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the pany’s products are now in 10；000 outlets worldwide。 It has set
up a bulk supply chain alongside its lean customized one and started
to design products to hanker after rather than just highly specified
black boxes。 Dell has also bought up several firms in the IT systems
management sector as it sees the shift from product… to service…driven
growth as an important factor in the future of its business sector。 Dell has
had to cut 3 billion of expenses； lay off 8；800 employees and change
the mindset of its engineers and designers to reposition it to execute its
new strategy。
Strategy 263
wrong in any of these areas the results it is aiming for may not be achieved；
it may fall behind others in the market or in the worst case fail altogether。
Ge。。ing all three areas right can be more of an art than a science； rather like
a short…sighted person trying to thread several needles； held in parallel by
different people； in one swi。。 movement。
DEVISING STRATEGY – THE OVERVIEW
Credit for devising the most succinct and usable way to get a handle on
the big picture has to be given to Michael E Porter； who trained as an
economist at Princeton； taking an MBA （1971） and PhD （1973） at Harvard
Business School where he is now a professor。 His book； petitive Strategy：
Techniques for Analyzing Industries and petitors （1980； Free Press； Old
Tappan； New Jersey； United States）； which is in its 63rd printing and has
been translated into 19 languages； sets out the now accepted methodology
for devising strategy。 As well as being essential reading in most business
schools； courses based on Porter’s work are taught in partnership with
more than 80 other universities around the world； using curriculum； video
content and instructor support developed at Harvard。
The three generic strategies
Porter’s first observation was that two factors above all influenced a business’s
chances of making superior profits。 First； there was the a。。ractiveness
or otherwise of the industry in which it primarily operated。 Second； and in
terms of an organization’s sphere of influence more important； was how
the business positioned itself within that industry。 In that respect a business
could only have a cost advantage in that it could make product or deliver
service for less than others。 Or it could be different in a way that ma。。ered
to consumers； so that its offers would be unique； or at least relatively so。 He
added a further twist to his prescription。 Businesses could follow either a
cost advantage path or a differentiation path industry wide； or they could
take a third path – they could concentrate on a narrow specific segment
（see Chapter 3 for more on market segments）； either with cost advantage or
with differentiation。 This he termed ‘focus’ strategy。
Cost leadership
Low cost should not be confused with low price。 A business with low
costs may or may not pass those savings on to customers。 Alternatively；
it could use that position alongside tight cost controls and low margins to
create an effective barrier to others considering either entering or extending
their penetration of that market。 Low…cost strategies are most likely to
264 The Thirty…Day MBA
be achievable in large markets； requiring large…scale capital investment；
where production or service volumes are high and economies of scale can
be achieved from long runs。
Low costs are not a lucky accident； they can be achieved through these
main activities：
。 Operating efficiencies： New processes； methods of working or less
costly ways of working。 Ryanair and easyJet are examples where analysing
every ponent of the business made it possible to strip out
major elements of cost； meals； free baggage and allocated seating； for
example； while leaving the essential proposition – we will fly you from
A to B – intact。
。 Product redesign： This involves rethinking a product or service
proposition fundamentally； to look for more efficient ways to work
or cheaper substitute materials to work with。 The motor industry has
adopted this approach with ‘platform sharing’； where major players
including Citroen； Peugeot and Toyota have rethought their entry car
models to share major ponents； this has bee monplace in
the industry。
。 Product standardization： A wide range of product and service offers
claiming to extend customer choice invariably leads to higher costs。
The challenge is to be sure that proliferation gives real choice and adds
value。 In 2008 the UK railway network took a long； hard look at its
dozens of different fare structures and scores of names； o。。en for identical
price structures； which had remained largely unchanged since the
1960s； and reduced them to three basic product propositions。 Adopting
this and other mon standards across the rail network they estimate
will substantially reduce the currently excessive ￡。 billion transaction
cost of selling ￡5 billion worth of tickets。
。 Economies of scale： This can be achieved only by being big or bold。
The same head office； warehousing network and distribution chain can
support Tesco’s 3；263 stores as well it can； say； the 997 that Somerfield
has。 The former will have a lower cost base by virtue of having more
outlets to spread its costs over； as well as having more purchasing
power。
THE EXPERIENCE （OR LEARNING） CURVE
The fact that costs declined as the output volume of a product or service
increased； though well known earlier； was first developed as a usable
accounting process by T P Wright； an American aeronautical engineer；
in 1936。 His process became known as the cumulative average model
or Wright’s model。 Subsequently； models were developed by a team of
Strategy 265
researchers at Stanford； known as the unit time model or Crawford’s model；
and the Boston Consulting Group （BCG） popularized the process with its
experience curve； showing that each time the cumulative volume of doing
something – either making a product or delivering a service – doubled； the
unit cost dropped by a constant and predictable amount。 The reasons for
the cost drop include：
。 Repetition makes people more familiar with tasks and consequently
faster。
。 More efficient materials and equipment bee available from suppliers
themselves as their costs go down through the experience curve effect。
。 Organization； management and control procedures improve。
。 Engineering and production problems are solved。
BCG itself was founded in 1963 by Bruce D Henderson； a former Bible
salesman and engineering graduate from Vanderbilt University； who
