TTO – When consulting the literature on business strategy, you will see the richness of strategic structures: low-cost leadership, diversification, mergers or acquisitions, globalization, concentration. Focus on customers, make a difference for products or services, etc
How are these strategies understood? Once you understand the opportunities and threats in the external environment as well as the strengths and weaknesses in the internal environment, how can you determine which strategy is best and most appropriate for the company? your company?
Essentially, every for-profit company has the same goal: to identify and pursue a strategy that will enable it to protect itself and become profitable in a certain market segment. Depending on the choice, this segment can be large or small, can create high profits on a few transactions or low profits through a series of transactions. That segment can also contain superficial relationships with many customers or long-term and deep relationships with a few customers. Whatever strategy it pursues, every company will try to increase its profitability – that is, the difference between what customers are willing to pay and what it costs the company to provide its goods or services. me.
This chapter describes four basic strategies: low-cost leadership, product or service differentiation, customer relationships, and network efficiency. Almost every business strategy falls into one of these four strategy categories or some variation.
Leading by Low Cost Strategy
The low-cost leadership strategy has paved the way to success for many companies. When they first appeared in the 1950s and 1960s, American discount retailers such as EJ Korvette and later Kmart captured much of the retail market from traditional department stores and other retailers. specialty store. Their success is due to their ability to offer products at low prices, and they have developed that ability by keeping their cost structure lower than those of traditional competitors. These discounters were in turn replaced by Wal-Mart and Target because both were able to implement a much more effective low-cost strategy.
In this strategy, the product or service that Wal-Mart or Target offers is completely similar to the product or service of its competitors. For example, items sold by Wal-Mart and Target can come from many different sources such as Duracell batteries, Minolta binoculars, Canon cameras, Kodak film, Wrangler jeans, Hanes underwear, Gillette razor blades, Bic pen... So why do many people like to go to Wal-Mart and Target to buy these items and ignore their competitors' sales locations? Because they believe they will buy the same items but at a cheaper price. These two corporations have specifically built low-cost advantages in mind as a key part of their overall strategy.
The key to a successful low-cost strategy is to deliver the value customers expect at a cost that ensures adequate profitability. Figure 3-1 is adapted from a model first improved by Adam Brandenburger and Harborne Stuart. The vertical distance between a customer's willingness to pay (top line) and the cost of delivering the product (bottom line) represents the price range within which every company must operate. It also represents the company's added value as perceived by customers. For common goods or undifferentiated products, the gaps between these lines are narrow. And the top line – that is, what customers are willing to pay – is usually fixed. Therefore, to generate higher profitability, the seller must lower the supply cost curve. They often try to do this by forcing suppliers to offer low prices. This is a game that Wal-Mart has been playing and winning for many years. They have squeezed costs from their suppliers more than any other major retailer.
The low cost leadership strategy applies not only to tangible products such as clothing, paint, steel, etc. but also to products in the service industry. Consider the case of Vanguard - a leading investment management group. Founded in 1975, this company offers a variety of mutual funds and a very high level of customer service. There's nothing particularly appealing about Vanguard or its funds. While some actively managed funds have long-term leadership positions, many others work to replicate market profitability. Over the years, mutual funds that invest in this index actually outperform the average managed mutual fund.
What really sets Vanguard apart from other funds is that they have a zero-commission policy and have the lowest average expense ratio of any fund. For example, in 2003, Vanguard's average expense ratio was 0.25% of assets – less than one-fifth of the mutual fund industry's average expense ratio of 1.38%. This gave Vanguard clients a 1.13% higher annual return on their principal (all other factors being equal). By keeping management and trading costs low, Vanguard actually invests and reinvests more money while delivering higher rates of return over time. Vanguard's success with this strategy has made them popular with individual investors and has become one of the largest funds in the US.
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