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. |
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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:
- Competition are stuck in the middle.
- The firm has pioneered an important innovation.
- Cost leadership is heavily affected by market share.