Description
Find an article about a specific company that will allow you to address the
following:
o Paragraph of article summary. 5 points
o Identify the generic strategy (Figure 5.1) they are using and support your
assertion with chapter and article facts. 12 points
o ID two internal factors – Figures 4.1, 4.2, 4.3, Tables 4.1, 4.2, 4.3 – that
they use to support the above strategy. Fully explain the connections between
factor and strategy using supporting information from chapter 4 & 5 within
your analysis. 13 points
Each bullet should be its own section, separated by white space or a new paragraph.
Failure to provide the full article reference: -5 points.
Be sure to follow all aspects of the Chapter Concept usage and citation document
Only legitimate business sources may be used for the BP assignments: Forbes, Fortune,
BusinessWeek, Wall Street Journal, Inc., CNN, Fox, etc. No Wikipedia, Investopedia, etc., or
other random websites. A really good place to find Business Press articles is via Flipster. On the
university website, type “flipster” into the search function in the upper right. Follow the links. Under
“Business” you get Forbes, Fortune, and BusinessWeek.
Each BP assignment starts with one paragraph to summarize the article. Then your task is to use
chapter concepts to analyze your article according to the given Unit’s assignment in Content, and
in the format described in the previous section of the syllabus. Also be sure of the following:
• Specific facts from the BP article must be used. As an example, “They had really good
sales.” is not specific, you need to give the actual numbers the article provided: “Their
sales grew 30% in 2022.”
• These are essay answers and must be detailed. Flesh out your ideas; do not use bullet
points.
• If an assignment asks you to ID two things, both things need chapter concept support.
• On multi-part questions, start a new paragraph or section for each question.
Unformatted Attachment Preview
Chapter Concepts usage and citation
Each question or each part of a multi-part question must have at least one full chapter concept
as its basis. (See the example below for what constitutes a full concept) This concept will be
highlighted and cited, by most immediate heading in the book and then the paragraph number
following that heading (see below). Then use your own words to apply the concept(s) in analysis
of your article situation or quiz question. Be very specific in applying the concept to the article
situation or the quiz question, generic arguments are not analytical.
Example:
Question: What strategy is your firm employing?
Wrong answer #1: This company is using a low price strategy. They have lower prices than all
their rivals and thus they get more customers.
Why this is wrong: It doesn’t use any concepts from the chapter, so it has nothing highlighted and
no citations. It also has no specifics from the student’s chosen article. This answer would earn
zero points.
Wrong answer #2: This company is using a broad low-cost strategy. They are trying to keep
their costs low so they can pass on low prices to their customers.
Why this is wrong: It uses a term from the book and highlights it, but not the full concept of the
broad low-cost strategy. There is no citation. It also offers no detail from the article about what
the company is doing to lower costs. This answer would earn less than 50% credit.
Right answer: This company is using a broad low-cost strategy, defined in the chapter as
striving to achieve lower costs than rivals targeting a broad spectrum of buyers (Broad
Low-Cost Strategies, paragraph 1). They are doing this by reducing their transportation costs
through strategic alliances and by increasing their purchase volumes to lower per-unit materials
costs. However, it’s important for broad low-cost firms to incorporate features and services
that buyers consider essential (Broad Low-Cost Strategies, paragraph 1), so they are also
adding simpler touch-screen controls and a stronger online support system.
Why this is right: Chapter concepts are highlighted and cited, they are beyond just the general
term, there are several (not just in the topic sentence), and they are used to analyze article
specifics. This answer earns full credit. Well done, Dr. Mullane!
NOTE: Use bold or underline to highlight chapter concepts on the BP assignments. D2L does not
always allow bold or underline on the Quiz function, so use ALL CAPS as an alternative to
highlight chapter concepts on your quizzes.
BUAD 4980
Strategic Management Process Rubric
Explanation of the Exemplary rating
Performance Area
Analysis of Internal
Environment
Exemplary Performance
Exhaustive use of all internal analytical tools required by professor. May
include SWOT, financial analysis, value chain analysis, resource
analysis, and others at professor’s discretion.
Follow all handouts and instructions for use of analytical tools.
