Digbly International's broad cost leadership strategy and market positioning

Digbly International Inc. has been successfully using throughout the year a Broad Cost Leader Strategy, which permits it a presence in both markets. The Broad Cost Leader Strategy implies obtaining a cost competitive advantage over other companies. For Digbly, it is also equivalent to producing highly qualitative sensors for the market, but keeping in mind a cost efficiency which means lower R& D. spending and scale economies where possible.

Company History

The company's mission, as expressed by the vision statement, has always been to produce quality at low prices ("high quality at lowest prices"). In this perception, the necessity to offer the market completely new products at double the price does not have an economic justification. It is preferable, in this sense, to reposition the product so that it will reach the customers who are likely to be purchasing a lower priced sensor. Value and low cost are the two main components of the vision vector.

The management model relies greatly on a functional model, with directors coordinating each department (R& D, marketing and sales, technical etc.) and responding to the vice-president in charge. Unfortunately, although it has been tried to avoid hierarchical differentiations and to refer to all directors on the same level, the fact that the company does not place its accent on R& D. Or on marketing has meant that these directors have a lower leading status within the company. The management model will probably need remodeling soon.

Internal Analysis

The internal analysis of the company will start with a SWOT analysis and then refer to the strategic issues that the company faces, as related to the present day strategy.

In terms of strengths, the company has been on the market long enough to present its strategy and acquire customers who are satisfied to use a cheaper product, but a product where cost reduction does not necessarily imply a quality reduction as well. As such, one may consider that Digbly has formed a set of loyal customers and that its presence in both segments of the market means that it coves a large portion of the market. As a strength, Digbly has a very well defined set of consumers it is addressing, namely the price sensitive clients.

Also in terms of strengths it needs to be pointed out the good margins that the broad cost leader strategy implies and which have created a sustainable and positive financial situation for Digbly. Additionally, the company has developed its departments in a way they can sustain the overall strategy that the company is promoting.

In terms of weaknesses, the main weakness that can be speculated is the fact that the company is relying solely on its broad cost leader strategy. Indeed, it is commercializing one single type of product, which is cheap and is addressing a certain category of consumers. There is no diversification and no innovation in such a strategy and it is to be discussed whether the global environment which characterizes the present-day economy accepts such a model.

Such a strategy (1) allows only for a limited amount of growth, because the set of consumers remains practically constant and only increases and decreases within the same fixed coordinates and (2) is not prepared to face changes in the macroeconomic and external environment. In this sense, if there was another company producing the same type of sensors at an even lower price, then it is likely that Digbly will probably go bankrupt, due to losing all its clients.

Finally, the broad cost leader strategy implies no spending on R& D, which means no innovation and this implies a reactive rather than a proactive role. A reactive role means that the company is much more likely to react to the moves of the competitors on the market, as well as to the changing in macroeconomic factors, than to create the premises of change from within the company. A reactive strategy implies that the company will simply go with the trend rather than create a trend of its own.

In terms of opportunities, because the company is so specialized and has a minimal portfolio of products, one may refer to opportunities in developing countries. For example, the East-European market has become a highly interesting one. In the last couple of years, eight new countries from the region have joined the European Union and overall revenues and GDP have encountered sustainable figures and sustainable growth. This means that the respective markets have become more and more attractive because they are still less competitive than the Western ones, but have been regulated and are available as an optimal alternative. Because revenues still remain below Western levels, the lower priced product that Digbly is selling may be quite successful on the market and may point towards high margins.

In this sense, it may be pointed out, in the absence of a product diversification, to the alternative of a geographical diversification, a diversification where the company approaches new markets, both in terms of product offer and the relocation of production. Referring to the latter, relocating to such areas as Eastern Europe, where an important part of the production can be sold, is important in the context of a Broad Cost Leader Strategy.

As for threats, some of them have already been mentioned. The most important one to be noticed is the threat of new competitors, especially on the particular segment where Digbly is selling, that is to price sensitive customers. If a new company producing and selling at lower prices appears on the market, then it is likely that it will be able to gain quite a large portion of the price sensitive customers Digbly strongly relies on. In this case, the company needs to have alternatives which, at the present time it does not.

