What Tools Are Available to Generate Strategies?

What Tools Are Available to Generate Strategies?
Strategic Business Planning for Commercial Producers Identifying Strategies What Tools Are Available to Generate Strategies? In earlier lectures we’ve looked at the internal environment (the strengths and weaknesses in the business) and the external environment (the opportunities and threats). This has given us lists of characteristics about our businesses. Now what do we do with them? Those things will help us now to build a strategy. In this lecture we’ll show you how to put those characteristics into a strategy. Any strategy you choose will be highly dependent on those characteristics, and will guide you to picking a strategy. We’ll show you several basic strategies that you could follow, and tools you can use to help identify them. © Purdue University, Center for Food and Agricultural Business, 2002

Generating Alternative Strategies from SWOT
Strategic Business Planning for Commercial Producers Identifying Strategies Generating Alternative Strategies from SWOT SWOT analysis is a tool for helping assess the current situation for the firm. However, we need to be able to combine the information in the SWOT analysis in a meaningful way to generate alternative strategies that we might pursue. The TOWS matrix is a tool designed to match external opportunities and threats with internal strengths and weaknesses. The SWOT that we’ve been dealing with in other lectures has been a useful tool to helping identify key characteristics of our businesses, but it doesn’t really help guide us to choosing strategies. For that there is the TOWS matrix which will integrate some of the things we’ve used to create the SWOT. The next slide shows what the SWOT is made of. © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers
Identifying Strategies SWOT Analysis Strengths 1. 2. 3. Weaknesses 1. 2. 3. Internal Environment Here is the SWOT tool introduced in the Business Environment section. SWOT is a conceptual framework for a systematic analysis that helps organize the external threats and opportunities with the internal weaknesses and strengths of the organization. To use it you simply list the strengths/weaknesses you have in your business and the opportunities and threats you face. You can use the IFAS and EFAS tables to help list those items. SWOT analysis is the simplest way to conduct environmental scanning. A SWOT analysis should result in the identification of an organization’s core competencies, and of opportunities that the company is unable to take advantage of due to a lack of, or insufficient, current resources. Let’s take this a step further and develop some useful strategies out of the assessments you’ve done, using the TOWS matrix. Opportunities 1. 2. 3. Threats 1. 2. 3. External Environment © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies TOWS Matrix Technique used in strategy formulation for combining External analysis Opportunities Threats Internal analysis Strengths Weaknesses Now we have the TOWS matrix which uses the same basic breakdown by the external and internal analysis. But we’re going beyond basic assessment of the situation and onto strategy formulation. The next slide shows how it is organized. The model starts with threat (The T in TOWS) because in many situations a company undertakes strategic planning as a result of a perceived crisis, problem, or threat. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies TOWS Matrix From External Analysis (EFAS) From Internal Analysis (IFAS) Opportunities: 1. 2. 3. Threats: 1. 2. 3. Strengths: 1. 2. 3. SO Strategies Use strengths to take advantage of opportunities ST Strategies Use strengths to avoid threats The TOWS tool combines the ingredients of SWOT (our assessment of the internal and external environments, which used the EFAS and IFAS tables) in a way that can suggest some strategies. It matches external opportunities and threats facing a particular company with that company’s internal strengths and weaknesses to result in four sets of possible strategic alternatives. The strategies that result depend on the particular combination of resources and capabilities in each business. For instance, a business with a high degree of mechanical ability and desire to work in the field in an environment in which land is difficult to come by may consider being a custom farmer (a SO strategy). Or a business that continually is late in the field and not good with machinery should consider hiring a custom farmer, or renting out their land (a WT strategy). SO Strategies ST Strategies WO Strategies WT Strategies Source: Adapted from Long-Range Planning, April 1982, H. Weihrich, “The TOWS Matrix—A Tool for Situational Analysis.” and Wheelen and Hunger Weaknesses: 1. 2. 3. WO Strategies Take advantage of opportunities by overcoming weaknesses WT Strategies Defensive strategies to minimize weaknesses and avoid threats Source: Weihrich © Purdue University, Center for Food and Agricultural Business, 2002