Analysis of External
Environment
Exhaustive use of all external analytical tools required by professor. May
include Porter’s five forces analysis, competitor/strategic group analysis,
stakeholder analysis, general environmental analysis (demographic,
economic, sociocultural, political/legal, technological, and global), and
others at professor’s discretion.
Follow all handouts and instructions for use of analytical tools.
Development of
Sound Strategies
Strategies are grounded in the accepted generic strategies from
text/lecture.
Appropriate generic strategies used for the company situation: Business
level (cost leadership, differentiation, market segmentation), Corporate
level (vertical integration, related diversification, unrelated
diversification), and International (global, multidomestic, and
transnational, with entry modes).
Follow all handouts and instructions for developing strategic alternatives.
Development of
appropriate
recommendations to
solve strategic
management
problems
Recommendation is justified logically based on competitive advantage
and addressing the problem/issue at hand.
Recommendation is explained organizationally, including functional
implications and implementation issues.
Benefits and consequences of adopting the recommendation are
discussed.
Follow all handouts and instructions for making an appropriate
recommendation.
Hints for Effective Writing, Grammar, and Usage
Grammar and Usage
1. Do not use contractions in business writing (can’t, don’t).
2. Where possible, use third person. Avoid using first person unless the assignment has you
writing about a personal experience or opinion.
3. Commas and periods are always placed inside closing quotations. Even if you are only quoting
one “word,” place the comma or period inside the closing quotation.
4. In a list of phrases, make sure the form of the phrase is consistent. Instead of, “One would
prefer living in Montana, to buy groceries at Albertson’s, and a nice apartment,” write, “One
would prefer living in Montana, buying groceries at Albertson’s, and renting a nice apartment.”
5. Make sure your verbs match the plurality of the subject.
6. Always use complete sentences. This sounds so obvious, but I frequently see phrases that
students intend to be sentences but lack the properties of a sentence (both a subject and
predicate).
7. It is very common for students to be prolific with commas. Comma rules can be confusing.
You are more likely to get into trouble with commas if you are writing conversationally or
using sentences that are long and unorganized. Do not use commas to set off phrases unless (1)
it is a phrase that could be eliminated from the sentence, or (2) the phrase contains a subject
and predicate (is a full sentence on its own). An example of proper comma usage for (1) is
“The students liked the class, especially the experience with computers.” An example of proper
comma usage for (2) is “The students liked the class, and they enjoyed their experience with
computers.” Note that in this second example, you are required to use a comma because it is a
compound sentence. See #10 below. An example of improper comma usage is: “The students
like the class, that included experience with computers.”
8. Properly denote possessive nouns and pronouns. Often students leave apostrophes out or put
them in the wrong place. The most common error: “The company announced who would be
it’s new CEO”. “It’s” always stands for “it is.”
9. Use pronouns that are of the correct plurality. The most common error is “Microsoft released
their earnings.” (company=singular, their=plural pronoun) The correct way is “Microsoft
released its earnings.”
10. This is a very common improper usage of a comma: “We went out to eat at the Montana Club
on Wednesday night, and watched the boxing matches at the Wilma.” The comma is not
necessary because the two phrases that it separates are NOT complete sentences. To correct
this, either remove the comma or insert a subject in the second phrase (“We went…. night, and
we watched …”).
Effective Writing
1. Use headings and subheadings. Not only will this force you to organize your thoughts, but it
will also provide the reader information about where you are going in your paper.
2. Provide transitional paragraphs when switching between two marginally related topics. When
switching between two closely related topics, transition in the first sentence of the new topic or
the last sentence of the old topic.
3. Watch paragraph length. Often a long paragraph really contains discussion of several main
ideas, so it could be broken into several shorter paragraphs.
4. Do not be too casual in your writing. Students tend to write like they speak, which can be very
informal and “chatty.” Professional business writing should not sound like a casual
conversation when it is read. Casual writing carries an unintended aura of not being serious
about your subject or assignment.
5. If the paper has been composed by more than one person, be sure the different writing styles
are not blatant. If a paper is divided up in a group, designate one person to integrate the parts.
