Resources-Based Strategic Options - Cost Reduction

Resources-Based Strategic Options - Cost Reduction

Introduction

With emergent of economy, strategic options are not longer focusing on just key options on expansion, sustaining competitive advantages, capabilities and core –competencies. Cost reduction of current operation activities must not be overlooked and neglect, as it form part of the agent in the key success of the company. With extensive pressure from new threat of entrant to the industry, it quite possible for organization to purchase raw material from less developed countries, engaged low wages foreign workers and even shift their whole production plant to third world countries, to reduce their current cost and maximise their financial benefit.

 

There are a few main routes of cost reduction to be discussed:

1) Design

In some industries, large cost reductions come not from activity in the production plant, but before the product ever reach the factory. By carefully designing the product –for instances, so that it has fewer parts or is simpler to manufacture-real reductions in cost can be achieved. In large organization, before a product is launched a through market research were conducted, buyer needs and wants, the market trends and consumer buying pattern are recorded, with this relevant information, R&D department could design more practical products. This lead to time and cost reduction in material wastage and chances of failure product launched.

2) Supplier Relationship

Due to increasing supply consolidation, a company’s overall performance and efficiency is more and more dependent on the capabilities of its suppliers. An organization benefits greatly when key suppliers dramatically reduce costs, introduce new services designed to address the organization’s needs, expand their footprint to provide seamless coverage in multiple regions, and work with the organization to streamline joint processes.

Benefit to Organization:

-Develops new services and products that can drive competitive advantage

-Closes capability and performance gaps

-Creates a reliable and long-term source of supply

-Provides access to new ideas and opportunities for improvement

-Prioritizes capability development and supplier investment

Benefit to Supplier:

-Creates additional revenue generation opportunities

-Enables the development of a long-term relationship

-Creates opportunities for joint investments

-Provides opportunity for supplier to advance to next tier

-Gives insight into customer organization’s business needs

3) Economic of Scale & Scope

When it is possible to perform an operation more efficiently or differently at large volumes, then the increased efficiency may result in lower costs .Economics of scale can lead to lower costs- for example in major petrochemical plants and in pulp and paper production. Whereas economic of scope occur when costs savings are available as a result of providing two distinct products from the same company compared with providing them from separate companies. An example might be those products that share the same retail outlet and can be delivered by the same transport. However with lack of production flexibility and the depersonalized nature of the work may be significant drawbacks on both economic of scale & scope.

Economic of scale are also available in areas outside production. They may occur in areas such as

1) Research and development: On some occasions, only a large scale operation can justify special services or items of testing equipment.

 

2) Marketing: Really large companies are able to aggregate separate advertising budgets into one massive fund and negotiate extra media discounts that are simply not available to smaller companies.

3)Distribution: Loads can be grouped and selected to maximise the use of carrying capacity on transport vehicles traveling between fixed destinations.

4) Using the  experience curve effect  

It suggests that significant reductions in costs are achieved as companies and the whole industry produce more product. The cost reductions relate to the cumulative production ever achieved, not just in one year.

The cost experience concept can be seen at both the company level and the industry level.

-at the company level, the market leader will, by definition, have produced cumulatively more product than any other company. The leader should have the lowest costs and other companies should be at a disadvantage.

-at the industry level, costs should fall as the industry overall produces more .Every company should benefit from knowledge that is circulated within it industrial.

Even within an industry, there are ways of overcoming experience curve effects, the most obvious being by new technology. Another way would be to entice an employee of a more experienced company to join the organization, there are real limits to the benefit of the experience curve as per follow,

1)    Market demand in market segments for a special product change or variation cannot easily be met: to achieve scale, production flexibility may have to be sacrificed.

2)    Technical innovation can overtake learning in a more fundamental way: a new invention may radically alter the cost profile of an existing operation.

3)    Demand needs to double for every significant proportionate cost reduction. In markets where growth is still present but slowing down, this is only possible if an ever-larger market share is obtained. As market share becomes larger, this becomes progressively more difficult and expensive to achieve.

5) Capacity Utilisation

This is an important consideration into cost reduction. Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between potential output 'could' be produced and actual output that 'is' produced with installed equipment.

