Business Level Strategies

Business Level Strategies

• An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets.

• Business-level strategies are intended to create differences Between the firm’s position relative to those of its rivals.

•To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals.

CHOICE OF COMPETITIVE STRATEGY

INDUSTRY STRUCTURE POSITIONING OF

FIRMDetermined by 5 forces:-•Threat of new entrant.• Low barriers raise the prospect

of new entrants pushing down prices.

•Threat of Substitute Pdt or Service.• Strong threat firms to be more

competitive•Bargaining Power of Suppliers• Push cost of imputs upwards.

•Bargaining Power of Buyers.• Negotiate low prices.

•Industrial Rivalry• Intense competition keeps prices

down.

Determined by 2 Variables:-•Competitive Advantage• It is ability of a firm to add more

value for its customers than its rivals and therefore attain a position of relative advantage.

•Competitive Scope• Breadth of firms target within its

industry. For eg. Product Range, Distribution Channels etc.

Business Level StrategiesCompetitive Advantage

Low-cost Differentiation

CompetitiveScope

Broad Target

Narrow Target

Cost leadership

Superior profits through lower costs

Differentiation

Special features with premium price

Cost Focus Differentiation Focus

Concentration on limited market .

Generic Strategy Commonly RequiredSkills & Resources

Common OrganizationalRequirements

Overall CostLeadership

Sustained capital investment & access to capitalProcess engineering skillsIntense supervision of laborProducts designed for ease in manufacturing Low cost distribution system

Tight cost controlFrequent detailed control reportsStructured Firm and responsibilitiesIncentives based on meeting strict quantitative targets

Differentiation Strong marketing abilitiesProduct engineeringCreative flairStrong capability in basic researchReputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businessesStrong cooperation from channels

Strong coordination among functions in R&D, product development, and marketingSubjective measurement and incentives instead of quantitative measuresAmenities to attract highly skilled labor, scientists, or creative people

Focus Combination of the above policies directed at the particular strategic target

Combination of the above policies directed at the particular strategic target

Business Level Strategies- Cost Leadership StrategiesMEANING

Firms must offer relatively standardized products with features or characteristics that are acceptable to

customers at the lowest competitive price.

Firms competes on price within Industry and earns higher unit profit.

Cost Leadership based on:-Efficiency to drive down costs.Effectiveness-knowing what is & what is not important

to the customers.

Beneficial in markets where customers are price sensitive.

•Eg. TATA Steel, Reliance Communications.

Business Level Strategies- Cost Leadership Strategies

Sources of Cost Leadership Strategy• Building efficient scale facilities-Reduction in waste, Low Cost Supply, Production & Labour, Relocation to new site.• Cost reductions through experience-Superior Management• Establish tight cost and overhead controls.-Greater operating efficiency & effectiveness• Accurate demand forecasting• Cost minimization in R&D, service, and sales forces-Latest Technology available.• Withholding differentiation

Advantages• High relative market share & average profits• Favorable access to raw materials.• Design of products towards ease of manufacturing- offset of threat of cheaper substitues • Effective Barrier for entry of new entrants.

Business Level Strategies- Cost Leadership Strategies

Strengths of Firms for implementing Cost Leadership

• Access to capital required to make significant investments in fixed assets.

• Design Skills for effective manufacture• High Level of expertise in manufacturing process.• Effective Distribution Channel.

When to use:• When firm is the market or cost leader (good strategy during a

price war).• If widespread competition exists, using low-cost strategies allows winning the war of attrition.

5 FORCES & GENERIC STRATEGY-COST LEADERSHIP

THE 5 FORCES THE COST LEADER IS

ENTRY BARRIER Cut prices and discourage new entrants

BUYER POWER Offer competitive price to buyer

SUPPLIER POWER Insulated from powerful supplier due to low costs

THREAT OF SUBSTITUTION

Uses low price as defense against substitutes

RIVALRY Better able to compete on prices

Business Level Strategies-Differentiation StrategyMEANING

Goal is to provide value to customers through unique features and characteristics of a firm’s products.

