Cost Leadership as a Strategy - Essay Example

Discussion Question One: The generic strategies of Porter give a of how a company is able to pursue and achieve a competitive advantage across its chosen market, and industry. There are three generic strategies that a business organization can engage in, and they are differentiation, lower cost, and focus. These three generic strategies arise out of the ability of an organization to pursue either differentiation strategy, or cost advantage strategy (Babitsky and Mangraviti, 2013). A company may decide to pursue either of the strategies with the aim of achieving efficiency, and increasing its market. For example, a company may decide to lower the costs and prices of its products, in comparison to its competitors. An example is Wal-Mart, which is a chain of supermarkets and it is known to sale low cost products. This is when compared to its major competitors such as Target, Kmart, Meijer, etc. Because of its low cost products, Wal-Mart has emerged as one of the biggest and most profitable retailing units in the world (Babitsky and Mangraviti, 2013). However, this comes with a disadvantage. The main disadvantage is that Wal-Mart is forced to reduce the cost its production. This includes overhead costs such as labor, etc. Wal-Mart is a company that is known for paying its employees very low wages, and hence it has a high turnover. This is not beneficial to the company because it losses experienced labor or workforce. Another type of a competitive strategy a company may choose to follow is differentiation. This normally occurs through the various dimensions that are valued by the target customer of the organization. This is for purposes of commanding a high price or value for the product under consideration. Apple’s is a communications hardware company that uses this strategy for purposes of penetrating its target market (Gil and Reyes, 2013). Under focus, an organization would either choose to offer its products to a specific target market or segments within a market, or it may choose to offer its product to the entire market segment. A good example in this scenario is in the car industry. Mercedes Benz offers luxurious motor vehicle products to its target population. The people who can afford to drive these luxurious vehicles are the rich and the upper middle class people (Maria, 2012). This is the segment in which Mercedes Benz sales its products to. It is important to understand that the generic strategy developed by porter gives a reflection of the choices that a company makes, with the intention of gaining a competitive advantage over its main rivals. Cost Leadership and Strategic Management: Cost leadership as a strategy involves expanding the market share of a business organization through appealing to customers by reducing the costs of business organization. An organization will achieve this strategy by reducing prices of its products, to the minimum, for purposes of appealing to its market segment. For purposes of succeeding at offering lower prices, and at the same time maintaining profitability, and achieving high returns, an organization has to operate at lower costs of production, when compared to rival companies. There are three major methods of achieving this objective (Babitsky and Mangraviti, 2013). The first method in this approach is to achieve a high asset turnover. For example in a service industry, this may imply that a restaurant is able to turn its tables in a quick manner, or an airline company that manages to turn its flights very quickly. In a manufacturing industry, this situation implies that a company will manage to achieve a high volume of output (Maria, 2012). This approach will therefore imply that the mean fixed costs are able to be spread over a large number of production units. This will in turn result to a low unit cost. That is, business organizations seeking to take advantage of the benefits that come with economies of scale, and experiencing a curve effects. In industrial firms, mass production is a strategy, and an end. This is because it involves a high output, and this requires a high market share. This also has an effect of creating an entry buyer to any potential competitors. These are competitors who are unable to achieve the necessary scale for purposes of matching the organizations low prices and costs. The second dimension under the cost leadership strategy is achieving low indirect and direct operating costs. This is achieved by offering standardized or high volumes of products. The cost of production is kept low through the use of few and standard components. This has an effect of creating a limit on the number of models produced, and it is with the intention of ensuring a large production run. Furthermore, it is possible to keep overhead costs by paying low wages, and location of premises that attract low rents, and establishing a culture of cost consciousness. Maintenance of this strategy would require a continuous search for all measures aimed at reducing costs in a business organization (Gil and Reyes, 2013). This includes control of