The low cost strategy emphasizes having the lowest costs, not necessarily the lowest price, in a market. A firm attempting to realize a low cost strategy should stress resources that facilitate efficiency. A firm that has successfully achieved a low cost position will have the lowest costs relative to competitors. A firm can use such a position to either lower its prices and gain market share and sales from rivals or keep its prices at the present market level and make relatively more profit per unit sold. The key idea is that cost and price are independent choices, and this strategy is focused on cost.
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The differentiation strategy focuses on developing a unique product or (equally useful) a perception of a unique product that customers are willing to pay a premium for. If a firm is not receiving a premium price for its goods or services it is NOT a differentiator. A firm seeking to follow a differentiation strategy should attempt to develop and enhance its resources that promote customer responsiveness, quality, and/or innovation. Note that costs are still important to a differentiator because it is possible that the costs of making the product unique will be greater than the premium consumers are willing to pay for it.
The firm can choose to compete in the mass market with a broad scope, or in a defined, focused market segment with a narrow scope. In either case, the basis of competition will still be either cost leadership or differentiation. In adopting a narrow focus, the company ideally focuses on a few target markets (segmentation strategy or niche strategy). The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency.
Our focus in this report is to showcase implementation of these strategies by picking examples of companies that have successfully used these strategies to gain competitive advantages.
Walmart: Cost Leadership
Founded by Sam Walton, the first Wal-Mart store opened in Rogers, Arkansas, in 1962. Seventeen years later, annual sales topped $1 billion. By the end of January 2002, Wal-Mart Stores, Inc. (Wal-Mart), was the world’s largest retailer, with $218 billion in sales.
Wal-Mart’s winning strategy in the U.S. was based on selling branded products at low cost. Each week, about 100 million customers visited a Wal-Mart store somewhere in the world. The company employed more than 1.3 million associates (Wal-Mart’s term for employees) worldwide through more than 3,200 stores in the United States and more than 1,100 units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom.
In 2001, Fortune magazine named Wal-Mart the third most admired company in America, and the Financial Times and PricewaterhouseCoopers ranked it as the eighth most admired company in the world. The following year, Wal-Mart was named number one on the Fortune 500 list and was presented with the Ron Brown Award for Corporate Leadership, a presidential award that recognized companies for outstanding achievement in employee and community relations.
Wal-Mart enjoyed a 50 percent market share position in the discount retail industry. Procter & Gamble, Clorox, and Johnson & Johnson were among its nearly 3,000 suppliers. Though Wal-Mart may have been the top customer for consumer product manufacturers, it deliberately ensured it did not become too dependent on any one supplier; no single vendor constituted more than 4 percent of its overall purchase volume.
About 85 percent of all the merchandise sold by Wal-Mart was shipped through its distribution system to its stores. (Competitors supplied to their retail outlets on average less than 50 percent of the merchandise through their own distribution centers.) The company owned a fleet of more than 3,000 trucks and 12,000 trailers. (Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network system that allowed information to be shared between the company’s wide network of stores, distribution centers, and suppliers. The system consolidated orders for goods, enabling the company to buy full truckload quantities without incurring the inventory costs.
Wal-Mart’s Value Proposition
Wal-Mart’s value proposition can be summed up as “everyday low prices for a broad range of goods that are always in stock in convenient geographic locations.” It is those aspects of the customer experience that the company overdelivers relative to competitors. Underperformance on other dimensions, such as ambience and sales help, is a strategic choice that generates cost savings, which fuel the company’s price advantage. If the local mom-and-pop hardware store has survived, it also has a value proposition: convenience, proprietors who have known you for years, free coffee and doughnuts on Saturday mornings, and so on.
Sears falls in the middle on many criteria. As a result, customers lack a lot of compelling reasons to shop there, which goes a long way toward explaining why the company is struggling to remain pro¬table.
Walmart in 2010
Growth opportunities continue. Price leadership continues to be the cornerstone of how it goes to market. Growth in the United States will come from additional penetration into more metropolitan markets, as well as from new formats and stronger integration with the online business. Walmart.com traffic exceeded one billion visits this past year, growing more than 15 percent over the previous year through Site-to-Storeâ„¢ and home delivery.