Differentiators focus or concentrate on product innovation and

developing product features that customers value. Customers percieve the product to be different &

better than the rival.As a result of the value added by the uniqueness of

the product may allow the firm to charge a premium price for it.

Business Level Strategies-Differentiation Strategy

Can differentiate based on:

• Superior quality & performance (DC Cars, Mercedes, Cocoberry)• Customer service (IBM)• Engineering design (Hewlett-Packard)-features that raise performance of pdt.• Unique features- Additional Features offerd to match tastes & preference• Image of prestige or exclusivity (L’Oreal Cosmetics, Mercedes)• Package design (Arizona Iced Tea, Parle’s Tetra Packs for Frooti)• Speed of Distribution & High Service Levels (Amul)

Market Conditions for differentiation• Markets where customers need are too diversed to be satisfied by standardised pdt.• Market is too large to be catered by few firms.• Customers values additional features at additional costs


Competitive risks:• If selling price is too high buyers may become price sensitive despite customer loyalty or uniqueness (price differential between standardized and differentiated product is too high).

• Buyers may decide they don’t need the special features (means of differentiation no longer provides value).

• Rival firms may imitate the product thereby decreasing product uniqueness.

Benefits

• Differentiation offers the prospect of charging a premium price.• Demand for differentiated pdt will be less elastic.• DS results in above average profits.• It creates additional barriers for new entrants.


• Success in DS means that:-– Gaining Competitive Advantage by making their product

different from Competitors.– Competing on the basis of value added to the customers.– Persuading customers about the superiority of the firms

product.– Customers willingness to pay extra price to cover high costs.

• Differentiation can be based on product image, durability, after sales service, quality, additional features, after sales.

• Firm requires flair, research capability & strong marketing skills.

• Extra costs to added only in areas where customers perceive to be important & which must be recognized & difference is appreciated.

5 FORCES & GENERIC STRATEGY-DIFFERENTIATION

THE 5 FORCES THE COST LEADER IS

ENTRY BARRIER Requires others to overcome customer loyalty and product uniqueness.

BUYER POWER Removes buyer power due to a lack of comparative alternatives.

SUPPLIER POWER Allows an increase in price margins (customers willing to pay more, can withstand supplier price changes).

THREAT OF SUBSTITUTION

Protected by customer loyalty

RIVALRY Decreases rivalry due to brand loyalty and resulting lower sensitivity to price.

Business Level Strategies- Focus Strategy

Firms can also use core competencies to serve a narrow segment of

the market or a particular customer group.

Primary goals of a focused strategy:

• Focus on a particular buyer group, segment of the market, etc.

• To serve a narrow target or market segment more effectively than broad-based competitors can due to core competencies.

• Select target segments which are the least vulnerable to substitutes or where competitors are the weakest.


• Requirements are:-– Identification of suitable target group.– Identification of needs of that group.– Confirmation that market is large to sustain the

business.– Estimation of the extent of competition.– Production of products to meet specific needs of

the customer.– Decision to opt for Cost Leadership or

Differentiation.


Two primary focused strategies:

• Focused differentiation:

Requirements for usage similar to differentiation strategies.

Defense against the five forces similar to differentiation strategies.

Examples: Rolls Royce, Fort Howard Paper.

- Rolls Royce (prestige, quality, engineering design). - Fort Howard Paper (specialty lens paper).


• Focused low-cost strategies:

Requirements for usage similar to low-cost strategies.

Defense against the five forces similar to differentiation strategies.

Examples: Rally’s, Martin Brower, White Castle.

- Rally’s (no frills service, limited menu, no dine-in). - Martin Brower- 3rd largest food supplier, serves fast food chains by:

Gearing to their purchasing cycles. Locating warehouse locations based on their locations. Stocking products only for these 8 firms Meeting their specialized needs.

Business Level Strategies- Focus Strategy Competitive risks:• Broad range competitors may find ways to match focused firms services.• Shifts in buyer preferences and needs.• A competitor may find a smaller segment within the target segment (out-focus the focuser).• Limited oppurtunity of growth• Risk of imitation. When to use:

• When no rivals are in the same segment.• Resources don’t permit operation in wide segments.• When their are different groups of buyers who use the product in different ways.• When industry segments differ widely in size, growth, or profitability.• Uniqueness in the segment• Specialised requirements for using the product & service.• Potential of growth in the market.• Firm possess necessary skill & expertise.