le。。 the Harvard Business School 90 days before graduation to work for
Westinghouse Corporation。 From there he went on to head Arthur D Li。。le’s
management services unit before joining the Boston Safe Deposit and Trust
pany to start a consulting arm for the bank。 Naming this the experience
curve； it was the strategy tool that put BCG on the path to success and has
served it well ever since （Figure 12。1）。
The value of the experience curve as a strategic process is that it helps
a business predict future unit costs and gives a signal when costs fail to
drop at the historic rate； both vital pieces of information for firms pursuing
a cost leadership strategy。 Every industry has a different experience curve
that itself varies over time。 You can find out more about how to calculate the
Total lifetime units produced Cost per unit
2 4 8 16
10
8
6
Figure 12。1 The experience curve
266 The Thirty…Day MBA
curve for your industry on the Management And Accounting Web （h。。p：//
maaw。info/LearningCurveSummary。htm）； and the National Aeronautics
and Space Agency （h。。p：//cost。jsc。nasa。gov/learn。html） provides a Learning
Curve Calculator。
DIFFERENTIATION
The key to differentiation is a deep understanding of what customers really
want and need and； more importantly； what they are prepared to pay more
for。 Apple’s opening strategy was based around a ‘fun’ operating system
based on icons； rather than the dull MS…DOS。 This belief was based on its
understanding that puter users were mostly young and wanted an intuitive
mand system； and the ‘graphical user interface’ delivered just that。
Apple has continued its differentiation strategy； but has added design and
fashion to ease of control in order to increase the ways in which it delivers
extra value。 Sony and BMW are also examples of differentiators。 Both have
distinctive and desirable differences in their products and neither they nor
Apple offers the lowest price in their respective industries； customers are
willing to pay extra for the idiosyncratic and prized differences embedded
in their products。
Differentiation doesn’t have to be confined to just the marketing arena；
nor does it always lead to success if the subject of that differentiation goes
out of fashion without much warning。 Northern Rock； the failed bank that
had to be nationalized to stay in business； thought its strategy of raising
most of the money it lent out in mortgages through the money markets was
a sure winner。 It allowed the bank to grow faster than its petitors； who
placed more reliance on depositors for their funds。 As long as interest rates
were low and the money market functioned smoothly； it worked。 But once
the differentiators that fuelled its growth were reversed； its business model
failed。
FOCUS
Focused strategy involves concentrating on serving a particular market or a
defined geographic region。 IKEA； for example； targets young； white…collar
workers as its prime customer segment； selling through 235 stores in more
than 30 countries。 Ingvar Kamprad； an entrepreneur from the Sm。land
province in southern Sweden； who founded the business in the late 1940s；
offers home furnishing products of good function and design at prices
young people can afford。 He achieves this by using simple cost…cu。。ing
solutions that do not affect the quality of products。
Warren Buffe。。； the world’s richest man； who knows a thing or two about
focus； bined with Mars to buy US chewing gum manufacturer Wrigley
Strategy 267
for 23bn （￡11。6bn） in May 2008。 Chicago…based Wrigley； which launched
its Spearmint and Juicy Fruit gums in the 1890s； has specialized in chewing
gum ever since and consistently outperformed its more diversified petitors。
Wrigley is the only major consumer products pany to grow
fortably faster than the population in its markets and above the rate of
inflation。 Over the past decade or so； for example； other consumer products
panies have diversified。 Gille。。e moved into ba。。eries； used to drive
many of its products； by acquiring Duracell。 Nestlé bought Ralston Purina；
Dreyer’s； Ice Cream Partners and Chef America。 Both have trailed Wrigley’s
performance。
Businesses o。。en lose their focus over time and periodically have to rediscover
their core strategic purpose。 Procter & Gamble is an example of a
business that had to refocus to cure weak growth。 In 2000； the pany was
losing share in seven of its top nine categories； and had lowered earnings
expectations four times in two quarters。 This prompted the pany to
restructure and refocus on its core business： big brands； big customers and
big countries。 They sold off non…core businesses； establishing five global
business units with a closely focused product portfolio。
First…to…market fallacy
Gaining ‘first mover advantage’ are words used like a mantra to justify high
expenditure and a headlong rush into new strategic areas。 This concept is
one of the most enduring in business theory and practice。 Entrepreneurs
and established giants are always in a race to be first。 Research from the
1980s that shows that market pioneers have enduring advantages in distribution；
product…line breadth； product quality and； especially； market
share underscores this principle。
Beguiling though the theory of first mover advantage is； it is probably
wrong。 Gerard Tellis； of the University of Southern California； and Peter
Golder； of New York University’s Stern Business School； argued in their
book Will and Vision： How Lateers Grow to Dominate Markets （2001；
McGraw…Hill Inc。； United States） and subsequent research that previous
studies on the subject were deeply flawed。 In the first instance； earlier
studies were based on surveys of surviving panies and brands；
excluding all the pioneers that failed。 This helps some panies to
look as though they were first to market even when they were not。
Procter & Gamble （P&G） boasts that it created America’s disposablenappy
（diaper） business。 In fact a pany called Chux launched its
product a quarter of a century before P&G entered the market in 1961。
Also； the questions used to gather much of the data in earlier research were
at best ambiguous； and perhaps dangerously so。 For example； the term；
‘one of the pioneers in first developing such products or services；’ was
used as a proxy for ‘first to market’。 The authors emphasize their point by
268 The Thirty…Day MBA
listing popular misconceptions of who were the real pioneers across the
66 markets they analysed。 Online book sales – Amazon （wrong）； Books。
（right） –