Long-term goal and generic strategies

Long term goals:

(long term objectives) are determined in line with the organisation’s vision. These goals are strategic and reflects on the organisation’s specific direction on a high level. Strategic goals (long term goals) are the basis for more specific tactical goals (short term/functional goals)

strategy refers to important high – level plan as where tactic refers to the detail. What seems tactical today may improve strategic tomorrow. Long term strategic goals are important because they set a specific direction, the importance of tactics cannot be ignored. Sometimes a tactical decision (Henry ford’s black cars) may prove to have critical competitive consequences.

Long term goals serve as a reference for the selection of specific strategies and the associated short – term goals of each organisational unit and its subunits. Policies are rules / guidelines that express the limits within each action resulting from a short – term (and by implication long term) goal. For example purchases in excess of R10 000 need to be approved by the purchasing and logistics manager.

Long term goals

Short term goals

Examples

Increase market share of customers by 10%

In order to increase our market share in the long run, we need to do the following in the short term:

• Introduce monthly promotional activities with discounted products to lure new customers

• Introduce product X into the youth market segment

• Cross – sell products in all market segments

Strategic importance of individuals goals

High

Lower

Nature

Strategic (providing strategic direction)

Operational (i.e. to be directly implemented as part of the operations of the organisation)

Time frame

Long term (1 – 5 years) – depending on the industry

Short term (annual, quarterly, monthly or weekly)

Management involvement

High level managers

Lower level managers and supervisors

Specificity

Low

High

Quantity

Few high – level goals

Numerous lover – level goals associated with a long – term goal

Long and short term goals need to comply with specific requirements:

A long term goal should not be open to interpretation that varies from employee to employee, but should clearly and unambiguously indicate what management wants to achieve in the future. These goals should provide direction to the organisation, establish organisational priorities, reduce uncertainty and serve as the basis for all allocation and managing resources.

It’s critical that goals should be realistic, clear and decisive to ensure concerted and coordinated efforts by all the organisational unit. Some considerations should be:

• Are all efforts directed towards clearly understood, decisive and attainable over all goals?

• The specific goals of subordinate units may change in the heat of campaigns or competition, but the overriding long – term goals for all units must remain clear enough to provide continuity and cohesion for tactical choices during the time horizon of the strategy

• If the goals are to be achieved. They should ensure the continued viability and vitality of the entity vis á vis its opponents.

Some additional considerations:

• Goals should be measurable and clearly indicate a time frame

• Goals should also be consistent and congruent across organisational units

Clearly defined goals provide direction to the organisation, establish priorities, reduce uncertainty and assist in the allocation of resources.

Competitive advantage:

According to Porter, Competitive advantage is all about the activities an organisation undertakes to gain a competitive advantage in a particular industry. The competitive advantage of an organisation is the answer to the question: “what competency / advantage should the organisation use to distinguish it from its customers”.

Certain criteria should be met, it must:

• Relate to an attribute with value and relevance to the targeted customer segment

• Be perceived by the customer as a competitive advantage

• Be sustainable, i.e. not easy limited by competitors

The Comp advantage that an organisation selects should be based on its resources, strengths or distinctive competencies relative to competitors, but must also be perceived as such by its customers. A organisation should not only consider its competitors when determining its competitive advantage, but also its customers and their value proposition.

The opportunity for companies to sustain competitive advantage is determined by their capabilities. Distinctive capabilities: those characteristics of a company that cannot be replicated by other companies, or can be replicated with great difficulty, even after these competitors have realised the benefit they yield for the originating company. Reproducible capabilities: can be bought or created by any company with reasonable management skills and financial resources.

Only Distinctive capabilities can be the basis of a stainable competitive advantage

Examples of distinctive capabilities:

SA example:

Government licences

Telecommunications industry

Strong brands

Vodacom, MTN in cellular industry

Skills and knowledge

Well known accounting firms – KPMG

Examples of reproductive capabilities:

Technical capabilities

Internet banking, purchasing software, human resources management systems.

Marketing capabilities:

Good advertising, marketing channels

Classifying strategies:

The aim of all these strategies in chapter 6 and 7 is to achieve a fit between organisational capabilities, customer expectations and the competitive environment – and in so doing achieve a sustainable competitive advantage.

In order to gain competitive advantage organisations must decide to adopt one of these generic strategies – that is why the generic strategies are sometimes referred to as competitive strategies. An organisation also decides on a Grand strategy in order to strengthen the generic strategy in its pursuit of competitive advantage.