This person will need to make changes to the other members’ parts to make the paper more like
his/her writing style throughout the paper.
6. Use charts, illustrations, tables, and figures as appropriate. Place them in the body of the paper
at the appropriate point.
7. Properly introduce and summarize your topic with opening and closing paragraphs.
8. Designate your sources in some format preferred by your instructor. Some assignments and
papers will have formal guidelines on footnoting, while others will not. Even if there is no
formal requirement for footnotes, you should list your sources in a reference or bibliography
list.
9. Do not plagiarize. When you are answering questions about a reading or summarizing a
reading, it is tempting to copy and paste the words from the reading. If you do this without
placing the words in quotations and footnoting the source, this is plagiarism. This is illegal and
constitutes a violations of the Student Conduct Code. Reword the content in your own words.
This shows thought and understanding of the topic.
http://www.business.umt.edu/Faculty/herron/writing_hints.htm
1
2
Automobile Industry Analysis
Introduction
The automobile industry is a competitive yet dynamic industry. It involves the
production, wholesaling, and maintenance of an automobile. Personal vehicles are becoming
necessary to the public as transport at a person’s convenience. Style performance and quality are
the forefront qualities that buyers look for in a car.
The main competitors in this industry include GMC, Ford, Toyota, BMW, Mercedes,
Audi, Nissan, and Rover. These car companies are significant competitors in different regions of
the world. Their dominance over an area might be because each has standardized prices to suit
the clientele. GMC is a company known for its high-quality, spacious cars. Ford is infamous for
its high-performance vehicles. Toyota makes reliable cars that do not cost much compared to
most of the companies mentioned. For quality cars, the rover company offers quality cars with
innovative features that improve the car’s reliability. Mercedes cars are elegant, with high
performance and innovative features for the comfort of the passengers. Audi is a sports car that
has diversified its cars to include family cars with sporting features so it does not lose its identity.
The Audi car’s performance, speed, and quality make it unique to its clientele. BMW is a
company that produces reliable, high-performance, high-quality sports cars. Nissan is a relatively
affordable, reliable, high-quality car, which creates stiff competition for other car companies.
3
Competitive Analysis Grid
Quality
Reliability
Performance Cost
Innovation
Total
BMW
6
4
5
6
4
25
Mercedes
7
6
7
7
7
34
Nissan
3
2
4
4
2
15
Audi
5
5
6
5
4
25
Rover
7
6
5
6
6
30
Toyota
2
3
3
4
5
17
Ford
4
5
4
3
3
19
GMC
6
7
5
6
4
28
Key Success Factors
Quality
Car quality is based on its safety precautions, quality inspection, and warranties. Quality
assurance is measured by the safety standards that the company has implemented on the car
design before being mass-produced for usage by the customers. Conducting quality controls
along each step of the production process improves the quality of the car (Waluya et al., 2019).
Warranties also tell a lot about the quality of a vehicle as it reflects the manufacturer’s trust in
their product.
Reliability
Trust in cars to be low maintenance is one of the key reasons people want to buy
vehicles, which means the car would offer less financial burden. Customers prefer quality over
quantity as cheaper cars tend to be more of a financial burden and unreliable. Car reliability is
often assured through continuous quality control procedures undertaken at the factory (Olabi et
4
al., 2021). Reliability ends up affecting a company’s reputation, making it lose customers. A car’s
resale value depends on its mechanical efficiency, as recalling back cars tarnishes the company’s
reputation and image.
Performance
This is one of the most important aspects of a car, as most car buyers look at its
performance. A car’s agility, speed, and powerful engine attract buyers to certain vehicles
because personal cars are preferred due to a car’s driving experience. Powerful engines ensure
that maintenance costs are low as the car can withstand different road conditions and for more
extended periods (Delic & Eyers, 2020). Speed and agility create a sporting feel to a vehicle and
serve to save time for car owners.
