Disney cost leadership

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Module 3 Overview, Part 1

Welcome to Module 3, Part 1!

This module you will make a transition from strategy analysis to strategy formulation.

Before moving on to strategy formulation, let's recall what we discussed about strategy analysis during the past two modules.

First, you, as a strategist, review the mission, vision, goals, and objectives to determine if there are any conflicts between your long-term vision and mission and the short-term goals and objectives being set.

Next, you perform a stakeholder analysis because it helps leaders formulate their stakeholder "posture" and plans. You also analyze whether or not all stakeholders hold equal importance. If not, you identify the primary and secondary stakeholders and the reasons for this categorization.

Strategy analysis also involves analyzing the external environment, including the general and the competitive environment. External environment analysis facilitates gathering key information about industry trends and driving forces that directly affect an organization and others in the same strategic group. You should be clear about what you need to scan, monitor, and forecast to stay ahead of changes in the external environment.

You need to answer some key questions to complete the external environment analysis:

· How is the competitive landscape changing?

· Where are the new threats likely to come from?

· How profitable is the niche in which you compete, and do you need to change your competitive and market focus?

· Are you well positioned to adapt to the external forces?

You can answer such questions through strategy analysis, helping in strategy planning and formulation.

Module 3 Overview Continued

Next, you perform internal analysis, which is a kind of a "pulse check" on the organization's strategy and performance to date.

By considering the organization's resources, value chain activities, financials, and strengths, weaknesses, opportunities, and threats (SWOT), you as a strategist would be able to answer the following questions:

· How successful is your strategy?

· How much change in strategic direction do you need to ensure healthy growth and financial performance?

· Do you need to cut costs or revamp your value chain to deliver more value to your customers?

· Most importantly, does the organization have a source of sustainable competitive advantage over its rivals?

Finally, after analyzing the internal and external environments, you focus on the following questions:

· Given all the data of the strategy analysis, what should the organization do to achieve its goals and objectives?

· What revision in strategy do you need?

This module you will learn about strategy formulation by observing three generic business-unit-level strategies:

· Cost leadership

· Differentiation

· Focus

You will also discuss the vital role the industry life cycle plays in determining what corporate strategists should do.

Strategy Formulation: Overview

Strategy formulation may be defined as the process of creating or determining the strategies of an organization.

Strategy formulation focuses on the subject matter of strategies.

Let's discuss what the process of strategy formulation entails and how to move toward strategy formulation.

Creating and Sustaining Competitive Advantage: Selecting the "Right" Competitive Strategies

As we discussed, industries vary dramatically from one another, and organizations adopt the "most likely to be successful" stance to succeed in their industry.

There are two levels at which strategy planning takes effect—at the business-unit-level and at the corporate-level.

Levels of Strategy ? Business-Unit-Level Strategy A business-unit-level strategy is concerned with a division or product line or profit center that can be planned independently. The strategy deals with positioning the business against rivals, anticipating changes in the industry, and influencing the nature of the competition. Southwest Airlines (SWA) is a good example of a business unit — it is in a single line of business. It is also an excellent example of an overall cost leadership competitive strategy. To learn more about SWA click here. ? Corporate-Level Strategy A corporate-level strategy is concerned with selecting businesses in which an organization competes and developing and coordinating that portfolio. Corporate-level strategies focus on how to grow and manage a corporation with multiple businesses as part of its portfolio. Disney is a multibusiness unit corporation with four business broad groups including media networks — ABC TV and ESPN; parks and resorts — Disney Land and Disney World; studio entertainment — movies; and consumer products — retail and licensed products. Each of the business units pursues a competitive strategy of differentiation.

Generic Competitive Strategies

Very broadly defined, there are three stances by Michael Porter called generic strategies that firms can adopt towards being successful.

The three generic competitive strategies are:

· Overall Cost Leadership: A strategy that is lean and capable of producing volumes and lowering the unit cost of services and products. The idea is to provide low-cost services and products as compared to competitors. Examples include Aldi grocery stores, Sam's Club, Cost Cutters, Great Clips hair salons, and nonbranded products.

· Differentiation: A strategy where the products have a distinguishing quality or the quality of differentiation. Product differentiation refers to the services and products that stand out in the market place because they have an added value and uniqueness that customers desire and are willing to pay for. There are many ways to differentiate products, and these products are brands that stand out such as Rolex watches, Bose sound systems, Target in specialty retailing, and Toll Brothers in homebuilding.