Generic competitive strategies:

Porter’s well – known competitive strategy classification scheme incudes the generic strategies of cost leadership, differentiation and focus (cost focus and differentiation focus)

Generic strategies provide focus and direct organizational activities. Organizations have to select specific generic strategies that complement their competitive advantage. According to Porter an organisation can strive to supply a product or service in three distinct ways, by pursuing one of the following generic strategies:

1. By being more cost – effective that its competitors, i.e. Cost leadership

2. By adding value to the product or service through differentiation and commanding higher prices.

3. By narrowing its product to a special product market segment which it can monopolise; i.e. Focus

Combining the cost and differentiation advantage adds another generic competitive strategy, namely:

1. By offering the lowest (best) prices compared with rivals offering products with comparable attributes, i.e. Best – cost strategy.

Cost leadership and differentiation are usually incompatible and businesses that don’t develop one or the other is usually “stuck in the middle” and almost guaranteed inferior performance. The choice of the generic strategy should be based on the strengths and weaknesses of a organisation relative to those of its competitors.

1. Cost leadership:

Organisations here usually sells a product or service that appeals to a broad target market. Their product or services are highly standardised ad not customised to an individual’s taste, needs or desires. To achieve a cost advantage, an organisation’s cumulative across its overall value chain must be lower than its competitor’s cumulative cost. There are two ways to accomplish this:

1. out – manage rivals in the efficiency with which value chain activities are performed and in controlling the factors that drive the cost of value chain activities.

2. Revamp the organization’s overall value chain to eliminate or bypass some cost -producing activities

Some of the associated cost rivers that need to be managed as part of a cost – leadership strategy, are the following:

Economies of scale

Arise when activities can be performed more cheap at a larger volume than a smaller volume and from the ability to spread out certain fixed cost such as research and development (R&D) and advertising over greater sales volume. The various cost involved in production and which should be reviewed when economies of scale come into play are:

• The total cost account for all the production cost. Total cost ↑ as output ↑

• Fixed cost (equipment and land) remain the same for different levels of production unless the production operations are expanded in size.

• Variable costs are he cost of variable inputs (raw materials and labour). Variable cost vary with output.

• Average cost is the mean cost of total production (i.e. total cost / total number of units produced during a given period).

Economies of scale exist if average cost are lower at higher levels of production. PnP has much more bargaining power with suppliers of fast – moving consumer goods than a newly established supermarket chain. The prices that PnP negotiates with the suppliers will be much lower than what the new supermarket chain will be able to negotiate.

Experience and learning – curve effects

An organisations cost can decline as employee experiences increase. This leads to higher productivity, employees applying technology better or devising ways of improving systems. Learning fosters increased understanding of responsibilities and leads to the mastering of skills to achieve organizational goals more effectively and efficiently.

The % of capacity utilisation

Capacity utilisation is an important cost driver for value chain activities associated with substantial fixed cost. Increased capacity utilisation leads to fixed cost being spread over a larger unit volume which lowers the fixe cost per unit, especially in capital – intensive organisations. Ways to achieve this are through better demand forecasting, conservative expansion policies, aggressive pricing and increased depreciation rates.

Technological advances

Investment in cost – saving technologies can enable organisations to reduce the unit cost of their products or services significantly. Investments in technology are often associated with manufacturing activities, but investment in office and service automation is also popular. (Pnp’s scanners saves time and better stock management

Improved efficiencies and effectiveness through supply chain management

An organizaion’s value chain is intimately linked to the value chains of its suppliers and customers in a highly interactive way. Focusing on the activities in which it portrays competencies saves time and money.

Distinguishing features of the cost leadership strategy

Strategic target

A broad cross – section of the market

Basis of competitive advantage

Lover overall cost than those of competitors

Product line

A good basic product with few frills (acceptable quality and limited selection)

Production emphasis

A continuous search for cost reduction without sacrificing acceptable quality and essential features.

Marketing emphasis

Trying to make a virtue out of product features that lead to low cost.

Keys to sustaining the strategy

Economical prices/good value

Low cost (year after year) in every area of the business.

is this the best strategy to follow when:

• The organization has the ability to reduce cost across the supply chain

• Price competition among competitors is vigorous

• The targeted customer market is price sensitive

• Competitive products are similar and there is a great degree of product standardisation as van be seen from the history of the tertiary education industry

• Brand loyalty does not play a big role among customers

• Buyers have a high bargaining power because of a higher concentration

• New entrants to the industry use introductory low prices to attract buyers and build a customer base.

