Unit 3 (b) – Business level strategies

R.Kannan

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What Is Business-Level Strategy?

Business-level strategy– A plan of action to use the firm’s resources and

distinctive competencies to gain competitive advantage.

Abell’s “Business Definition” process– Customer needs – product differentiation (what)– Customer groups – market segmentation (who)– Distinctive competencies – competitive actions

(how)

Competitive positioning: Generic Business level strategies

•With cost leadership and differentiation on two axes we can depict the three issues of differentiation, cost and pricing option•Value creation frontier is reached by following one or more of the four building blocks of competitive advantage

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Competitive positioning: Generic Business level strategies

•To reach the value creation frontier the company must follow one or a combination of generic business strategy•Generic means all companies can follow these strategies

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Cost Leadership

• Lower the cost structure and increase efficiency – Wal Mart, Dell– Development of distinctive competencies in

different functions – • Manufacturing -flexible manufacturing systems, • Materials management - efficient materials

management techniques,

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Cost Leadership

• Sales - capturing large, stable set of customer orders, • Human resource - instituting training programs that

increases employee productivity• R & D – process improvements• Service industry –

– Supply chain management, – organizational structure, – rigorous use of budgets to reduce production and selling costs

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Cost Leadership

• Low to moderate level of differentiation• Wait till the customer need is established• Position its product to average customer,

ignore different market segments

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Competitive advantages

• Cost leader is protected by cost advantage– Less affected by increase in cost of inputs

(powerful suppliers, or price (powerful buyers)– Increases its bargaining power over its suppliers

due to bulk purchases– Ward off substitutes by lowering the price– Low cost advantage acts as a barrier to entry

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Principal threats

• Competitors ability to pursue new strategies that reduce their cost structures – technological change, lower labour costs

• Competitors ability to imitate the cost leader - China

• Single minded desire to reduce costs – customer support reduction

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Focused cost Leadership strategy

• Concentrate on Narrow business segments defined by geography, type of customer, or product line

• Competes with the cost leader, – in the segments in which it can operate without

cost disadvantage

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Focused cost Leadership strategy

– Producing custom built products that do not lend easily to economies of scale

– Operates at value creating frontier as it has no cost disadvantage in its market segment competing against companies following cost leadership or differentiated strategies

– Cost structure will be higher

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Cost leadership: implications and conclusions

• Enormous effort needed to incorporate latest information, material management and manufacturing technologies into their operations to reduce costs

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Cost leadership: implications and conclusions

• Requires on- going strategic thinking to keep business model aligned with changing environment

• Respond to strategic moves of its differentiated competitors and improve quality and features in the long run

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Differentiation strategy

• Producing a product or service that the customer as different or distinct in some aspects – charge premium price– Mercedes Benz, BMW, Rolex watches

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Differentiation – strategic choices

• Gains competitive advantage by investing its resources – Excellent quality – P & G– Superior innovation – Samsung– Responsiveness to customer needs – IBM, Godrej,

Dell, BMW– High level of quality of service – FedEx, Lawyer

firms, Consultants

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Differentiation – strategic choices

– Appeal to customers’ psychological desires (prestige or status) – BMW, Rolex

– Differentiation can also be tailored to age groups and socio economic groups

– Dividing its market into many segments and niches _ Toyota, Dell

– Developing distinctive competencies in the functions that provide it with competitive advantage

– Controlling the cost structure – Savoy Hotel4-16

Differentiation: Competitive advantages and disadvantages

• Safeguards company against competitors - Brand Loyalty, Patents and first mover

advantage• Suppliers power – Pass on the price

increases to the customers

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Differentiation: Competitive advantages and disadvantages

• Buyers – distinct product and brand loyalty• Entry Barriers – Differentiation and brand

loyalty• Substitute products – Customer need,

Premium price for distinctness• Challenges – Sustaining the distinctiveness

(imitation), Limited life of patents and first movers’ advantage

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Implications and conclusions

• Strategic choices that reinforces each other and together increase the value of goods or services

• Warding off imitation - Design or functionality• First movers’ disadvantage

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Focused differentiation

• Business model based on differentiation and generic business level strategies – distinctive products in one or more market segments

• Selecting niche means focusing on one type of customers – very rich or very young.

• Reaching the value frontier by developing a distinctive product which meets better customer needs in the given market segment

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Focused differentiation - challenges

• Niche disappears over time – technological changes, changes in taste and preferences – and the company cannot move easily to a new niche

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Choosing a Generic Business-Level Strategy

Product/Market/Distinctive-Competency Choices and Generic Competitive Strategies

Cost LeadershipCost Leadership DifferentiationDifferentiation FocusFocus

ProductProductDifferentiationDifferentiation

LowLow(principally(principallyby price)by price)

HighHigh(principally by (principally by uniqueness)uniqueness)

Low to highLow to high(price or (price or uniqueness)uniqueness)

MarketMarketSegmentationSegmentation

LowLow(mass market)(mass market)

HighHigh(many market (many market segments)segments)

LowLow(one or a few (one or a few segments)segments)

DistinctiveDistinctiveCompetencyCompetency

ManufacturingManufacturingand materials and materials managementmanagement

Research and Research and development, sales development, sales and marketingand marketing

Any kind of Any kind of distinctive distinctive competencycompetency

TABLE 6.1

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FIGURE 6.1

Types of Business-Level Strategies

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Choosing a Business-Level StrategyCost-leadership strategy success is affected by:

– Competitors producing at equal or lower costs.– The bargaining strength of suppliers.– Powerful buyers demanding lower prices.– Substitute products moving into the market.– New entrants overcoming entry barriers.

