Index
1. Introduction
In the business world as in politics, sports and wars there have always been strategies and strategists. All entrepreneurs still not knowing what a strategy is and although they have not studied anything they apply a strategy, be it to imitate what their direct competitors do or to look for new alternatives and possibilities for innovation, be it in their products or processes, or both, in the forms of marketing and distribution, in pricing policies or in the way of advertising or imposing a brand.
In the west, during the last decade of the last century and the first decade of the present, kaizen as a philosophy and system of continuous improvement aimed at the constant and systematic improvement of quality, costs and performance was established with great force, although not generally. services in companies. For many entrepreneurs and managers, kaizen was or is a fad or a marginal action or policy in the central task of management. Many times for the discipline that the implementation and application of kaizen requires and other times for not coming to understand what is really within this spirit and the need for continuous improvement, therefore they did not get to deepen its application and permanence in the weather.
The last decades have seen a central position in the competitive strategy of companies, first in financial activities and then in marketing. In this way, the proposal of new innovations and the generation of value for the client came to occupy a supreme place, totally leaving aside the fight against inefficiencies and extremely high levels of waste that invade the different sectors and processes of the company, both in its productive aspects, such as commercial, financial and services. These types of companies focus on obtaining the highest levels of benefits and cash flow, leaving aside the strengthening of their capacities over time and thus being able to face the competitors whatever they may be.
Back in the eighties, the American guru of business consulting, Michael Porter, published his works Competitive Strategy and then Competitive Advantage. In these works, the aforementioned author analyzes what are the factors and circumstances that make a company at a given time more or less competitive, and therefore what strategies should be applied to acquire and retain the ability to be competitive and obtain optimum levels. of profitability in the market. Among the fundamental strategies it recognizes the existence of three, absolute cost leadership, differentiation and specialization. Making its realization feasible requires action plans to improve and enhance the company's primary and secondary activities, those that generate value for the client,those for which customers choose it and are willing to sacrifice resources in their acquisition. Thus, the central issue becomes the application of continuous improvement within a philosophy of lean management, with kaizen being the most suitable system to generate the desired results.
Many companies can continue to focus on branding, advertising and distribution as central axes of their strategies, leaving production processes under a series of measures that are often disconnected and ineffective, where all activity is productive even though its existence or form of realization is a waste. But competing companies are on the horizon in different parts of the world, focused on eliminating the irrational and inefficient use of resources. These companies raise the bar for competitiveness, removing waste generating companies from competition in international markets, and at the local level they tend to reduce or make their survival impossible.
2. The basic competitive forces
The first thing that business managers must respond to is what competitive forces are they exposed to, and how do they operate in their ability to compete and be profitable?
A company has a competitive advantage when its profit index is higher than its industry average. The profit rate is normally defined as a certain index, for example, return on sales or return on assets.
Companies are exposed to five fundamental forces, they are:
- The ability of new competing companies to enter The bargaining power of the buyers The bargaining power of the suppliers The threat of substitute products or services The level of rivalry of the current competitors in the sector.
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In the following video, Professor Antonio Verdú explains the model of Porter's five competitive forces and its interrelation with the company's strategy (Miguel Hernández University of Elche, 11 minutes).
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The conformation and characteristics of these forces change over time as a result of changes in technologies, in the size and nature of markets, in changes in legislation and in competing political, economic and social ideas. Currently these forces can be described on the following foundations:
2.1. The income capacity of new competing companies
As the incorporation or entry of new competitors is difficult or impossible, the company is stronger. But the globalization of the markets, with the tendency to compete in large markets or international markets, favored by the low cost of transport and the speed and quality of communications, makes it increasingly difficult for a company to be safe from entry. of new companies.
The more difficult it is for new companies to enter, the less competition there is and the greater the probability of obtaining long-term benefits.
The existence of seven barriers that hinder the entry of new competitors in a given market can be considered:
2.1.1. Economy of scale
In some industrial sectors, large companies have an advantage since the unit cost of producing a product or running an operation decreases as the volume of production increases. Therefore, a new company entering the sector must either spend large sums of money to be able to produce on a large scale, or it must accept to suffer a cost disadvantage due to its smaller size.