Cost
Cost is a determinant primarily of the car’s production cost as the manufacturer is subject
to ensuring a quality product is brought to the market. Quality cars are relatively costly to
purchase as they have better and more sophisticated technology, which is expensive to fit in
vehicles (). Cost also might be associated with the brand name as car companies have built on
their reputation for manufacturing quality cars. The functionality of a car is also associated with
cost, considering off-road vehicles are more expensive to acquire than saloon cars, which are
used in cities.
Innovation
Manufacturers have invested heavily in innovating new ways to improve the buyer’s and
passengers’ driving experience. Innovation creates a preference from customers as they are
assured of a better driving experience from the car (Orji et al., 2020). Some of the innovations
5
being fitted in vehicles assist in increasing safety standards, improving car efficiency, and
inventing new automation features.
Competition Grid Analysis
In the first column, Nissan and Toyota have a relatively low rating compared to the other
car companies—the durability and performance of a car measure the quality of cars. High-quality
cars have longer endurance and require minimal maintenance costs caused by regular visits to the
auto shop. Some of the safety precautions might not be the newest technology or malfunction
affecting the quality of the car. Road safety is essential to the driving experience, as high-quality
vehicles have features that reduce the risk of losing lives through accidents. The manufacturer’s
design should be altered with suitable structures and features to improve passenger safety. This
reflects on the cost of the vehicle as vehicles such as Mercedes and Rover car companies have
invested heavily in innovations to enhance passenger and driver safety, increasing the price of
the car.
The cost of the car is directly proportional to the car’s performance as this involves the
car’s ability to accelerate, brake, and handle in different conditions. Each company uses different
technologies to improve and increase the engine’s durability in different situations. Expensive is
cheap might be a redundant saying, the cost of an automobile might be high, but it saves on the
cost of maintenance as the engine is durable in different road conditions (Agyemang etal., 2019).
The quality of Toyota might be the poorest in the column, yet it has one of the biggest markets in
the world as it serves a large population that can purchase it. Even with relatively low quality,
reliability, and performance ratings, Toyota is one of the most innovative car companies in the
world. The relative affordability of Toyota makes it one of the most driven cars in the world.
6
The success factor among these car companies depends on the car’s quality, performance,
and reliability. These three factors help to build a company’s reputation and eventually affect the
cost of the vehicle and boost sales performance. Driving experience is measured by how the car
handles, accelerates, and brakes; in addition, the comfort of a car plays a huge role in this
experience. Innovation helps raise car prices as companies compete to give car passengers a
unique driving experience. The cost of all car companies is relatively fair to high, which shows
that companies are improving in assembling and manufacturing better cars. The difference in
prices is due to the innovation of new technology implemented on vehicles to suit client’s needs
to enhance their experience.
When factoring in the critical success factors, innovation helps to level the playing field.
The cost of cars is reducing due to clientele preference. Cars fitted with innovations to the
client’s liking help improve the car’s marketability to a specific niche of clients. Car companies
often opt to diversify their car types to reach a larger market and curve out their share price in the
automobile industry.
In the totality of the competitive analysis grid, the preferred car companies should be
Rover and Mercedes. Yet, they receive stiff competition from Toyota and Nissan, with a low
totality rating below 20. This shows that although these two companies might have superior
technology and the best quality, they will still face stiff competition from Toyota and Nissan as
they have carved out their own niche through marketing and innovation. These two factors aid in
regulating their prices as they have a large clientele.
7
References
Agyemang, M., Kusi-Sarpong, S., Khan, S. A., Mani, V., Rehman, S. T., & Kusi-Sarpong, H.
(2019). Drivers and barriers to circular economy implementation: An explorative study in
Pakistan’s automobile industry. Management Decision, 57(4), 971-994.
Delic, M., & Eyers, D. R. (2020). The effect of additive manufacturing adoption on supply chain
flexibility and performance: An empirical analysis from the automotive
industry. International Journal of Production Economics, 228, 107689.
Olabi, A. G., Wilberforce, T., & Abdelkareem, M. A. (2021). Fuel cell application in the
automotive industry and future perspective. Energy, 214, 118955.
Orji, I. J., Kusi-Sarpong, S., & Gupta, H. (2020). The critical success factors of using social
media for supply chain social sustainability in the freight logistics industry. International
Journal of Production Research, 58(5), 1522-1539.
