REPORT ON GROUP ASSIGNMENT NO. 2
COURSE: SM02.41
READING STUDY PAPER SUBMITTED TO
DR. K. RAMANATHAN
SCHOOL OF MANAGEMENT
NOVEMBER 20, 1995
BY
JOE, TAI -SURP (SMM958359)
WU XIAOHONG (SMM959387)
WANNA PITOONPONG (SMM959439)
SAURABH PANDEY (SMM959600)
HENRIETTE HINDRICHSEN (SMG959556)
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(A) What type of competitive strategy is being used by the industry/firms
described in each reading?
I. INTRODUCTION
OECD industries lost competitive advantage due to the following reasons:
(i) Manufacturing shifts towards low-wage countries resulting in lower
costs.
(ii) Diffusion and availability of process and technological and sometimes
even product innovation worldwide
(iii) Day by day increasing demand and expectation by customers.
Resulting increasing pressure from competitive forces that determine
profitability of an industry, i.e. potential entrants, substitutes, supplies and
rivalry among firms.
Thus, to survive, and to improve their position, they had to develop
innovation in product and in manufacturing technology in combination with
new organizational forms (e.g. marketing channels and service system)
The companies described in the readings adopted generic strategies not only
to respond to the environment but to shape that environment in the firm's
favor. Main strategies onto which they have focused are:
- differentiation
- differentiation focus, and
- cost advantage.
To formulate these strategies they have to use four tools:
- product innovation
- process innovation
- organizational innovation
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- service innovation
Combining these tools and different strategies we will try to discuss it in some
more details.
(1) Cost advantage by Process innovation
Due to the shift of most labor intensive industrial activities to areas where
wage cost are relatively low, the OECD countries in many industries lost
competitive edge to low-wage countries. Hence, to reduce this effect,
industries went for new processes which are less dependent on labor.
- In watch industry in Swiss. Swatch went a new type of highly automated
assembly line. Hence cutting down labor cost and time to remarkably lower
levels.
- In textile industry. In OECD countries , realizing the facts mentioned above,
they also went for process innovation that substantially reduce the share of
labor cost.
Yet these process innovations are available worldwide and as investing power
of industries in developing countries have also increased in time, these
innovations alone were unable to keep OECD industry profitable.
(2) Differentiation by product innovation
Earlier it was thought that mass production system is the key factor for
success. Then it was found out that flexible small batch production is even
more beneficial. Then quality comes as key factor and proved in long run
quality production is cheaper. And now, it is said that quality should be taken
for consideration and ability to bring new product is the key to be on top.
Swatch brought a completely new product both technically (in the number of
parts and the way they are assembled) and in design. It was designed which
made swatch an item of fashion more than a mere device for telling time.
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(3) Differentiation focus by product innovation
Another good strategy is to focus on a distinguished market segment to
provide them value oriented products to it.
Textile companies in OECD countries such as Germany and Switzerland,
have laid more and more weight on product innovation by moving to higher
value-added textile items as fine fabrics, home furnishing and sophisticated
industrial textiles.
(4) Differentiation by organizational innovation
In some industries where production and process innovation have occurred,
this kind of organizational innovations are really needed.
A very good example is the Benetton company. By implementing a
comprehensive information network which links together the entire structure
from retailing via warehouse to production, instantly processed information
about the market and permitted quick response of production to market
changes. (see appendix 1)
(5) Differentiation by service innovation
Sometimes, differentiation by service innovation is the way to gain
competitive advantage. That is the better a firm services the better it will earn.
A good example is Japanese department stores, where the concept of
differentiation has been practiced through not only service, but also marketing
innovations and delivery system. All these have made Japanese department
stores become much more than just retail outlets providing cultural activities
and services, from interior design to shoe repair. Daily basket computerized,
shopping by phone provided by Isetan, computerized catalogue shopping are
some of the very good examples of using technology for improvement of
services. (See appendix 1)
III. CONCLUSION
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By utilizing different strategies, companies have achieved competitive
advantage. When cost leadership is lost, some companies have managed to
switch to a differentiation strategy. This can be done by best utilization of
technology in developing in any field such as product, delivery, marketing,
services, organizational development, etc.
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(B) Generic activities, drivers of cost and uniqueness, and industry
structure influencing competitiveness
Competition is at the core of the success or failure of firms.
Competition determines the appropriateness of a firm’s activities that can
contribute to its performance, such as innovations, a cohesive culture, or good
implementation. Competitive strategy aims to establish a profitable and
sustainable position against the forces that determine industry competition.
A firms generic activities affect competitive advantage through its
impact on the value chain. The firms in the same industry may have similar
chains, but the value chains of competitors often differ. So differences among
competitors value chains are a key source of competitive advantage.
Value activities are discrete building blocks of competitive advantage.
How each activity performed combined with its economics will determine
whether a firm is high or low cost relative to competitors and also determine
its contribution to buyers needs and hence differentiation.
In any industry, the rules of competition are embodied in five
competitive forces: the entry of new competitors, the threat of substitutes, the
bargaining power of buyers, the bargaining power of suppliers and the rivalry
among the existing competitors. Every industry is unique and has its own
unique structure.
Though a firm can have a myriad of strengths and weaknesses vis-à-vis
its competitors, there are two basic types of competitive advantage a firm can
posses: low cost or differentiation. The two basic types of competitive
advantage can be combined with the scope of activities; that is the focus.
The generic activities, cost drivers, uniqueness drivers, and industry
structure influence firms’ competitiveness. (Table 1 & Figure 1 present the
examples of manufacturing and service industries.)
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<Table 1> Manufacturing Industry
(OECD Countries’)
Category
Generic
activities
Watches
(Swatch)
 Primary activities
Product innovation
* technical & design
Process innovation
* Automation line 
New marketing methods
 Support activities
 Organizational
innovation

