Strategies to Sustain Competitive Advantage

Q1: Using an appropriate model, evaluate the business model of a company of your choice, describing how the company differentiates itself from its competitors and sustain competitive advantage.

1. Executive Summary

Cummins started off as diesel engine manufacturing company since 1919 and now growing as “power” leader in the world. Cummins expand network through company- owned distributor, independent distributor and dealer to serve customer globally. In 2009, Cummins reported net income of $428 million in $10.8 billion of sales [1].

Cummins have been diversifying its business to broad range of products from power generation, filtration technology, turbo technology, fuel system, emission controls and air handling [2]. Due to external pressure and growing market in Asia, Cummins recently setup Centre of Excellent in Singapore focus more on Marine and Offshore market. In this post module assignment, competitive strategy will only focus on Cummins’s marine and offshore business. In this PMA, the value curve is based on own industry experience’s assumption. However, analysis on financial will based overall Cummins business listed in stock market which named “CMI”.

1.1. Vision Statement

“Making people’s lives better by unleashing the Power of Cummins” [3]. Cummins believe in by developing new technology will lead to better living for the people.

1.2. Mission Statement

Cummins mission statement as quoted below [3]

• “Motivating people to act like owners working together”
• “Exceeding customer expectations by always being first to market the best products”
• “Partnering with our customers to make sure that they succeed”
• “Demanding that everything we do leads to a cleaner, healthier, safer environment”
• “Creating wealth for all stakeholders.”

1.3. Cummins compare with Industrial leader

Figure 1 Financial Analysis CMI Vs Industry Leader [4]

Figure 1 shows overview financial analysis of Cummins (CMI) compare within industry leader [4]. Cummins rank 35 among 379 diversified machinery industries in industrial goods sector for market capitalisation. Cummins stock values increase more than triple over the past 3 years and promise future growth with its business strategy [4].

1.4. Ocean Strategy

Ocean strategy has been introduced by W.C. Kim and R Mauborge since 2004. Starting then, this strategy is adopted and implemented successfully in various organisations globally. Recently, Malaysia’s Prime Minister Datuk Seri Najib Razak shared his experience on Ocean Strategy when dealing with increasing crime in the country [5]. He is using Blue Ocean Strategy as management tools in order to promote thinking out of the box. Key successful activities such as leveraged untapped resources when replaced police with soldier doing patrolling around country’s border and conduct training for new police force in the underutilised army facilities. This initiative save a lot of money from government and promote cross functioning role among government agency [5].

The principle of the ocean strategy is treating market as universe. There are two oceans available in the universe named Red Ocean and Blue Ocean. Red Ocean defined as known competition. In this Ocean, product is already well defined and competitors only able to compete with price [6] .Customer expectation on the product almost generic and not much technology can be developing in this area. For diesel engine in marine and offshore market, the competitors for Cummins include Caterpillar, MTU and Mitsubishi. How Cummins can break trough become market leaders?

Cummins apply Blue Ocean Strategy when dealing with its business. Blue Ocean Strategy defines as untapped market which no competition and industries that do not exist at this point of time [6]. This in return will resulting higher profit compare with conventional approach. This clearly shows in W.C. Kim and R Mauborge study’s on business launches in 108 companies. They summarize revenue and profit impact of business launches shows in Figure 2. In this study, 86% business launches within own boundaries (Red Oceans) and 14% business launches looking for new opportunities (Blue Oceans) [6].

Red Oceans approach focus on existing customer by improving their product and study shows that this resulted 62% on total revenue and 39% on total profit. In contrast, 14% of the businesses launches by creating blue oceans can bring in higher return which about 61% of the total profit [6].

Cummins spend heavily on research and development for past 5 years as shown in Figure 3. In 2010 alone, Cummins invest 414million in new technology development [2]. One of recent Blue Ocean’s initiatives is setting Marine and Offshore Centre of Excellent in Singapore. This business focus on the “Packaging” instead of selling conventional type of “bare diesel engine” like other competitor such as CAT, MTU and Mitsubishi. Figure 4 shows pictorial view on the value added components into bare diesel engine

1.5. Strategy Canvas

Figure 5 shows strategy canvas of the marine and offshore diesel engine. X-axis represents critical success factors of the market’s competition and Y-axis correspond to values perceived by marine and offshore customer.

Marine and offshore is a mature and establish market. Engine makers always compete with price, image, brand, delivery, product performance and service availability. Cummins performs averagely in critical successful factors. However, in order to compete in the competitive market, Cummins break through conventional way by creating new team to focus on product value added specifically for marine and offshore customer. Cummins applied Blue Ocean strategy.

