PERSPECTIVES ON STRATEGY AND STRUCTURE

PERSPECTIVES ON STRATEGY AND STRUCTURE

 

Two perspectives on strategy and structure are described here: One by Michael E. Porter (Competitive Strategy, The Free Press, New York, 1980) and the other by Thomas J. Peters and Robert H. Waterman Jr. (In Search of Excellence, Warner Books, 1982).

 

Porter’s Perspective

 

Porter has enunciated three generic strategies: Overall Cost Leadership, Differentiation and Focus. According to him the successful implementation of the three generic strategies requires not only different resources and skills but also imply different organizational arrangements, control procedures and inventive systems. 
 

Overall cost leadership (common in 1970s in the USA) is achieved through a set of functional policies culminating into what is popularly known as the Experience Curve Effect. This strategy requires construction of efficient scale facilities, vigorous pursuits of cost reduction from experience, tight cost and overhead control and cost minimisation in areas like R&D, sales force, advertising and so on. A great deal of managerial attention to cost control is necessary to achieve the aims.

 

The differentiation strategy implies offering a product or service by the firm which is perceived in the industry as being unique. Differentiation can be approached in many ways (one or more at the same time); product design features, brand image, technology, customer services, dealer network and other dimensions.

 

The focus strategy means concentrating on a particular buyer group, segment of product lines, or geographic market.

 

As with differentiation, focus may take many forms. Whereas the ‘low cost’ and ‘differentiation’ strategies aim at achieving their objectives industry-wise, the focus strategy is built around serving a particular target very well. All functional policies are geared in that direction. This strategy rests on the premise that the firm is able to serve its narrow strategic target more effectively and efficiently than those competitors who are engaged in broader activities.

 

We now turn our attention to the organizational requirements for each strategy. Some common implications of the generic strategies in terms of skills and resources and organizational requirements are presented in Table -1 which are

self-explanatory.

 

Table -1 : Organizational Requirements for Different Generic Strategies
 

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COST FOCUS

COST FOCUS

The third business level strategy is focus. Focus is different from other business strategies as it is segment based and has narrow competitive scope. This strategy involves the selection of a market segment, or group of segments, in the industry and meeting the needs of that preferred segment (or niche) better than the other market competitors (Bolter & Mcmanus, 1999). This is also known as a niche strategy. In focus strategy, the competitive advantage can be achieved by optimizing strategy for the target segments. 

Focus strategy has two variants. They are:

 

1.   Cost Focus; and

2.   Differentiation Focus

Cost focus is where a firm seeks a cost advantage in the target segment; and Differentiation focus where a firm seeks differentiation in the target segment (Cherumilan, 2004). We shall discuss these variants later.

 

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DIFFERENTIATION

DIFFERENTIATION

CONCEPT OF DIFFERENTIATION :

Every individual customer is unique in itself so is his/her preferences regarding tastes, preferences, attitudes, etc. These needs of the customers are fulfilled by the firms by producing differentiated products. In our day-to-day life we see many such examples of differentiated products. Most of the fast moving consumer goods like; biscuits, soaps, toothpastes, oils, etc. come under the category of differentiated products. To satisfy the diverse needs of the customers, it becomes essential for the firms to adopt a differentiation strategy. To make this strategy successful, it is necessary for the firms to do extensive research to study the different needs of the customers. A firm is able to differentiate from its competitors if it is able to position itself uniquely at something that is valuable to buyers. Differentiation can lead to Differential advantage in which the firm gets the premium in the market, which is more than the cost of providing differentiation. The extent to which the differentiation occurs depends on the overall strategy of the firm. Previously differentiation was viewed narrowly by the firms, but in the present scenario it has become one of the essential components of the firm’s strategy. Reliance Infocomm, offers varied products like; different facilities to its customers in the CDMA telephones. This is differentiation. 
 

When we talk of differentiation, it can be said that virtually any product can be differentiated (Sadler, 2004). The greatest potential of differentiation lies in products, which are of complex nature but do not have to adhere to strict regulatory standards, but the success of a differentiation strategy depends on the firm’s commitment towards customers and the understanding of customer needs as differentiation is all about perceiving on the part of the customer of something unique. Differentiation can be said to have more competitive advantage than the cost advantage as it is quite difficult to imitate the differentiated products. Even if the initiation is done in terms of concept, then also a particular product remains unique regarding its value, style, packaging, etc. Therefore, when we talk about differentiation, it is important to understand the demand of the customers and fulfilling this demand keeping in mind the differentiation advantage. In this case, one thing the firms should concentrate on its creativity and innovativeness than on market research. We have discussed about the concept of differentiation as a whole but we need to know the why aspect of differentiation, i.e., why do the firms need differentiation? 
 

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COST LEADERSHIP

COST LEADERSHIP

The firms operating in this highly competitive environment are always on the move to become successful. To strive in this competitive environment the firms should have an edge over the competitors. To develop competitive advantage, the firms should produce good quality products at minimum costs etc. This means that the firms should provide high quality at low cost so that the customer gets the best value for the product he/she is buying. Therefore, it becomes necessary for the firms to have a strategic edge towards its competitors. One such competitive strategy is overall cost leadership, which aims at producing and delivering the product or service at a low cost relative to its competitors at the same time maintaining the quality. According to Porter, following are the prerequisites of cost leadership (Cherunilam, 2004):

 

1) Aggressive construction of efficient scale facilities;

2) Vigorous pursuit of cost reduction from experience;

3) Tight cost and overhead control;

4) Avoidance of marginal customer accounts;

5) Cost minimization.

 

According to Porter cost leadership is perhaps the clearest of the three generic or business level strategies (Bolten & McManus, 1999). To sustain the cost leadership throughout, the firm must be clear about its accomplishment through different elements of the value chain. Figure-1 shows a matrix of the three generic competitive strategies and their interrelationship given by Porter.

 

Figure-1 : Three Generic Competitive Strategy

 

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COST STRATEGY TO GAIN COMPETITIVE ADVANTAGE

WHAT IS COST STRATEGY ? HOW TO GAIN COMPETITIVE ADVANTAGE THROUGH COST STRATEGY ?

Cost analysis occupies an important place in business strategy. In order to gain and sustain competitive advantage, a firm should not only monitor its cost performance but also should endeavour to control it. Several strategic decisions like fixation of competitive prices, provision of after-sale services, quality of the products etc. depend upon relative cost level of the business firm. The role of cost in different market conditions is to be examined. The Experience Curve analysis is also important to derive the cost strategy of a firm. Michael Porter in his book Competitive Advantage suggested three generic competitive strategies aiming to develop a dependable position in the long-run and out-perform the competitors. These three strategies are:

 

1.   Cost Leadership,

2.   Differentiation,

3.  Focus. 

 

All the three strategies can either be used individually or in combination to each other. Figure-1 shows a matrix of the three generic competitive strategies and their interrelationship given by Porter.

 

 

Figure-1 : Three Generic Competitive Strategies 

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