Generic Strategy & Value Drivers

Generic Strategy & Value Drivers

The value drivers of shareholder value consist of six drivers. They are:

  1. Sales Growth
  2. Pretax profit margin
  3. Tax rate
  4. Incremental investment in working capirtal
  5. Incremental investment in fixed assets
  6. The firm’s cost of capital

The three related to operations and their implementation in the business is as follows:

Value Driver  Cost Leadership Strategy  Differentiation Strategy 
Sales Growth Competitive pricing.Expand market share. Premium pricing.Segment markets.
Operating profit margin Achieve cost of scale for all activities.Improve rate of learning. JIT supply chain.Cut non-value adding costs. Activities chosen to create the most cost-effective differentiation.Eliminates cost that do not contribute to customer needs.
Working capital investment Minimise cash balances.Minimise A/R.Minimise Inventory.
Minimise cash balances.Link working capital policies to differentiation.

Making Choices

Having chosen a generic strategy it is vital to stick to it:

  • Failing to choose between generic strategies – getting stuck in the middle.
  • Cost reduction is not the same as cost advantage. Following a differentiation strategy does not mean maintaining non-value-added costs.

Being both the cost leader and following a differentiation is possible if:

  1. Competition are stuck in the middle.
  2. The firm has pioneered an important innovation.
  3. Cost leadership is heavily affected by market share.