Figure 6 shows Red Ocean strategy from others diesel engine maker and Blue Ocean strategy from Cummins.

Q2: Using either Porter’s generic strategies or the Strategy Clock, identify examples of organizations following strategies of differentiation, low cost or low price, and stuck-in-the middle or hybrid. How successful are these strategies.

2. Porter’s 5 forces & generic Strategies

“Using the five forces framework, creative strategists may be able to spot an industry with a good future before this good futureis reflected in the prices of acquisition candidates” Michael Porter [7].

Porter’s five forces:

• Threat of New Entrants: Analyse potential new comer to market is important to understand potential future competitors
• Bargaining Power of Buyers: Buyers is the party that create demand for industry, understand buyer’s requirement will help to maintain competitive advantages. For example, bargaining power of buyers is high if product is standard.
• Threat of substitute products or service: Buyers always look for alternative or cheapest way to get products or service. Substitute product can bring the overall industry price lower
• Bargaining Power of Supplier: Supplier supply raw material or service to manufacturer. Bargaining power of supplier is high when to many buyer and less supplier in the market
• Rivalry among existing competitors: Current fast moving industry, its important understand the strategy of existing competitors. Example: How competitor gain competitive advantages or product differentiation.

Porter’s 5 Forces allowed the company undertand and analyse own industry struture and futher help the management to decide on company’s strategy. According to Porter, organisation is able to gain competitive advantanges by strategies the company using one of the “Porter’s Generic Strategies” as shown in Figure 8; 1) Cost Leadership, 2) Differentiation, 3) Focus [8].

2.1. Cost Leadership Strategies

Cost leadership strategies emphasize on low cost in company strategies. Company will offer low per-unit cost product or service to customer that sensitive to price. In order to become low cost provider, company can practise integration strategies (backward, forward and horizontal). There are few factors that will affect the strategies include economies of scale, learning curve, productivity, company structure, relationship with supplier and quality control. Several example organizations that practice this are Wal-Mart (general merchandiser), Air Asia (budget Airline) and Macdonald’s (Fast Food) [9]. In this PMA, I will use Air Asia as example to study its business model and look into company successful factor.

Air Asia strategy as illustrate in Figure 9, the company mission is to continue to be the market’s carrier low cost provider.

In order to compete with other aircraft carrier and achieve company vision for “Lowest cost airline”, Air Asia implement a few strategy to reduce operation cost. Strategy implemented as per below:

2.1.1. Keep operation cost low- NO frills

In order to compete in this competitive market, Air Asia able to keep operational cost low by implementing few “NO”s in the strategy [10]:

• NO meal: No food or drinks will be provided free in the in-flight service.
• NO frequent flyer program: NO Membership or rewarding program which commonly used for others airline like Kris flyer for Singapore Airline and Skymiles for Delta airline.
• NO Seat assignment & Ticket: In order to keep administrative cost low
• NO Entertainment: NO news paper and entertainment system such as movie, games and music.
• No ticket : Ticketless replaced conventional type printed ticket
• No waiting lounge: NO lounge provide in the airport

2.1.2. Single air craft fleet

In order to streamline the operation, Air Asia phasing out its 14 Boeing B737 in 2010 and replace by only operate single air craft which is A320. Few advantages of using single aircraft as stated below

• Keep inventory cost low
• Saving cost in service and maintenance such as keeping same model of spares parts.
• No duplicated resource due to difference Air Craft experience needed
• Reduce time and training cost due to only one model. This allowed the company avoid going to through the expensive “learning curve” process and also may dissatisfied demanding customer. Michael and Nikos study on the organisation learning curves for customer dissatisfaction across airlines. They plotted estimate U-Shaped learning curve as show in Figure 10 and show evident that complaint rates followed U-shaped function of experience
• Able to increase fuel efficiency and improve productivity

2.1.3. Simplified distribution system

Air Asia design simple user friendly system for customer to book and check- in their ticket. Customers are able to check in using own mobile as shown in Figure 11. This ticketless system is able to reduce waiting time for customer queuing to check- in at the airport counter.

2.1.4. Point to point network (≤ 4 hrs)

All Air Asia flight is running by point to point network within 4 hours radius or less as its business model. This model only carry passenger from point A to point B without any connecting flight. This in order to keep operation cost simple in order to reduce costs [10].