• The market is large enough to provide the organisation with economies – of – scale advantages

• Buyers incur low switching cost.

Political pitfalls:

• Sometimes organizations run the risk of being overly aggressive with their price cutting and ending up with lower profitability.

• Value – creating activities that form the basis of this strategy can often be imitated too easily.

• A degree of differentiation is often still needed. A low cost provider’s product offering must always contain enough attributes to be attractive to prospective buyers – low price is not always appealing to buyers.

Advantages:

• Increases the potential of an organisation to increase both its market share and its profitability - - - in cases where high profitability is obtained, the capital reserves that are accumulated also provide the organisation with a greater variety of strategic alternatives when it comes to defending or expanding the market share of the organisation.

• Customers who are familiar the products and services of low – cost leaders are unlikely to switch to a competing brand, unless the competing brand has something very different or unique to offer. Customer loyalty is therefore often an advantage of a prolonged cost leadership strategy. - - - One of the most important advantages that cost leaders have is their ability to keep new entrants from entering the market. Establishing a new organisation usually requires vast capital investment in fixed assets. These new organisations usually do not have the turnover to create economies of scale and are too young to enjoy the benefits of economies of learning and experience.

1. Differentiation:

Consists of creating differences in the organisations product or service offering by creating something that is perceived to be unique and its values by customers. It can take many forms such as:

• Prestige or brand image (BMW,NIKE,ROLEX)

• Technology (LG)

• Innovation (NOKIA)

• Features (Microsoft)

• Customer service (Investec Personal banking)

• Product reliability (Johnson & Johnsons)

• A unique taste (Nando’s)

• Speed and rapid response (out-surance)

As a rule, differentiation yields a longer – lasting and more profitable competitive edge when it is based on product innovation, technical superiority, product quality and reliable, comprehensive customer service and unique competitive capabilities. – such as differentiating attributes tend to be difficult for rivals to copy or offset profitability, and buyers widely perceive them as having value.

The most important by-product of a differentiation strategy is customer retention and loyalty. This means that customers are locked in and are therefore safe from rival competitive activities.

Distinguishing features of the Differentiation strategy

Strategic target

A broad cross – section of the market.

Basis of competitive advantage

Ability to offer buyers something attractively different from that of its competitors.

Product line

Many product variation; wide selection; emphasis on the differentiating features.

Production emphasis

Differentiating features that buyers are willing to pay for; product superiority.

Marketing emphasis

Flaunting differentiation features; charging a premium price to cover the extra cost of differentiating features.

Keys to sustaining the strategy

Constant innovation to stay ahead of imitative competitors

A few key differentiation features

Is this the best strategy to follow when:

• Buyer’s pretences are diverse and varied, as can be seen in the very diverse telecommunications offerings available to different customer segments

• Fewer competitors follow similar differentiation approaches with less head-to-head rivalry, as used to be the case when Woolies entered the convenience food market with their home made gourmet convenience foods – many competitors have followed this.

• There are many ways to differentiate the product and many buyers perceive differences as having value

• Technology changes frequently and competition often centres on changing product features, such as the case with mobile headsets

• Higher industry entry barriers result In higher demand for products and less price sensitivity

• Differentiated products can be designed so that it has wide appeal to many market sectors

• Brand loyalty exists

Political pitfalls:

• Uniqueness that’s not valuable: Its not sufficient to be different – the key is providing a valuable uniqueness and difference

• Too much differentiation: The key is to provide an appropriate level of quality at a lower price

• Charging too high premium: prices still need to be competitive in order to reduce customers switching to lower – priced competitive products

• A uniqueness that is easily imitated

• Dilution of brand identification through product – line extensions: profit declines can occur because of differentiation to one product / product line at the expense of another. Another possibility is that one product can cannibalise the revenues of another in the organisation at the expense of overall profitability.

1. Focus:

Based on the choice of a narrow competitive scope within the industry. The organisation targets a specific customer segment or group of segments to which to provide products. The essence is exploiting a market niche that differs from the rest of the industry. (Ebay / Porsche / BnB’s)

• A focus strategy based on cost leadership: aims at securing a competitive advantage by serving buyers in the target market niche at a lower cost and price that its competitors.

• A focus strategy based on differentiation: aims at securing a competitive advantage by offering niche members a product they perceive as well suited to their own unique tastes and preferences.