Leverage scale and reduce costs. Innovation, process improvements and strong management teams drove significant improvements in our business. Walmart repositioned the business to leverage operating expenses on a slower rate of sales growth this past year. Improved productivity through enhanced scheduling systems better matched associate staffing levels in stores to customer traffic. Stronger supply chain processes also improved inventory flow. Merchandising and planning systems contributed to lower inventory levels, which were also benefited by increased sell-through. Global sourcing initiatives now under way strengthen efforts to drive down the cost of goods and pass those savings on to customers.
Improved returns. Walmart significantly increased its cash flow and return on invested capital in fiscal 2010. Gross margin improvements, tight expense control, strong inventory management and efficient capital allocation contributed to this improved performance. It reduced year-end inventory by $1.8 billion, or 7.6 percent, and increased inventory turns as well.
Apple’s differentiation approach enhances the company’s competitive advantage in the market. It favors Apple to continue down a path that not only maintains premium positioning but also enhances it. It is clearly doing this at the research and development (R&D) level. The introduction of a new portable manufacturing process (the unibody MacBook and MacBook Pro) and a relatively fast-paced operating system release cycle are clearly a function of Apple’s ever-evolving differentiated positioning. The upcoming Mac OS X Snow Leopard (successor to Mac OS X Leopard) and iPhone OS 3.0 will continue to push the envelope and set the groundwork for continued innovation in the years to come. Apple has never shied away from starting over. It did this with the transition to Mac OS X, the transition to Intel processors, and the re-design of their portable Macs. Each enhancement widens the differentiation gap that competitors must narrow or copy in order to compete with Apple.
The Company participates in several highly competitive markets. While it is widely recognized as a leading innovator in the markets where it competes, these markets are highly competitive and subject to aggressive pricing. To remain competitive, Apple believes that increased investment in research and development and marketing and advertising is necessary to maintain or expand its position in the markets where it competes.
Digging deeper into the strategy, the trade-off protects Apple’s unique position. Competitors have two main ways to imitate an incumbent. A competitor can (1) reposition itself or (2) straddle, an approach that attempts to match the incumbent’s position while maintaining its existing position. By maintaining its price premium at the expense of unit volume, Apple has created an imitation barrier that competitors cannot easily cross. PC competitors cannot realistically enter Apple’s space by transforming themselves into a premium brand without alienating or pricing out existing customers. If a competitor decided to reposition or straddle it would have to compete with Apple’s decades long premium brand equity. Thus, PC vendors have two transformational issues working against them, time and cost. Apple’s competitors will not be able to transform their brand image overnight. Any such effort will take considerable amount of time on numerous dimensions ranging from product design to marketing. This leads to the second issue, cost. Any transformation undertaken by a competitor will cost tens or perhaps hundreds of millions of dollars in a sustained re-branding and advertising campaign. In today’s marketplace, a cost of this magnitude is not feasible. From a trade-off perspective, Apple has systematically analyzed what not to do; attempt to compete at lower price points.
Apple’s entry into retailing, for example, is designed to provide better point-of-sales service to customers wishing to purchase an Apple product than can be had from independent stores. By helping to raise the overall level of differentiation associated with Apple’s offering, the strategy is designed to strengthen Apple’s competitive position.
Zara: Focused Differentiation
Zara is a phenomenon in the textile industry; it was a start-up in Spain and gradually has evolved to be today a very successful leader quoted company in its industry.
Zara, the most profitable brand of Inditex SA, the Spanish clothing retail group, opened its first store in 1975 in La Coruña, Spain, they have expanded operations into 45 countries with 531 stores located in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. Throughout this expansion Zara has remained focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. In order to realized these results Zara developed a business model that incorporated the following three goals for operations: develop a system the requires short lead times, decrease quantities produced to decrease inventory risk, and increase the number of available styles and/or choice. These goals helped to formulate a unique value proposition: to combine moderate prices with the ability to offer new clothing styles faster than its competitors. These three goals helped to shape Zara’s current business model.
Capabilities of Zara, or the required resources needed to exploit the opportunities and execute this conceptual strategy, are numerous for Zara. Zara maintains tight control over their production processes keeping design and manufacturing in-house or with some strategic partnerships located nearby Headquarters. Value drivers for Zara are both tangible and intangible in the benefits that are returned to all stakeholders. Tangibly, Inditex, the parent company of Zara, has 11.02% net margin on operations and their market capitalization (Equity – market value) is â‚¬13, 981 (in thousands) in 2002. Their net working capital (current assets – current liabilities) is â‚¬133 (in thousands) . Additionally, the success of Zara can be demonstrated through their outstanding financial performance. From 1996 to 2000, Inditex SA tripled their corporate profits and in 2001, a year of overall economic downturn in the retail industry, Inditex SA saw a 31% increase in profits. Intangibly, customer loyalty and brand recognition have provided significant value to Zara. The number of consumers they attract continues to rise and their brand is synonymous with the cutting edge of fashion at affordable prices. The successful implementation of Zara’s business model provides great value to stakeholders and differentiates their business from their peers.
