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Differentiation
Differentiation strategy is a set of actions that are structured by a company to deliver unique services and goods at an acceptable cost. The customers see as if something different has been done to guarantee satisfaction (Baker, 2001). According to Fred Smith, the founding director of the FedEx, the main tenet of differentiation is innovation (Kottler, 1986). For a firm to create products that will constantly appeal to the mass market without losing its lustre, it must enhance products through differentiation. The price of the goods and services can be more than what the clients are willing to pay as long as differentiation creates value that was not there in the first place (Kaye, 2005). Some customers are known to have a knack for unique, differentiated features which are more expensive than the ordinary version of the product because they expect more value from the different products. This means that business-level strategies of firms should adopt differentiation strategies that offer the customers unique products even if it means at a higher price (Haines, 2004). Unique products at a higher price will tend to fetch more revenue than ordinary ones at a lower price and this is a factor that can give a business a competitive advantage over its rivals in the market that have ordinary products at low cost (Fahey,1986). The advantage of the differentiation strategy to a firm is that the value provided by the unique products and service features usually attract a premium price and gives the customers a higher level of satisfaction. The products and the services have superior quality; they are exclusive and more prestigious (Estelle, 2000). For a firm to succeed through this strategy, it must design new ways of doing things and develop new systems. It must also shape perceptions of the differentiated products and services through intensive marketing campaigns and rigorous advertising because this is another way of creating a competitive advantage (Duncan, 2000). One of the automotive companies that have used this business-level strategy is Toyota (TMC) which has products for the high-end and the low-end consumers. The company has the highest number of vehicle models and has used this strategy to create variety to serve the diverse tastes of its expansive clientele. Volkswagen is another automotive manufacturer that has used this business-level strategy to create value for its customers (Dess, 2006). Volkswagen’s vehicle model has been differentiated after the vehicle manufacturer realized that it can gain a competitive advantage by segmenting its market and serving the needs of the different market segments separately (Coyne, 1996).
Hybrid
Companies in the automotive sector can successfully occupy a “hybrid” position which means simultaneous low cost and differentiation based strategic positioning (Kottler, 1986). The low cost position can be occupied through a business level strategy called cost leadership strategy which refers to an amalgamated set of actions that are structured to deliver services and goods at the lowest cost possible in comparison to the rivals while maintaining value that will appeal to the existing and the new customers (Kurtz, 2010). This means that the products must be standardized, with features that are acceptable to the consumer’s.This will enable the firm to cut costs as it maintains quality of service and satisfaction given to the customers. There are some costs saving actions that this strategy needs to be effective (Kurtz, 2010). These include the installation of effective scale facilities, tight control of the entire overhead cost, minimal sales costs, existence of efficient facilities for manufacturing, simplification of the process of production and the proper monitoring of outside costs (Laemer, 2007). There are certain requirements that must suffice for the strategy to be used effectively. According to an acclaimed business author, Michael Porter, there must be the economies of purchasing meaning that the relative market share must be very high. Secondly, firm must have a favorable access to raw materials because if the access to raw materials is not that favorable, cost leadership strategy may encounter some difficulties. The firm must also make structures and the designs of products in a cost effective way to drive down the cost of operations (Lears, 2008). The maintenance of cost leadership can be enhanced through the reinvestment of high margins. Some of the examples of firms that have succeeded in using this strategy include the Toyota motor corporation, Mitsubishi and Volvo. There are experts who claim that this hybrid strategy is dangerous in the face of Porter’s five forces but it can easily be defended against these forces (Levitt, 1990). The first force is the competitors and in this case the position of low costs can make heavy returns especially after all the competitors have used all their profits to out do each other in the competitive market in bid to carve a bigger niche of the market share (Lorenzen, 2006). The second force illustrated by Porter is the power of suppliers and hybrid position the suppliers can give more room for the firm to cope with the increase of the costs of the inputs (Menon, 1999). When it comes to the buyers as a competitive force; there is a possibility of the buyers forcing the prices down almost to the level of the lowest rival even if they move out of the firm as the main supplier (Miles, 2003). The fourth force illustrated by Michael Porter is the new entrants and in the case of cost leadership, there are some scale economies that in most cases prohibit the entry of new players in the market which keeps the competition low, improving the cost advantages The other force is the threat of the substitutes and alternatives and in this case, the firm having adopted a low cost potion will be able to reduce its process so as to have a balanced price value relationship which means that