2.1.2. Product differentiation
Established companies have brands and have earned customer loyalty over time. A company that enters for the first time in the cola sector will have to spend large sums of money to be able to compete against brands like Coca Cola and Pepsi and in this case, even investing heavily, it will not be possible to displace them in their very strong position. in the market. The positioning of a brand is the place that said brand occupies in the minds of consumers, to the extent that the company occupies a privileged place in their minds, the possibility of new companies entering and making it some kind of strength or threaten their market share is reduced.
2.1.3. Capital needs
The greater the resources necessary to start operating a business, the greater the barrier to entering a sector. In many cases this is given by the production in question, which requires enormous equipment, such as the production of cement, for which investments must be made in large crushing machines and ovens of large sizes. Another type of example is linked to pharmaceutical companies given their high costs and risks in terms of research and development.
2.1.4. The costs linked to the changes
A barrier to enter a certain sector can be generated if customers had to face the high costs of changing providers.
2.1.5. Access to distribution channels
Having them is always critical, and much more for certain types of activities such as cinema chains, car dealerships, large drugstores, pharmacy chains, among others.
2.1.6. Disadvantages of costs regardless of company size
Established companies may have cost advantages associated with a number of reasons, including technology, product know-how, favorable access to raw materials, favorable location, government aid, expertise. of its workforce among others.
2.1.7. Government policy
Governments can limit or prevent the entry of new companies in certain sectors, requiring licenses for them, or limiting access to raw materials, or through other types of regulations.
2.2. The bargaining power of buyers
It is not the same for a flour factory to negotiate the supply of 50-kilo bags to a large number of bakeries and pasta factories, as it is to negotiate most of its sales with a small number of large hypermarkets. The greater the number of buyers and the specific weight of them in total sales, the less, the greater the ability of the company to negotiate and the less the buyers. An auto parts supplier that manufactures parts for two automotive companies has negotiations that lead to long-term contracting, since the parts to be manufactured, the quantity and manner of supplying them, the requirements regarding quality and objective costs, lead to very close relationships. with buyers, therefore, the negotiating capacity of the autopartist is reduced.
2.3. The bargaining power of suppliers
From which providers? Providers of both inputs, as well as labor, machinery and real estate, financial resources and various services. The main supplier on which the analyzes are concentrated are always those of inputs and components necessary for production.
But no less important is the existence or not of strong unions, the company unions as they exist in Japan are not the same as the unions at the country level as they exist in Western countries. When the union is by company, it is negotiated taking into account the reality of the company and the fundamental objectives are shared by managers, owners and workers.
Equally important is access to credit resources, many financial institutions require customers to access loans of large sums and special conditions that the balance sheets of the company are signed by some of the External Audits of a list that the Banks put into consideration the client's.
Both in union and financial matters, the company's negotiation capacity will allow it more or less freedom and power when competing in the markets. Does the company have the possibility of receiving financial support in order to provide better payment terms to its customers? Provider groups have power if the following conditions exist:
- They are dominated by a few companies and are more concentrated than the industry they serve. They do not have to compete with other substitute products sold to the industry. The supplier is not dependent on the buyer because the buyer represents a significant fraction of their sales. The supplier sells are important to the buyer's company. The supplier's products are somewhat unique, or it would be very expensive or difficult for the buyer to obtain a substitute product. Some suppliers may become the buyer's competition using the products. / Resources that are currently selling to the buyer to produce for themselves the item that the buyer is currently producing.
Suppliers and companies often do well to help each other with reasonable prices, better quality, new service development, just-in-time deliveries, and low inventory costs, thus enhancing long-term profitability for all stakeholders.
2.4. The threat of substitute products or services
These can come from the same industrial sector or from new sectors.
An example of this is the famous Encyclopedia Britannica. Who does not remember these voluminous and lofty specimens, who does not remember the search that is towards sellers to offer the same. What happened? Encarta (digital encyclopedia on CD) came out and at a much lower cost, without the need for sellers, with a very low distribution cost, and which adapts to the demands of a buyer who requires less physical space, more ease of use and search, according to the modern technology they are looking for for their children, it completely displaced the once famous and impregnable Encyclopedia Britannica. Encarta now suffers from pressure or has already been displaced by Encyclopedia via Internet, and the latest, the use of Google and YouTube as a means of information.
