Competitive Strategy and Kaizen

1. Introduction

In the business world, as in politics, sports, and wars, there have always been strategies and strategists. All businessmen still do not know what a strategy is and although they have not studied anything about it, they apply a strategy, be it to imitate what their direct competitors do or to look for new alternatives and innovation possibilities, be it in their products or processes, or both, in the forms of commercialization and distribution, in the 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 was established with great force, although not in a general way, as a philosophy and system of continuous improvement aimed at the constant and systematic improvement of quality, costs, and results. services in companies. For many businessmen and managers, kaizen was or is a fashion or a marginal action or policy in the central task of management. Many times due to the discipline that the implementation and application of kaizen require and other times due to not understanding what is really within this spirit and the need for continuous improvement, therefore they did not go deep into its application and permanence in the time.

The last decades have seen financial activities take a central position within the competitive strategy of companies first and then marketing. In this way, the proposal of innovations and the generation of value for the client came to occupy a supreme place, completely leaving aside the fight against inefficiencies and very high levels of waste that invade the different sectors and processes of the company, both in its productive aspects, such as commercial, financial and service aspects. These types of companies focus on obtaining the maximum levels of benefits and cash flow, leaving aside the strengthening of their capacities over time and thus being able to face 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 more or less competitive at a given moment, and therefore what strategies must be applied to acquire and preserve the ability to be competitive and obtain optimal levels. of profitability in the market. Among the fundamental strategies, he recognizes the existence of three, absolute cost leadership, differentiation, and specialization. Making its realization feasible requires action plans to improve and enhance the primary and secondary activities of the company, those that generate value for the client, those for which clients choose it and are willing to sacrifice resources in their acquisition. Thus, the central issue becomes the application of continuous improvement within a lean management philosophy, with kaizen being the most suitable system to generate the desired results.

Many companies can continue to focus on the brand, advertising, and distribution as central axes of their strategies, leaving the production processes under a host of measures that are often unconnected and ineffective, where all activity is productive even though its existence or form of realization is a waste. But competing companies rise 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 companies that generate waste from competition in international markets and at the local level tend to reduce or make impossible their survival.

2. The basic competitive forces

The first thing that business managers must answer 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 ratio is greater than the average for its industry. The profit rate is usually defined as some index, for example, the return on sales or the return on assets.

Companies are exposed to five fundamental forces, they are:

1. The ability of new competing companies to enter.
2. The bargaining power of buyers.
3. The bargaining power of suppliers.
4. The threat of substitute products or services.
5. The existing level of rivalry from current competitors in the sector.

The conformation and characteristics of these forces change over time as a result of changes in technologies, the size and nature of markets, changes in legislation, and conflicting political, economic, and social ideas. Currently, these forces can be described on the following grounds:

2.1. The ability of new competing companies to enter

To the extent that it is difficult or impossible to incorporate or enter new competitors, the company is stronger. But the globalization of 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 the entry of new companies.

The more difficult it is for new companies to enter, the less competition and the greater the probability of long-term profit.

The existence of seven barriers that hinder the entry of new competitors in a certain market can be considered :

2.1.1. Economy of scale

In some industrial sectors, large firms 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 industry must spend large sums of money to be able to produce on a large scale or must accept 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 the cola beverage sector for the first time will have to spend large sums of money to be able to compete against brands such as Coca-Cola and Pepsi and in this case, even investing heavily, it will not be feasible for them to displace their very strong positioning. 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 that new companies enter and exert some kind of force on it. or threaten their market share is reduced.

2.1.3. capital needs

The greater the resources needed to be able to start operating in 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 grinding machines and large kilns. 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 associated with the changes

A barrier to entering a certain sector can be created if customers have to face the high costs of changing providers.

2.1.5. Access to distribution channels

Having them is always critical, and much more so for certain types of activities such as movie theater chains, car dealerships, large drugstores, and pharmacy chains, among others.

2.1.6. Disadvantages of costs regardless of company size

Incumbent firms may have cost advantages associated with several reasons, including technology, product know-how, favorable access to raw materials, favorable location, government aid, and experience of its labor force among others.

2.1.7. government policy

Governments can limit or prevent the entry of new companies in certain sectors, demanding licenses for them, limiting access to raw materials, or through other types of regulations.