Business-Level Strategy
Strategic Business Planning for Commercial Producers Identifying Strategies Business-Level Strategy Each individual business unit generally operates in its own specific competitive environment, and so requires a separate strategy for that subunit. Business-level strategy focuses on answering the question: How do we build competitive advantage for this particular business? A strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm. Business units have 1. A distinct mission and specific target market, 2. Control over their resources, 3. Their own competitors and 4. Plans independent of other SBUs At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the business level, the strategy formulation phase deals with: positioning the business against rivals anticipating changes in demand and technologies and adjusting the strategy to accommodate them influencing the nature of competition through strategic actions such as vertical integration For instance, KFC, a division of PepsiCo has the strategy of providing food based on its famous chicken recipes. Since it focuses on chicken, unlike a McDonalds, it efforts are aimed at a distinct segment. © Purdue University, Center for Food and Agricultural Business, 2002

What Is Business-Level Strategy?
Strategic Business Planning for Commercial Producers Identifying Strategies What Is Business-Level Strategy? Strategy is an integrated and coordinated set of commitments and actions designed to exploit core competencies and gain a competitive advantage. Business-level strategy is an integrated and coordinated set of commitments and actions designed to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product markets. An organization's core competencies should be focused on satisfying customer needs or preferences in order to achieve above average returns. This is done through Business-level strategies. Business level strategies detail actions taken to provide value to customers and gain a competitive advantage by exploiting core competencies in specific, individual product or service markets. Business-level strategy is concerned with a firm's position in an industry, relative to competitors and to the five forces of competition. A business strategy exploits a firm’s core competencies to gain competitive advantage. It is derived from a close understanding of its external environment and provides greater value than that offered by competitors’ products which should result in above-average returns. How the firm delivers superior value in a specific market The firm uses info to determine Who it will serve? What needs it will satisfy? How it will satisfy those needs? You may think of a business-level strategy in terms of the business units in your organization. These could be organized along the lines of customers, markets, or competitors. It is up to you do define them. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Strategic Position Successful farms will answer a fundamental question: Where will my farm focus its resources and its passion? A firm positions itself by leveraging its strengths. Senior management has to decide how to do this. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Strategic Position Is the way a firm goes to market. Is the fundamental way the firm creates value for the customer. Is the passion of the organization. Drives the organization’s resource investment decisions. Is built around the firm’s core competencies, the firm’s primary skills and sources of competitive advantage. Here is what we mean by strategic position. For each business unit or profit center in your business you’ve got a strategic position. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Positioning Options Example of Possible Positions in an Agricultural Production Firm Low-cost, bulk commodity producer Customer-oriented specialty products producer Full-service, consumer-focused custom farming operation Efficient, partnership-focused contract animal feeder Technology-focused, cutting-edge animal breeder Here are a number of tacks a farm business can follow in its strategic position. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Customer Focus Adding value for customers ultimately determines a firm’s success. But we need to know who the customers for our product are, what those customers needs are, and how to satisfy those customers’ needs. Customers are the foundation or essence of a organization's business-level strategies. Who will be served, what needs have to be met, and how those needs will be satisfied are determined by the senior management. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Customer Focus Who is about determining what segment of customers we will serve. Is it the broad market? Or a specific customer in our local marketplace? What is about determining what the customer groups’ needs are that our products and services can satisfy. Is it organic GMO-free products? Is it consistent timely delivery of the product over an entire year? How is about exploiting our core competencies to implement value-creating strategies to satisfy our customers needs. How can we take advantage of what we do well to deliver our targeted customers’ needs in a way that gives us a competitive advantage with this set of customers? Who are the customers? Demographic, geographic, lifestyle choices (tastes and values), personality traits, consumption patterns (usage rate and brand loyalty), industry characteristics, and organizational size. What are the goods and/or services that potential customers need? Knowing ones customers is very import in obtaining and sustaining a competitive advantage. Being able to successfully predict and satisfy future customer needs is important. (Perhaps one of Compaq's mistakes was not understanding who their real customer was and what that customer -- end user -- wanted.) How to satisfy customer needs? Organizations must determine how to bundle resources and capabilities to form core competencies and then use these core competencies to satisfy customer needs by implementing value-crating strategies. © Purdue University, Center for Food and Agricultural Business, 2002