Vertical integration: a distinctive feature of Zara’s business model, has allowed the company to successfully develop a strong merchandising strategy. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara manufactures 60% of its own products. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of this production is done through the season, which allows the chain to constantly provide its costumer with very updated products. Traditional retailers lack this flexibility. Traditional retailers are obligated to place production orders to manufacturers overseas at least 6 months in advance of the season. Zara purchases its fabric in advance , much of it in grienge form this gives flexibility to colour & print , to desired effect.
Low current inventory: Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Therefore, Zara’s scarcity climate allows the company to sell more items at full price. This strategy minimizes Zara’s total cost because it reduces 15-20% of markdown merchandise compare to a traditional retailer. Zara’s centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods, distribution center is a place where merchandise is moved rather than stored. The current ratio shows that for every euro in short-term debt, Inditex has 1.02 million euros in current assets. H&M however, has 3.40 million euros in current assets for every euro in short-term debt.
The company designs and cuts its fabric in-house and it acquires fabrics in only four colors to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories.
Technology: Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, ZaraÊ¼s IT expenditure is less than one-fourth the fashion industry average. Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spend on tech has a payoff. It still uses the DOS system without much networking capability, whereas its competitors like Prada use RFID technology, Benneton uses SAP.
Marketing & Advertising: Zara also has an advantage over its competitors due to its low advertising costs. Zara’s advertising investment is 0-.3% as compared to traditional retailers who expends 3 – 4%. Zara relies mainly on its stores to project their image. For that reason, Zara has a department, which exclusively works in acquiring global prime real estate locations. In addition, this department is responsible for the frequent refurbishing of store layouts, as well as the creation of a common window display for Zara’s global stores.
Controlling notorious bottlenecks along the supply chain is key to speed. For example dyeing and fit are critical processes within the supply chain. Zara is a large investor in a dye and finishing plant-a notorious bottleneck. Its control allows them to oversee the dyeing process. A further trouble spot is sewing. Even though Zara uses sub-contractors some subcontractors, it carries out the bulk of all cutting itself-a crucial process that determines fit. 60% of the manufacturing processes are outsourced in countries close to the Zara headquarters in Spain to help achieve a quick turnaround. Zara maintains a strong relationship with their contractors and suppliers-viewing them as part of the company. To successfully react to consumers demands, design decisions are delayed as long as possible. Typically, Zara pre-commits to 50%-60% of its production in advance of the season, whereas other clothing retailers commit to 80%-90%. Thus Zara reserves mill capacities to ensure production facilities are available when needed.
In today’s competitive environment, Zara has shown that fine tuning the supply chain is no longer a strategic tool, but a necessity. It has shown that supply chain management can be managed provide sustainable competitive differentiation and positioning on the one hand and increase throughput, reduce inventories and operating expenses on the other.
Zara’s Product Offering
Zara’s unique capabilites allow it to cater to a focussed set of customers yet at a cost leadership position. Zara has a competitive advantage in logistics, with production just in time with better performance that its competitors, it also has the ability to renew all what is in their stores in few weeks. It also counts with storage in Europe, in Zaragoza that is close to the distribution centres.
Low unit margin
High fashion: out of price
M&S :Out of fashion
According to Porter, the reason so many firms suffer aggressive, margin eroding competition, is because they’ve defined themselves according to operational effectiveness rather than strategic positioning. Operational effectiveness refers to performing the same tasks better than rivals perform them. Everyone wants to be better, but the danger in operational effectiveness is in “sameness”. At its heart Zara is building on a vertically integrated demand and supply chain, while most other textile chains rely on outsourcing and cheap labour in China. It enables company to short turnaround times and achieves greater flexibility, reducing stock to a minimum and diminishing fashion risk to the greatest possible extent.