2.2. The bargaining power of buyers

For a flour factory, negotiating the supply of 50-kilo bags to a large number of bakeries and pasta factories is not the same as negotiating most of its sales to a small number of large hypermarkets. The greater the number of buyers and the lesser their specific weight in total sales, the greater the company’s ability to negotiate and the lesser that of the buyers. An auto parts supplier that manufactures parts for two automotive companies has negotiations that lead to long-term contracts, since the parts to be manufactured, the quantity and way of supplying them, and the requirements in terms of quality and objective costs, lead to very close relationships. with buyers, therefore the bargaining power of the auto parts manufacturer is reduced.

23. The bargaining power of suppliers

From which providers? Suppliers of inputs, as well as labor, machinery and buildings, financial resources, and different services. The main supplier on which the analyzes are concentrated is always those of inputs and components necessary for production.

But no less important is the existence or not of strong unions, the unions by the company 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 the company, it is negotiated to take into consideration 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 Auditors from a list that the Banks put into consideration the clients.

Both in union and financial matters, the company’s bargaining power will allow it greater or lesser freedom and power when it comes to competing in the markets. Does the company have the possibility of receiving financial support to be able to grant better payment conditions to its clients? Supplier groups have power if the following conditions are met:

• They are dominated by a few companies and are more concentrated than the industry they supply.
• They do not have to compete with other substitute products sold to the industry.
• The supplier does not depend on the buyer because the latter represents a significant fraction of its sales.
• The products that the supplier sells are important to the buyer’s business.
• The supplier’s products are in some way unique, or the buyer would find it very expensive or difficult to obtain a substitute product.
• Some of the suppliers could become the buyer’s competition by using the products/resources they are currently selling to the buyer to themselves produce the item 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 delivery, and low inventory costs, thereby 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 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 for sellers to offer them? What happened? Encarta (digital encyclopedia on CD) came out 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 that they seek for their children, completely displaced the once famous and impregnable Encyclopedia Britannica. Encarta now suffers from pressure or has already been displaced by Encyclopedias via the Internet, and the latest, the use of Google and Youtube as a means of information.

We now have before us the replacement of liquid insulin with 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 to the few powerful insulin laboratories?

2.5. The existing level of rivalry from 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 firms, or the competing firms 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 certain time frames within which they must sell the product.
• The product or service is viewed as a consumer good for which the buyer has several options, and the cost to the buyer of switching brands or suppliers is small. In these cases, the buyer is looking for price and service and the competition is very strong.
• The production capacity given the technological characteristics of its production requires significant increases.
• Competitors have different strategies, backgrounds, and business cultures.
• The exit barriers are high.

The rivalry between competing companies is usually the most powerful of the five forces. The strategies followed by a company will only be successful to the extent that they offer it a competitive advantage compared to the strategies followed by rival companies.

Strategically, each company must try to achieve greater competitive capacity and reduce the ability of competitors, customers, and suppliers to reduce their levels of profitability. The objective is one and this is supreme, to achieve the maximization of the stream of updated future income.

The three main competitive strategies are:

• Cost leadership.
• The differentiation.
• And the specialization.

Through these, companies can face and improve the response capacity against customers, suppliers, current competitors, the incorporation of new competitors and substitute goods and services.

3. Competitive strategies

Competitive strategy is about taking offensive or defensive steps to find a defensible position in an industry so that you can successfully deal with the five competitive forces and thus achieve a higher return on investment. Although there are numerous ways to achieve this goal, there are only three ways in which it is possible to overcome other companies within a deregulated framework and actively open to competition, these being: cost leadership, differentiation, and specialization.

3.1. Cost leadership

The cost level 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 the rivalry for the market.

A low-cost position defends the firm from stronger buyers because buyers can only exert their power to drive prices down to the level of the next most efficient competitor.

The low-cost level is also a defense against 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 economies of scale or cost advantages.

Finally, a competitive cost position normally positions the company favorably over substitute products from industry competitors.

Thus, a competitive cost position protects the firm against all 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 over their competitors, or else they must have some other type of advantage, such as favorable access to raw materials. What was not taken into consideration is the ability of companies to improve their processes to the point of eliminating very high levels of waste. If we take into consideration that in a traditional company, the level of waste can reach up to 30% or 40% of the value of sales, we clearly understand the importance of fighting against waste.