Masood, T., & Egger, J. (2019). Augmented reality in support of Industry 4.0—Implementation
challenges and success factors. Robotics and Computer-Integrated Manufacturing, 58,
181-195.
Waluya, A. I., Iqbal, M. A., & Indradewa, R. (2019). How product quality, brand image, and
customer satisfaction affect the purchase decisions of Indonesian automotive
customers. International Journal of Services, Economics and Management, 10(2), 177193.
chapter 5
The Five Generic
Competitive Strategies
Learning Objectives
After reading this chapter, you should be able to:
LO 5-1 Understand what distinguishes each of the five generic
strategies and explain why some of these strategies
work better in certain kinds of competitive conditions
than in others.
LO 5-2 Recognize the major avenues for achieving a competitive
advantage based on lower costs.
LO 5-3 Identify the major avenues to a competitive advantage
based on differentiating a company’s product or service
offering from the offerings of rivals.
LO 5-4 Explain the attributes of a best-cost strategy—a hybrid of
low-cost and differentiation strategies.
Roy Scott/Media Bakery
It’s all about strategic positioning and competition.
Michele Hutchins—Consultant
I learnt the hard way about positioning in business, about
catering to the right segments.
Shaffi Mather—Social entrepreneur
Strategic positioning means performing different activities
from rivals or performing similar activities in different ways.
Michael E. Porter—Professor, author, and cofounder of Monitor
Consulting
A company can employ any of several basic
approaches to gaining a competitive advantage
over rivals, but they all involve delivering more
value to customers than rivals or delivering value
more efficiently than rivals (or both). More value for
customers can mean a good product at a lower
price, a superior product worth paying more for, or
a best-value offering that represents an attractive
combination of price, features, service, and other
appealing attributes. Greater efficiency means
delivering a given level of value to customers at a
lower cost to the company. But whatever approach
to delivering value the company takes, it nearly
always requires performing value chain activities
differently than rivals and building competitively
valuable resources and capabilities that rivals cannot readily match or outdo.
This chapter describes the five generic competitive strategy options. Each of the five generic strategies represents a distinctly different approach to
competing in the marketplace. Which of the five to
employ is a company’s first and foremost choice in
crafting an overall strategy and beginning its quest
for competitive advantage.
PART 1
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Concepts and Techniques for Crafting and Executing Strategy
TYPES OF GENERIC COMPETITIVE STRATEGIES
A company’s competitive strategy lays out the specific efforts of the company to
position itself in the marketplace, please customers, ward off competitive threats,
and achieve a particular kind of competitive advantage. The chances are remote
that any two companies—even companies in the same industry—will employ competitive strategies that are exactly alike in every detail. However, when one strips
away the details to get at the real substance, the two biggest factors that distinguish
one competitive strategy from another boil down to (1) whether a company’s market
target is broad or narrow and (2) whether the company is pursuing a competitive
advantage linked to lower costs or differentiation. These two factors give rise to four
distinct competitive strategy options, plus one hybrid option, as shown in Figure 5.1
and listed next.1
• LO 5-1
Understand what distinguishes each of the
five generic strategies
and explain why some
of these strategies
work better in certain
kinds of competitive
conditions than in
others.
1. A broad, low-cost strategy—striving to achieve broad lower overall costs than rivals
on comparable products that attract a broad spectrum of buyers, usually by underpricing rivals.
2. A broad differentiation strategy—seeking to differentiate the company’s product
offering from rivals’ with attributes that will appeal to a broad spectrum of buyers.
3. A focused low-cost strategy—concentrating on the needs and requirements of a narrow buyer segment (or market niche) and striving to meet these needs at lower
costs than rivals (thereby being able to serve niche members at a lower price).
4. A focused differentiation strategy—concentrating on a narrow buyer segment (or market niche) and offering niche members customized attributes that meet their tastes
and requirements better than rivals’ products.
