Chapter 9 Purchasing and Business Strategy
Purchasing and Competitive Strategy
The long-term strategy of many companies nowadays focuses on ‘selective growth’, i.e. a
combination of enhancing the core activity and new business development and innovation. One
consequence of this strategy is that companies consistently outsource those activities that are not
considered to belong to their ‘core business’.
In general, the following reasons may underlie this trend:
- Increased outsourcing and subcontracting, as a result of make-or-buy studies.
- Buying of finished products instead of components.
- Turnkey delivery.
- Technological development.
Cost Leadership and Differentiation: Consequences for
Manufacturing and Purchasing Strategy
Every company’s goal is to develop a distinctive, sustainable competitive advantage. Only then will
the company be able to guarantee its long-term survival. According to Porter, there are three basic
strategies that can lead to a distinguishing market position:
1. Cost leadership: the main focus of this strategy is to continually work at reducing the cost
price of the end product. If a company succeeds in marketing products at a lower cost price
than its competitors, it will achieve a satisfactory return.
2. Differentiation: this strategy aims at marketing products which are perceived by the
customer as being unique. Product individuality can be in the design (Swatch watches), the
logo (Lacoste), the technology (Apple), service (American Express) and many other
dimensions.
3. Focus strategy: this strategy aims to serve a specific, clearly-defined group of customers in
an optimal way. A focus strategy means that the company studies the activities of the
customer group, becomes familiar with their operational requirements and provides specific
solutions.
The consequence of not making a choice between these strategic alternatives is that the company
will be unable to build up a sustainable competitive advantage in the end-user markets.
Production companies that strive for cost leadership are usually large, integrated companies that
take advantage of effects of scale through vertical integration.
The company that applies a differentiation strategy operates in a completely different way and there
is much less attention to costs.
Cost leadership and differentiation require totally different types of supplier networks and therefore
different purchasing and supplier strategies.
In the case of cost leadership, an important criterion for supplier selection is not so much delivery
time, but delivery reliability.
In the case of differentiation the emphasis is much more on collaboration and cooperation with the
supplier.
1
, Lean Manufacturing
Fundamental to lean management is that it transfers the maximum number of tasks and
responsibilities to those workers actually adding value to the product, and it has in place a system
for detecting defects that quickly traces every problem, once discovered, to its ultimate cause.
Important features of lean management:
- The teamwork among line workers, who are trained in a variety of skills to conduct different
jobs within their working group.
- Lean management uses simple, but comprehensive information display systems that make it
possible for everyone in the plant to respond quickly to problems and understand the plant’s
overall situation.
- There is a total commitment to quality improvement on the shop floor.
There are significant differences when comparing Japanese manufacturing practices to Western
manufacturing companies. The most important differences are apparent in the way that Japanese
manufacturers manage their supply chain:
- The average supply base is much smaller than for Western manufacturers.
- Most Japanese OEMs have a ‘layered’ supplier structure, which is often three or more tiers
deep.
- Suppliers are usually involved in new product development at a very early stage.
- Suppliers are confronted with well-defined targets.
Integrating Purchasing into Business Strategy
- Strategic triangle: explains how a company positions itself against its three main
stakeholders, i.e. customers, competitors, and suppliers.
The following stakeholders constitute what we would call the strategic triangle:
1. Primary customer groups or target groups
2. Major competitors
3. Major suppliers
The conclusion is that the ultimate competitive position of a company is thus a result of:
a. The company’s positioning relative to its major customers.
b. Its sustainable, distinctive advantage compared with direct and indirect competitors.
c. Its positioning versus its major suppliers and its supply chain strategies.
2
Purchasing and Competitive Strategy
The long-term strategy of many companies nowadays focuses on ‘selective growth’, i.e. a
combination of enhancing the core activity and new business development and innovation. One
consequence of this strategy is that companies consistently outsource those activities that are not
considered to belong to their ‘core business’.
In general, the following reasons may underlie this trend:
- Increased outsourcing and subcontracting, as a result of make-or-buy studies.
- Buying of finished products instead of components.
- Turnkey delivery.
- Technological development.
Cost Leadership and Differentiation: Consequences for
Manufacturing and Purchasing Strategy
Every company’s goal is to develop a distinctive, sustainable competitive advantage. Only then will
the company be able to guarantee its long-term survival. According to Porter, there are three basic
strategies that can lead to a distinguishing market position:
1. Cost leadership: the main focus of this strategy is to continually work at reducing the cost
price of the end product. If a company succeeds in marketing products at a lower cost price
than its competitors, it will achieve a satisfactory return.
2. Differentiation: this strategy aims at marketing products which are perceived by the
customer as being unique. Product individuality can be in the design (Swatch watches), the
logo (Lacoste), the technology (Apple), service (American Express) and many other
dimensions.
3. Focus strategy: this strategy aims to serve a specific, clearly-defined group of customers in
an optimal way. A focus strategy means that the company studies the activities of the
customer group, becomes familiar with their operational requirements and provides specific
solutions.
The consequence of not making a choice between these strategic alternatives is that the company
will be unable to build up a sustainable competitive advantage in the end-user markets.
Production companies that strive for cost leadership are usually large, integrated companies that
take advantage of effects of scale through vertical integration.
The company that applies a differentiation strategy operates in a completely different way and there
is much less attention to costs.
Cost leadership and differentiation require totally different types of supplier networks and therefore
different purchasing and supplier strategies.
In the case of cost leadership, an important criterion for supplier selection is not so much delivery
time, but delivery reliability.
In the case of differentiation the emphasis is much more on collaboration and cooperation with the
supplier.
1
, Lean Manufacturing
Fundamental to lean management is that it transfers the maximum number of tasks and
responsibilities to those workers actually adding value to the product, and it has in place a system
for detecting defects that quickly traces every problem, once discovered, to its ultimate cause.
Important features of lean management:
- The teamwork among line workers, who are trained in a variety of skills to conduct different
jobs within their working group.
- Lean management uses simple, but comprehensive information display systems that make it
possible for everyone in the plant to respond quickly to problems and understand the plant’s
overall situation.
- There is a total commitment to quality improvement on the shop floor.
There are significant differences when comparing Japanese manufacturing practices to Western
manufacturing companies. The most important differences are apparent in the way that Japanese
manufacturers manage their supply chain:
- The average supply base is much smaller than for Western manufacturers.
- Most Japanese OEMs have a ‘layered’ supplier structure, which is often three or more tiers
deep.
- Suppliers are usually involved in new product development at a very early stage.
- Suppliers are confronted with well-defined targets.
Integrating Purchasing into Business Strategy
- Strategic triangle: explains how a company positions itself against its three main
stakeholders, i.e. customers, competitors, and suppliers.
The following stakeholders constitute what we would call the strategic triangle:
1. Primary customer groups or target groups
2. Major competitors
3. Major suppliers
The conclusion is that the ultimate competitive position of a company is thus a result of:
a. The company’s positioning relative to its major customers.
b. Its sustainable, distinctive advantage compared with direct and indirect competitors.
c. Its positioning versus its major suppliers and its supply chain strategies.
2