2.1.5. Optimum Aircraft Utilization

Another way to keep operating cost low and maximizes profit, Air Asia increase productivity by optimise flight utilisation. Air Asia is the fastest in the region by achieving 25 minute turnaround time. Air Asia is able to achieve equal or more than 75% for last 5 years on the load factor. Once, Air Asia achieve close to 100% load factor for Bali – Perth route. Load factor is defined by AirAsia as “numbers of passengers as a percentage of number of seats flown” [10]. On top of that, Air Asia applies “Tier based” system for ticketing which depend on supply and demand. When demand is low, the price is low. When demand is high the ticket price will also go high. This system is efficient especially during low season allowed Air Asia maintain the reasonable high percent load factor,

2.2. Differentiate Strategies

Differentiation strategies offer service or product which unique perceived by customer. Differentiation strategies do not guarantee good payback especially current standard product offered in the industry is more than enough to meet customer expectation. There will a risk on implementing this strategy and need to study carefully on customer requirement before implementing. Product value added, extra servicing, products flexibility and better compatibility are some of the features that can create differentiate in the industry. Cost is not an issue in this strategy; hence company can demand higher price if customer strongly attached to offered differentiation features. Typical move in this strategy is product development. Organisations that apply these strategies include Apple (Lifestyle product), Raul Lauren (Apparel) and Maytag (Home appliance)

Apple is applying differentiate strategies compare with other competitors in the industry by selling lifestyle product instead of conventional electronic gadget. In first 6 months of 2011, Apple spends 1.2 billion in research and development. This is about 40% increase compare with 2010 [13]. One of the successful examples when Apple launches iPad during 2010 and Steve Jobs defined iPad as “entirely new category of mobile devices”. Apple sold more than 15 million units worldwide after launching [14].

2.2.1. Innovative and creativity product

Apple is a “trend leading” company in the market. The company famous in creating innovative products and able to capture a significant market share after launching new products. Apple spends heavily in research and development because the company believe R&D are critical for future growth and are able to create competitive advantages

2.2.2. Wide range of software and applications

Apple created another successful platform for customer to download software and application. Traditional, example like phone, other competitor just focus on few simple features which only contains game, photography function, movie and some basic feature. By introducing new approach, Apple created “The App Store”. Now “The App Store” has more than 350,000 apps available for iPhone, iPad and iPod touch globally. The apps offered wide range of application from games, entertainment, utilities, social networking, music and others. In Jan 2011, Apple announces that more than 10 billion apps have been downloaded .

2.2.3. Apple store

Unlike others competitor’s store which only focus on product’s price and feature, Apple differentiate by giving customer different shopping experience in the store. Apple design Apple’s retail store to give the patrons good impression of stylish, clean, fashion and stream-lined. The product like i Phone, iTunes and etc will placing in a place that customer can try out the features and application.

2.2.4. Provide good service and maintenance

Apple provides good service respond compare with others competitors like Samsung and Nokia. In Singapore, Apple provides one to one exchange for i Phone if there is defect and still under warranty. This is different from some of the competitors, depend on the level of repair, some will take about 2 to 3 weeks. This will create some issue for some consumer that only has one hand phone.

2.3. Focus Strategies

Focus strategies offers product or service to fulfil the requirement for targeted groups of customer in the industry [9]. Focus strategies can be categorized into 2; Focus cost leadership which focus on low cost solution in narrow market and Focus differentiation provide customised product or service to niche market [16]. Market penetration and market development can be use when applying focus strategies [9]. Focus strategies beneficial when competitors are not able to support on unique requirement of certain group of customer. Organisation which pursuing this strategies include IKEA (Furniture), Ferrari (Automotive) and Federal Express (logistic)

2.3.1. Focus Cost Leadership Strategy

IKEA is the Swedish global furniture company that applied focus cost leadership strategy in their business strategy. IKEA offering wide range of home furnish product with low price so that many people can afford to purchase. In order to achieve the strategy, IKEA apply below concept:

2.3.1.1. Design and develop base on price

In order to keep competitive price, IKEA design and develop product base on price. The price is “fix” even before the product is launch. The designer will have to work directly with supplier to ensure meeting low cost by optimised productivity, material efficiency and process improvement [17].

2.3.1.2. Reduce logistic, handling and operating cost

In order to reduce logistic, handling and operating cost, IKEA designer always consider flat-pack transportation and self-assembly during design and development phase. Flat-pack furniture is often delivered in multiple sub assemblies together with simple instruction manual and required customer to perform self assembly. This modular concept is able to save transportation, handling and operating cost. For example, assembled furniture tends to be more bulky and is more expensive to store in warehouse and transportation. Besides, that, IKEA is able to save operating cost by reduce one “Assembly” process in production .

2.3.1.3. Self-Service in IKEA Store

In order t keep the operating cost low and reduce the needs of sales assistance, IKEA design the flow of store layout and display the product effectively by using “actual room” concept. For example, sofa is placed in “living room” section and bed is placed in “Bed Room” section. All the furniture is clearly labelled and useful information like dimension is easily located in the display product [17].