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Choosing a Business-Level Strategy

Differentiation strategy success is achieved through:

– An emphasis on product or service quality.– Innovation in providing new features for which

customers will pay a premium price. – Responsiveness to customers after the sale.– Appealing to the psychological desires of

customers.

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Choosing a Business-Level Strategy

Differentiation strategy success is affected by:– Competitors imitating features and services.– Increases in supplier costs exceeding

differentiator’s price premium. – Buyers becoming less brand loyal.– Substitute products adding similar features.– New entrants overcoming entry barriers related to

differentiator’s competitive advantage.

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Choosing a Business-Level Strategy

Focus strategy success is affected by:– Competitor entry into focuser’s market segment.– Suppliers capable of increasing costs affecting only

the focuser.– Buyers defecting from market segment. – Substitute products attracting customers away

from focuser’s segment.– New entrants overcoming entry barriers that are

the source of the focuser’s competitive advantage.

Dynamics of competitive positioning

• While some companies are able to develop business model and strategies that allow them to reach the value frontier many other cannot and so achieve only average or below average profits – Toyota, Dell, Wal-Mart– Why some companies are able to sustain their

competitive advantage?

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Dynamics of competitive positioning

– How the business model puts the company in strategic groups of competitors

– Why differences in performances are to be expected and why some companies run into competitive problems that threaten their existence?

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Competitive Positioning for Superior positioning: Broad

differentiation• Need to lower cost structure and

differentiate in a global competitive environment

• Middle of value creation frontier occupied by broad differentiators– Selecting a level of differentiation giving

competitive advantage in the chosen market segment

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Competitive Positioning for Superior positioning: Broad

differentiation– Lowering the cost structure over time– Threat to both cost leaders and differentiators

– Toyota – New technology – The way in which a business model

differentiates distrupts the industry competitive equilibrium

• Mass production days Vs. Lean production days – GM Vs. Toyota

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Competitive Positioning for Superior positioning: Broad

differentiation– Low cost structure is to make product targeted to

one market segment and allow limited customization

– Using internet and e-commerce to become broad differentiator

• Dell and Amazon– Rapidly expanding the range of products– Highly efficient materials management systems

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Strategic Groups and Business-Level Strategy

Implications for business-level strategy– Immediate competitors are companies pursuing

same strategy within the same strategic group.– Different strategic groups can have a different

standing with respect to the effects of the five competitive forces.

First mover advantage– Benefits are first choice of customers and

suppliers, setting standards, building entry barriers.

Strategic Groups

• Map competitors according to the choice of business model and identify the products, market segments and competencies for competitive advantage

• Identify the companies in its strategic group which may be close substitutes

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Strategic Groups

• Benchmark against closest rivals on important performance dimensions

• Focus attention to other strategic groups to determine possible threats

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Choosing an Investment Strategy at the Business Level

Investment strategy– The resources (human, functional, and financial)

required to gain sustainable competitive advantage.Competitive position

– Market share is an indicator of competitive strength.– Distinctive competencies are competitive tools.

Life Cycle Effects– An industry’s life cycle stage affects its

attractiveness to investment prospects.

Strategic Groups

• Map competitors according to the choice of business model and identify the products, market segments and competencies for competitive advantage

• Identify the companies in its strategic group which may be close substitutes

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Choosing an Investment Strategy at the Business Level

Stage of the Stage of the Industry Life CycleIndustry Life Cycle

Strong CompetitiveStrong CompetitivePositionPosition

Weak CompetitiveWeak CompetitivePositionPosition

EmbryonicEmbryonic Share buildingShare building Share buildingShare building

GrowthGrowth GrowthGrowth Market concentrationMarket concentration

ShakeoutShakeout Share increasingShare increasing Market concentration or Market concentration or harvest/liquidationharvest/liquidation

MaturityMaturity Hold-and-maintain or profitHold-and-maintain or profit Harvest or Harvest or liquidation/divestitureliquidation/divestiture

DeclineDecline Market concentration or Market concentration or harvest (asset reduction)harvest (asset reduction)

Turnaround, liquidation,Turnaround, liquidation,or divestitureor divestiture

TABLE 6.2

Failures in competiton

• Fit between business model and strategies required for sustainable competitive advantage– Cost leader should not strive for high level of

market segmentation– Differentiator should not try to reduce cost on

the base of its differentiation

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Failures in competiton

– Business level strategies should work in harmony and maintain competitive position

– Continuously improve their business model– Strategic business intent

• Factors for making competitive errors– Focuser may over expand losing control of business– Differentiators can end up in the middle if focused

competitors attack their markets with more low cost or specialized products

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