Business level strategies

“It is at the level of the business that most competitive interaction occurs and where competitive advantage is won or lost”

Business level strategiesBusiness Strategies are course of actions adopted by each of its businesses separately to serve identified customer groups and provide value to the customer by satisfaction of their needs.

Business Strategies Michael E. Porter is credited with extensive

pioneering work in the area of business strategies or what he calls competitive strategies.

The dynamic factors that determine the choice of a competitive strategy, according to Porter are two namely, the industry structure and the positioning of the firm in the industry.

The industry structure refers to the Porter’s 5 forces model

Business Strategies Positioning of the firm in the industry – It is to

gain a sustainable competitive advantage and is based on two variables – the competitive advantage and the competitive scope.

Competitive advantage can arise due to two factors – Overall cost advantage and differentiation

Competitive scope can be in terms of two factors – broad target and narrow target

Porter’s Generic Business Strategy

Cost Leadership

Focused costleadership

Differentiation

FocusedDifferentiation

BroadTarget

Narrowtarget

Low cost Differentiated

Competitive Advantage

CompetitiveScope

Cost Leadership When the competitive advantage of a firm lies in its lower

cost of products or services compared to its competitors, it is termed as cost leadership strategy

Amul operates in the branded ice-cream market on low cost platform

Moser Baer India, manufactures CD recordable and competes on a low cost strategy

Tata steel continuously benchmarks itself against global standards in cost competitiveness

Reliance communication was the first company to offer ultra low cost mobile phones for Rs.500

Wal-Mart – Everyday Low Price strategy Sam Walton set up the first Wal-Mart store in Arkansas in

1962 Business Model- Discount product prices to expand

volume and increase overall profits By 1969, there were 18 Wal-Mart stores mostly in small

towns with sales of $44million Subsequently Wal-Mart built discount stores in all the 50

states of U.S to become the only national discount chain In 1991 Wal-Mart started operation overseas One marketing principles guided Wal-Mart –

CONSISTENT LOW PRICE

Cost Leadership Central to the objective of achieving cost leadership is the

understanding of the value chain of the product or service

1. Accurate demand forecasting and high capacity utilization

2. High levels of standardization of products and mass production leads to lower costs

3. Investment in cost-saving technologies

4. Withholding differentiation till it becomes absolutely necessary

Benefits and risks associated with low cost strategyBenefits

1. Best insurance against industry competition

2. Threat of substitute products can be offset

3. Cost advantage can act as an entry barrier for new entrants

Risks

1. Cost advantage is ephemeral as competitors can imitate it easily

2. Limits experimentation with product attributes

3. Technology shifts are a great threat to a cost leader

Differentiation When the competitive advantage of the firm lies in

special features incorporated into the product, which is demanded by the customer, who are willing to pay for it, then the strategy adopted is called differentiation

Apple Mac book, I-phone – differentiation in form and function leaving all competitors behind.

Duracell battery – highly priced but promises extra long life.

Federal Express – innovation in packing, prompt delivery, tacking of consignment

Differentiation Strategy Incorporate features to raise the

performance of the product Incorporate features that offer additional

utility Incorporate features that claim

distinctiveness (status and prestige)

Benefits and risks associated with Differentiation strategy

Benefits

1. Customer brand loyalty safe guards against competition

2. Substitute products are a negligible threat

3. Differentiation is an expensive proposition and acts as an entry barrier for new entrants

Risks

1. Differentiation can also be copied

2. Differentiation fails to work if the feature added is not valued by the customer

3. Price premiums too have a limit. Customers shun products which are too expensive

Focus Strategies Focus strategies essentially rely on either differentiation

or cost leadership but cater to a narrow segment of the total market. Focus strategies are niche strategies.