Overall Strategic Orientation
Strategic Business Planning for Commercial Producers Identifying Strategies Overall Strategic Orientation Core Competency Cost Coordination Differentiation Low-Cost Leader Broad Coordination Differentiation Market Scope Although there are as many different strategies as there are businesses competing there are essentially three broad types of strategies. These generic strategies are used to help organizations establish a competitive advantage over industry rivals. They are called generic strategies because they are not firm or industry dependent. One useful theoretical framework for making strategic choices is that of Generic Strategies, developed by Michael Porter. Porter suggested that the most fundamental choices facing any business are the scope of the markets that it attempts to serve and how it attempts to compete in these chosen markets. The scope can either be broad—tackling the whole market—or narrow—tackling only a particular part of the market. Companies achieve competitive advantage either by having the lowest product cost (note: this is not the same as having the lowest price) or by having products which are different in ways which are valued by customers. Note that differentiation implies a difference in the perception by clients of the product, whereas customization implies a difference in target market. We’ve added coordination to this framework to recognize that some businesses create value through their ability to arrange resources. There were two effective ways of competing in a market. Each of the three options are considered within the context of the competitive scope of the market – does the company target a wide market, or does it focus on a very narrow, niche market? Customization Niche © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Orientation
Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Orientation Core Competency Cost Cost Coordination Differentiation Low-Cost Leader Broad Market Scope Cost Leadership The low cost leader in any market gains competitive advantage from being able to produce at the lowest cost. Facilities are built and maintained, labor is recruited and trained to deliver the lowest possible costs of production. ‘Cost advantage’ is the focus. Costs are shaved off every element of the value chain. Products tend to be ‘no frills.’ Niche © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Low-Cost Leader Strategy PRICE = $10 PRICE = $8 PROFIT = $5 PROFIT = $6 The cost leader increases profit to above average levels by lowering costs. However, low cost does not always lead to low price. Producers could price at competitive parity, exploiting the benefits of a bigger margin than competitors. Some organizations, such as Toyota, are very good not only at producing high quality autos at a low price, but have the brand and marketing skills to use a premium pricing policy. COST = $5 COST = $2 INDUSTRY AVERAGE COST LEADERSHIP © Purdue University, Center for Food and Agricultural Business, 2002

Low-Cost Leader Strategy
Strategic Business Planning for Commercial Producers Identifying Strategies Low-Cost Leader Strategy Actions are integrated and designed to produce or deliver goods or services at the lowest cost, relative to that of competitors, with features that are acceptable to customers. Firms seeking competitive advantage through this business-level strategy often sell no-frills, standardized goods and services to the industries typical customers Successful implementation requires a consistent focus on driving costs lower, relative to competitors’ costs. Not about providing low cost – not cheap products Source of value: the ability to produce and deliver products at the lowest cost relative to competitors In the value chain, look for ways to continually reduce costs No frills, standardized A company’s goal in pursuing cost leadership is to out-perform competitors by producing goods and services at a lower cost. One advantage with this generic strategy is that when all companies in the industry charge the same price for their products, the cost leader makes higher profits because its costs are lower. How do firms derive competitive advantage with this strategy? © Purdue University, Center for Food and Agricultural Business, 2002

Characteristics of a Low-Cost Leader
Strategic Business Planning for Commercial Producers Identifying Strategies Characteristics of a Low-Cost Leader Usually make investments in efficient-scale facilities Maintain tight cost and overhead control Usually minimize costs in areas such as service offerings, labor force, and R&D Minimizing costs in the labor force is NOT giving away management and family labor Typically have standardized processes, limited variety, supply chain mentality, and a frugal culture The successful low cost strategy puts all these together. Continuous efforts to lower costs relative to competitors is necessary in order to successfully be a cost leader. This can include: Building state of art efficient facilities (may make it costly for competition to imitate) Maintain tight control over production and overhead costs Minimize cost of sales, R&D, and service. © Purdue University, Center for Food and Agricultural Business, 2002

The Value Chain for a Low Cost Strategy Strategic Business Planning for Commercial Producers Identifying Strategies Firm Infrastructure – cost-effective management information systems (MIS), few managerial layers, simplified planning practices. Human Resources: consistent policies to reduce turnover, intense focus on training employees to be efficient and multi-skilled. Technology: Easy-to-use production technologies, investment in technology that improves production efficiencies. Procurement: procedures to find the lowest cost inputs, frequent evaluation of suppliers’ performances. Inbound Logistics Efficient systems to link supplier products with production processes. Operations Use of Economies of scale. Construction of efficient scale facilities. Outbound Delivery schedule that reduces costs. Selection of low-cost carriers. Marketing & Sales Small, highly trained sales force. Products priced to generate sales volume. Service Efficient quality control to reduce buyer complaints. MARGIN Value Chain – A framework that firms can use to identify and evaluate the ways in which their resources and capabilities can add value. The value of the analysis lies in being able to break the organization's operations or activities into primary (such as operations, marketing & sales, and service) and support ( staff activities including human resources management & procurement) activities. Analyzing the firm's value-chain helps to assess your organization and what you perceive your competitor’s value-chain to be will uncover ways to cut costs, and find ways add value that will provide a competitive advantage. Here we have a value chain for a low cost strategy that identifies some activities that are used to keep costs low. © Purdue University, Center for Food and Agricultural Business, 2002

