Mutual Exclusiveness of Generic Strategies - Essay Example

?Mutual Exclusiveness of Generic Strategies Summary This critical analysis provides insights into the mutual exclusiveness of cost leadership and differentiation as components of generic strategies. The essay looks at the various justifications why cost leadership and differentiation should not be seen as being mutually exclusive. Through this critical analysis, the fear that firms employing both strategies simultaneously run the risk of being stuck in the middle is dispelled. To prove that integration of the two strategies into the operations or a business organization is possible, several examples have been draw ranging from the cost leadership approach in Toyota to the contingency approach employed in human resource practices. The link between strategy and business performance has taken the center stage in organizations’ preoccupation with how best to increase their profits. These organizations are now investing in strategic management as a means of achieving an edge over their competitors. For this reason, finding the best ways of incorporating effective strategies call for a firm to consider a number of strategies available and then choose the most suitable from the available theories and practices. Organizations are now looking for strategies that will give the competitive advantage over customers’ decision to choose products and services from one firm over the other. Therefore, firms are concerned with how best to make use of the generic strategies as proposed by Michael Porter. Bearing in mind the warning that porter gave concerning their mutual exclusiveness, firms are careful in their decisions to adopt cost leadership, differentiation or both of the strategies. A firm can achieve a higher profit margin compared to its rival in two ways. Firstly, the firm has an option of supplying a similar service or product at a lower cost (Schermerhorn, 2011) or secondly, the firm can opt to supply its services or products in a differentiated manner that makes customers be willing to offer a premium price that is higher than the additional cost of differentiation. Firms that undertake the two options are said to poses cost advantage and differentiation advantage respectively (Brandenburger, 2002). Firms that pursue cost advantage have the ultimate goal of becoming the cost leader in the industry or industry segment that it is in operation. Thus, a firm that seeks cost leadership must explore all avenues that will guarantee its cost advantage in the industry. For a firm to achieve differentiation advantage over its competitors, it must come up with the necessary measures to produce a unique service or product that is valued by the customers to the extent of foregoing a relatively cheaper service or product offered by the firm’s competitors to buy from the firm at a higher price (Dahlen, 2006). Therefore, cost leadership and differentiation strategies define two fundamentally different approaches to business strategy given that a firm competing on low cost is discernible from that competing through differentiation evident from their different organizational characteristics, market poisoning, capabilities and resources (Grant, 2010). Michael Porter pooled differentiation and cost leadership with the firm’s choice of scope to constitute the generic strategies that a firm can use to achieve high profit margins. According to Porter, cost leadership and differentiation are mutually exclusive strategies to the extent that firms that endeavor to practice both strategies are stuck in the middle. Further, Porter defines a firm that is stuck in the middle as one with a guaranteed low profitability since it losses the high volume customers who demand low prices or has lowered its profits so that it can attract customers from those firms offering lower prices. The firm that is stuck in the middle loses its high-end customers who have high margin targets in their mind or have generally achieved differentiation. Such a firm would also lack a well-defined corporate culture in addition to having an incompatible set of organizational motivation system and arrangements (Grant 2010, P 222-3). Porter has argued that firms that do not follow a one predetermined strategy runs the risk of being stuck in the middle, a situation where the firm lacks clear policies and strategies that guide its operation. However, there are other researchers who have proven that low costs and differentiation strategies might be compatible approaches to dealing with competitive forces in the modern business environment (Beal &Yasai-Ardekani, 2000; Campbell-Hunt, 2000). These researchers have pursued what they term as “hybrid”, “mixed”, “integrated” or “combination” strategies (Kim, Nam and Stimpert 2004; Spanos, Zaralis and Lioukas, 2004). As with most general approaches, there are caveats and shades of grey that interact between cost leadership and differentiation strategies. Porter hints to the lack of exclusiveness when he claims that firms seeking cost leadership must also take care of minimum criteria for equivalence with differentiators in the industry. These assertions points to the fact that low prices must also conform to the fit for purpose expectations of the potential customer. Therefore, a business needs to differentiate itself from the competition through a unique blend of cost through pricing and value due to differentiation. However, even as Porter warns of the dire consequences, firms that seek to combine these two generic strategies in their attempt to boost profits; care must be taken not to misunderstand the implications of explanation. Porter has suggested that firms that