Revolution, plus size clothing Over Drive - Car Magazine

Aravind Eye Hospital – Focused cost leadership Palace on wheels – Focused differentiation

Benefits and risks associated with Focus strategyBenefits

1. The competitors who have broader target market do not possess competitive ability required for a niche market

2. Powerful barrier for substitute products

3. Loyal Customers ward of threat of new entrants

Risks

1. Serving niche markets requires development of distinctive capabilities

2. May be difficulty to achieve economies of scale and difficult to move to other segments

3. Niches are often transient. The may disappear due to technology or market factors

Online travel booking industry provides a good example for the 3 strategies

Lowestfare is pursuing a low cost strategy Travelocity is pursuing a differentiation strategy

by offering the most comprehensive range of services to the traveler

Last minute is pursuing a niche strategy by focusing on clients who need to travel at a short notice

Tactics for Business Strategies A tactic is a sub-strategy. It is a specific operating plan

detailing how a strategy is to be implemented in terms of when and where it is to be put in action.

1. Timing tactics – A business strategy of low cost, differentiation or focus may be essentially a right move but only if it is made at the right time.

2. Market location – This aspect deals with the issue of where to compete (the target market the organization aims at)

Timing strategy First Movers and Late Movers – The first company to

make or sell a new product or service is called a first mover or a pioneer. The organizations which enter subsequently are called late movers.

Example – Parle was the first mover in packaged mineral water industry in India and has dominated the industry leading to its brand Bisleri becoming generic to the product category. The industry has subsequently attracted many brands like Coca Cola’s Kinley, Pepsi’s Aquafina, Manikchand’s Oxyrich and Vijay Mallya’s King Fisher brand.(Late movers)

UTI was the first mover for Mutual funds and Kotak Mahindra, ICICI, HDFC, Max New York are the late movers

Market Location TacticsThis aspect deals with the issue of where compete. Market

location could be classified as the role that organizations play in the target market and the type of Business tactics they adopt to play such a role.

Market Leaders – Firms that enjoy the largest market share and generally leads others in new technology introduction, new product development, promotional practices etc. Such firms are likely to devise defense strategies to maintain its position and stay the leader.

Market Challenger – Organizations that have second or lower rank in the industry. These organizations challenge the leader by going for a head on frontal attack or by attacking the weak areas of the leader.

Market followers – Many companies in product industries that are capital intensive and deal in products viewed as homogenous such as cement, steel, chemicals etc prefer to stay as followers. They usually copy the leader and present similar products. Opportunity to create meaningful differentiation is very little and price sensitivity is considerable.

Nichers – Organizations that operate in a small segment.

Strategies for Market LeadersMarket Leaders are organizations that have a large market

share in the relevant product market. They generally lead the industry in technology, product attributes, price benchmarks etc.

In order to take up a Market Leader position the following strategies have to be used:

Expand the total market by Finding new users Creating new uses Encouraging more usage

Protect its current market share by Adopting defense strategies

Sun Tze’s defensive strategy

“Do not assume the enemy will not come but be prepared for his coming… Do not presume he will not attack, but instead make your own position unassailable.”

Defense Strategy

Commonly used defense strategies Position Defense Mobile Defense Flanking Defense Contraction Defense Counter-Offensive Defense

Defense Strategy (cont’d)Position Defense Least successful of the defense strategies “A company attempting a fortress defense will find itself

retreating from line after line of fortification into shrinking product markets.” Saunders (1987)

This could include increasing brand equity, customer satisfaction, customer loyalty, or repeat purchase rate. It could also include exclusive distribution contracts, patent protection, government protected monopoly status

e.g. Mercedes was using a position defense strategy until Toyota launched a frontal attack with its Lexus.

HUL was doing position defense in Fairness cream (Fair and lovely) segment till Emami came up with Fair and handsome

Defense Strategy (cont’d)Mobile Defense A mobile defense is intended to create a moving target

that is hard to successfully attack, while simultaneously, equipping the defender with a flexible response mechanism should an attack occur. This is a proactive strategy.

In business this would entail introducing new products, modifying existing products, changing market segments, changing target markets, repositioning products, or changing promotional campaigns. Example – Nike has sustained the leading share of athletic shoe market. It has developed a series of line extensions that offer features to satisfy consumer preferences.

Defense Strategy (cont’d)

Flanking Defense: The market leader adopts this strategy to outsmart the

challengers This involves the re-deployment of your resources to

deter a flanking attack. You strengthen your flank if you think it is vulnerable.

P&G’s Tide is an extremely successful laundry detergent. In order to appeal to consumers who prefer even lower cost, P&G introduced Cheer, a lower quality product with lower price.