Low-Cost Strategy and the Five Forces
Strategic Business Planning for Commercial Producers Identifying Strategies Low-Cost Strategy and the Five Forces Rivalry – can sustain low prices better than competitors Power of buyers – price pressure not likely to be below that of next-most-efficient competitor Power of suppliers – better able to absorb price increases than other competitors Threat of new entrants – ever improving efficiency levels to create entry barriers Substitutes – has more flexibility to reduce prices to thwart customers switching to substitutes Be very brief with this. Just let them know there is a connection back to the external analysis material here. Porter's 5 Forces Model In other lectures we discussed Porter's Five Forces Model. A cost leadership strategy may help to remain profitable even with: rivalry, new entrants, suppliers' power, substitute products, and buyers' power. Rivalry – Competitors are likely to avoid a price war, since the low cost firm will continue to earn profits after competitors compete away their profits (Airlines). Buyers – Powerful customers that force firms to produce goods/service at lower profits may exit the market rather than earn below average profits leaving the low cost organization in a monopoly positions. Buyers then loose much of their buying power. Suppliers – Cost leaders are able to absorb greater price increases before it must raise price to customers. Entrants – Low cost leaders create barriers to market entry through its continuous focus on efficiency and reducing costs. Substitutes – Low cost leaders are more likely to lower costs to entice customers to stay with their product, invest to develop substitutes, purchase patents. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Low-Cost Leadership Organization attempts to outperform competitors by doing everything it can to produce goods or services at a lower cost than competitors Emphasis is on operational efficiency May be achieved through process innovations Results in above average returns The cost leader chooses low product differentiation because differentiation is expensive. The cost leader also chooses to serve the needs of the average customer, avoiding high costs of serving different segments. The cost leader develops a competency in manufacturing. The cost leader’s strategy is geared to squeezing out every cent of cost savings by making consistent product/market/distinctive-competency choices. Advantages: Maintaining customers is usually assured. The cost leader is less effected by powerful suppliers than are competitors. The cost leader is less effected by buyer’s ability to squeeze down prices. Cost advantage is a barrier to entry because other companies are unable to enter at a lower cost. The cost leader is better able than its competitors to reduce its price in order to compete. How to Obtain a Cost Advantage? Determine and control cost Reconfigure the Value Chain as needed Risks: Competitors may find ways of producing the product at a lower cost, perhaps because of technological developments or because of cost savings, such as those foreign competitors can sometimes achieve. Competitors may imitate the cost leader’s methods. And, in a single-minded effort to reduce costs, the cost leader may lose sight of changes in consumer tastes. © Purdue University, Center for Food and Agricultural Business, 2002