Right now we have before us the replacement of liquid insulin by capsule insulin. Costs will be drastically reduced, the ability of current providers to react to the new treatment is limited, and the effects of the new drug pose revolutionary effects in the treatment of diabetes. Will what happened to the Encyclopedia Britannica happen with the few powerful insulin labs?
2.5. The level of existing rivalry of the current competitors in the sector
Competition is much more intense in an industry in which some of the following conditions prevail:
- There are several competing companies, or competing companies are relatively equal in size and resources. The industrial sector is growing very slowly. Companies in the sector have high fixed costs. Storage costs are high. Companies have margins of time within which they must sell the product.The product or service is considered as a consumer good over which the buyer has several options, and the cost that the buyer must face for changing brands or suppliers is small. In these cases, the buyer seeks price and service and the competition is very strong. The production capacity given the technological characteristics of its production requires significant increases. The competitors have different strategies, origins and business culture.The exit barriers are high.
The rivalry between competing companies is usually the most powerful of the five forces. The strategies that a company follows will only be successful insofar as it offers a competitive advantage compared to the strategies that rival companies follow.
Strategically, each company should try to achieve greater competitive capacity and reduce the ability of competitors, customers and suppliers to reduce their profitability levels. The objective is one and this is paramount, to achieve the maximization of the updated future income stream.
The three main competitive strategies are:
- Cost leadership, differentiation and specialization.
Through these it is possible for companies to face and improve responsiveness to customers, suppliers, current competitors, the incorporation of new competitors and substitute goods and services.
3. Competitive strategies
The competitive strategy consists of taking offensive or defensive measures to find a defensible position in an industry, in order to successfully face the five competitive forces and thus achieve a higher return on investments. Although there are numerous ways to achieve this end, there are only three ways in which you can face surpassing other companies within a deregulated framework and actively open to competition, being them: cost leadership, differentiation and specialization.
3.1. Cost leadership
The level of costs is a weapon with which the company can defend itself against its competitors since its low costs allow it to obtain benefits once its competitors have squandered theirs in rivalry for the market.
A low cost position defends the company from the strongest buyers because buyers can only exert their power to bring prices down to the next most efficient competitor level.
The low cost level is also a defense to suppliers by providing more flexibility to deal with increases in the cost of inputs.
Generally the factors that lead to a low cost position also lead to the creation of barriers to entry in terms of economy of scale or cost advantages.
Finally, a competitive position in costs normally positions the company favorably compared to substitute products from competitors in the sector.
Therefore, a competitive position in costs protects the company against the five competitive forces because the price war will only continue to erode margins until those of the next most efficient competitor are eliminated, and because the least efficient competitors will be the first to face competitive pressures.
It was considered that this strategy could only be applied by companies with a high market share in relation to their competitors, or they should have some other type of advantage, such as favorable access to raw materials. What was not taken into account is the ability of companies to improve their processes to the point of eliminating the highest levels of waste. If we take into account that in a traditional company the level of waste can reach 30% or 40% of sales value, we clearly understand the importance of fighting against waste.
There are four sources of cost efficiency, being:
- the economy of scale, the cost of provisioning, the experience and the design of products and processes.
It is in the experience and the design of the processes and products where kaizen as a system destined to the continuous reduction of costs allowed the large Japanese companies with a smaller market than the North American ones to snatch these important market shares. Companies such as Toyota were forced to produce various models of wheels with lower manufacturing levels than the North American or European ones, which could have special production lines for each model.
Toyota had to make a few lines to produce many models and this was feasible by reducing machine set-up times, with special attention to dies. These dies, which at that time took up to two hours to change in western factories, could be made in less than 10 minutes at Toyota and other Japanese car companies.
It is not just about applying the SMED (Single Minute Exchange of Die), but about continuously improving the application of the SMED. The European and North American automakers produced the various components in large batches, which greatly increased inventories of products in process, with the consequent financial and inventory management costs (physical space + personnel + insurance + internal transportation + deterioration + safe).
While western companies required huge capitals stuck in stocks, Japanese companies with small capital achieved high asset rotations and high levels of profitability. Also the high levels of quality made it less necessary to have stock to supply defective components. The high inventories made it possible to hide the quality problems, so if at the time of the assembly of the pieces there were pieces that due to defects could not be integrated, these were replaced by those that made up the abundant stocks.