 

There are a number of reasons why a firm might be experiencing low capacity utilisation, including the following:

        

• Fall in market demand due to changes in consumer tastes or fashion
• Unsuccessful marketing – one or more aspect of the marketing mix may simply mean that the firm is not successful
• Seasonal demand – this is especially apparent in the tourist industry where firms like hotels and leisure parks are full in the summer but see much lower utilisation at other times of the year
• New competitors taking market share or causing over-supply in the market

Problems arising from low capacity utilisation

• Staff can become bored and demoralised if they don’t have as much to do, especially if they fear losing their jobs
• Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic
• Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy – such as a shop or a health club - signifying loss of popularity

Benefits of low capacity utilisation

Low capacity utilisation is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include:

• There may be less stress for employees than if they were working at full capacity
• The firm can cope with new orders; firms in expanding markets may expect to have low utilisation whilst they build their sales
• A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade

6) Synergistic effects

In exploring cost cutting options, it is possible to develop a model which examine this in a structural and cross functional way. Overall, the model does not pretend to be comprehensive but rather to show the options that are possible, their logical flow and the interconnections between the various elements.

The synergistic effects also create the opportunity of a combined corporate entity to reduce or eliminate expenses associated with running a business. Cost synergies are realized by eliminating positions that are viewed as duplicate within the merged entity. Examples include the head quarters office of one of the predecessor companies, certain executives, the human resources department, or other employees of the predecessor companies.

Conclusion

In conclusion, on above factors that contribute to cost reduction, I will like to further add on, for cost reduction strategy to be successful implemented. Company must have proper management planning before proceed, this proper management planning will reduce the risk of failure and prevent any interruption of work process.

Different levels of diversification

Different levels of diversification

Levels of diversification

The nature of diversification in groups of companies takes on many forms. Some diversified group have little connection across parts of the group. For example is Samsung, it has construction and electronics businesses.

 

For the purposes of strategy development, 3 main levels of diversification are identified.

1)    Close-related diversification

The different companies within the group may have different products or services but have some form of close affinity such as common customers, common suppliers or common overheads.

For example, the Unilever group includes separate companies in such businesses as Magnum ice cream and Knorr soups. Each of these company shares similar supermarket customers, some common suppliers and common competitors. It makes commercial sense for such companies to seek out the benefits of co-operation where appropriate.

2)    Distant-related diversification

The different companies in the group are more diversified with quite different products or services using wholly different technologies. However, they may share the same underpinning core competencies or some other area technology or services that would benefit from co-ordination by a central headquarters.

For example, 3M has many diversified businesses but it underpinning core competencies in adhesives and coatings are widely used throughout the group.

Another example is the Japanese company, Canon whose underpinning core competencies in optics are used in a range of applications from cameras to photocopies.

3)    Unrelated Diversification

The different companies in the group have little in common with regard to products, customers or technologies. However, they benefit from the resources of the headquarters with regard to the availability of lower-cost finance, quality of management direction and other related matters.

The examples are Samsung

Benefits of a corporate-level strategy

Corporate level strategy is the value added contribution of the central headquarters of a group of diversified businesses with its own strategy. It is delivered by the headquarters’ decisions on the selection of businesses to be in group, their management in the group and the resources allocated by the centre to individual companies. Corporate purpose is the maximisation of value added and the additional competitive advantage contributed by the central headquarters of the group of companies.

The diversified group should earn above average profits by the special contribution of group’s headquarters over and above the contribution of the individual companies.

Benefits of diversification are delivered in 3 main areas

1)    Internal to the group

a)    Economies of scope (For closed related diversified group)

It refers to cost savings developed by a group when its shares activities or transfers capabilities and competences from one part of a group to another

For example, 2 different companies might share a common sales team or share similar technologies

b)    Core competencies (For closed related and distant-related groups)

It refers to transferring core competencies between companies internally within the group.

c)    Shared activities (For distant-related groups)

For example, companies might share purchasing activities because they have similar raw materials or distribution activities because they have same customers. Such activities occur regularly in many consumer products companies such as Unilever where sugar and supermarkets apply respectively.

2)    External to group

a)    Vertical integration

This occurs when a company chooses to backward integration or forward integration. It creates cost savings such as not having to pay distributors or market power through direct access to customers.

For example, cosmetics retail shop chain Body Shop produces its own products and sells them in its own stores. There is more control over special products and is able to respond to the market trend without having to negotiate with other retailer to stock its products.

b)    Market power

Close related diversified firms in a group co-operates to gain external benefits in terms of increasing negotiating power with customers or lower costs with regard to distribution. Market power exists when a company has lower costs or a superior competitive position as a result of such co-operation.

c)    Competitor blocking

The blocking of competitive activity through providing a wider range of products within a closely related diversified group will result in market power. This affects the competitors from offering products as the products are being offered at a much lower price.

