limit of the market price and, as a result, increase its market share. This provides the company not only with greater stability in relation to industry competitors, but also with greater opportunities to counter the entry of third-party firms and substitute products into the market. This type of strategy is effective when the industry is characterized by a high degree of product standardization and industry demand is sensitive to price changes.
A company can become a price leader only if it a) provides better cost management (control over production factors) and b) is able to transform cost chains in the direction of reducing them. The first can be achieved by intensifying production by refining technology, modernizing equipment and distributing production experience across departments, as well as increasing economies of scale by increasing market share and reducing product differentiation. The second can be realized by reducing production costs by simplifying products, using different technology, cheaper materials and automation of expensive processes, as well as by reducing transaction costs through the use of new methods of promoting goods, moving production to economically favorable regions (proximity of sources of raw materials and buyers, low taxes) and deepening vertical integration both towards suppliers and towards distribution channels.
At the same time, the concentration of a company's efforts on reducing costs makes it vulnerable to changes in demand. In the event of technological breakthroughs (the creation of a new type of product) and changes in consumer preferences, the company may lose all demand, despite the low price. In addition, the low-price leadership strategy has the disadvantage that it can be easily imitated by competitors, reducing its long-term viability, thereby limiting the strategy's value to the firm.
Cost leadership imposes a number of obligations on the firm that it must fulfill in order to maintain its position: reinvest in modern equipment, ruthlessly write off obsolete assets, avoid expanding the specialization of production, and monitor technological improvements. “To achieve cost leadership, it is necessary to actively create production capacity at a cost-effective scale, vigorously pursue cost reductions based on the accumulation of experience, tightly control production and overhead costs, avoid small transactions with customers, minimize costs in areas such as research and development, service , sales system, advertising, etc. All this requires great attention to cost control on the part of management. Lower costs relative to competitors become the keynote of the overall strategy, although product and service quality and other areas cannot be ignored,” Porter writes.
A low-cost position protects a firm from competitors because it means it can earn profits when its rivals have lost that ability. A low-cost position protects the firm from powerful buyers, since the latter can only use their power to reduce prices to the level of less efficient competitors. Low costs protect against powerful suppliers, giving the firm a greater degree of flexibility as input costs increase. The factors that provide a low-cost position also tend to create high barriers to entry associated with economies of scale or cost advantages. Finally, a low-cost position typically places a firm in a more favorable position with respect to substitutes than its competitors. Thus, a low-cost position protects the company from all five competitive forces.
A low cost strategy is especially important in the following cases:
· price competition among sellers is especially strong;
· the product produced in the industry is standard;
· differences in price for the buyer are significant;
· most customers use the product in the same way;
· costs for buyers to switch from one product to another are low;
· There are a large number of buyers who have serious power to reduce the price.
Risks of a low-cost strategy: technological changes that undermine past investments or experience; the ability of companies or followers new to the industry to reduce costs by copying experience or investing in the latest equipment; the firm's inability to respond to necessary product changes or market changes due to increased cost concerns; cost inflation, which reduces a firm's ability to maintain sufficient price differentials to offset brand prestige or other competitive advantages in differentiation.
General requirements for resources, qualifications and production organization when implementing a low-cost strategy:
· Real investments and access to capital;
· Skills in technological process development;
· Careful supervision and control over labor processes;
· Product design to facilitate production;
· Low-cost distribution and sales system;
· Strict control over the level of costs;
· Frequent and detailed control reports;
· Clear organizational structure and responsibility;
· Incentives based on clear quantitative indicators.
The second basic strategy is the strategy of differentiating the product or service offered by the company, that is, creating a product or service that would be perceived as unique within the entire industry. Differentiation can take many forms: by design or brand prestige, by technology, by functionality, by service, by dealer network or other parameters. Ideally, a company differentiates itself in several areas. The differentiation strategy is associated with giving the product specific properties that will provide the company with consumer loyalty to its products.