productions costs, outsourcing of services, advertising, R&D, asset capacity utilization, etc. The third dimension involves a situation whereby the company is involved in controlling the value chain of a business organization. This includes marketing, finance, inventory, procurement/supply, information technology, etc. This is for purposes of ensuring that the organization manages to use low costs in adding value to these sections (Gil and Reyes, 2013). In a procurement or supply chain, it is possible to achieve this objective through bulk buying. This is for purposes of enjoying benefits that come with quantity discounts, forcing suppliers to reduce prices, engaging in a competitive bidding of contracts, and working with vendors for purposes of ensuring that inventories are low. This is by using methods such as vendor managed inventories, and the just in time purchasing systems. Wal-Mart is a company that uses its large purchasing power for purposes of ensuring that it gets a discounted price for its supplies (Gil and Reyes, 2013). This is one of the reasons that have enabled Wal-Mart to manage selling its products at lower costs, when compared to its main rivals such as Target, and Kmart. Cost leadership methods are only conducive for large organizations that can enjoy the benefits of economies of scale, and command a big market share. This strategy has some disadvantaged in that it is difficult to retain the loyalty of customers. This is mainly because the customers of the organization are cost conscious, and they will move to the next business that offers low quality products. Furthermore, having a reputation as a cost leader may lead to having a reputation for offering low quality products. This makes it difficult for the company to rebrand itself. Differentiation Strategy: This involves differentiating services or products in methods that enable them to compete effectively, and successfully. Examples of companies that have successfully used this strategy include Honda, Hero, Asian Paints, BMW group of automobiles, etc (Maria, 2012). This strategy is successful when the company targets customers who are not price-sensitive, or a market that is not competitive (Haslam, 2013). It is also successful in a market segment that has specific needs, and the needs under consideration are not adequately catered for. Examples of differentiation strategies include patents, intellectual properties, unique technical skills, innovative practices, etc. A successful differentiation strategy occurs when a company is able to make the product to be highly attractive to its target customers, increasing the revenues of the products, and create the brand loyalty. A good example of a company that has achieved a successful differentiation strategy is Apples. Through its high quality and unique products, the company has managed to increase its market share (Haslam, 2013). This is through the development of an iphone, innovative telecommunication products that was very unique, and attractive to mobile phone users. The iPhone products are some of the innovative products of Apples, and it distinguishes the products from other mobile phone substances (Gil and Reyes, 2013). This differentiation strategy is always expensive to a company, and this is because of the labor and the innovative costs that a company incurs while producing their products. To achieve profits, the values of the company’s products are sold expensively. Furthermore, these companies have a strong brand name that is associated with the manufacture of high quality products. This situation helps in creating brand loyalty, hence making it gain a competitive advantage over its main competitors. This type of strategy cannot succeed when a business organization pursuing it is small in nature (Gil and Reyes, 2013). The differentiation strategy can occur through either of the following functional groups within a company, purchase, finance, inventory, marketing, etc. It is always possible to use the differentiation strategy, in conjunction with focus strategies. For example, a company may decide to focus in the production of a specific substance, and invest heavily in its innovation. This is with the case of Coca cola, and Crown Berger. Coca Cola has managed to achieve great success by concentrating on the production of beverages, and constantly innovates its products (Gil and Reyes, 2013). Furthermore, the company has managed to secretly keep the formula for its beverages. This is one of the strategies the company has used to protect its uniqueness in the market. Focus as a Strategy: Most companies normally do not apply this strategy alone. They may either combine it with cost leadership strategy, or even differentiation. This strategy is highly useful for small companies, and specifically companies that seek to avoid competition with established and big companies (Maria, 2012). Through the adoption of a narrow focus, the company is able to target few segments of a market. These should be a distinct group, with various specialized needs (Gil and Reyes, 2013). The choice of offering a differentiated product