Examples of Low Cost Leadership
Strategic Business Planning for Commercial Producers Identifying Strategies Examples of Low Cost Leadership Southwest Airlines Wal-Mart Gateway Computers Nucor Steel Nissan What are the components of Nissan’s cost-leadership strategy? To keep its costs and prices lower than other Japanese and U.S. car manufacturers, Nissan started its low-cost strategy for its Altima car at the design stage. First, its engineers designed the Altima to be easy and inexpensive to manufacture. Then Nissan limited the number of different models that it would produce to keep costs low: a basic version or a luxury-equipped version. Finally, Nissan focused its marketing on the amount of quality and luxury in the car, given its low price, to present to customers a high-quality/low-cost image of the car. The results were astonishing as sales exceeded even Nissan’s optimistic projections. Southwest is a flowing a low cost strategy. Use a single aircraft model (Boeing 737) Use secondary airports Fly short routes No meals 15 minute turnaround time No reserved seats No travel agent reservations © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Cost Leadership What are some things that can help us be cost leaders in production agriculture? Farm examples? Low overhead, share machinery Self sufficient Buying power Can we do something cheaper than my competitors? © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Orientation Core Competency Cost Cost Coordination Differentiation Differentiation Low-Cost Leader Broad Differentiation Market Scope Differentiation Value is provided to customers through unique features and characteristics of an organization's products rather than by the lowest price. This is done through high quality, features, high customer service, rapid product innovation, advanced technological features, image management, etc. This allows companies to desensitize prices and focus on value that generates a comparatively higher price and a better margin. The benefits of differentiation require producers to segment markets in order to target goods and services at specific segments, generating a higher than average price. For example, British Airways differentiates its service. The differentiating organization will incur additional costs in creating their competitive advantage. These costs must be offset by the increase in revenue generated by sales. Costs must be recovered. There is also the chance that any differentiation could be copied by competitors. Therefore there is always an incentive to innovate and continuously improve. On the dimension of product differentiation, the differentiator aims for a very high level of differentiation and frequently produces a wide range of products. Niche © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Differentiation Organization attempts to create a product that is perceived by customers as unique in some important way Emphasis is on strategic positioning May be achieved through Superior quality Superior customer responsiveness Superior innovation Results in above average returns through premium pricing How do firms derive competitive advantage? © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Differentiation PRICE = $12 PROFIT = $6 PRICE = $10 PROFIT = $5 COST = $6 The cost of producing and marketing a differentiated product will be higher than that of other firms, but because some key consumer need is being filled the price the company receives is higher, and above average profits are reaped. COST = $5 INDUSTRY AVERAGE DIFFERENTIATION © Purdue University, Center for Food and Agricultural Business, 2002

Differentiation Strategy
Strategic Business Planning for Commercial Producers Identifying Strategies Differentiation Strategy Integrated set of actions is designed to produce or deliver goods or services that customers perceive as being different in ways that are important to them. Firms following this business-level strategy rely on unique features of their product or service to drive superior margins to those of their competitors. A firm’s product can be differentiated in an almost countless number of ways, such as: Unusual features Responsive customer service Rapid product innovation Technological leadership Perceived prestige and status Different tastes Eric Akins. Even #2 yellow corn can be differentiated. Create Value by providing unique qualities in the product for which customers are willing to pay more, such as Lowering Buyers' Costs – Higher quality means less breakdowns or product problems, quicker response to problems. Raising Buyers' Performance – Buyer may improve performance, have higher level of enjoyment. Sustainability – Creating barriers by perceptions of uniqueness and reputation, creating high switching costs through differentiation and uniqueness. © Purdue University, Center for Food and Agricultural Business, 2002

Characteristics of Differentiated Firms
Strategic Business Planning for Commercial Producers Identifying Strategies Characteristics of Differentiated Firms Mental focus on the customers’ needs Entrepreneurial business structure, creativity, and innovation prized and encouraged Efforts spent communicating value to customers Efficiency important, but cost secondary to delivering value to the customer Need to be sure and bring farm examples into the discussion here. © Purdue University, Center for Food and Agricultural Business, 2002

The Value Chain for a Differentiation Strategy
Strategic Business Planning for Commercial Producers Identifying Strategies Firm Infrastructure – Highly developed MIS to capture customer preferences, firm-wide focus on high-quality products. Human Resources: Compensation encourages creativity, subjective performance measures, superior training. Technology: strong capability in basic research, investment in technologies that allow for production of highly differentiated products. Procurement: procedures to find the highest quality inputs, purchase of highest quality replacement parts, strict standards for suppliers. Inbound Logistics Superior handling to minimize damage and improve quality. Operations Consistent production of attractive products. Rapid response to customers’ production demands. Outbound Accurate and responsive order processing. Rapid and timely deliveries. Marketing & Sales Extensive granting of credit buying. Extensive personal relationships with buyers. Service Extensive buyer training to assure max. value from Product. MARGIN Analyzing the firm's value-chain helps to assess your organization and what you perceive your competitor’s value-chain to be will uncover ways to ways add value that will provide a competitive advantage. On the dimension of distinctive competency, which function is most important depends on the source of the company’s differentiation advantage. If it seeks a competitive advantage based on innovation and developing a technological competency, the key function is R&D; if customer responsiveness is its goal, then after-sales service, distribution, and customer service functions are most critical. Here we have a value chain for a low cost strategy that identifies some activities that are used to keep costs low. © Purdue University, Center for Food and Agricultural Business, 2002