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Ikea: Focused Cost Leadership
Ikea is one of the known global home furniture and household goods retailer which is a privately owned company. It was established by Ingvar Kamarad Sweden and in year 2008 the company owned 244 Ikea stores in 24 nations and the management is still planning to open 23 new stores. The company has also 32 stores on 16 nations and these stores were still managed and owned by franchisees outside the Ikea Group which extends the global reach of Ikea to 35 territories overseas. The Ikea Group has also been able to diversify their products beyond furnishings and furniture into food products and prefabricated housing. The company has been able to ensure that they have franchise agreements among most of the overseas operations to ensure capitalization of local marketing expertise and practices of the franchisees. The concept and trademark of Ike is owned by Ikea Systems BV and the operations of the company are basically controlled by Ingka Holding.
Primarily, the company is based on providing broad range of well-designed, functional home furnishing goods at an affordable cost to attract more customers. This concept of the Ikea is the foundation of their business operations which includes product designing, manufacturing, transportation, retailing, and assembling. The company sees to it that they work hard in attaining their business goals and providing quality products and services among their target market.
In order to analyse the capabilities of IKEA, different marketing tools will be considered. This includes the
Porter’s Five Forces Model, and
Core Competencies analysis.
According to Kim and Weaver (2000), the administration and management of a particular business organization entails full utilization of the resources of the company in order to lead, direct, and control operations to meet the set objectives. It can be said that IKEA has been able to use strategic approach to sustain their competitive advantage. One of the capabilities IKEA is how the leaders of the company do their business. Guided by their vision and mission, the leader and management of the industry clearly illustrate integrity in all their actions. The management has also strong commitment in promoting the company values and the value of diversity among the employees and staffs. In addition, the management of the company has been able to understand the priorities of the business and make every decision in line with the strategic direction by giving consideration to the effect on all aspects of the business and on other stakeholders.
Another sustainable capability of the company is its continuous focus on the importance of both internal and external customers to ensure that these customers remain loyal to them. The company also makes it sure that they motivate, inspire, coach, guide, and support their staffs to realise the mission of the IKEA. Furthermore, the company’s ability to identify and recognise contributors is another factor that sustains the company’s competitive advantages. The ability of the management to diversify and differentiate their business strategy to dominate the global market can also be considered as the major capabilities of the IKEA.
In this report, the analysis of the current situation of Ikea will be done using different marketing tools. Herein, IKEA will be analysed through the use of SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis. The purpose of this internal and external analysis is to see what the organization has to work with as it begins to position itself to deal with the opportunities and threats identified through the analysis of the external environments. Specifically, it helps identify what existing strengths and weaknesses might impact the organization’s value creation capabilities.
As mentioned, IKEA has been one of the leading brands in household furniture’s in its global operations. One of its strength is its being a very profitable company, in both its domestic and international branches. In addition, IKEA is a global brand established upon a reputation of quality products and services with almost 10,000 product range and 244 stores in different regions. Furthermore, one of the strengths of IKEA is its strong ethical values integrated with its business strategy which include cost leadership and product differentiation.
The strength of the company can also be attributed to their ability to distribute their product effectively in the global market. One of their strengths is their ability to diversify when the company has been able to launch their private label food items in 2005. The offerings of the company include Swedish dishes which include meatballs, smoked elk sausage, roll-mop herring, and crisp breads.
Although IKEA encompass much strength, the company has also its weaknesses. One of the weaknesses of the companies is the notion that IKEA remain vulnerable to the plausibility that the creativity and product development may falter over time. In addition the company has also lacking the ability to look for a business portfolio for various regions, like in the case of IKEA so as to spread business risk.
With the management system and the marketing strategies implemented within IKEA as well as with the strengths that the company, it can be said that IKEA has bigger opportunities to still dominate the global market in terms of providing quality household furniture as well as food products and services to its residents, commercial and industrial clients or even have an opportunity to be the most competitive brands in the global market. With the continuous innovation of the company and the support that it shows to different needs of the region, the company can gain loyalty from their customers to make them more competitive in the marketplace.
The continuous initiatives of the company in diversification of its revenue resources also open new opportunities to make the business become stronger to outgrow all its rival companies. Such opportunities will include the development of new products, leveraging the company’s investment in the low cost leadership and differentiation, and other business opportunities in both non-core and core areas. In line with IKEA, the household furniture as well as food products and services have the opportunity to expand their market in the global level, and it can be said that IKEA is on its way ahead of its competitors in terms of international expanding.
