August 21, 2006

Cost, Focus & Preemptive Move

Following are few quotes in the context:

• What matters in the new economy is not return on investment, but

return on imagination – Gary Hamel.
• The first man gets the oyster, the second man gets the shell –
Andrew Carnegie.

We turn to the consideration of the 3 additional strategic thrusts.

These provide routes to an SCA (special competitive advantage):

• Low cost ( or Low value)
• Focus – this is give direction to the company who wants to get
focused.
• Preemptive move (attaining the first mover advantage) –
brookbond tea - the company sent its management people in
bullock cart to the remote village and ask them to canvas about the
brookbond dust tea. Also consider the airline companies like
airdeccan who had first mover advantage.

Traditionally we are forced to think of low cost strategies as :

• Scale economies
• Low cost labour or
• Production automation.

Low – cost Strategies

In reality there are many ways to obtain a low-cost advantage – such as:-
1. No frills Product / service:
a. Ex: Air deccan - They never serve food not even water. Since
they don’t serve food they don’t need to clean the aircraft.
Actually the no frill in this case has cascading effect.
2. Product design.
3. Operations.
4. Scale economies.
 5. Experience curve.
Explanation of the above points:

1. No frill Product / service:

a. A direct approach to low cost is simply to remove all frills and
extras.
b. Risk Factors: competitor can add just a few more features and
position themselves against no-frill firm.
c. Goal is to generate a “no-frill cost advantage” that is sustainable
for one or two reasons:
i. First: competitors cannot stop offering services that their
customers expect.
ii. Second: Competitor’s operation and service have been
designed for such services – which cannot be easily
changed.
d. Example: southwest airlines
i. Started in 1971 with just 3 planes.
ii. No assignment seats.
iii. Peanuts only – Meal service.
iv. Low overheads – They have low overhead cost.
v. Below – industry
vi.
vii.
viii.
ix.
x.
2. Product design:
a. A product design or composition can create cost advantage
b. Example:
i. Japanese competitors have created Copier by designing
1. Reliable
2. Simple product
3. Involving relatively few, readily available parts,
4. As opposed to customized parts of competitors.
ii. Gillette has developed patented shaving systems that involve
low initial cost but high margins on accessories.
3. Operations: Enduring cost advantage can be created through assets
and competitors in operations. These can be based on –
a. Accessing to raw material – they say the supplier as to not to
supply to their competitors.
 b. Low cost distribution – direct rather than long channels
c. Cost of labour
d. Government subsidies – for ex Sriperambatur has got 3 big
companies like Nokia etc. govt has provided huge subsidies.
e. Location cost
f. Innovation – like today we can get flight tickets at home.
g. Reduction in overheads.
4. Scale of Economies: Scale effect natural efficiencies associated with
size. Following fixed cost can be spread over more units –
a. Advertising
b. Sales force overheads
c. R&D – ex Ranbaxy invest a huge chunk of money in R&D making
them possible to do lot of research and be a leading company
d. Facilities upkeep etc.
5. The experience Curve:
a. Learning: The basic idea that people learn to perform tasks faster
and more efficiently – simply by repetition.
b. Technological improvement in production / operations: Installation
of new machinery, computers, information system can
dramatically affect costs…
c. Product redesign: simplifying products can sharply reduce costs.

FOCUS STRATEGIES

1. Avoid Strategy dilution or distraction: All big brands succeed due to

focus strategies
a. When:
i. Internal investments,
ii. Programs and
iii. Cultures are directed towards a single end…
b. The result will be assets, competencies and functional strategies
that match market needs.
2. Compete with limited resources: All companies have limited
resources. A business lacks the resources to compete in a broad
product market – must focus.
a. Focus is necessary to generate the impact needed to compete
effectively. Example Automobile manufacturer facing huge
product development cost. They cannot support multiple brands.
3. Bypass competitors: A focused strategy helps bypass competitor
assets and competencies. Example, in cereal and other packaged food
industries –
a. The ability to produce brand names is a key success factor.
b. However firms that focus on private labels can also do well!!!
4. Private positioning strategy: A focused strategy may also provide a
positioning devise. The association of a business with –
a. A narrow product line
b. Segment or geographic area can serve to provide a useful identity.
c. Example: Caterpillar clearly focuses on high end forklifts for the
premium end customer. The JCP is not able to provide that sort of
timely service as provided by the Caterpillar.
5. Reduce competitive pressures: Focused strategy may help in reducing
competitive pressures by:-
a. Focusing on the product line: Enhance line’s technical superiority.
b. Targeting a segment
i. Castrol focuses on male car owners who change the oil
themselves.
ii. They don’t distribute through service stations
iii. Keeping introducing new product and package – keeping
retailers off balance…
c. Limited Geographical area: For business like cements, bakeries,
and dairies, where transportation costs are high – may benefit from
being regional.