Posts tagged ‘cost leadership’
Well, it is now time for Treacy and Wiersema’s Value Disciplines theory. Please hold your horses, I do have something in mind…but first need to lay the grounds for that.
Treacy and Wiersema (T&W from now on) proposed that any company in order to be successful must provide the best offering in the marketplace, by creating customer value from one specific perspective/dimension. From this one perspective, the company should aim to be the best in its industry.
A firm may choose to create value to its customers by offering products at the lowest price compared to its competitors. This company according to T&W is an example of Operational Excellence. This company’s focus is on efficiency, streamlined operations, Supply Chain Management, no-frills and economies of scale (volume counts). Core competencies of such a company are to have low customer service, effective demand management, low-cost operations and totally dependable product supply. In terms of company culture, the firm focuses on processes, works through disciplined teamwork and conformance to a “one size fits all” mindset.
An example of a Product Leadership oriented company would be one that chooses to create value to its customers by providing cutting-edge products or services and pursue the highest levels of innovation. The company’s focus is on development, innovation, design, time-to-market, high margins in a short time frame. Core competencies would be to have excellent marketing skills, to be able to rapidly exploit market opportunities and have applied research geared towards product development. Culture-wise, the company is concept and future driven, focused on action “go for it” and cultivates the “outside of the box” mindset. Employees are given freedom to innovate, and holding internal competitions to produce products that will obsolete current best-selling lines are the kind of initiatives nurtured in the organization. To secure this setup, the company shall maintain a dynamic internal development structure, with overlapping, self-organizing teams and placing low importance to job titles.
The third value discipline is Customer intimacy. Customer intimate companies promote themselves as the one that helps their clients being successful. Such a company is a partner, not a supplier and this should be an essential component in the company’s thinking. These firms deeply understand their customers and have detailed information on their customers’ needs/challenges/buying habits. Products and services are tailored almost to individual customers. Being a customer intimate company is also about selecting one or a few high-value customer niches and do an extensive effort at getting to know these customers in detail. This requires anticipating the target customer’s needs and sharing risks with them when the development of new products/services is required. Focus is on CRM, deliver products and services on time and above customer expectation. Concepts and buzzwords are of lifetime value and reliability plus being close to the customer. Employees being close to the customer have decision authority and are highly skilled to solve customer problems. Core Competencies are exceptional skills in discovering customer needs, problem solving proficiency, flexible product/solution customization, use collaborative (win-win) negotiation skills and to have a customer relationship management mindset. The company’s culture is client and field driven, focused on information gathering and communication and cultivation of the “have it your way” mindset.
In line with Porter’s theory, T&W proposed that a company should choose one of the three value disciplines. In this one discipline, the company should aim to be the best. The other two disciplines should not be neglected (as opposed to Porter’s theory), but the aim is to focus all energy and assets on improving and delivering upon one discipline. By organizing its efforts, the company shall be able to deliver better performance than another company that divides its efforts/attention/focus among more than one value discipline.
There is a lot to talk around these definitions: analogies, recommendations, critiques. Let me leave it here for now. Since competitive strategy theory has always been somewhat a controversial issue, I am sure you may have comments to share…Or may be willing to answer the question I posed in the post’s title…
A central question for a strategist is “which strength do we have against our competitors?”. You know…strategists do SWOT (Strengths, Weaknesses, Opportunities and Threats) analyses, we try to use all the guidance that planning tools may give you. The sad thing is that answering that question won’t help much answering the truly important question…What shall we do that competition may not easily replicate?
Yes, I find myself (once again) wondering about competitive strategy and reviewing Porter’s writings…
”Sometimes companies such as Microsoft get so far ahead that they seem to avoid the need for strategic choices, but this becomes their ultimate vulnerability”
Interesting thought…but let me leave it aside, for now…
The most intriguing and controversial passage of Porter’s work is the “undeniable” trade-off between competitive strategies (Cost leadership and Differentiation). That is to say, firms that fail to develop its strategy in at least one of the three directions are so called “stuck in the middle”, a situation that will most certainly lead to low profitability.
Critiques apart, Porter’s theory has provided some with food-for-thought on the need to consider strategy making a serious undertaking.
By interpreting Porter in order to answer the “truly important question”, what conclusions can we draw?
1) Be something your competitors are not
The “be” in this sentence is about creating a brand image. Much of what you are is what you are perceived to be. Do not underestimate perception!
2) Feel you are something your competitors are not
Beyond creating the image of a cost-leader, a premium-brand or a niche player, is your organization, your processes and your culture tailored to excel every day in being the best in your class? Porter stressed that many managers fail to distinguish between strategy and operational effectiveness, that is to say, by moving operations to low cost countries, Apple may lower its costs, yet it will remain a differentiator.
Strategy implementation concerns all functions and organizational elements in a corporation. Michael O’Leary (Ryanair CEO) realized that the success of his company wouldn’t come from being 10% cheaper but maybe on being 80-90% cheaper. That was only possible via a thorough company transformation.
To a stated degree or extent, we can say that if a firm is a differentiator, the differentiation strategy will present in the whole company. To reduce costs will increase margins but such measures should be taken to the point it won’t damage the main differentiator strategy.
Porter’s theory is about corporate strategy, i.e. it does not allow for different business units to pursue varied competitive strategies. Treacy and Wiersema’s Value Disciplines theory preaches something a bit different…
Now, how does a differentiator, a cost-leader and a niche player look like in the Telecommunications world? I promise to come back to this…