Quality problems not only lead to higher stocks as a form of security, but also defective products cause high costs for scrap or reprocessing. The theme is not only to have a quality final product, but to achieve it the first time for all that this implies in terms of costs.
This leadership in costs requires the discipline to work hard in the fight against the different types of waste.
3.2. Differentiation
With differentiation, the company cares less about costs and more about being perceived by the industry as unique in some sense. The Caterpillar company, for example, stands out in durability, services, spare parts availability and a good dealer network, to differentiate itself from its competitors. Unlike the cost leadership strategy, in which there can be a single cost-leading company in an industry, in the case of the differentiation strategy, in the same industry there can be many differentiating companies since each of them You can emphasize an attribute that differs from that of your rivals.
Differentiation requires certain exchanges with costs. Differentiators have to invest more in research than cost leaders. Your product designs must be better.
Kaizen revolutionizes the world of strategy by allowing high-quality products to have competitive costs at the same time. A company, even producing high quality goods or services, has no alternative but to systematically detect, eliminate and prevent the appearance of different types of waste that increase its costs and reduce its profits. Thus, when the difference between the prices of the cost-leading competitors and the differentiators becomes significant, customers may abandon the differentiator and opt for the cost-leading competitor, the less differentiator.
Cost-leading competitors may be able to imitate the differentiator so well that they manage to win off all their customers. For example, Harley Davidson, a clear example of differentiation-focused motorcycle maker, may be vulnerable to Kawasaki, Yamaha, Honda, or Suzuki, which make motorcycles similar to Harley Davidson but at lower costs.
Kaizen is also a fundamental system in the systematic search for not only lower costs, but also differences in design, quality and service. Kaizen not only pursues the continuous improvement of production processes, but also the continuous improvement of design processes and of products and services, both in quality and design.
3.3. Specialization
In this case, a company focuses on a particular buyer, product line, or geographic market. While the cost and differentiation leadership strategies aim to achieve their objectives throughout the industry, the specialization strategy aims to serve a certain target.
Thus, the fundamental difference between the specialization strategy and the other two strategies is that a company focused on specialization is deciding to compete only in a small segment of the market. Rather than trying to appeal to all buyers by offering low costs or unique products or services, the specialty company aims to serve only one particular type of buyer. By focusing on that narrower market, a specialized company can pursue cost leadership or differentiation with the same advantages and disadvantages as absolute cost leaders and differentiators.
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To summarize the topic of competitive strategies, we suggest the following series of video-lessons through which you can review Porter's generic strategies: cost leadership, differentiation and focus. (4 videos, 36 minutes, Professor Antonio Verdú, Miguel Hernández University of Elche)
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4. The value chain
Cost leadership and differentiation strategies end up becoming a reality in the chain of activities that a company carries out in order to provide value to its customers. These chains of activities are classified into primary and secondary. Among the primaries we have:
Inbound logistics
It includes all the activities related to the reception, storage and control of the inputs necessary to manufacture the product, such as material handling, storage, inventory control, vehicle program and return to suppliers. It is essential in all of them to improve the working methods in order to make the different activities and processes more efficient, thus allowing to improve quality, reduce costs and increase the organization's response capacity to market demands and changes.
Alliances with suppliers for just-in-time deliveries, at the place of use within the production line, making use of kanban systems, with perfect deliveries in quality and quantity that make inspection and control unnecessary upon receipt greatly reduces the costs. First, order costs. Second, reception, inspection, counting and storage costs. Third, inventory handling costs. Fourth, internal transportation costs to the assembly line. Fifth, administrative costs of accounting and control of invoices and remittances.
Operations
Formed by those activities related to the transformation of inputs into the final product, such as mechanization, packaging, assembly, verification, printing and operations in general. Central activities when applying continuous process improvement in order to increase quality levels, customer and user satisfaction, and reduce costs. It is critical to detect, eliminate and prevent waste in order to improve the company's ability to compete and increase its market share.
Among the seven classic squanderings of operations we have:
- Excess inventory Overproduction Faults and reprocessing Internal transportation Excessive movement Waiting times Unnecessary processing
In the same way that there is waste due to excess inventories, there is also waste due to excess fixed assets and excess personnel, waste due to loss of sales and loss of customers, waste due to breakdowns and poor maintenance management, waste due to bad debts and delinquency in debt collection. Waste due to loss or misuse of energy. Waste due to information deficiency. And waste of resources for being liable to acts of fraud, or what is the same, for deficiency in internal controls.
