- Describe factors that come into play in formulating a strategy
- Identify and describe three generic strategies. Some of these generic strategies are independent of an industry or an entity.
- Describe how each of the generic strategies might be achieved, their characteristics and the risks associated with them.
- Analyzing an operating environment and an entity provides the basis for an entity to formulate its strategy. While every strategy will be unique, a set of generic strategies can be used to guide the development of a particular strategy. Therefore, there are certain generic strategies that should be identified which can be useful for that purpose.
Within the context of an economic system and economic market structure, and with an understanding of the characteristics of the macro-environment, the industry in which an entity operates or may operate and the relationship between an entity and its external environment, an entity can formulate its basic strategy. That strategy will seek to leverage the entity’s strengths in order to achieve objectives and goals established in the strategic planning process. While the specific strategy formulated will be unique to the entity (or component of the entity) and the environment, there are still three industry-independent/entity-independent generic strategies that identify, at a high level, the possible strengths of entities.
The two basic generic strategies that provide the competitive advantage:
- Cost Leadership
- Differentiation - By considering, these basic strategies as they relate to both a broad industry and more discrete market segments within an industry, a third strategy is based on competitive scope:
- COST LEADERSHIP STRATEGY:
- Under this strategy, an entity will seek to be the low-cost provider in an industry for a given level of output.
- An entity will sell its product or service either at the average industry price and earn a profit higher than that of other competitors in the industry or below the average industry price so as to gain market share.
- Entities acquire or maintain cost advantages by:
- Identifying and avoiding unnecessary costs
- Improving process efficiency
- Gaining exclusive access to lower cost inputs
- Using outsourcing in an optimal manner
- Pursuing vertical integration - moving up or down in the supply chain
- Characteristics of cost leadership entities - Entities that successfully carry out the cost leadership strategy typically have the following types of strength:
- Significant capital to invest in production and logistical assets to keep cost low
- High levels of expertise in manufacturing processes
- High levels of skill in designing products for efficient manufacturing
- Efficient channels for the distribution of products
- Techniques for achieving cost leadership - Firms seeking to achieve and maintain cost leadership may use a number of processes aimed at lowering costs and reducing time to delivery of its goods or services, including:
- Lean Manufacturing: It is the identification and elimination of waste in the production process. The focus is on improving product design, increasing production flexibility, and reducing production time, defects and inventory quantity so as to reduce costs.
- Supply Chain Management: It involves improving the flow of goods, services, and information along the entire supply chain, from the basic raw material to delivery of the final good or service to the end user. Supply chain management requires coordination and information sharing among all entities in the entire supply chain.
- Process reengineering: A critical evaluation and major redesign of an existing process to achieve breakthrough improvement in performance and cost reduction.
- Risks to cost leadership strategy - Entities that adopt the cost leadership strategy face certain risks, including:
- The possibility that other entities will be successful in adopting a cost leadership strategy and meet or beat the cost of the entity.
- The possibility that technology will improve such that other firms may be able to produce an equally low cost or be able to apply new technologies to produce at an even lower cost.
- The possibility that a number of firms may focus on segments of the industry and be able to separately achieve lower costs in each of those segments so that as a group they are able to control a significant portion of the industry.
- DIFFERENTIATION STRATEGY:
- In this strategy, an entity will seek to develop a product or service that offers unique features that are valued by customers and that those customers perceive to be better than or different from the products of competitors in the industry.
- An entity expects that the value added by the quality or uniqueness of the product or service will allow the entity to charge a premium price which will more than cover the extra cost providing the good or service.
- An entity may acquire or maintain differentiation by providing goods or services that have special or unique:
- Service and Customer support
- Characteristics of entities following a differentiation strategy - Entities that successfully carry out the differentiation strategy typically have the following kinds of strengths:
- Highly creative and skilled product/service development personnel
- Leading-edge scientific and market research capabilities
- Strong and dedicated marketing and sales personnel capable of conveying the strengths of the product or service
- A reputation for innovation, quality, and service.
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