Differentiation Strategy and the 5 Forces
Strategic Business Planning for Commercial Producers Identifying Strategies Differentiation Strategy and the 5 Forces Rivalry – creates customer loyalty that reduces price sensitivity Power of Buyers – the uniqueness of the good or service reduces number of suppliers and increases switching costs Power of Suppliers – higher margins insulate the firm, and price insensitivity by buyers allows the firm to pass on price increases Threat of New Entrants – loyalty of customers and need to invest in differentiating techniques reduces this threat Substitutes – loyal customers and high switching costs Porter's Five Forces Model – Effective differentiators can remain profitable even when the five forces appear unattractive. Advantages: Rivalry: Potential competitors are not a threat if the company has cultivated brand loyalty for its products and customers want the company’s goods. Powerful suppliers are rarely a problem because differentiators charge a premium price they can more afford to absorb higher costs and customers are willing to pay extra too Powerful buyers are rarely a problem because only the company can supply the differentiated product. Potential entrants would be forced to develop a unique product in order to compete. This is expensive, especially when existing companies enjoy strong brand loyalty. The threat of substitute products depends on the ability to of competitors to develop products that can meet the same customer needs as the differentiator’s products and break brand loyalty. Disadvantages: The first is the company’s ability to maintain its perceived uniqueness in customers’ eyes. This depends on how quickly other companies move to imitate successful differentiators. Another threat is that a source of uniqueness may be overridden by changes in consumer tastes and demands. A company must constantly look out for ways to match its unique strengths to changing product/market opportunities. Risks of Using a Differentiation Strategy Uniqueness Imitation Loss of Value © Purdue University, Center for Food and Agricultural Business, 2002

Examples of Differentiated Companies
Strategic Business Planning for Commercial Producers Identifying Strategies Examples of Differentiated Companies Nike Harley-Davidson Levi Jeans Mercedes-Benz John Deere Barley –JIT Oilseeds?– see Craig Product differentiation can be achieved in many ways: examples include the purity we are asked to associate with Ivory Soap, Maytag’s reputation for reliability, and Sony’s link with product quality. IBM and Federal Express have made their names on service; so have Neiman Marcus and Nordstrom. Finally, BMW and Rolex appeal to customer’s prestige needs. When a company pursues differentiation, it seeks to distinguish itself along as many dimensions as possible. Hence, BMW is not just a prestige car; it is also fast, reliable, and technologically sophisticated. With Mercedes you get technology and workmanship. When market segmentation is considered the differentiator generally segments its market into many niches. If it offers products for many market niches, it is pursuing a broad differentiation strategy-as GM does by offering cars for every market niche. Uniqueness may relate to the following: 1. Physical characteristics of the product, such as quality or reliability Ex: John Deere, “nothing runs like a deer” or Harley-Davidson, “nothing rides like a Harley.” 2. Appeal to a psychological need of customer, such as status or prestige. Ex: Mercedes; Lexus; BMW 3. The number of models in company’s product range 4. The development of a distinctive competency, such as service © Purdue University, Center for Food and Agricultural Business, 2002

Differentiation Strategy
Strategic Business Planning for Commercial Producers Identifying Strategies Differentiation Strategy What are some activities that we can focus on to differentiate ourselves in the production agriculture marketplace? Do you think you can pursue this strategy in one of your business units? © Purdue University, Center for Food and Agricultural Business, 2002

Strategic Business Planning for Commercial Producers Identifying Strategies Strategic Orientation Core Competency Cost Cost Coordination Coordination Differentiation Differentiation Low-Cost Leader Broad Coordination Differentiation Market Scope Our next generic strategy is Coordination. Coordinator firms work to develop unique marketing channels linking suppliers and customers. They pursue efficiencies or differentiated products that can be obtained only through a systems approach that spans several levels of the food chain. The competitive advantage of coordinating firms can stem from the special relationships they cultivate with their suppliers and customers. These close, collaborative relationships can be based on high levels of coordination, shared assets, participation in joint programs, and close communication links. Or the competitive advantage may be due to the control they exert over the supply chain through ownership of key assets or information. This strategic orientation has become common in the animal agriculture sector and is likely to become more common in the crop sector in the future. Niche © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Coordination Focus: playing the facilitator role linking suppliers and customers Competitive advantage based on innovative relationships/linkages Key strengths in ability to control without ownership, identify market opportunities Push for a more coordinated agriculture to create a potential role for such organizations © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Coordination May add substantial value through re-configuring the supply chain Heavy focus on soft assets, information and people, as opposed to hard assets, plant and equipment Real focus on building trust among channel partners, developing incentive, and payment mechanisms that keep partners engaged Really need to bring some farm examples in here to convince them this might be possible. Coordinate growers with market © Purdue University, Center for Food and Agricultural Business, 2002