The organization of the production plant by specialized functions leads to excess personnel, batch production, and therefore excessive inventories in process, excess use of physical space, internal transportation, and delay in the detection and correction of failures.
Outbound logistics
Activities related to the gathering, storage and physical distribution of the product to buyers, such as storage of finished products, material handling, organization of delivery vehicles, order processing and schedules. Delivery time and form. Satisfy customers by delivering the product demanded, in the quantity demanded and at the right time. Reactivity is essential and is an important factor in differentiating yourself from competitors.
Marketing and sales
Constituted by those activities related to the development of a reason that justifies the purchase of the product and with the motivation of the buyers to buy it, such as advertising, promotion, sale, offers, selection of the distribution channel, relations with the channel distribution and prices. Not only logistics, production and services must be subject to continuous improvement, but marketing and sales are also open to kaizen as a management system and philosophy. Actively participate in the specialization task.
Services
Constituted by all those activities related to the provision of a service to realize or maintain the value of said product, such as the installation, repair, training, supply of spare parts and product readjustments. Constantly improving the quality of services, improving the use of resources is what will make the difference between successful companies from those that are not.
And among the secondary activities we have:
Purchases
All those activities related to the purchase of raw materials, supplies and other consumable items, in addition to machinery, laboratory equipment, office equipment and buildings. When making purchases, it is the total cost that must be evaluated and not merely the price and the form of financing. Timely delivery of quality products and services, small batch delivery that prevents inventory build-up, and subsequent costs are critical and critical, high delivery reliability will reduce receipt costs in terms of quantity and quality control.
Technology development
Set of activities related to product and / or process improvement, including research and development, product design, media analysis, process design, service procedure design, etc. Fundamental activities and processes when implementing lean management, that is, achieving the highest level of production with the least amount of resources.
Human resources management
Comprised of all activities related to the search, recruitment, training, development and compensation of personnel. The discipline and polyfunctionality of the personnel are critical, in order to have good time management, of materials, supplies, machinery and tools, to have an optimal maintenance work, to have participative and motivated personnel when making suggestions and work in quality control circles, have knowledge to carry out different types of tasks and be able to perform in work cells.
Company infrastructure
Activities for planning, management, finance, accounting, legal issues, quality management, etc. These activities should serve as support in the planning, deployment of policies, diagnosis, measurement and evaluation of results and controls of the progress and management of the company.
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As a learning complement to the topic of the value chain we recommend the following pair of video-lessons in which it is defined what it consists of and what are its links. (2 videos, 9 minutes, Professor Antonio Verdú, Miguel Hernández University of Elche)
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5. Use of statistics
In order to set improvement objectives, it is necessary to have measurements of the activities and results of the various processes that make up the value chains. From these measurements and the existence of statistics that allow verifying their evolution, as well as detecting which are the vital few and the many trivial ones, controls and goal setting can be carried out.
Detecting points of leverage that allow significant cost reductions, considerable time reductions, and increased productivity is a vital task, which is facilitated by the existence and use of statistics.
Few are the companies that have an action plan for the creation of internal statistics, the use and analysis of data. This implies establishing the following points:
- What data should a company have? Use of data from computer systems to form databases, with multiple filters that allow obtaining different types of data and their relationships. Who are in charge of obtaining the information? Where are they from? Obtained each of the required data. What is the periodicity of the measurements and their registration. Where do they accumulate or record this information and measurements. What type of report is made with said data. Presentation periods: Who receives each of the reports.
To better manage the value chains and the processes and activities that comprise them, it is necessary to carry out measurements, record them, analyze them and adopt the actions leading to their improvement and improvement.
6. Balanced Scorecard
One of the first and main reasons for the development of the Balanced Scorecard was to improve the strategic focus and control. Thus, the Balanced Scorecard was introduced as a method for operational control, complementary to financial control, which provides a more complete description of the company's results.