Distinguishing features of the Focus strategy

Focus: Low cost

Focus: Differentiation

Strategic target

A narrow market niche in which buyers needs and preferences are distinctively different

A narrow market niche in which buyers needs and preferences are distinctively different

Basis of competitive advantage

Lower overall cost that rivals in serving niche buyers

Attributes appealing specifically to niche buyers

Product line

Features and attributes tailored to the taste and requirements of niche buyers

Features and attributes tailored to the taste and requirements of niche buyers

Production emphasis

A continues search for cost reduction while incorporating features and attributes matched to niche buyer preferences

Custom made products that match the taste and requirements of niche buyers.

Marketing emphasis

Communicating attractive features of a budget – priced offering that fits niche buyers expectations.

Communicating how the product offering does the best job of meeting niche buyers expectations.

Keys to sustaining the strategy

Consistent innovation to stay ahead of imitative competitors

A few key differentiating features.

Commitment to serving the niche better than rivals; does not blur the organisations’ image by entering other market segments or adding other products to widen the market appeal

Is this the best strategy to follow when:

• The target market niche is large enough to be profitable and offers good growth potential

• It provies a way for smaller organisations to avoid direct competition with the larger organisations that do not deem the segment important to compete in

• Its viable for organisations to meet the specialised needs of the niche segment while still maintaining performance in their mainstream markets

• The industry has a variety of potentially profitable market segments and overcrowding by competitors is thus less of a risk.

• Customers are willing to pay a high premium for the perceived value that they attach to a differentiated (customised) product / service.

• Customers are brand loyal and are unlikely to shift their loyalty to a competing brand, regardless of the price they have to pay for the particular product or service.

Political pitfalls:

• The needs, expectations and characteristics of the market gradually shift towards attributes desired by the majority of the buyers in the broader market, which will decrease the profit potential of this segment

• Competitors may develop technologies or innovate products that may redefine the preferences of the niche that the organisation has been concentrating on

• The segment may become so attractive that it is soon inundated with competitors, intensifying rivalry and eroding profits.

1. Best cost Strategy:

Organisations that successfully integrate cost leadership and differentiation strategies find that their competitive advantage is often more difficult fir competitors to imitate.

It has been found that this integrated strategy has a positive relationship with above average returns. An integrated strategy enables an organisation to provide value in terms of differentiated attributes, as well as lower prices.

The aim becomes to provide unique products and services more efficiently than other competitors do. These strategies are also referred to as “Middle of the road strategies” (mc’D burger tastes the same no matter where you find yourself)

Distinguishing features of the Best Cost strategy

Strategic target

Value conscious buyers

Basis of competitive advantage

Ability to give customers more value for money

Product line

Items with appealing attributes; assorted upscale features.

Production emphasis

Produce upscale features and appealing attributes at lower cost than rivals

Marketing emphasis

Flaunt delivery of best value

Either deliver comparable features at a lower price than rivals or match rivals on prices and provide better features.

Keys to sustaining the strategy

Unique expertise in simultaneously managing cost down while incorporating upscale features and attributes.

Is this the best strategy to follow when:

• The potential for economies of scale and learning exists in the market

• Customer demand, expectations and needs provide sufficient impetus investment in enhanced efficiencies and cost saving, as well as differentiation.

• Competition is fierce and barriers to entry is low

• Customers are simultaneously price and quality sensitive

• Mass customisation becomes a possibility because of advances technological, distribution and marketing capabilities: Growth of the internet as a distribution channel (online shopping / internet banking)

Political pitfalls:

• Organisations that fail to create both competitive advantage simultaneously may end up with neither and become stuck in the middle

• Organisations may underestimate the challenges and expenses associated with providing low prices and differentiating at the same time.

• Organisations may miscalculate the source of revenue within the industry and fail to achieve expected profitability.

Criticism against the generic strategy framework:

• An organisation can employ a successful hybrid strategy without being stuck in the middle, Porter argues that an organisation MUST decide on either a differentiation or low – cost strategy. If an organisation in stuck in the middle – this will result in suboptimum performance.

• Low cost strategy does not sell products in itself: If the lowe cost are not reflected in a lower price, the products will not sell.

• Price can sometimes be used to differentiate: Porter did not take this into consideration

Long term goals are footlights of an organisational strategic, They will illuminate the direction that the organisation should follow to reach its future vision. They guide the path to an organisational success and provide the basis for subsequent short – term, tactical goals.

Long term goals also serve as the foundation for competitive strategies. These competitive strategies answer the “how” of achieving goals.