Generic Strategy & Value Drivers
The value drivers of shareholder value consist of six drivers. They are:
- Sales Growth
- Pretax profit margin
- Tax rate
- Incremental investment in working capirtal
- Incremental investment in fixed assets
- 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.|
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:
- Competition are stuck in the middle.
- The firm has pioneered an important innovation.
- Cost leadership is heavily affected by market share.