2.3.2. Focus Differentiate strategy

Ferrari is applying focus differentiate strategy by develop high performance car within automotive industry. Ferrari focus on high end consumer compare with other automotive competitors like Honda, Toyota or Ford which target more broad customer. Below is the strategy for Ferrari:

2.3.2.1. New Way of Purchase Car

Ferrari compete created innovative approach by introduce new way of purchase car “Premium Ownership Program” to serve its target customer. This program include insurance, maintenance, warranty , Ferrari tailored made driving course and pit stop service which provide the customer “mind free” after owning and driving Ferrari car [18].

2.3.2.2. Innovative Technology

Ferrari developed own software to meet customer service expectation such as rapid response times, up to date database and personalise customer service. One of the latest features such as, the customer can view the look of the vehicle and change the preference in “Service configurator system” even in pre-order stage [19].

2.3.2.3. Best Dealer

Ferrari believes choosing the right strategic partner or dealer is the right way to serve the customer. In order to motivate the dealer, Ferrari created prestigious award – Podio Awards for supplier or business partner recognition.

2.4. Stuck in the middle or Hybrid Strategies

Porter does not recommend “Stuck in the middle” or Hybrid strategies if the company want to achieve above average performance in the industry. Company must choose either one of the strategy in the Porter’s Generic strategy. He claimed that it is difficult for a company to strategies the business to produce low cost product but still remain unique perceived by customer [8].

However, Rodney Goon argues on Porter’s theory and commented some of the company such as Singapore Airline (SIA) are able to success using “Hybrid strategy”. Figure 12 shows business strategy applied by SIA which plotted by Rodney [21]. Singapore Airline have been awarded 2nd place in World Top Airline in 2010 by Skytrax in Hamburg [22]. Figure 13 shows main operating cost for SIA. Top 3 costs consist of Fuel, Aircraft and People [23]. In order to achieve competitive advantages, SIA apply below approach:

2.4.1. Become Market Leader – Differentiation Strategy

SIA founded in 1972 started as small airline company and now evolve become the world trend leading company for Airline industry. SIA become market leader by setting trend started since 1970s when introducing headsets, drink and choice of meals in Economy Class. Figure 14 shows overview on SIA trend setting for more than 39 years in the industry. In 1991, SIA introduce satellite- based telephone to enable passenger to call to ground during flying. In 1998, in order to improve the quality and standard of in-flight meal, SIA formed International Culinary Panel which involves renowned chef from all over the world. By doing this, the passengers are able to enjoy world class cuisine even during travelling.

In order to improve customer service satisfaction, SIA introduce in-flight entertainment system named Krisworld which include Audio and Video system. Passenger can watch movie, listen to music and playing game during flying. In 2004, SIA reach another milestone by flying world longest non-stop flight from Singapore to New York (Newark). In 2007, SIA flying new Airbus design A380 which is world largest passenger Aircraft from Singapore to Sydney .

2.4.2. Brand “Singapore Girl” – Differentiation Strategy

SIA successfully improve its service compare with others competitors by creating unique iconic image for SIA’s air stewardess as “Singapore Girl” and promote “You’re a great way to fly” started in 1972. This iconic brand is famous of caring, elegant and good looking girl whom will provide good service for the passenger during on board the plane. “Singapore Girl” has continuously won many awards in Airline and Travel Industry over the years .

2.4.3. Low Cost -Cost Leadership Strategy

“Everything behind The Scenes Is subject To Rigorous Control” quoted by Rodney . SIA spend heavily on the area that customer can be seen as discussed above in order to remain premium in the industry but cutting cost for area that behind the scene in order to remain cost compatible. Total cost for Singapore airline is about 14.2% is the lowest in the market compare with other competitors like American Airline which labor cost is approximately 31% of total operating expense . Other than that, average price per aircraft purchase is less than other airline provider. This is due to SIA is the market leader in trendsetting and always working with aircraft builder like Airbus when there is new product launching. First purchase in world for A380 allowed SIA command a better purchase price.

Q3: What are the major advantages and disadvantages of an integrative strategy?

3. Integrative strategy

Organisation is able to gain competitive advantages by using integrative strategy. Integrative strategy can be categorized as vertical, backward, forward and horizontal integration. There are advantages and disadvantages when applying each concept and detail discuss as below:

3.1. Vertical Integration

Vertical integration is business strategies which expand its business either through gaining control over company that distribute or selling its product (Forward integration) or taking control over company that provide the raw material for finish goods (Backward Integration). Figure 15 illustrate 4 typical stages for value added chain in PC industry (27).