The SWOT analysis created excellent premises for a recapitulation and an analysis of the strategic issues that the company is facing, as well as to alternative solutions to these problems. The main problem that has been identified so far was the extreme dependency of the company on one single product and one sole strategy. It has been pointed out towards the fact that the company is relying too much on low-cost products and that the lack of any innovation or diversification strategy will likely create problems in the future.

However, as previously seen, if the company is determined to use the broad cost leader strategy, it is also able to practice a geographical diversification, which means that it can relocate its production and its sales to other countries, countries where the lower costs of production go hand in hand with the broad cost leader strategy that the company is promoting.

The relocation of production will create cheaper sensors which can be sold on the respective local market, first of all, but also on the native market, at even lower prices than presently. This solution will create the proper alternatives for the eventual competitors that may appear on the price sensitive market segment, because Digbly will be operating at competitive prices well below market average.

Department Analysis

1. R& D.

The research and development department is clearly underrated within the company, due to the implications of a broad cost leader strategy. There is almost no investment in innovation and in the creation of new products, with new features for the market. Unfortunately, the company has specialized on creating low cost, low budget products and innovation is not part of its strategy.

The company may attempt, in the future and without necessarily renouncing the broad cost leader strategy, to gradually increase R& D. spending in order to create additional features for the existing product. This does not necessarily mean large spending on innovation, but an attempt to slightly diversify the nature of the company's activity and to be able to counteract any possible repercussions in the future. Nevertheless, the present day strategy is an obvious downturn for any R& D. investments and spending.

2. Marketing.

The marketing sector and spending is not sufficiently encouraged either. Of course, within the broad cost leader strategy there is no actual need to have extensive marketing campaigns. The reason for this is rather simple: Digbly is addressing the same price sensitive customers and it is not trying to approach new ones. The marketing campaigns rely greatly on word-to-mouth tactics, where the present-day customers will tell other potential customers about Digbly and about the low prices the company practices. In the electric sensor industry, this may prove to be an efficient form of marketing.

As such, the marketing campaign is only directed at consolidating the current customer basis. One would suggest, in this case, moderate spending on brand awareness within the customer group. The marketing campaign should point out towards the main characteristics of Digbly: low prices and high quality. The customers should be able to grasp the fact that the low prices are due to the company's efficiency and scale economies it is able to obtain rather than to a renunciation to the quality principles it upholds.

3. Production.

Automation is certainly important given the strategy the company is pursuing because it means the ability to increase the company's production capacity. The broad cost leader strategy implies selling large volumes at low prices, in order to obtain high profit margins. In this sense, one needs to be able to produce large volumes of goods with the current plant capacities. This means high production efficiency and can be attained with high automation levels.

The broad cost leader strategy that the company is promoting relies greatly on the success of production for overall success on the market. If the company is not able to produce at low costs that would allow it to sell at lower prices and have a definite price competitiveness over other company, then the strategy needs to be changed.

Although the strategy does not imply it, it is recommended that the company makes some investments in technology and technological improvements. It seems quite important for the company to remain on top of the list in terms of production, because production is intrinsically linked with the company's ability to sell at low prices. Newer technology could help improve overall efficiency levels within the company.

4. Finance

The company has been successfully using long-term debt, especially in the form of bond issues, and stock issues to finance its investments. The financial ratios point out to strong figures in terms of debt management ratios (debt-to-assets ratio), which come to show that the company has a financial policy relying moderately on debt to finance its investments.

The liquidity ratios, pointing out towards the company's short-term solvability, are stable and gradually increasing, mainly because the stock issues allow the company to have a certain cash reserve. This is generally used from time to time for dividend payments to the stockholders.

5. Senior management.

The senior management needs to keep in mind both strategic issues and possible problems that have arisen from this report and tactical ones associated with the roles of departments in the structure and the way each can play a role in the company's success.

The main thing to be kept in mind is that the company needs to approach some form of diversification, may it be geographical or product diversification, and that the broad cost leader strategy it is sustaining relies greatly on the capacity to provide products and services at low costs. This means that production relocation is an alternative solution that needs to be kept in mind in order to be able to produce at lower and more efficient costs. The senior management team faces strategic decisions as to how the production and sales strategy needs to be improved and developed in the future.