achieve success select and concentrate their operations on effective implementation of one of the strategies to avoid being stuck in the middle. Though cost leadership and differentiation may seem mutually exclusive, firms can base their successful strategies on the two. A plausible example of a market situation is where Toyota is the overall cost leader in the motor vehicle industry, but at the same time differentiates its products (Peng, 2009). The company offers different car models for the different market segments, in addition to related Lexus range. Since it is a position, competitors of the company might be implementing a cost reduction strategy, this position becomes insecure and risky the firm does not take advantage of other avenues for adding value to its products. Consequently, cost leadership is a strategy that relies on being efficient and making sound cost management decisions, but being deferent from other players in the industry also matters. In the same way, differentiation is a strategy whose aim is to add value that trickles down to cost but a firm must manage its costs. Firms must understand their cost driver since it is important to add and incur cost only in areas where the firm can recover through premium prices. However, in the event the firm concentrates on issues of market share and size of operation, it might intentionally decide to charge relatively lower prices and not make any attempts to recover the extra costs it had added in its attempt to be different. Such a firm would choose to forgo higher profits, mostly in the short run, as it builds a power base (Thompson & Martin, 2010). According to Proff (2000) the modern market had undergone considerable changes that makes it different from the needs of past market environments. These changes have been experienced mainly in the demand and supply areas. Such changes calls for the application of a combination of strategies at the same time for a business organization to compete favorable. In such situations, the application of both low costs and differentiation business strategies at the same time becomes necessary. The author notes that on the supply side, projections are increasingly becoming hard due to product cycles, which tend to be shorter and discontinuities in the supply chain are increasingly frequent nowadays. For this reason, firms that go for a pure low costs strategy has a reduced chances of succeeding. Concerning demand for goods and services, price tends to be less important as a sales argument and demand becomes more differentiated. Additionally, some customer demands are converging, while lifestyle is becoming more varied and needs are more individual. Mass customization together with development of organizational networking demand for and contributes to flexibility that makes possible the combination of multiple strategies (Kim, Nam and Stimpert, 2004). For firms to meet the market demand and supply, they have to find a point at which balancing between their costs and differentiation strategies are possible. Roberts (2004) observes in the analysis of contingency approach to human resource practices, that firms can successfully use multiple strategies like expertise development and acquisition or differentiation and cost leadership suggesting that they can be mutually exclusive. However, the author warns that different business strategies highlight different organizational performance criteria and there is frequently an exchange between performance indicators. The author uses an example of the possibility that a firm may lose track of customer needs during efforts to operate efficiently and produce a low cost service or product as a potential danger of employing multiple strategies. However, the author asserts that organizational strategies that that may seem to competing with one another can be complementary. As an example of these complementarities, the author notes that cost defender firms may largely exploit human resource practices that promote a monitoring-oriented and control but might in addition value a stable work climate therefore choosing to undertake practices that promote communication, citizenship and coordination. Stonehouse and Snowdon (2007) opposes porters claim that differentia and cost leadership strategies are mutually exclusive by noting that many have undertaken a conscious operation a hybrid strategy that combine both low cost and differentiated services and products and instead of being stuck in the middle, such companies are highly successful. The authors maintain that low prices and low cost, do not guarantee high sales volume of products and services. According to the authors, the products and services should also have qualities that customers perceive as desirable and of value to them. In addition commodity price, combined with organizational image, quality products and services, after sales support and design, can all serve as the basis of product differentiation. Researchers in strategic management that are in favor of resource-based approach have also raised fundamental questions adding to the view that generic strategies cannot be the basis of competitive advantage. Those who belong to this school of thought suggest that organizations need to develop exceptional firm-specific core competences enable them surpass their competitors in terms of performance, which is only possible, if they did things differently and better. Porter presents generic strategic management approach that mainly consists of cost leadership and differentiation. The two strategies raise fundamental questions that must be answered. Firstly, what precisely does the notion of generic differentiation entail