Overall Strategic Orientation
Strategic Business Planning for Commercial Producers Identifying Strategies Overall Strategic Orientation Core Competency Cost Cost Coordination Coordination Differentiation Differentiation Low-Cost Leader Broad Broad Coordination Differentiation Market Scope Customization (Niche) strategy The customization strategy is also known as a ‘niche’ strategy. Where an organization can afford neither a wide scope cost leadership nor a wide scope differentiation strategy, a niche strategy could be more suitable. Here an organization focuses effort and resources on a narrow, defined segment of a market. Competitive advantage is generated specifically for the niche. A niche strategy is often used by smaller firms. A company could use either a cost focus or a differentiation focus. With a cost focus a firm aims at being the lowest cost producer in that niche or segment. With a differentiation focus a firm creates competitive advantage through differentiation within the niche or segment. There are potentially problems with the niche approach. Small, specialist niches could disappear in the long term. Cost focus is unachievable with an industry depending upon economies of scale. Customization Niche Niche © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Customization Focus: developing highly tailored solutions to fit a specific set of customers Deep relationships with the segment of choice Can be applied to differentiation, cost minimization, coordination Pursued by both large and small firms in an increasingly fragmented market Source of value: produce a product that has lowest cost and is differentiated from other products Customization (Focus) Strategy: the focus strategy, differs from the other two in that it is directed at serving the needs of a limited customer group or set. It concentrates on serving a particular market niche that may be defined as geographically (by region or locality), by type of customer (very rich or young), and by segment of the product line such as only very expensive autos or designer clothes. A focus strategy can be pursued using either a differentiation or a low-cost approach. When a company adopts a low-cost approach, it competes against the market leader only in those segments where it has no cost disadvantage. Focused companies can particularly exploit their knowledge of a small customer set because they are closer to the customer than a broad differentiator. Advantages/Disadvantages: The company is protected from rivals to the extent it can provide a product or service at a price or quality others cannot offer. Powerful suppliers may be a threat because the company buys in such small volumes that it has less bargaining power. The ability to satisfy unique customer needs gives the company power over its buyers. Potential competitors as well as substitute products have to overcome the hurdle of consumer loyalty. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Customization Focus: solving problems/creating results for chosen segments Unparalleled tailoring of solutions Support tailoring through range of products and services consistent with needs, seamless access to resources, localized decision making “Customer wins/we win” attitude Once again farm examples are important. However, many of them have probably been exposed to the idea of niche marketing. I might want to really stress the important skills it takes to accomplish this. Customer Orientation Keen Marketing Capability Access to the Market Keen focus on product not process A fundamental understanding of distribution, inventory management etc. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Summary Successful farms of the new millennium will: Thoroughly understand the dimensions of the external environment Not take the market environment as a given, and will drive change through their own actions Choose a strategic position that is consistent with the marketplace and their own competencies Deliver on the critical elements supporting that strategic position Problem: Being Stuck in the Middle: It is possible to try to integrate the low cost and differentiated generic strategies. The main risk is that the firm may become stuck in the middle, i.e. lacking a strong commitment to or expertise with either type of generic strategy. There are many companies that have made the wrong choice. They are called stuck in the middle because they have been unable to obtain a competitive advantage and to earn average or above-average returns. Sometimes a low-cost company may diversify into new product markets where it has less expertise or may invest in R&D inappropriate to its strategy. Another path to failure is that taken by the successful focuser that tries to become a broad differentiator and ends up stuck in the middle. Also, differentiators can lose their strategy if competitors enter the market and chip away at their competitive advantage. © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Exercise Consider one of the business units on your farm. Who are the customers you are trying to serve from this business unit? What opportunities and threats exist for this business unit? What strengths and weaknesses do you have in this business unit relative to your competitors? Using the TOWS matrix, is there a set of low-cost strategies you can pursue for this business unit? What about differentiation strategies? © Purdue University, Center for Food and Agricultural Business, 2002

Identifying Strategies Strategic Business Planning for Commercial Producers © Purdue University, Center for Food and Agricultural Business, 2002

What Tools Are Available to Generate Strategies?

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