3)    Financial benefits (Often used in unrelated diversification)

 

a)    Lower cost of capital

The central headquarters able to use its greater negotiating power to obtain finance for individual companies than they would obtain independently of the group

b)    Business restructuring

The central HQ may be able to facilitate and finance essential restructuring of a business in the face of competitive pressure beyond the resources of an individual company.

c)    Efficient capital allocation

The central HQ can allocate finance across the group more efficient as a result of its central viewpoint of the needs and returns of individual companies

 

Conclusion

The corporate purpose is the purpose and contribution of the central headquarters of diversified group of companies. Diversified groups brings advantages such as lower risk of overall failure, mutual technical support, strength core competencies and building up company’s resources. Thus, the role of the group headquarters is to identify and manage the financial and other capital resources of the firm to realise these advantages.

 

 

Organisation's purpose shaped by vision, leadership and ethics

Organisation's purpose shaped by vision, leadership and ethics

Introduction

The corporate strategy is only a means to the purpose of the organisation. It is impossible to develop strategy if the purpose remains unclear and purpose remains unique to each organisation. The definition of purpose is complex and multifaceted; Michael Porter simplified the term purpose as ‘profit maximisation’ while Professor Oliver Williamson defined purpose as ‘survival’.

Shaping of the purpose of the organisation

The complexity of developing purpose is overcome by shaping the purpose of the organisation which is a process by identifying and concentrating on essentials on the organisation. The shaping of the purpose of the organisation involves examination of strategic vision, roles of leadership and ethical considerations.

Purpose shaped by ethical considerations

The ethical considerations are standards and conduct that the organisation sets itself in its dealing within the organisation and outside with its environment.

Ethical issues:  4 prime considerations in the ethical conduct of organisations

The ethical issues are to identify what is morally correct behaviour for the organisation. There are 4 main reasons for considering the ethical conduct of organisations.

1)    In every society, such considerations are sometimes inescapable. For example, legal limits on conduct.

2)    They may be important to conduct in that society. For example, respect for ‘green issues’ in the environment that go beyond legal limits.

3)    A consideration of ethics is part of the professionalism of business. For example, the treatment of workers and ethics groups.

4)    The self-interest of organisations is often best served by developing attitudes to ethical issues before they come acute. For example, bad publicity as a result of accusations of incorrect behaviour.

Types of issues in developing business ethics

They are 3 basic areas that need to be explored in the context of purpose and strategy development which are:

1)    The extent of ethical considerations

It states the extent of organisation to consider the ethical issues that could arise in its conduct of business beyond legal minimum. It may involve in every area or lay down some basic principles and the leave parts or individuals to conduct themselves appropriately.

2)    The cost of such considerations

Some actions will have a cost to the organisation and many of the real conflicts arise here because if they were without cost then they would be easily undertaken. There are no abstract rules but each organisation will need to consider this area.

3)    The recipient of responsibility

It concerns the organisation’s responsibility to the state, local community or individual. For example, McDonalds’ continuous efforts in children welfare through raising funds.

Ethical issues that might impact on purpose

1)    Espionage

The sources that company acquire from to find out about competition and the reasonable enquiry finish and aggressive search for additional data.

2)    Tyrannical regimes

The ethical issues arise whether companies selling products a country that is run by tyrannical regimes is justified.  

3)    Bribery and corruption

The line is undefined whether organisations should engage in such activity in every circumstance so that jobs may be saved and contracts won for only limited sums to all number of people.

4)    Telling half-truths and operating misleading negotiation tactics.

The truth is not presented fully and might mislead into negotiating tactics. For example, unethical financial planners may hide some hidden clauses of the particular financial product which will affect their closing of customers, customers sees it lucrative and decides to buy.

 

Ethical considerations and corporate strategy

Ethical considerations may influence corporate strategy at a number of levels. The values of the organisation will need to be reflected in its purpose and mission statements. Such matters may reflect the role that the organisation sees itself playing in society and the responsibilities.

1)    The national and international level

The role of the organisation in society and the country.

Political, economic and social issues will impact.

Laissez faire vs. Dirigiste.

The role and power of trade blocks and closer economic union.

The organisation is entitled to have a view on these matters and seek to influence society.

2)    The corporate level

Ethical and corporate issues over which the organisation has some direct control. Such matters as the preservation of the environment, contributions to political parties, and representations to the country’s legislative parliament are all examples of direct corporate activities that need to be resolved.

3)    The individual manager and employee level

The standards of behaviour which the organisations wish to set for individual managers and workers. Some of these matters may not be strategic in nature in the sense that they are unlikely to affect the future direction of the organisation overall but rather the future of individuals. However, there may be some general policies on, for example, religion, ethnic and equality issues that involve both the individual and fundamental matters relating to the direction of the organisation. These general matters of policy deserve to be treated at the highest possible level and therefore come within ambit of corporate strategy.