There are four sources of cost efficiency, which are:

1. the economy of scale,
2. the cost of provisioning,
3. the experience and
4. product and process design.

It is in the experience and the design of the processes and products that the kaizen as a system destined for the continuous reduction of costs allowed the big Japanese companies with a smaller market than the North American ones to snatch important market shares from these. Companies like Toyota were forced to produce various models of wheels with manufacturing levels lower 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 the preparation times of the machines, with special attention to the dies. These dies, which at that time took up to two hours to change in Western factories, could be done 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 the inventories of products in process, with the consequent financial and inventory management costs (physical space + personnel + insurance + internal transport + deterioration + sure).

While Western companies required huge capital tied up in stocks, Japanese companies with little capital achieved high asset turnover and high levels of profitability. Also, the high levels of quality made it less necessary to have stock to replace defective components. High inventories made it possible to hide quality problems, so if at the time of assembly of the parts, there were parts that could not be integrated due to defects, they were replaced by those that made up the abundant stocks.

Quality problems not only lead to having larger stocks as a form of security but also defective products cause high costs for scrap or reprocessing. The issue is not only to have a quality final product but to achieve it the first time because of all that this implies in terms of costs.

This cost leadership requires the discipline to work hard to combat all kinds of waste.

3.2. Differentiation

With differentiation, the company worries less about costs and more about being perceived in the industry as unique in some way. The Caterpillar company, for example, stands out in terms of durability, services, availability of spare parts, and a good network of distributors, to differentiate itself from its competitors. Unlike the cost leadership strategy, in which there can be only one 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 can emphasize an attribute that differs from those of your rivals.

Differentiation requires certain trade-offs with costs. Differentiators have to invest more in research than cost leaders. Your product designs need to be better.

Kaizen revolutionizes the world of strategy by allowing high-quality products to be cost-competitive at the same time. A company still 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 less differentiating, cost-leading competitor.

Cost-leading competitors may be able to imitate the differentiator so well that they win all of your customers. For example, Harley Davidson, a clear example of a motorcycle manufacturer focused on differentiation, may be vulnerable to Kawasaki, Yamaha, Honda, or Suzuki, which make motorcycles similar to Harley Davidsons’ but at lower costs.

Kaizen is also a fundamental system in the systematic search not only for lower costs, but also for differences in terms of design, quality, and service. Kaizen not only pursues the continuous improvement of production processes, but also the continuous improvement of design processes and 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 leadership and differentiation strategies seek to achieve their objectives in the industry as a whole, the specialization strategy seeks 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. Instead of trying to attract all buyers by offering low costs or unique products or services, the specialty company aims to serve only a particular type of buyer. By concentrating on that narrower market, a specialty firm can pursue cost leadership or differentiation with the same trade-offs as absolute cost leaders and differentiators.

4. The value chain

Cost leadership and differentiation strategies end up becoming a reality in the chain of activities that a company carries out to provide value to its customers. These chains of activities are classified as 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. All of them need to improve work methods to make the different activities and processes more efficient, thus allowing to improve quality, reduce costs and increase the organization’s response capacity to demands and changes in the market.

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 at the time of receipt greatly reduce costs. costs. First, ordering costs. Second, costs of receiving, inspection, counting, and storage. Third, inventory handling costs. Fourth, internal transport costs to the assembly line. Fifth, administrative costs of accounting and control of invoices and delivery notes.

Operations

Made up of those activities related to the transformation of inputs into the final product, such as machining, packaging, assembly, verification, printing, and operations in general. Central activities when applying the continuous improvement of processes to increase quality levels, customer and user satisfaction, and reduce costs. It is critical to detect, eliminate and prevent waste to improve the company’s ability to compete and increase its market share.

Among the seven classic wastes of operations, we have:

1. excess inventories
2. overproduction
3. Failures and rework
4. internal transport
5. excessive movement
6. Timeouts
7. 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 uncollectibility and delinquency in the collection of debtors. Waste due to loss or misuse of energy. Waste due to information deficiency. And the waste of resources due to being subject to acts of fraud, or what is the same, due to a deficiency in internal controls.

The organization of the productive plant by specialized functions leads to excess personnel, production in batches, and therefore to excessive inventories in process, excessive use of physical space, internal transport, and delays in the detection and correction of faults.