or low prices depends on the various needs of a selected segment, capabilities and resources of the organization. The reason for focusing on a narrow market is because the organization has chances of improving the quality of its products, and the efficiency of meeting the various needs of the market under consideration. The organization seeks to acquire a competitive advantage over its rivals, through the innovation and better branding of the products (Gil and Reyes, 2013). This strategy works best in a market that is not vulnerable to substitute products, or a market that has a weak competition. Most organizations do not seek to pursue this strategy. This is because of increased competition, and the need to diversify for purposes of acquiring more profits. Extent in Which Patented Products are differentiated in a Pharmaceutical Industry: Patents are one of the major ways in which an organization can differentiate its products. A patent is a license that confers a title or right for a business organization to use a specific invention over a certain period of time. In the pharmaceutical industry, most organizations have developed patents, and they act as a differentiation strategy. As of the year 2009, the patent market was approximately 740 billion United States dollars. The five leading organizations that control patents in the pharmaceutical industry include Pfizer, Glaxo Smithkline, Sanofi-Aventis, Merck, and Astra-Zeneca (Johnson, Whittington and Scholes, 2011). Under the patented drug market, the performance of a laboratory is dependent on its capacity to be innovative. These companies are able to manufacture their own drugs, out of research. The drugs that they manufacture have specific qualities, and are aimed at serving a particular need. An example is the manufacture of blockbuster drugs (Johnson, Whittington and Scholes, 2011). These are popular drugs that have the capability of generating approximately one billion dollars in terms of sales revenue to the company manufacturing the drugs. Examples of blockbuster drugs include Zoloft, Lipitor, and Vioxx, and they are normally used to treat common health problems such as high blood pressure, diabetes, cholesterol, cancer and asthma (Gil and Reyes, 2013). Generic Drugs as Cost Leaders: Generic drugs are an example of a cost leadership strategy. These drugs are developed out of the patented drugs, whose licenses have expired. These drugs are normally 40% lower than the price of the original products of medicines. This is mainly because the price of manufacturing these drugs is low, when compared to their original drugs. The laboratories that manufacturers these drugs do not invest on R&D (Haslam, 2013). This makes it possible for them to manufacture these drugs cheaply. This makes these organizations to sale these products cheaply. Furthermore, the profit margins emanating from the sale of these drugs is low. This is because of their cheap prices (Johnson, Whittington and Scholes, 2011). To succeed in this market, business organizations have to produce these substances in large scale. Through this action they will enjoy the benefits that come with economies of scale. It is only through large scale production that that the companies producing generic food substances can get discounted prices for their prices (Johnson, Whittington and Scholes, 2011). Question Two: Genzyme and Sanofi Aventis Acquisition: The acquisition of Genzyme by Sanofi Aventis group will make a strategic sense. Sanofi-Aventis is a pharmaceutical company with a global out reach. It has the capability of developing, discovering, and producing innovative therapies that can improve the health status of people. The pharmaceutical division of the company produces consumer health care drugs, and prescription drugs. Genzyme on the other hand is middle sized pharmaceutical company, and it lacks the capability of competing with large companies in the industry (Haslam, 2013). This acquisition is suitable because the two companies are operating in the same industry. This acquisition will therefore help Sanofi Aventis to enjoy the benefits of scale, and hence it can employ strategies such as cost leadership, and differentiation in an effective manner. Genzyme is also a company that is innovative, and constantly produces new products. Sanofi Aventis will therefore rely on the strong R&D department of Genzyme, and their expertise and skills. This is advantageous for Aventis Sanofi as it will make it to be more competitive by the production of patented drugs. It is these drugs that make an organization to acquire more profits (Maria, 2012). This makes this investments and purchase feasible. This investment is also acceptable to Sanofi Aventis because Genzyme is operating in the same industry, and hence the company will be increasing its market share. This is by taking the market that was previously controlled by Genzyme. Question Three: (a): Influence of Globalization on the Pharmaceutical Industry It is possible to refer to globalization as a process whereby people all over the world are integrated into a single society. This