Optimal strategies for successful business operations

A company can achieve a competitive edge by various means, e.g., by manufacturing products more cheaply than competitors, by offering unique products or services, or by concentrating on small market niches. Logistics supports each of these business strategies in its own way. Such logistics concepts as “mass customization” or “postponement” even allow cost leadership and differentiation strategies to be achieved simultaneously

Logistics in various business strategies

Business strategies determine the products with which and the markets in which a company intends to achieve competitive advantages. Porter has identified three promising types of generic competitive strategies that enable companies to outperform their sectoral competitors [1]:

  • Comprehensive cost leadership,
  • Sector-wide differentiation and
  • Concentration on focal areas such as market niches.

 

The third strategy can also be interpreted as an application of the first two strategies with a focus on one particular market segment.

 

Comprehensive cost leadership

The strategy of comprehensive cost leadership in a sector requires the rigorous exploitation of the experience curve effect Experience curve effect to reduce unit costs. This requires an aggressive build-up of capacities and strict cost control [2].
The job of logistics systems is to handle large volumes of goods in geographically spread-out markets at the lowest possible cost. A company that pursues a strategy of cost leadership must rely on logistics process capacities that allow for simple and far-sighted logistics systems. This includes technological capacities for implementing flows of material, the capacity to simplify procedures and the capacity to anticipate necessary processes [3].
In this strategy, profits are earned by selling large quantities of items at low prices. The lower unit costs mean that these margins can still be achieved when competitors are no longer profitable due to lower experience curve effects Experience curve effect [4].

 

Sector-wide differentiation

The differentiation strategy strives to lend a special status to a product from the customer’s perspective, enabling it to be perceived as unique throughout the sector. The differentiation can result from a special brand image, the product’s quality or special product-related services. This also includes a high-level delivery service Delivery service .
Customer-oriented capacities such as rigorous market segmentation, accessibility and a high level of flexibility have a positive impact on a company’s success. Differentiation shields the company from its competitors and creates a customer relationship with the product. Because customers are prepared to pay higher prices for the image, the quality and/or the additional services, profits generated by this strategy result from higher margins, not high sales volumes [4].

 

Concentration on focal areas

The strategy of concentrating on focal areas such as market niches requires the company’s focus to be placed on a particular customer group, a regional market or a small range of products within a sector. The competitive edge results from the adjustment to the specific requirements of a market segment as well as from cost advantages in this market segment. The differentiation takes place largely on the individual customer level as the company constantly offers new services and responds as flexibly as possible to specific customer needs.
In contrast to the cost leadership strategy, the cost advantages are not based on the experience curve effect Experience curve effect - which is related to large sales volumes. Rather, certain costs are never incurred at all - e.g., warehousing costs for delivery warehouses when a regional market is supplied directly from the plant. The concentration on market niches can result in simpler logistics systems as well. But it can also require special adjustments in the logistics systems to meet the service requirements of a specific market segment [4].

 

Cost leadership plus differentiation

In logistics, it is also possible to pursue hybrid strategies - that is, strategies that aim for cost leadership and differentiation at the same time. One case in point is the mass-customization concept Mass customization . Here, large unit numbers of standardized product components or modules are initially produced. End production, which churns out a multitude of product versions, follows only at the end of the value-creation process.
Here is an example: Large numbers of white T-shirts are pre-produced in China and imported to Europe. But the T-shirts are not dyed until they reach their final destination. This postponement Postponement concept, in which product customization is put off, generates economies of scale and synergy effects in production of standardized modules. This can result in both a high level of added value for the customer thanks to variety or differentiation and in cost leadership [4].

Recommended reading

Logistikmanagement | Pfohl 2004

Strategic Logistics Management | Stock / Lambert 2001

References

[1] Competitive Strategy | Porter 2002
[2] Strategische Unternehmensführung | Hinterhuber 2004
[3] The Effects of Logistics Consolidation schemes. A Portfolio Effect Analysis | Lynch / Keller / Ozmet 2000. In: Journal of Business Logistics 21(2000)2
[4] Logistikmanagement | Pfohl 2004

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