FIGURE 5.1
The Five Generic Competitive Strategies
Market Target
Type of Competitive
Advantage Being Pursued
A Broad
Cross-Section
of Buyers
Lower Cost
Differentiation
Broad
Low-Cost
Strategy
Broad
Differentiation
Strategy
Best-Cost
Strategy
A Narrow
Buyer
Segment
(or Market
Niche)
Focused
Low-Cost
Strategy
Focused
Differentiation
Strategy
Source: This is an expanded version of a three-strategy classification discussed in Michael E. Porter, Competitive Strategy (New York:
Free Press, 1980).
chapter 5
The Five Generic Competitive Strategies
129
5. A best-cost strategy—striving to incorporate upscale product attributes at a lower
cost than rivals. Being the “best-cost” producer of an upscale, multifeatured product allows a company to give customers more value for their money by underpricing
rivals whose products have similar upscale, multifeatured attributes. This competitive approach is a hybrid strategy that blends elements of the previous four options in
a unique and often effective way. It may be focused or broad in its appeal.
The remainder of this chapter explores the ins and outs of these five generic competitive strategies and how they differ.
BROAD LOW-COST STRATEGIES
Striving to achieve lower costs than rivals targeting a broad spectrum of buyers is an
LO 5-2
especially effective competitive approach in markets with many price-sensitive buyers.
A company achieves low-cost leadership when it becomes the industry’s lowest-cost Recognize the major
producer rather than just being one of perhaps several competitors with comparatively avenues for achieving a
low costs. But a low-cost producer’s foremost strategic objective is meaningfully lower competitive advantage
costs than rivals—not necessarily the absolutely lowest possible cost. In striving for a cost based on lower costs.
advantage over rivals, company managers must incorporate features and services that
buyers consider essential. A product offering that is too frills-free can be viewed by
consumers as offering little value regardless of its pricing.
CORE CONCEPT
A company has two options for translating a low-cost advantage over rivals into
The essence of a broad,
superior profit performance. Option 1 is to use the lower-cost edge to underprice
low-cost strategy is to procompetitors and attract price-sensitive buyers in great enough numbers to increase
duce goods or services for
total profits. Option 2 is to maintain the present price, be content with the present
a broad base of buyers at a
market share, and use the lower-cost edge to raise total profits by earning a higher
lower cost than rivals.
profit margin on each unit sold.
While many companies are inclined to exploit a low-cost advantage by using
option 1 (attacking rivals with lower prices), this strategy can backfire if rivals respond
with retaliatory price cuts (in order to protect their customer base and defend against
a loss of sales). A rush to cut prices can often trigger a price war that lowers the profits
of all price discounters. The bigger the risk that rivals will respond with matching price
cuts, the more appealing it becomes to employ the second option for using a low-cost
advantage to achieve higher profitability.
•
The Two Major Avenues for Achieving
a Cost Advantage
To achieve a low-cost edge over rivals, a firm’s cumulative costs across its overall
value chain must be lower than competitors’ cumulative costs. There are two major
avenues for accomplishing this:2
1. Perform internal value chain activities and/or value chain system activities
more cost-effectively than rivals.
2. Revamp the firm’s overall value chain to eliminate or bypass some costproducing activities.
Cost-Efficient Management of Value Chain Activities For a company to do
a more cost-effective job of managing its value chain than rivals, managers must
diligently search out cost-saving opportunities in every part of the value chain.
A low-cost advantage over
rivals can translate into
superior profitability through
lower price and higher market share or higher profit
margins.
CORE CONCEPT
A cost driver is a factor that
has a strong influence on a
company’s costs.
PART 1
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Concepts and Techniques for Crafting and Executing Strategy
No activity can escape cost-saving scrutiny, and all company personnel must be
expected to use their talents and ingenuity to come up with innovative and effective
ways to keep down costs. Particular attention must be paid to a set of factors known as
cost drivers that have a strong effect on a company’s costs and can be used as levers to
lower costs. Figure 5.2 shows the most important cost drivers. Cost-cutting approaches
that demonstrate an effective use of the cost drivers include
1. Capturing all available economies of scale. Economies of scale stem from an ability
to lower unit costs by increasing the scale of operation. Economies of scale may
be available at different points along a company’s value chain (both internally and
elsewhere along its value chain system). Often, a large plant is more economical to
operate than a small one, particularly if it can be operated round the clock robotically. Economies of scale may be available due to a large warehouse operation on
the input side or a large distribution center on the output side. In global industries,
selling a mostly standard product worldwide tends to lower unit costs as opposed
to making separate products (each at lower scale) for each country market. There
are economies of scale in advertising as well. For example, Anheuser-Busch InBev
SA/NV could afford to pay the $5.6 million cost of a 30-second Super Bowl ad in
2020 because the cost could be spread out over the hundreds of millions of units of
Budweiser that the company sells.