process occurs because of a combination of technological, economic, political, and socio-cultural factors. The Pharmaceutical factor in the globalization process comes as a result of the technological and economic factors. The commercial business approach in the pharmaceutical industry is focused on the research distribution and development of drugs, under the banner of healthcare (Haslam, 2013). Globalization has a great impact in the pharmaceutical industry, and this is mainly because companies have the capability of opening their branches in any part of the capitalistic world. A good example is in 2001, when 41 Pharmaceutical companies were suing the South African government for their enactment of the Medicine Act. This Act allowed the South African government to import cheap generic drugs for the treatment of AIDS. This case was able to attract international condemnation, and the pharmaceutical companies dropped it. This is an indication that the pharmaceutical industry has a considerable influence in the global world. In the next five years, this influence by the pharmaceutical companies is set to increase. This is because of the emergence of new diseases such as Ebola and Marburg, and the need of a coordinated effort to treat these diseases. Various governments will have to coordinate and collaborate with these pharmaceutical industries for purposes of getting a cure of such kind of diseases (Haslam, 2013). These companies will therefore play a great role in influencing the various policies of governments. In fact, large pharmaceutical companies such as Glaxo Smithkline are capable of influencing various health care policies in their home countries. This is because they normally sponsor political candidates, `who in turn formulate policies aimed at protecting the interests of these pharmaceutical companies. For example, the pharmaceutical industry normally spends approximately 19 billion US dollars for purposes of lobbying the congress or political officials to implement policies that favor their operations (Haslam, 2013). This action is set to increase in the next five years, mainly because of an increased competition, that emanates from the liberalization of the world economies and markets. This is because in the next five years, there will be an increase in the emergence of new pharmaceutical companies. There will also be an increase in new innovations and inventions of drugs. This is because more of these companies have invested in research and development for purposes of seeking new drugs and making them to be more competitive. There is likelihood that the pharmaceutical companies will get a breakthrough in the treatment of cancer, diabetes, HIV AIDS, and other diseases that are not curable. Question 3 (d) Power of alliances and the Pharmaceutical Industry In any business association or industry, alliances are an important means of improving the profitability of the organization. This is because it helps in increasing the market share of the business under consideration. In the pharmaceutical industry, alliances are of great importance, and this is because it helps in innovation (Johnson, Whittington and Scholes, 2011). The Pharmaceutical Industry is under pressure because of the numerous expiring drug patents, increasing costs in the R&D, and a long duration to build and develop a drug. This has made it possible for the companies operating in this industry to seek alliances. One of the major impacts of this situation is that it would increase the productivity and efficiency of the pharmaceutical industry. These companies will share knowledge and skills, and hence develop better strategies of meeting the needs of their target markets (Maria, 2012). On this basis, the pharmaceutical industry is poised to grow and increase its revenue base. Furthermore, these alliances will increase the chances of a business organization to develop innovative products. This is because they would shares resources and costs in the R&D department, leading to an increase in the development of innovative and new products. For instance, these companies might get a breakthrough in the manufacture of drugs that have the capability of treating cardio vascular diseases, and other diseases that are not curable. Formation of alliances is therefore a positive issue in the pharmaceutical industry. Bibliography: Babitsky, S., & Mangraviti, J. (2013). The street smart MBA 10 proven strategies for driving business success. S.l.: Apress ;. Gil, E. L., & Reyes, A. (2013). International business research: strategies and resources. Lanham: Scarecrow Press. Haslam, C. (2013). Redefining business models: strategies for a financialized world. New York, NY: Routledge. Johnson, G., Whittington, R., & Scholes, K. (2011). Exploring Strategy: text and cases. New York: FT Prentice Hall. Maria, E. (2012). Exploring knowledge-intensive business services: knowledge management strategies. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Safko, L. (2012). The social media bible: tactics, tools, & strategies for business success (3rd ed.). Hoboken, N.J.: Wiley. Read More