One of the threats of that IKEA may face is the emergence of a new and stronger company which offered a more diversified household furniture as well as food products which is cheaper than the existing companies. If these companies will not be able to provide the latest trends in this kind of business industries, the company may experience some industrial threats.
In order for the company to maximise its strengths and minimise or totally eliminate its weaknesses, the company must be able to use or impose a strategic management system that will help them enhance their business operations.
Porter’s Five Forces Model
It can be noted that an industry is a group of firms which market its products and services closely substituted from one another. According to Porter (1980), some firms tend to become more profitable and gain competitive advantage than their rivals companies. With this, a company like Ikea should always bear in mind that the industry will only survive in the global market by using a strategy that will sustain their competitive advantage and position. Through the use Porter’s Five Forces Model, the analysis of the industry aspects of the IKEA will be analysed.
New Market Entrants
The first element of Porter’s Five Forces Model includes threat of entrance of new industries. Apparently, the objective of IKEA is to build a position in the household furniture as well as food shops service industry and to be recognised as company which would always be competitive in the global market. IKEA is said to be a world-class companies in providing household furniture as well as food products and services in market environment. With this, it can be said that because of the existence of IKEA, having another household furniture as well as food shops is unnecessary unless, the new company which will emerge will have the appropriate and efficient marketing strategy to outgrow both leading companies. Hence, it can be said that the household furniture as well as food shop belongs to a higher entry obstruction because of the existence of competitive companies like the companies and their other rival industries.
It can be noted that the conditions and the present system in the household furniture as well as food shop industries largely determines the extent in which effective competition can be achieved. The bargaining power of a supplier could be a threat for the profit of the company, and both IKEA is very much aware of it. In this manner, IKEA is trying to have a good contract with its supplier, herein; IKEA makes it sure that they are also benefited in the said contract while the suppliers enjoy the agreement with them. In this kind of business, there is a high level of competition in the household furniture as well as food brand supply market.
IKEA still enjoy their competitive position in the global market. In this analysis, it shows that the company still dominate the household furniture as well as food market by providing those quality and innovative services. This means that IKEA is still on top of the competition among other household furniture as well as food retail companies in world. The company enjoys its competitive position in the region and still trying to sustain its competitive advantage among its rivals.
Porter’s also include in his model the concept of the bargaining power of Buyers. Hence, the management of IKEA makes sure of it that their clients and customers in all aspects will be satisfied for the quality service they provide. Specifically, the company has focused their marketing approach on the demands and needs of the buyer for a household furniture as well as food service source that satisfy them and heavily positioned their products in this segment. The company also uses their corporate responsibility as a good public image to make the company more appealing to their customers. The competitive aim of each company is to do significantly a better job of providing what buyers are looking for and, thereby enabling the firm to gain competitive advantage and out compete rivals within the marketplace (Thompson, Strickland & Gamble, 2003).
Threats of substitutes
In terms of threats and substitutes, although the company is aware that there were threats for substitute products or retail household furniture as well as food shops because of its high demand in the global market, specifically now that companies offered household furniture as well as food alternative products and flavours which suit the needs of the household furniture as well as food market. The company has been able to continue to grow and expand their business in various parts of the world. It can be said that IKEA has been able to use various strategies which enable them to sustain their competitive position in the global market.
IKEA follows the focused cost leadership strategy. Young buyers in search of stylish and fashionable furniture and household accessories at a low cost are IKEA’s targeted market segment. For these customers, the firm offers home furnishings that combine good design, functionality and acceptable quality at low prices. According to the firm, low cost is always a priority. This applies to every phase of their activities.
IKEA emphasises several activities to keep its costs low. For example, instead of relying primarily on third party manufacturers, the firm’s engineers design low-cost, modular furniture ready for assembly by customers. IKEA also positions its products in domestic settings. Typically, competitors’ furniture stores display multiple varieties of a single item in separate rooms, meaning that their customers examine living room sofas in one room, tables in another room, chairs in yet another location, and accessories somewhere else entirely. In contrast, IKEA’s customers can view different furniture combinations (complete with sofas, chairs, tables, and so forth) in a single setting, which eliminates the need for sales associates or decorators to help the customer imagine how a furniture arrangement would look when placed in the customer’s home. This approach requires fewer sales personnel, allowing IKEA to keep its costs low. A third practice that helps keep IKEA’s costs low is expect
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