the firm is not threatened by substitutes and the alternatives in the market (Suzanne, 2003). However there are some competitive risks that are associated with the hybrid position. The most prominent one is lack of vision when it comes to cost reduction. Some managers of firms are so myopic in their attempts to reduce costs that they tend to overlook the needs and the preferences of the customers (Sharp, 2001). This makes the firm to compromise on quality in order to cut costs leading to dissatisfied clients who will definitely look for alternatives and substitutes. The second competitive risk that may afflict the cost leadership strategy is the imitations of the low cost strategy by rivals thus watering down the efforts of the firm (Keeley, 2007). The rapid changes in the technological world can increase costs instead of reducing them and this can nullify the gains made by the cost leadership strategy (Scott, 1982). The other competitive risk that the firm might be exposed to by the cost leadership strategy is the danger of conservatism (Tracy, 2000). A firm using this strategy can become averse to change, making it remain with practices and principles that may not be competitive. Companies in this industrial sector can successfully occupy a “hybrid” (simultaneous low cost and differentiation based strategic positioning). There are specific times that are desirable for the use of the strategy. The most opportune time is when the firm is already a leader in the market and there are price wars(Rajagopal, 2000). This will enable the company to gain when the rivals are using their resources to battle each other. In a case where stiff competition does not abate, using strategies that cuts costs can help the firm to emerge victorious in the attrition war (Westbrook, 1997).
Portfolio 2: PESTEL ANALYSIS
PESTEL analysis is a tool used to analyze the environmental influences that affect the operation of a business or industry (Porter, 1988). Any business or industry operates in an environment that is affected by political, economic social, technological and environmental factors. This paper will carry out a PESTEL analysis of the brewing industry in the Europe and develop three possible future scenarios for this industry. Starting with political factors, there are various political factors that affect the beer industry in Europe. On of them is the government policy on drinking hours where most countries have relaxed those policies (Bowles, 2005). This has led to increased consumption of alcoholic products because due to relaxed temporal rules. One of the countries where the brewing industry benefits from this policy is the UK where drinking parlors operate 24 hours a day and this has been lucrative for the country’s beer industry. The other political factor in play is the rising concern on binge drinking which has wrecked the lives of many alcohol consumers (Potter, 1999). Binge drinking is promoted by the relaxed regulations and it has affected the countries socially and economically because of the amount of resources being directed towards alcohol consumption. A political factor that has affected consumption of beer in Europe is the charged campaign against drunken driving. The governments are also concerned about harmful effects of excessive consumption of alcohol and this has led to campaigns raising awareness on the dangers of alcohol and the success of these campaigns leads to reduced alcohol consumption. There are economic factors that have affected the brewing industry in Europe. One of them is the rise in demand of alcoholic products in other areas especially western Europe and Asia and this has driven beer sales to unprecedented high levels. Secondly, the recession that hit the world at the end of last decade had an impact on consumption trends across Europe and the brewing industry was hardest hit because reduced purchasing power could only allow minimum spending on luxuries like beer. In UK, pub business is not very lucrative and the rate of closure of pubs is higher than the rate at which pubs are being opened (Seymour, 2003). The other economic factors is the cost of operations in this industry because brewing requires a lot of energy and water in the production process meaning that it is sensitive to high costs of energy and even transportation. There are various social factors that have affected brewing industry in Europe. The first one is changing consumer preferences where more consumers are moving towards consumption of wines. The other social impact is the increased awareness on the dangers of alcohol which has affected the volumes of beer consumed across Europe (Sherwin, 2003). Furthermore, there are more people who are consuming homemade beer and home brewing has affected the growth of the industry. Technological factors that affect alcohol consumption include electronic point of sale which has led reduced costs of operation. Technology has also reduced costs of production and improved quality of beer produced (Becker, 1993). Environmental factors that affect the industry include the drive on environmental sustainability. Finally, there are legal factors that have affected the industry and these include the use of alcohol detectors by traffic police to nab drunken drivers and alcohol restriction for people under the age of 18 which have all reduced the consumption levels.
Forces that are likely to have a high impact on the industries future development
Uncertain forces
The uncertain forces include water supply, changing consumer preferences, economic recession and legal requirements. These are forces which the industry cannot predict meaning that they need to have a buffer against these uncertain forces because they can hit the industry any time.
Certain forces
The certain forces include rise in health awareness, rising cost of production, environmental and legal requirements, rise in demand of European beer outside Europe and availability of technology.
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