Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 45

Strategic Analysis, the Camera Industry Olympus, Kodak, Canon, and other firms in the market for low-cost cameras have experienced significant changes in recent years. The rate of introduction of new products has increased significantly. Entirely new products, such as the digital camera, are coming down in cost, so they are likely to be a factor in the low-cost segment of the market in the coming years. Additionally, product life cycles have fallen from several years to several months. The new products in this market are introduced at the same price as the products they replace, but the new products have some significant advances in functionality. Thus, there are price points at which the customer expects to purchase a camera of a given functionality. In effect, the camera manufacturers compete to supply distinctive and therefore competitive functionality at the same cost as that of the previous models.

The manufacturing process for Olympus, one of the key firms in the industry, is representative of the others. Olympus makes extensive use of suppliers for components of the camera. Working closely with the suppliers, not only in a supplier’s manufacturing process but also in the supplier’s design of the parts, ensures the quality of the parts. Each supplier is, in effect, part of a team that includes the other suppliers and Olympus’s own design and manufacturing operations.

Required

1. How does this type of competition differ from the Michael Porter framework of cost leadership and differentiation?

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2. Develop a value chain for Olympus camera company. What are the opportunities for cost reduction and/ or value enhancement for Olympus?

Step 1 of 2

1.?The objective of this problem is to have the students understand that the concept of competition is perhaps not as simple as set out in Porter’s framework. We use Porter’s framework because it provides a useful organizing theme for understanding how firms compete. But the context of the camera companies and how they compete at price points shows an understanding of competition that can be more complicated.

Some argue that Porter’s view of strategy and competition does not adequately describe the intensity of competition in certain industries, particular certain consumer products industries such as cameras. Porter’s concept, as well as that of the build and harvest concepts of the Boston Consulting Group, conceive of a competitive equilibrium in which the firms in an industry find a stable, relatively long-term mode of competition, often called “sustainable competitive advantage.”  This might be cost leadership or product differentiation. The major point is that, by applying the cost leadership strategy for example, a firm remains competitive and successful as long as it remains the cost leader. Some argue that the competition in certain industries is far too intense to have any one firm achieve more than a temporary advantage, whether it be on cost or differentiation. 

Instead, each firm must simultaneously compete on the three competitive factors: cost (low cost and low price), quality (conformance of the product with advertised features and specifications), and functionality (the product’s features; its ability to perform the desired task). Robin Cooper makes a persuasive case (When Lean Enterprises Collide, Harvard Business School Press, 1995) that most firms in the consumer products industries do not achieve a competitive advantage. In particular, the camera companies tend to compete simultaneously on price, quality and functionality. This happens because cameras are sold at a certain “price point” of $49 or $99, etc., and the consumer expects to get as many desirable features as possible at the targeted price.

 It is assumed that quality is near perfect, as is the consumer’s expectation. Thus, the camera firms work hard at identifying the key features (that is, functionality) which the consumer desires at each price point. What does the purchaser of the $99 camera really want in terms of features?  At the $49 level?  This type of competition is

characterized by frequent model changes (18 months is the life cycle of products in this industry) and intense efforts to identify consumer desires (Olympus hires sales agents to work in retail camera stores to identify customer preferences, for example).