PESTEL analysis

Introduction

A PESTEL analysis is study of the political, economic, socio-cultural, technological, environment and legal factors. It provides a useful starting point to any analysis of the general environment surrounding an organisation.

Political

The political environment consists of laws, government agencies, and pressure groups that influence and limit various organizations and individuals in a given society. For example is the corporate tax.

Economic

The economic environment consists of factors that affect consumer purchasing power and spending patterns. With the generation moving into its prime wage-earning and the number of small families headed by dual-career couples continue to increase, organisation must pay attention to consumer expenditure and disposable income as consumers continue to demand for quality products and better service. Nations also vary greatly in their levels and distribution of income e.g. GNP trend. Constant monitoring of inflation, currency fluctuations and exchange rates is necessary so that the organisation would not be caught short in a boom e.g. A country’s economic slowdown that leads to retrenchment hence unemployment. With adequate warning, organisations can take advantage of changes in the economic environment.

Cultural

The cultural environment is made up of institutions and other forces that affect a society’s basic values, perceptions, preferences and behaviour. People in a given society hold many beliefs and values. Although core values are fairly persistent, cultural swings do take place. Organisations predict cultural shifts in order to spot opportunities or threats. People also vary in their emphasis on serving themselves versus serving others. Some people seek personal pleasure while others seek self-realization hence organisations must take into concern people attitudes to work and leisure. Organisations must pay attention to income distribution as well as average income. With the more educated workforce, lifestyle changes for the demand for quality products etc.

Technological

The technological environment is the most dramatic force shaping our destiny. The technological environment changes rapidly and it creates new markets and opportunities. New technology replaces old technology hence organisations should watch the technological environment closely before their products turn obsolete. Today’s research is usually carried out by research teams heavily subsidise by government on their focus on technology. In some situations, developments in nominally unrelated industries may be applicable in the organisation.

Environment

The natural environment involves the natural resources that are needed as inputs that affect the strategies. Such environmental trends are the increasing pollution and carbon emissions. For example is the disposal of chemical and nuclear wastes. Government intervention in natural resources management is their concern and efforts to promote a clean environment. For example, For example, tyres manufacture in china and India, it includes an anti-dumping law. Concern for the natural environment has spawned the so-called green movement that organisations are responding to consumer demands with ecological safer products and more energy-efficient operations. For example is that 3M runs a pollution prevention pays program that has led to a substantial reduction in pollution and costs.

Legal

It refers to regulations and legislation enforced to such as developing public policy to guide commerce, well-conceived regulation can encourage competition and ensure fair markets for goods and services. New laws and their enforcement will continue or increase and organisations must watch these developments when planning their strategy.

Importance of PESTEL analysis

It is important to study the environment surrounding the organisation for three main reasons.

1)    Most organisations compete against each other, so a study of the environment will provide information on the nature of competition as a step to developing sustainable competitive advantage.

2)    Most organisations will perceive opportunities that might be explored and threats that need to be continued. Opportunities and threats may come from government decisions, changes in technology and social developments and many other factors, hence not just from competitors.

3)    There are opportunities for networks and other linkages, which lead to sustainable co-operation. Such linkages with others may strengthen an organisation in its environment by providing mutual support.

Considerations

Before exploring specific aspects of the environmental analysis, it is important to consider the basic conditions surrounding the organisation. Special attention needs to be directed to the nature and strength of the forces driving strategic change such as the dynamics of the environment. Secondly in consideration of the factors surrounding the organisation, PESTEL analysis can be used to explore the general environment. It is useful to draw a distinction between the proactive outcomes and reactive outcomes when analysing the environment.

Limitations

There are three difficulties in determining the connection between the organisation corporate strategy and its environment.

Firstly is the prescriptive versus emergent debate. Interpretations in the corporate strategy process imply a different status for the same basic topic hence the difficulty to which the analysis is put to use.

Secondly is the uncertainty. Corporate strategists regard the environment as uncertain.

Thirdly is the range of influences as every element of an organisation’s environment influence corporate strategy hence the ability of an organisation to cope with the existing situation.

Conclusion

To the prescriptive strategists, although the items in a PESTEL analysis rely on past events and experience, the analysis can be used as a forecast of the future. The past is history and corporate strategy is concerned with future action, but the best evidence about the future may derive from the past. Prescriptive strategists would suggest that it is worth attempting the task because major new investments make this hidden assumption anyway.

The emergent corporate strategists may well comment that the future is so uncertain that prediction is useless. If this view is held, a PESTEL analysis will fulfil a different role in interpreting past events and their interrelationships. In practice, some emergent strategists may give words of caution but still be tempted to predict the future. Overall, when used wisely, the PESTEL analysis has a role in corporate strategy.