· Focus: A strategy where the product has a focus, either on cost leadership—focus-cost leadership—or on differentiation—focus differentiation. The idea is to focus on a narrow niche of customers. An organization may be a regional organization focusing on a narrow geographic niche instead of the entire U.S. market. Or the organization may have a narrow product line aimed at a particular target market. For example, Harry Winston is a jeweler targeting the "rich and famous" versus the middle-income client who may frequent a jewelry store in a mall. The key is that the organization's focus is narrow while it pursues either cost leadership or differentiation.

Generic Competitive Strategies Questionnaire

Lists thought-provoking questions related to competitive strategies: What are generic competitive strategies? How do competitive strategies apply to businesses? What should organizations possess to be successful in their application of the generic strategies?

Each of these generic competitive strategies targets customers with different needs and preferences.

To be successful in any one of the generic strategies, an organization should possess:

· Different competencies and capabilities.

· A different set of resources and strengths.

· A culture that matches the generic strategy.

· Leaders and employees with background and training in different areas.

· Metrics and measures that truly analyze how well the organization's employees are doing in executing its generic strategy.

Overall Cost Leadership Strategy

States that the experience curve depicts the efficiency developed through an organization’s cumulative experience. It explains the relationship between cost per unit and the cumulative output. Directs you to click to learn more about the experience curve.

What is overall cost leadership, and how does it help an organization gain competitive advantage?

An overall cost leadership strategy entails pricing products at a cost lower than the competitors while not compromising on quality and service.

Organizations in industries that have some, if not all, of the following characteristics adopt overall cost leadership:

· The dominant competitive force in the industry is price competition among rivals. Organizations face "cutthroat" competition as they attempt to take over one another's market share. Organizations that have lower cost structures than their rivals are better positioned for success compete on the basis of price. These organizations can ride out price wars, eventually taking over market shares from weaker rivals or prudently acquiring rivals nearing bankruptcy.

· Maintaining a lower cost structure requires constant improvements of value chain functions such as inbound and outbound logistics and operations. It also requires scrutinizing advertising or marketing, sales, services, and research and development (R&D), because these activities do not reduce, but add, costs.

· The experience curve effect, in most industries, lowers the unit cost of production as output or volume increases because of purchasing inputs in volume, using the production capacity to its maximum, and benefiting from other economies of scale.

· The industry's product becomes a commodity-type item that is readily available. A good example of this is how, over time, personal computers (PCs) have become a commodity, and rivals have had to find efficiencies and other cost savings to compete.

· Despite management efforts there are few ways to differentiate a product in the marketplace. For example, it is difficult to differentiate a board foot of lumber, which is sold primarily as a commodity.

· Most buyers have similar needs or requirements that a narrow set of product offerings can satisfy. The buyers are unwilling to pay for differentiation they do not want or need.

· Buyers incur low switching costs when changing sellers, so it is easy to change products. Such products may include toilet paper, light bulbs, and tissue paper. As a result there is little brand loyalty. Buyers are large and have significant bargaining power because they often purchase in bulk.

Competitive Advantages and Pitfalls

Competitive Advantage and Pitfalls of Overall Cost Leadership

By stringently managing costs and investing prudently in innovations that improve productivity, an organization can lower the unit cost of production as volume increases. This improves the organization's competitive position as compared to its rivals. It is able to buffer itself during challenging times without having to cut prices to stay in business rather than growing less profitable and more vulnerable with time.

In addition, cost leadership protects the organization against substitute products that new and existing competitors introduce. The new products would be more costly to produce and, therefore, unable to compete on price with the overall cost leader, which is key to this strategy.

The strategy, however, does have several disadvantages that managers should be aware of as they fine-tune it.

The following are three common mistakes managers make when executing this strategy:

· Focus on Selected Activities: An organization focusing exclusively on cutting costs and improving performance only in selected activities in the value chain may become vulnerable in other ways. For instance, managers who vigilantly manage operating budgets only to overspend on capital projects in which there is no return on investment as planned are shortsighted. An organization should explore all value chain activities for cost savings.

· Strategy Easily Copied: An overall cost leadership strategy that is easy to copy does not yield competitive advantage for long because rivals observe and imitate the investments, cost cutting, and deployment of resources the cost leader uses.