FIGURE 5.2
Cost Drivers: The Keys to Driving Down Company Costs
Incentive
systems and
culture
Outsourcing or
vertical
integration
Economies of
scale
Learning and
experience
Capacity
utilization
COST
DRIVERS
Bargaining
power
Supply chain
efficiencies
Communication
systems and
information
technology
Production
technology
and design
Input costs
Source: Adapted from Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: Free Press, 1985).
chapter 5
The Five Generic Competitive Strategies
2. Taking full advantage of experience and learning-curve effects. The cost of performing an activity can decline over time as the learning and experience of company
personnel build. Learning and experience economies can stem from debugging and
mastering newly introduced technologies, using the experiences and suggestions of
workers to install more efficient plant layouts and assembly procedures, and the
added speed and effectiveness that accrues from repeatedly picking sites for and
building new plants, distribution centers, or retail outlets.
3. Operating facilities at full capacity. Whether a company is able to operate at or near
full capacity has a big impact on unit costs when its value chain contains activities
associated with substantial fixed costs. Higher rates of capacity utilization allow
depreciation and other fixed costs to be spread over a larger unit volume, thereby
lowering fixed costs per unit. The more capital-intensive the business and the higher
the fixed costs as a percentage of total costs, the greater the unit-cost penalty for
operating at less than full capacity.
4. Improving supply chain efficiency. Partnering with suppliers to streamline the
ordering and purchasing process, to reduce inventory carrying costs via justin-time inventory practices, to economize on shipping and materials handling,
and to ferret out other cost-saving opportunities is a much-used approach to
cost reduction. A company with a distinctive competence in cost-efficient supply chain management, such as Colgate-Palmolive or Unilever (leading consumer
products companies), can sometimes achieve a sizable cost advantage over less
adept rivals.
5. Substituting lower-cost inputs wherever there is little or no sacrifice in product quality
or performance. If the costs of certain raw materials and parts are “too high,” a
company can switch to using lower-cost items or maybe even design the high-cost
components out of the product altogether.
6. Using the company’s bargaining power vis-à-vis suppliers or others in the value chain
system to gain concessions. Home Depot, for example, has sufficient bargaining
clout with suppliers to win price discounts on large-volume purchases.
7. Using online systems and sophisticated software to achieve operating efficiencies. For
example, sharing data and production schedules with suppliers, coupled with the
use of enterprise resource planning (ERP) and manufacturing execution system
(MES) software, can reduce parts inventories, trim production times, and lower
labor requirements.
8. Improving process design and employing advanced production technology. Often, production costs can be cut by (1) using design for manufacture (DFM) procedures
and computer-assisted design (CAD) techniques that enable more integrated and
efficient production methods, (2) investing in highly automated robotic production
technology, and (3) shifting to a mass-customization production process. Dell’s
highly automated PC assembly plant in Austin, Texas, is a prime example of the use
of advanced product and process technologies. Many companies are ardent users
of total quality management (TQM) systems, business process reengineering, Six
Sigma methodology, and other business process management techniques that aim
at boosting efficiency and reducing costs.
9. Being alert to the cost advantages of outsourcing or vertical integration. Outsourcing
the performance of certain value chain activities can be more economical than
performing them in-house if outside specialists, by virtue of their expertise and volume, can perform the activities at lower cost. On the other hand, there can be times
when integrating into the activities of either suppliers or distribution-channel allies
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PART 1
Concepts and Techniques for Crafting and Executing Strategy
can lower costs through greater production efficiencies, reduced transaction cos