A differentiation strategy, when successfully implemented, is an effective means of achieving profits above the industry average because it creates a strong position to confront the five competitive forces, although in a different way than a cost leadership strategy. Differentiation protects against competitive rivalry because it creates consumer brand loyalty and reduces sensitivity to product price. It leads to an increase in net profit, which reduces the severity of the cost problem. Consumer loyalty and the need for competitors to overcome the uniqueness factor creates a barrier to entry into the industry. Differentiation provides higher levels of profit to counter the power of suppliers, and also helps moderate the power of buyers, since the latter are deprived of comparable alternatives and are therefore less price sensitive. Finally, a firm that has differentiated and earned customer loyalty has a more favorable position with respect to substitutes than its competitors.
The use of a differentiation strategy is effective when there is a high consumer appreciation of the distinctive properties of the product and there are a variety of ways to use it, and product differentiation itself has many aspects. It can be achieved on the basis of technical excellence, quality, service delivery, value for money (credit sales). The most attractive differentiation is the one that is difficult or expensive to imitate.
The main task of developing a differentiation strategy is to ensure a reduction in the total costs of consumers for using the product, which is achieved by increasing convenience and ease of use and expanding the range of satisfaction of consumer needs. To do this, the firm must focus its efforts on identifying sources of value for the consumer, giving the product features that increase consumer satisfaction, and providing support in the process of consuming the product. All this is associated with extensive research and development and active marketing activities. Since the success of a differentiation strategy depends on the consumer's perception of the value of the product, the risks of differentiation are:
Cost differentials between the differentiation firm and the low-cost firm may become too large to retain the loyalty of customers who will choose savings over exceptional features of the product or service.
· as consumer experience accumulates, the importance of the differentiation factor for more sophisticated buyers may decrease;
· copying reduces the resulting differentiation, which typically occurs as an industry ages.
General requirements for resources, qualifications and production organization when implementing a differentiation strategy:
· Opportunities to attract highly qualified labor, researchers and creative personnel;
· Product design;
· Creative skills;
· High potential for marketing and fundamental research;
· High reputation for product quality or technological leadership of the company;
· Significant industry experience or a unique combination of skills acquired in other industries;
· Close cooperation with sales channels;
· Close functional coordination of R&D, product design and marketing;
· Subjective assessments and incentives instead of quantitative indicators.
Focus, or concentration, is a type of strategy in which a firm concentrates its efforts on a specific group of customers, product type, or geographic market segment. The competitive advantage of a company generated by the specialization of activities can be associated with both lower costs and the uniqueness of the product. Even if a focus strategy does not lead to low cost or differentiation in terms of the market as a whole, it can achieve one or both of these positions in the space of a narrower target market. However, if the goals of a low-cost or differentiation strategy apply to the industry as a whole, then a focusing strategy means concentrating on a narrower goal, which is reflected in the activities of all functional areas of the business.
The benefits of such a strategy come from customer loyalty, which offsets the impact of economies of scale. A firm can pursue such a strategy if it can effectively serve the niche and the size of the niche itself is small enough not to attract large firms.
Focusing is useful when:
· the segment is too large to be attractive;
· the segment has good growth potential;
· the segment is not critical for the success of most competitors;
· a company using a focusing strategy has enough skills and resources to successfully operate in the segment;
· The company can protect itself from challenging competitors due to customer goodwill toward its outstanding ability to serve segment customers. Risks of a focused strategy: there is a possibility that competitors will find an opportunity to approach the company's actions in a narrow target segment; the requirements and preferences of consumers of the target market segment gradually spread to the entire market;
· the segment may become so attractive that it will attract the interest of many competitors.
The following set of risks is associated with focusing:
* increasing cost differences between competitors operating on a broad strategic plan and a firm pursuing a focusing strategy leads to the elimination of the latter's cost advantage in serving a narrow target market or neutralizing the differentiation achieved through focusing;
* narrowing the differences between the products or services in demand in the target market and the products or services in the industry market as a whole;
* a situation in which competitors find narrower market segments within the strategic target market and thereby overcome the advantage of the firm pursuing a focusing strategy.
The general requirements for resources, qualifications and production organization for a focusing strategy are a combination of the conditions and measures indicated above for differentiation and cost leadership strategies aimed at achieving a specific strategic goal.