The Balanced Scorecard is a method to agree on the path that an organization must follow and to ensure that it does not go out of it, using both monetary and non-monetary terms, to explain what is being done. To do so, it is necessary to focus on a group of deliberately selected measures, so that they can be controlled and applied to achieve and communicate a shared vision of the organization's strategy for its future development. The scorecard helps create a balance between several factors to consider. The inclusive balance that is adopted reflects the strategic decisions of the company. The selected indicators are a complement to financial controls, and also a means of reducing the danger of a short-term approach,while company personnel become more aware of their work and of the fundamental assumptions about the future and the company itself.
The scorecard aims to link short-term operational control with the company's long-term vision and strategy. In this way, the company focuses on a few fundamental indicators related to the most significant objectives.
It is about being leaders in costs, achieving differentiation or specializing, the Balanced Scorecard allows you to set short, medium and long-term objectives, objectives for each sector and process of the organization, in order to achieve competitiveness objectives. The scorecard not only involves planning, but also communicating this to those responsible for the sectors and processes, also allowing the evaluation over time of the fulfillment or not of the goals and objectives set. These objectives and targets are set according to the value chain and the different activities and processes that comprise it.
Thus, in order to reduce costs, the objective operational processes in terms of production cycle time, tool change time, machine operating efficiency, number of failures, levels of inventories in process, quality failures by type of cause, time elapsed between failures, among others.
If what is intended to be applied are differentiation strategies, actions must be carried out for this purpose, therefore it will be necessary to set goals and objectives in this regard, proceeding to control their implementation and the results obtained as a result.
The Balanced Scorecard facilitates the application of one of the fundamental systems of kaizen, which is the deployment of policies. If we want to improve, it cannot be done without objectives coordinated with the other processes and areas of the organization, but rather the objectives for each sector or process must be set, establishing the deadlines for their concretion and the interrelation between the various objectives.
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One last recommended video lesson: 'What is and how to apply the balanced scorecard' of the School of Business and Management, ENYD, useful to understand what this solution is about, how it is designed and how it is implemented.
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7. Conclusions
Firstly, the steps and characteristics of the competitive analysis processes were explained according to Porter's ideas, highlighting in the first instance the need to evaluate the competitive capacity of the company for its relationships with suppliers, customers, current competitors, suppliers of substitute goods and services, and entry of new competitors. In this analysis, the factors whose existence make the company more or less competitive are taken into account.
Subsequently, a review was made of the three fundamental strategies to compete in the markets, whether it is to be the leader in terms of costs, with its effect on the offer prices of products or services, or else the search for competitiveness in through differentiation, and finally specialization. Applying one or the other strategy implies the need to carry out actions aimed at improving costs, or the quality of services, design or security of deliveries, among others.
In this way, kaizen was developed as a Japanese management system and philosophy aimed at the continuous and systematic improvement of the various areas, processes and products / services of the company.
Making each of the strategies feasible implies focusing on the analysis, improvement and differentiation of the various processes that make up the value chain. It is here that the application of kaizen becomes critical and fundamental.
The issue for companies is not to talk about continuous improvement, but to set improvement objectives based on achieving strategic objectives that lead to greater competitiveness. It is not merely a matter of training personnel in continuous improvement systems, but of setting a strategy and determining goals and objectives that allow them to materialize over time.
Continuous improvement and especially kaizen, can only achieve results if they are implemented within a plan aimed at achieving strategic objectives, in which each participant is aware of the goals that must be achieved within a certain period.
8. Bibliography
- Kaizen. Mauricio Lefcovich. www.monografias.com 2003Thinking in Kaizen terms. Mauricio Lefcovich. www.monografias.com 2015Kaizen for waste disposal and cost reduction. Mauricio Lefcovich. www.gestiopolis.com 2004 Cost reduction with best practices. Mauricio Lefcovich. www.gestiopolis.com 2005How to implement Kaizen in the workplace. Masaaki Imai. McGraw Hill. 1998 Cost Reduction Systems. Meta Costs and Kaizen Costs. Yasuhiro Monden. 1994 Competitive Advantage. Michael Porter. CECSA 1987Be Competitive. New contributions and conclusions. Michael Porter. DEUSTO. 1999. Kaizen. The key to Japanese competitive advantage. Masaaki Imai. CECSA. 1999 Strategic Administration. Charles Hill and Gareth Jones. McGraw Hill. 1999