· Smart Customers: Customers with pricing information erode the cost advantage. You are aware that the Internet has been a boon to customers, providing the savvy customers with significant competitive information and, therefore, bargaining power. One interesting study of the life insurance industry found that for every 10 percent increase in a consumer's use of the Internet, there was a corresponding reduction in insurance prices to consumers by 3 to 5 percent. The savings to the consumers were between $115 and $125 million annually, which corresponded to a drop in the insurance industry revenue.

· Overall Cost Leadership Strategy: Questionnaire

· Organizations engaging in overall cost leadership are spartan, with a strong focus on containing costs. They often offer limited perks to executives and do not tolerate waste, emphasizing quality initiatives such as Six Sigma, lean manufacturing, and budget control.

· Often, employees engage in cost control initiatives and may even benefit through productivity-sharing programs.

· The organizations make investments after intensely scrutinizing cost-saving improvements such as new technology with proven benefits, automation, supply chain optimization, and outsourcing.

· Differentiation Strategy

· States that brand loyalty is the strongest measure of a brand's value. It can be explained as the inclination of a buyer to continue buying the same brand. Directs you to click to learn more about the best global brands as stated in Business Week.

· What Is Differentiation?

· Differentiation means adding more desirable features, services, and benefits to products that consumers want and that rival organizations cannot easily imitate. Note that it is a challenge to implement differentiation that cannot be easily copied.

· Differentiation is a generic competitive strategy that is simple to define but challenging to execute well. This is because most consumers are aware of differentiated products, because many of the products they use everyday are branded products. The features and benefits differentiated goods supposedly provide distinguish the goods from others. Therefore, consumers "get" differentiation.

· Managing a differentiation strategy is challenging because it is easy to foresee the rise in costs associated with differentiation. This rise is more than what the consumers are willing to pay for.

· In addition, profits erode when consumers are no longer willing to pay the price for the differentiated product.

· Given the warning about the rising costs of differentiation, many organizations have executed profitable and successful strategies based on one or more kinds of differentiation.

· When organizations successfully differentiate their products, they may command a premium price, have greater brand loyalty, and increase unit sales.

Ways to Differentiate

Differentiation comes in many forms and touches multiple activities in an organization's value chain.

The following are some of the ways an organization can differentiate its products:

· Prestige or Brand Image: For example, Neiman Marcus and Ritz-Carlton Hotels

· Different Taste: For example, Dr. Pepper

· Superior Service: For example, Federal Express, Nordstrom, and Lexus

· Product Design: For example, Target's "design for the masses" and Apple's iPod

· Spare Parts Availability: For example, Caterpillar

· More Value for Money: For example, Walmart

· Engineering Design and Performance: For example, Mercedes and Konica Minolta

· Quality: For example, Toyota

· Top-of-the-Line Image: For example, Armani, Hermes, and Manolo Blahnik shoes

· Technological Leadership: For example, 3M Corporation

· Unconditional Satisfaction: For example, L. L. Bean and REI

· Location: For example, the top places to live

For more information on any of the organizations mentioned above, search for the organization by using Google.com, and go to its Web site to see how it presents its products and describes the features that differentiate them from its competition.

Role of Signals in the Marketplace

States that the value chain is a systematic approach to examining the development of competitive advantage. The chain consists of a series of activities that create and build value. Directs you to click to learn more about value chain analysis.

How do buyers judge whether a product delivers on the promises its brand implies?

Consumer research seems to support the notion that buyers listen to "signals" in the marketplace, such as price as a surrogate of quality; brand recognition or how well a brand is known; and prestige customers, which is why celebrity and sports figure endorsements are key to establishing brand recognition with target markets.

Interestingly, these signals of value may be as important as the actual product or service value for first-time buyers, who rely on price, brand recognition, and prestige to solidify the product in their minds.

For infrequent purchases, such as furniture, price can often be a signal of value to customers who may not have purchased furniture for a long time.

Sustainable Advantages of Differentiation: Brand Loyalty and Solutions

As we discussed, organizations using differentiation should be aware of the cost of differentiation and should always search for ways to provide more value to their customers. Therefore, time organizations spend listening to their customers is key, and with differentiation, providing solutions, not only products or services, is essential.

To design products and services that are unique and clearly superior in ways that appeal to customers, strategists make efforts on both primary and secondary activities in the value chain.