Singapore airlines introducing a modern fleet

Defense Strategy (cont’d)Contraction Defense Withdraw from the most vulnerable segments and

redirect resources to those that are more defendable

By planned contraction or strategic withdrawal

Defense Strategy (cont’d)Counter-Offensive Defense Responding to competitors’ head-on attack and

then launch a counter attack. Example Maruti was facing attacks from other

manufacturers and market share erosion in its hatchback segment. The company then introduced Maruti swift that offers more value to customers

Market Challenger StrategiesThe market challengers’ strategic objective is to gain

market share and to become the leader eventually

How? By attacking the market leader By attacking other firms of the same size By attacking smaller firms

Market Challenger Strategies

Types of Attack Strategies Frontal attack Flank attack Encirclement attack Bypass attack Guerrilla attack

Frontal Attack Matching the opponent in terms of product, price,

promotion and distribution Seldom work unless

The challenger has sufficient staying power, and The challenger has clear distinctive advantage(s)

Korean car major Hyundai did a great job when it attacked Maruti’s reign, pitching the Santro against Maruti’s ever popular Zen. They challenged Zen’s mileage and value for money factor with the narrowest frontal attack. They simply concentrated on Santro being just as economical but with better technology.

Attack of Avis on Hertz

Dell’s attack on leading PC manufacturers

Flank attack Attack the enemy at its weak points or

blind spots i.e. its flanks (segmental flanking or geographic flanking)

Ideal for challenger who does not have sufficient resources

in the mid 1970's Xerox owned eighty-eight percent of the plain-paper copier market; however, almost ten years later the Japanese based Canon Copier took over half of Xerox's market . The main reason Canon took over such a large portion of Xerox's market was by use of the flanking strategy. Canon focused on the small size copier market that could not afford Xerox's larger copiers.

Encirclement attack Attack the enemy at many fronts at the same time Ideal for challenger having superior resources Advertisement Blitz, unbeatable product related

offers, presenting a unique service guarantee etc. e.g. Samsung beat Motorola and narrowed its gap with

Nokia, by using superior technology, customer oriented designs, low priced touch screen models and innovative advertising

Bypass attack Could overtake the leader by using new technologies The challenger launches new generation,

persuasively differentiated products that are far more advanced and more desirable than existing alternatives

Example: Apple attracting laptop users

Guerrilla attack By launching small, intermittent hit-and-run

attacks to harass and destabilize the leader Comparative advertizing, price cut, legal

action. Usually use to precede a stronger attack

One example of guerilla warfare occurred when IBM won a lawsuit against Hitachi on the grounds that Hitachi stole IBM software. Because IBM won this small battle, Japanese computer manufacturers had to become defensive by investing large sums of money into scarce software research and development personnel who had to re-write old programs.

Which Attack Strategy should a Challenger Choose?

Use a combination of several strategies to improve market share over time.

Best strategy is to be one’s own competitor

Market-Follower Strategies Theodore Levitt in his article, “Innovative

Imitation” argued that a product imitation strategy might be just as profitable as a product innovation strategy

e.g. Product innovation--Sony

Product-imitation--Panasonic

Market-Follower Strategies (cont’d) Each follower tries to bring distinctive

advantages to its target market--location, services, financing

Three broad follower strategies: Counterfeiter (which is illegal) – making

duplicates and sell at very low prices Imitator e.g. car manufacturers imitate the style of

one another Adapter e.g. many Japanese firms are excellent

adapters initially before developing into challengers and eventually leaders

Market-Nicher Strategies Smaller firms can avoid larger firms by

targeting smaller markets or niches that are of little or no interest to the larger firms

e.g. Logitech-computer mouse

Market-Nicher Strategies

Nichers must create niches, expand the niches and protect them e.g. Nike constantly created new niches--

cycling, walking, hiking, cheerleading, etc What is the major risk faced by nichers?

Market niche may be attacked by larger firms once they notice the niches are successful

Multiple Niching“[A] firm should `stick to its niching’ but not

necessarily to its niche. That is why multiple niching is preferable to single niching. By developing strength in two or more niches the company increases its chances for survival.”

Philip Kotler