The famous American professor at Harvard Business School M. Porter proposed basic strategic models based on consideration of the relationship between two important factors - the size of the target market and competitive advantages. Based on these factors, M. Porter identified three basic competitive strategies:
1. Differentiation strategy. According to Porter, means that a firm seeks to give a product unique properties that may be important to the buyer and that distinguish the product from competitors' offerings. Thanks to the distinctive features of the product and its uniqueness, the company receives significant competitive advantages. Differentiation may lie not only in the qualities of the product itself, but also in the image, brand, methods of delivery of goods, after-sales service and other parameters. Differentiation strategies come with higher production and distribution costs. Despite this, firms using this strategy make a profit due to the fact that the market is willing to accept a higher price.
2. Leadership strategy through cost savings. This basic strategy is typical for firms or SZH (strategic business area) that have wide market coverage by offering a standard product at a relatively low price. This strategy is based on high productivity and low production costs. These advantages may come from economies of scale, high technology, or advantageous access to raw materials.
3. Specialization (focusing) strategy. Using this strategy, a company seeks to focus on one segment or small group of customers and serve it (them) better and more efficiently than its competitors. There are two types of focusing strategy. Within a chosen segment, a firm seeks to achieve advantages either through low costs or through differentiation.
Each of the basic strategies has specific risks.
· Cost leadership risk is characterized by the fact that the firm is under constant pressure from competitors. Sources of risk may include: technological advances; new competitors; failure to recognize the need for product changes due to an exaggerated focus on costs; cost-push inflation, which undermines a firm's ability to maintain price gaps.
· The risk associated with differentiation is caused by the main sources:
The gap in costs between a firm using this strategy and firms using a cost leadership strategy turns out to be so large that it cannot maintain customers’ commitment to a special assortment, brand, prestige of the product, etc.
· The risk associated with focusing is due to the following reasons:
the price gap in relation to non-specialized goods becomes too large, i.e. the price level exceeds the effect achieved by focusing; the differences in product requirements between the target segment and the market as a whole are reduced, making the focusing strategy no longer practical.
STRATEGIES FOR INTENSIVE GROWTH (GOALS AND OPTIONS)
An intensive growth strategy is relevant when a company has not yet fully exhausted the opportunities associated with its products in the markets in which it operates.
The following alternatives are available.
1. Market penetration strategies. A penetration strategy should attempt to increase sales of existing products in existing markets. Options:
Development of primary demand, either by attracting new users of the product; encouraging customers to use the product more frequently; encouraging consumers to consume more one-time consumption; discovering new uses
Increasing the market share of goods by improving the product or services provided; change brand positioning; go for a significant price reduction; strengthen the sales network;
Changing brand positioning
Acquiring a market for your old traditional product by: buying a competing company to take over its market share; creating a joint venture to control a large market share.
2. Market development strategies
These strategies aim to increase sales by introducing existing products into new markets. Options:
New segments: address new segments in the same regional market;
New distribution channels: introduce the product to another network, noticeably different from the existing ones.
Territorial expansion: to penetrate into other regions of the country or into other countries.
3. Product development strategies.
Aimed at increasing sales by developing improved or new products targeted at the markets in which the firm operates. Options:
Adding features: increasing the number of features or characteristics of a product and thereby expanding the market.
Expansion of the product range: develop new models or product variants with different levels of quality.
Product line renewal: restore the competitiveness of outdated products by replacing them with functionally or technologically improved products.
Quality improvement: improve the performance of a product’s functions as a set of properties.
Acquisition of a range of goods: supplement or expand the existing range of goods using external means.
STRATEGIES FOR INTEGRATED AND DIVERSIFIED GROWTH (OBJECTIVES AND OPTIONS)
Integrated growth strategy.
1. Backwards Integration Strategies Used to stabilize or protect a strategically important source of supply. Sometimes such integration is necessary because suppliers do not have the resources or know-how to produce the parts or materials the firm needs. Another goal may be access to new technology critical to the success of the underlying business.