Cost
drivers
Preserve
competitiveness
Innovation, Economies
of scale

Low cost

Textile
(OECD Countries)
 Process innovation

* Preserve
competitiveness
 Product innovation
* Invest product
equipment as a firm
infrastructure
Clothing
(Benetton)
 Product innovation
 Organizational
innovation
* Comprehensive
information network

Quick response market
need & change

* Increase performance
 Strategic
investments

* Competitors have
difficulty imitating it.
Low price

 International cost
differentials
* Joint venture
 rganizational
innovation

Cost down
Recover competitiveness
Uniqueness
driver
 Fashionable
(Pioneer unique
product)

Differentiation (Create
Value)

 Moving up high
value-added textile
items (fine fabrics,
home furnishings
etc.)

Preserve attractiveness
Attractive for young
people
 Production
innovation
* Small number of item
 preserve
uniqueness
 Integration of chain
(from production to
retailing)

Industry
Structure
Increased Demand
 Innovation, Strategic
investment

Bargaining power of
suppliers
* Uniqueness

Satisfying buyers needs
 PAST
Low - wage countries’
industry
* Imitation of production
 PRESENT
Division of labors
industry’s
attractiveness
 International cost
differentials
 asily imitating
production
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Like competition itself, competitive advantage is a constantly moving target.
For any company in any industry, the key is not to get stuck with a single
simple notion of its source of advantage. The best competitors, the most
successful ones, know how to keep moving and always stay on the cutting
edge.1
(C) How is technology influencing the generic activities, drivers of cost
and uniqueness, and industry structure ?
Technology can influence the firm's value chain in profound ways.
Some technologies will be linked directly to the product and the process of
fabricating it, others to support activities. For the latter reason, there is, in
fact, no such thing as a low technology industry. For example, information
system technology is often cited as an example for a technology to affect the
support activities in every firm.
Also the drivers of cost and uniqueness can be altered through
technological change. It depends on the circumstances, however, which ones
will be most profoundly affected, and which direction the change will have.
Technology can also affect competitiveness directly, but this will not be
treated in the discussion of the two articles below.
If a technology employed in a certain activity becomes widespread, it
becomes an important determinant of industry structure. Any firm cannot
choose its technology strategy without taking into account the effects on
industry structure. In some cases, a firm might through the innovation and
diffusion of a new technology gain a short term competitive advantage, but in
the long term alter industry structure for its own worse.
For the industries and companies mentioned in the two articles,
technology among other factors has altered the rules of the game through its
influence on primary and support activities, drivers of cost and uniqueness,
and industry structure. Although it undoubtedly has done this in many more
ways than the ones mentioned in the articles, the discussion will only center
around these. (Table 2 shows the example of the influence of technology.)
1
Time - The Next Source of competitive Advantage, Stalk, Harvard Business Review, Jul.- Aug. 1988
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<Table 2> Influence of Technology
Category
Generic
activities
Cost
drivers
Uniqueness
drivers
Watches
(Swatch)
Primary activities:
manufacturing
operations (product &
process) -> new design
and marketing.
Support activities:
need for continuos
innovations from R&D
department ->
more resources for
R&D.
Policy choice
influenced by
innovative product &
process technology ->
low cost mass product.
Location not that
important anymore
(substitution of labor
with capital)
Timing
Learning
Policy choice
influenced by
innovative product &
process technology.
New Linkages
with channels necessary
because of new product
(stemming from new
technology)
Textile
(OECD Countries)
Primary activities:
manufacturing
operations (product &
process).
Support activities:
need for continuos
innovations from R&D
department ->
more resources for
R&D.
Policy choice
strategic investment in
product and process
technology -> cost
proximity.
Location not that
important anymore.
Clothing
(OECD Countries)
Primary/support
activities:
information network
links the all activities
more together.
Support activities:
need for continuos
innovations from R&D
department ->
more resources for
R&D.
Policy choice
influenced by product
and process technology
-> cost proximity.
Department Stores
(Japan)
Primary activities:
information technology
(computer attachment to
phone, possibly
computerized catalogue
selling) affect
operations.
Location not that
important anymore.
Learning
Timing
influenced by product
and process technology
(first mover advantage).
Learning
Timing
influenced by product
and process technology
(first mover advantage).
Policy choice
concentration on high
value added products
made possible by
technology.
New Integration
Linkages
because of information
technology.
New Integration
Linkages
because of information
technology.
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Industry
structure
Entry barriers are
raised because of higher
capital investment2 for
technology and
economies of scale.
Rivalry is less because
of brand identity in the
case of Swatch (not all
watches), created
through use of tech.
Entry barriers are
raised because of higher
capital investment for
technology, economies
of scale, and proprietary
product differences.
Substitution threat
less for OECD textiles
because of proprietary
product differences
(product and process
tech.).
Rivalry rules changed:
"division of labor"
Entry barriers are
raised because of higher
capital investment for
technology economies
of scale, and proprietary
product differences.
Substitution threat
less for OECD textiles
because of proprietary
product differences
(product and process
tech.), integration of
chain (info tech.)
Entry barriers to
retailing could be
eroded, if computer
attachment (e.g. also for
food) and catalogue
sales become
widespread (no need for
stores to buy goods.
Rivalry, buyer power
would change, too
2
It is stated that developing countries are investing heavily in new process innovations (p. 20, 3. column). While this certainly
holds true for some developing countries, not all possess the resources necessary to do this. The industrialized world might regain power
also on costs alone (also for lower value -added textile items) if technology keeps evolving fast enough (and profits stay so low that
developing countries cannot invest).
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