Outbound logistics

Activities related to the assembly, storage, and physical distribution of products to buyers, such as storage of finished products, material handling, organization of delivery vehicles, order processing, and scheduling. Delivery time and form. Satisfy customers by delivering the demanded product, in the quantity demanded and at the precise moment. The ability to react is essential and is an important factor in achieving differentiation from competitors.

Marketing and sales

Consisting of those activities related to the development of a reason that justifies the purchase of the product and with the motivation of 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 also marketing and sales are subject to kaizen as a management system and philosophy. Participate actively in the task of specialization.

Services

Consisting of all those activities related to the provision of a service to realize or maintain the value of the said product, such as installation, repair, training, supply of spare parts, and readjustments of the product. Constantly improving the quality of services, and improving the use of resources is what will make the difference between successful companies and those that are not.

And among the secondary activities we have:

Shopping

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. On-time delivery of quality products and services is critical and fundamental, delivery in small batches prevents the accumulation of inventories and subsequent costs, and high reliability in deliveries will reduce reception 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 maximum level of production with the least amount of resources.

Human resources management

Comprised of all activities related to the search, hiring, training, development, and compensation of personnel. The discipline and polyfunctionality of the staff are critical, to have good management of time, materials, inputs, machinery, and tools, optimal maintenance work, having participatory and motivated staff when it comes to making suggestions and working in quality control circles, knowing to develop different types of tasks and be able to perform in work cells.

Company Infrastructure

Activities aimed at planning, management, finance, accounting, legal issues, quality management, etc. These activities must 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.

5. Use of statistics

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. Based on these measurements and the existence of statistics that allow verifying their evolution, as well as detecting which are the vital few and the trivial many, controls and objective settings can be carried out.

Detecting leverage points 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 companies have an action plan for the creation of internal statistics, and the use, and analysis of data. This implies establishing the following points:

1. What data should a company have?
2. Use of data from computer systems to create databases, with multiple filters that allow obtaining different types of data and their relationships.
3. Who are the people in charge of obtaining the information?
4. Give where each of the required data is obtained.
5. What is the periodicity of the measurements and their registration?
6. Where such information and measurements are accumulated or recorded.
7. What type of report is made with said data? Presentation periods.
8. Who receives each of the reports?

To better manage value chains and the processes and activities that comprise them, it is necessary to make measurements, record them, analyze them, and adopt 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 strategic focus and control. In this way, 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 of agreeing on the path an organization should follow and ensuring that it does not stray from it, using both monetary and non-monetary terms to explain what is being done. This requires focusing on a group of deliberately selected measures so that they can be monitored 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 various factors to consider. The integrative balance that is adopted reflects the strategic decisions of the company. Selected indicators are a complement to financial controls, and also a means of reducing the danger of a short-term approach,

The scorecard is intended 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 for setting short, medium, and long-term objectives, objectives for each sector, and processes of the organization, to achieve the objectives of competitiveness. The scorecard not only implies planning but also communicating this to those responsible for the sectors and processes, also allowing to evaluate over time the fulfillment or not of the goals and objectives set. These objectives and goals are set based on the value chain and the different activities and processes that comprise it.

Thus, to reduce costs, objectives must be set at the level of the operational processes in terms of production cycle time, tool change time, operational efficiency of the machines, number of failures, levels of inventories in process, quality failures due to the type of cause, the 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 of it.

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 coordinated objectives with the other processes and areas of the organization, but the objectives for each sector or process must be set, establishing the deadlines for their realization and the interrelationship between the various objectives.

7. Conclusions

In the first place, the steps and characteristics of the competitive analysis processes were exposed according to Porter’s ideas, emphasizing in the first instance the need to evaluate the competitive capacity of the company by 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 makes the company more or less competitive are taken into account.

Subsequently, the three fundamental strategies to compete in the markets were reviewed, either it is about being the leader in terms of costs, with its effect on the offer prices of products or services, or otherwise the search for competitiveness through differentiation, and finally specialization. Applying one or another strategy implies the need to carry out actions aimed at improving costs, or the quality of services, design, or security in 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. This is where the application of kaizen becomes critically and fundamentally important.

The question for companies is not to talk about continuous improvement, but to set improvement objectives based on the achievement of strategic objectives that lead to a greater capacity for 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 their realization 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

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