2. Forward integration strategies. The motivation in this case is to ensure control over the output channels. In industrial markets, the main goal is to control the development of subsequent links in the industrial chain that are supplied by the company. This is why some basic industries are actively involved in the development of firms that further transform their products. In some cases, forward integration is done simply to better understand the users of your products. In this case, the company creates a branch whose task is to understand the problems of clients in order to better meet their needs.
3. Horizontal integration strategies. These strategies have a completely different perspective. Their goal is to strengthen the firm's position by absorbing or controlling certain competitors. The justifications here can be quite varied: to neutralize an interfering competitor, to achieve a critical mass to obtain economies of scale, to benefit from the complementarity of the product range, to gain access to a distribution network or customer segments.
Diversified growth strategy.
Justified if the value chain in which the firm is located offers little opportunity for growth or profitability, either because competitors are very strong or because the underlying market is in decline. There are concentric and pure diversification.
1. Concentric diversification strategy. In implementing this strategy, the firm goes beyond the industrial chain within which it operates and seeks new activities that complement existing ones technologically and/or commercially. The goal is to create synergies and expand the firm's potential market.
2. Pure diversification strategy. In this case, the company masters activities that are not related to its traditional profile, either technologically or commercially. The goal is usually to update your portfolio.
THE CONCEPT OF STRATEGIC ECONOMIC PORTFOLIO (PURPOSE AND CONDITIONS OF STRATEGIC PLANNING, FULL PLANNING CYCLE, STRATEGIC BUSINESS UNITS, BASIC STEPS IN ANALYZING APPLICATIONS)
SHP are the main elements of building a strategic marketing plan. Each of them has the following general characteristics: specific orientation; precise target market; one of the company's marketing managers at the head; control over your resources; own strategy; clearly identified competitors; clear differentiating advantage.
Research has shown that: for firms producing industrial products, the most important marketing goals are related to profit share, sales force efforts, new product development, sales to primary consumers and pricing policies; for consumer goods manufacturers - with profit sharing, sales promotion, new product development and pricing policies, sales force efforts and advertising costs; for companies operating in the service sector - with the efforts of sales agents, advertising themes, customer service and sales promotion.
Strategic planning requires compliance with 3 basic conditions:
· Management of the company's activities is based on the principles of managing an economic investment portfolio. SHP is a set of activities and goods that the company is engaged in or will be engaged in in the future. When planning, it is considered that each activity in this portfolio has a certain potential for generating profit for the company. The firm's resources are allocated according to this profit potential. It is generally accepted that an agricultural portfolio is good if this portfolio optimally adapts the strengths and weaknesses of the company to the opportunities of the environment.
· A thorough assessment of the prospects for each type of activity in agricultural enterprises. It is provided through the study of analyzes of market demand indicators and the competitive position of the company in a particular market.
· For each direction, SHP develops a plan for achieving long-term strategic goals.
The result of 3 conditions: i.e. the company analyzes its existing agricultural production and makes decisions on which areas should be directed in what volume of resources (financial, labor). The company must develop growth strategies with the possible inclusion of new directions in agricultural production.
Strategic business units (SBU)
SBU is an area of activity of a company that has its own mission and objectives of its activities. The activities of an SBU can be planned independently of other SBUs. An SBU can be a separate product group, a separate product (if it is very unique and has its own market).
An SBU is a business organization that produces a clearly defined list of goods and services sold to a specific homogeneous group of customers and deals with a specific group of competitors. Note that external factors (such as customers or the market) are important in determining the SBU. The essence of strategy is to position your business in such a way as to most effectively meet the needs of consumers at a higher level than your competitor.
Typical characteristics of SBU
· The SBU must be represented on a one-time market with related technologies;
· SBU has all the necessary resources for successful activities (NT, financial, labor base)
· SBU management is not responsible for the performance indicators of its SBU;
The firm may implement corporate strategies and support any individual SBUs to ensure their existence in the market. Due to the synergistic effect, SHP allows you to receive additional profit. Enterprise resource management when analyzing agricultural production is carried out using certain tools. The most common: BCG matrix; GE (General Electric) matrix (McKinsey matrix).