Wednesday, April 17, 2013

The right mix between Operational Efficiency and Differentiation in technology?


The article, Types of Strategy: Which Fits Your Business? (Excerpted from: Strategy: Create and Implement the Best Strategy for Your Business (HBS Press), 2006), talks about how the Low-Cost strategy has worked in the supply-chain business for companies such as Wal-Mart and Target. The key distinguisher for these businesses is operational efficiency, and a marginal improvement in costs results in increased profits. Is this relevant to technology?  

The strategy for companies, whose businesses revolve around efficient supply chains, can be broadly seen to have two sides - the supply side and the demand side. Any business would like to be in a market where supply is lower than demand, so that they can increase prices at which they sell their products.

Improved efficiencies on the supply side are beneficial even to technology companies. In the IT Services business for example - in customer support, if a customer support representative handles more calls over time, it is an improvement in operational efficiency. In other technology businesses such as consumer electronics, if the operational efficiencies in manufacturing improve, the cost of production reduces.

On the demand side, as time advances, we see that although consumers are price sensitive, businesses can clearly charge more by differentiating themselves from competition. The classic example here is the Apple iPhone or the iPod. When Apple launched the iPod, the market already had personal music players such as CD players and the Walkman selling at approximately $200. The Apple iPod was selling at approximately $499. Although the iPod was initially not very successful (2001 to 2004), improvements were made especially the compatibility with operating systems other than Mac. This along with improved internet connectivity resulted in skyrocketing sales and catapulted Apple to the position it is in today. The iPod, despite being far more expensive than other music players in the market won the war of music players through the ease of use, its curves and the technology it had. This drove demand and hence the fortunes of the company.   

Is this changing with new entrants? Low cost leadership strategy primarily comes into play when:
·      The product is a standard,
·      The consumers use the product in the same way and have similar needs from the product,
·      The consumers incur low switching costs

We do see the smart phone and tablet market going through this phase (to a certain extent). With new entrants such as Samsung, Amazon and Google, Apple is pressed to differentiate itself from competition to stay ahead. It is becoming even more necessary to focus on differentiation. The introduction of Android and other open source software is opening up choices for customers and making this market even more competitive.

The emergence of new markets in Asia, Africa and South America where the willingness to pay is lower than in the United States and Europe is a new challenge. The creation of “Blue Oceans” is a necessity to remain ahead of competition. Arriving at a strategy having a perfect mix of low cost leadership and differentiation is going to determine the next big thing.

Wal-Mart took over three decades to become significant and attain operational efficiencies at a scale never seen before. The turn-around time in technology is a fraction of that. Products become obsolete in 12 -18 months. Should technology companies just focus on differentiation, as the next product has to be launched before the previous one becomes obsolete? Or should the investment be made to attain operational efficiencies to cash in on “late adopters”?




References:

Types of Strategy: Which Fits Your Business? (Excerpted from: Strategy: Create and Implement the Best Strategy for Your Business (HBS Press), 2006)
Blue Ocean Strategy (Kim and Mauborgne, Harvard Business Review, Oct ‘04)




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