for Porter? Secondly, what is differentiated, the product or the business? According to the analysis presented by Porter, the business is differentiated. Porter’s account of differentiation is that a firm achieves differentiation that makes it stand out from its competitors when it offers something unique, therefore valuable to buyers beyond offering a low price (Ireland, Hoskisson, & Hitt, 2008). The phrase beyond simply offering a low price from his definition clearly points to competitive advantage. Having identified this competitive advantage, the question then shifts to what competitive advantage means. According to Porter’s theoretical framework, for any given business organization to successfully claim competitive advantage over its competitions, it is extremely important for others to find it impossible to imitate it. However, for firms to achieve this condition, it is essential that competitive advantage is impossible to identify, even, paradoxically, by the firm that makes it the center of its strategy. Indeed, based on the greatly hypothetical case where competitive advantage and its identification through analytical processes could be theorized as Porter claim, all firms in the business environment would try it out and in which case the advantage and competitiveness is lost (Aktouf, 2008). From the above examination, the concept of competitive advantage becomes ambiguous to the extent that it fails to signify anything precise. Therefore, can differentiation can have different meaning depending on the perspective one is identifying it from. From the position of firm’ directors, which is also Porter’s view, it is the business that is differentiated. While at the same time, employees and the consumers view differentiation in terms of only the products and services (Aktouf, 2008). These ambiguity makes it had for business organizations to exclusively rely on either one of the strategies since the business owners have cover all the areas of operations through inclusions of strategies that covers competitive advantage from the perspective of organization and at the same time cover customers’ views. This essay has looked at what is covered under cost leadership and differentiation as the two most important components of generic strategies. The following parts of the essay have looked at why it is possible for firms to implement both cost leadership and deferential generic strategies successfully. The paper has highlighted as a case example the strategic approach employed by Toyota which is an industry leader in automobile industry as a major example of how combining the two strategies is possible. The changes in market environment in areas like demand and supply calls for firms that need to keep up with modern trends to diversify their strategic approaches. Evidence from contingency approach to human resource management has been presented to oppose the mutual exclusive view of generic strategies. The fear that firms employing both strategies simultaneously run the risk of being stuck in the middle, not knowing which of the two to concentrate on, has also been dispelled. Last part has presented a brief analysis detailing why the concepts as detailed by Porter needs further scrutiny. This analysis assists in place Porters ideas in the context of practical business environment as opposed to the theoretical framework under which Porter postulated the two strategies. Therefore, this essay has succeeded in proving that Cost leadership and differentiation generic strategies are not mutually exclusive but are approaches that business organizations can take advantage of to achieve greater margins in terms of their profits. References Aktouf, O 2008, The false expectations of Michael Porter’s strategic management framework. Gestao & Planejamento-G&P, 1(11), PP 75-93. Beal, R M and Yasai-Ardekani M 2000, ‘Performance Implications of Aligning CEO Functional Experiences with Competitive Strategies’, Journal of Management, 26(4), pp. 733-762. Brandenburger, A 2002, Porter's added value: High indeed! The Academy of Management Executive, 16(2), 58-60. Campbell-Hunt, C 2000, What have we learned about generic competitive strategy? A meta-analysis, Strategic Management Journal, 21(2), pp 127-154. Dahlen, M 2006 Associate Professor, Center for Consumer Marketing, Stockholm: Stockholm School of Economics. Grant, R M 2010, Contemporary strategy analysis and cases: text and cases. New Jersey: Wiley. Ireland, R D, Hoskisson, R E, & Hitt, M 2008, Understanding business strategy: Concepts and cases, Connecticut: Cengage, Kim, E., D. Nam and J. L. Stimpert (2004), ‘The Applicability of Porter’s Generic Strategies in the Digital Age: Assumptions, Conjectures, and Suggestions’, Journal of Management, 30(5), pp. 569-589. Thompson, J. L., & Martin, F. (2010). Strategic Management: awareness & change. Connecticut: Cengage. Schermerhorn, J R 2011, Management, New Jersey: John Wiley & Sons. Stonehouse, G & Snowdon, B 2007 Competitive advantage revisited: Michael Porter on strategy and competitiveness, Journal of Management Inquiry, 16(3), 256-273. Peng, M W 2009, Global strategy, Mason: Cengage Learning, Spanos, Y E, G Zaralis and S Lioukas 2004, Strategy and Industry Effects on Profitability: Evidence from Greece, Strategic Management Journal, 25(2), pp. 139-165. Proff, H 2000, Hybrid strategies as a strategic challenge, The case of the German automotive industry’, Omega, The International Journal of Management Science, 28, pp. 541-553. Roberts, G 2004, A literature review on the impact of investment in human capital on economic success: How do human resources practices affect organizational performance? GRIN, Verlag. Read More