Advantages• Lower Investment in resources• Benefit from specialisation• Grater Knowledge of the segment.• Entry to new markets easy & less costly• High Degree of Customer Loyalty.

Tactics for Business Level Strategies

• Tactic is a sub-strategy, specific operating plan detailing how a strategy is to be implemented in terms of when & where it is to be put in action.

• Narrow in scope & Shorter in their time horizon than are strategies.

• These are:-– Timing Tactics– Market Location Tactics

• Market Leaders• Market Challengers• Market Followers• Market Nichers.


• Timing Tactics– First Movers & Late Movers– Advantages of Being a First Mover• Establish position as a market leader.• Benefit from suppliers, distribution channels & access

to new technology.• Brand Image & Reputation• Loyalty of customers


• Disadvantages of First Movers– Costlier than being a follower.– Risky proposition-setting up business &

technological changes threat.– Late movers can imitate technological

advancements.– Additional efforts to retain customers.


• Market Location Tactic– This aspect deals with the issue of where to

compete.– Market Leaders• The organisations that have largest market share in the

relavant product market lead the market in technological developments, product & service attributes, price benchmarks or distribution channel design.


• Market Location Tactic– Market Challengers

• The org. ranked second or lower in the industry . These either challenge the market or wish to follow them.

– Market Followers• The org. that imitate the market leaders and benefit out of

the innovations made by market leaders.– Market Nichers

• These organisations are the ones which cover the pdt/ service segment which is left untouched by other organisations.

Business Strategies for Different Industry Conditions

– Embryonic Stage • Unique product offering developed and patented,

thus beginning a new industry. • Firm uses focus strategy to stress the uniqueness of

the new product or service to a small group of customers

• Customers are known as "innovators" and "early adopters."

• Costly -- New product offering, developed and tested , and marketed the product. Significant cash outlay to continue to promote and differentiate the offering and expand the production flow from a job shop to possibly a batch flow.

• Profits--Negative at this stage. Any profits generated are typically reinvested.

• eg Biotech, Cyber Media, Drug Development, Organic Foods.


– Growth• Aim-- Differentiate a firm's offerings from other competitors

within the industry. • Costly--Funds required to launch a newly focused marketing

campaign and continuous investment in property, plant, and equipment to facilitate the growth required by the market demands

• Product Standardisation--Encouraging economies of scale and facilitate development of a line-flow layout for production efficiency.

• Life Cycle Curve--Very steep, indicating fast growth. Firms tend to spread out geographically and continue to disperse during the maturity and decline stages.

• For eg the automobile industry in the United States,IT, Mobile.

• Duration--Depends on the industry for eg fad clothing, experience short growth stage and move almost immediately into the next stages of maturity and decline or Hot toy this holiday season may be nonexistent after few months.


–Maturity• Curve--Curve becomes noticeably flatter, indicating

slowing growth.• Threat--Competition from late entrants .The

marketing effort to be strong and must stress the unique features of the product or the firm to continue to differentiate a firm's offerings wrt quality, cost from industry competitors to increase the volume of sales and make profits from inventory turnover.

• No. of firms--Fewer firms, and those that survive will be larger and more dominant.

• For eg. Outsourcing Industries, Steel, Textile Industries, Laundry detergents are examples of mature products


• Decline– Meaning--Inevitable in an industry, if product innovation

has not kept pace with other competitors, or if new innovations or technological changes have caused the industry to become obsolete, sales suffer and the life cycle experiences a decline.Larger shake-out in the industry as competitors who did not leave during the maturity stage now exit the industry.

– Also referred to as sick industries.– Mergers and consolidations will also be the norm as

firms try other strategies to continue to be competitive or grow through acquisition and/or diversification.

– For eg, beedi manufacturers, crackers, mining, print media etc.

Business Level Strategies

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