Example for Dell or Hewlett Packard, in order to produce a personal computer, assembly components such as chips, microprocessor and disk drive etc is needed from others manufacturing company (Intel/ Micron). Similarly, component parts manufacturing needs raw material like chemical, metal and ceramic to manufacture the component. Kyocera is one of the suppliers for those materials. Backward integration strategy in this case is trying to taking control over components parts manufacturing and raw material supplier. Whereas for forward integration strategy, PC maker try to gains control over the company that selling or distribute the final product such as OfficeMax and ComUSA [27] This company provide platform to reach end user.

3.2. Forward Integration

Forward integration strategy involves increase ownership or control over retailers or distributor and illustrates in Figure 16. One of the effective mean of forward integration is through Franchising [9]. Approximate $2 trillion revenue created annually through franchising business every year globally. This equal to 4th largest Gross National Product in the world [28]. Advantages and disadvantages as discuss below:

Advantages:

– Getting understanding customer better

One of the companies using forward integration strategy successfully is Dell. Dell founded in 1984 by Michael Dell with one direction “selling final products to customer directly” [29]. By doing this, company able to reach end user and getting feedback instantly through company’s distributor and retailer without filtering.

– Low development and training cost

By introduce franchising; the company are able to reduce development and training cost. Franchisor will provide training, equipment and product to franchisee. This in order to skip the “trial & error” phase for franchisee and able to help franchisee generate profit with less risk. Example companies like Subway, McDonalds and 7-eleven.

– Provide better services

Company can provide better services through its own controlled network and services.

– Provide lower cost of sales

In order to compete in this competitive world, price of the end product is always one of the critical successful factors for the company. Dell is using this strategy to reduce price bypassing third party involvement such as retailers etc. No mark up from other company in the finished goods

Disadvantages:

– Increase bureaucratic cost

Expanding business forward which also means that increase bureaucratic cost for whole value- added chain activities. Due to uncertain demand in current market, it will post some risk to the company

– Increase Inventory

Getting control over distributors or retailer, indirectly manufacturer may have to manage whole product cycle inventory include end products. Company may incurred higher inventory cost if wrongly manage

3.3. Backward Integration

Manufacturer need supplier provide raw material in order to produce its end products or service. Backward integration allowed company gain control toward supplier as shown in Figure 16. Advantages and disadvantages as discuss below:

Advantages:

– Getting better quality control

Company are able to apply standard quality plan throughout the value chain. This is especially important when dealing with sophisticated components such as crankshaft, piston and turbocharger for engine. By improving the quality of this critical component will increase competitive advantages among the rivals

– Reduce threat from powerful vendors

By increasing control over the vendors, it will reduce threat from powerful vendors.

– Optimized supply chain

“Keeping track of so many suppliers is onerous” says Mark Shimelonis of Xerox [9]. Nowadays, a number of companies following Japanese firm’s lead in managing the supply chain to ensure uninterrupted supplies and low prices.

– Lower structure cost

Outsourcing is one of the examples of the backward strategy. Outsourcing strategy will able to reduce cost when company engaging third party specialist that performing charging lower than company own operate value-chain activity. Cummins outsource IT support to India Company and panel design to CMR or Auto Maskin to keep the company structure cost lower. Nike outsourcing its manufacturing plant in China due to lower labor cost [27].

Disadvantages:

– Technology change

Technology change is inevitable in current competitive market. But backward vertical integration may lock a company “way of doing business” and prevent organisation changes due to technology change. One of the examples is when radio manufacturer acquired a manufacturer of vacuum tube in 1950s to reduce production cost. When, transistors replace vacuum tube in 1960s, the competitor rapidly change to latest technology. However for this radio manufacturer company, the management refuse to change and as the result, lost in the competitive advantages and cause business failure. Thus, backward integration can cause serious disadvantages when trying to match rapid technology change [27]

– Risk of information loss

Increase control over the supplier which mean also potentially important information flow to the supplier. For example, Cummins need to provide important parameter and interfacing information in the engine control module to backward supplier like CMR and Auto Maskin in order to joints develop the engine protection panel. Technical drawing will be shared among backward supplier and manufacturer.

– Potential high cost

Less supplier competition will lead to less efficiencies when produce a product. The backward support company will work in the “comfort zone” and less initiative. The manufacturer is “forced” to get the input from “internal supplier” even there will be some others external supplier can produce lower cost .As the result will cause potentially higher production cost .

3.4. Horizontal Integration

Horizontal integration refers to company that use “single industry strategy” and seeking control over competitor in same market. A number of the company apply this concept as growth strategy. Merger and acquisition allowed the company to expand its core business and technical capabi