Business policy and strategy (BBA 6th Sem)

Unit 2
Organizational Capabilities
Organizational capabilities deal with people, organization and technology working together to
drive business results. Organizational capabilities include collaboration, talent management
which binds all the part of the business together. Organizational capability-based strategy
focuses on planning, designing and delivering business capabilities to the firm.
Capability management deals with the establishing goals based on value. These organizational
capabilities help organization to become adaptable to the speed of change, to make
collaboration across boundaries, to learn and to establish a very good company’s culture,
visibility of the firm.

Organizational capabilities refer to a company's ability to manage resources, such as

employees, effectively to gain an advantage over competitors. The company's organizational
capabilities must focus on the business's ability to meet customer demand. They are anything
a company does well that improves business and differentiates the business in the market.
Developing and cultivating organizational capabilities can help small business owners gain an
advantage in a competitive environment by focusing on the areas where they excel.
Importance of organisational capabilities

1. Strategic capabilities focus on the firm’s assets and its market position and determine
how the firm can be able to employ strategies in future.
2. Organizational capabilities are known as intangible assets which include financial
services, solution, software development skills, people engagement, process
excellence which an organization can leverage upon while building its business
strategy.
3. Organizational capabilities always focus on providing service and satisfaction to its
customers. It is important for an organization to choose and decide the most impactful
capabilities and its feasibility to implement it.
4. Organizational capabilities provide a company with an advantage in the marketplace.
When an organization continues to create new capabilities and develops existing
ones, it will maintain the advantage over its competitors. Capabilities that provide a
competitive advantage include knowledge, product licenses and innovative designs.
5. The skills and knowledge of a company's workforce allow the organization to direct
those skills to achieve the business's goals. Training programs, education assistance
and effective recruiting and hiring programs are organizational capabilities that
ensure a knowledgeable workforce.
6. Good customer relationships ensure the continued growth and competitiveness in the
market. The relationship between the organization and its customers is an
organizational capability that affects sales, reputation and loyalty for future business.
Maintaining existing relationships with customers as well as developing new ones
ensures the company will grow and thrive in the future.

Example of Organizational Capabilities

Business capabilities can be seen in banking sector where a bank is responsible for managing
risks; its credit department is responsible for credit risks and IT department is to manage
Information security. For a FMCG company, organizational capabilities are needed in order
to set prices for the products, when the company launches and develop some new innovative
product, in providing customer service. In aircraft industry, the customer queries and claims
are handled by the airline operation department.
 Unit 3
Strategy Formulation
It is the process of choosing the best corporate as well as business course of action for an
organization so that it achieves the goals and objectives. A good strategy maximizes
competitive advantage and minimizes competitive disadvantage by making best use of the
corporate strengths and managing weaknesses.
Strategy formulation essentially involves six basic steps:

• Setting the vision and mission of the company, along with its goals and objectives to be
achieved both in long and short term.
• Performing SWOT and other environmental checks to evaluate macro and micro environment
and the state of the competition.
• Setting very specific quantitative goals, for example a 20% increase in revenue.
• Setting up the whole organization and all departments so that they work in coherence towards
the set target.
• Review of the current status of the organization, its set target and the status of the competition
and the methods by which the target could be achieved.
• Evaluating the available alternatives and choosing the best among them to be the strategy of
the organization.

Formulation of Competitive strategy

Competitive Strategy is defined as the long-term plan of a particular company in order to
gain competitive advantage over its competitors in the industry. It aimed at creating defensive
position in an industry and generating a superior ROI (Return on Investment). Such type of
strategies plays a very important role when industry is very competitive and consumers are
provided with almost similar products. One can take example of mobile phone market.
Before devising a competitive strategy, one needs to evaluate all strengths, weaknesses,
opportunities, threats in the industry and then go ahead which would give one a competitive
advantage. Companies can study & evaluate on the basis of their SWOT analysis , which
would eventually help them drive business & sales revenue.

PORTER’S COMPETITIVE STRATEGIES

Also known as Michael. E Porter’s Generic Competitive Strategies. The Generic
Competitive Strategy (GCS) is a methodology designed to provide companies with a strategic
plan to compete and gain an advantage within the marketplace. According to Porter, a
company can leverage its strengths to position itself within the competition. When classifying
the strengths of a company, they can either be placed under the heading of cost advantage or
differentiation. Within those two strength categories, the scope of the company is either broad
or narrow. Combining these two scopes with the two strength categories results in three
generic strategies for achieving above average performance in an industry: cost leadership,
differentiation, and focus. The focus strategy has two variants, cost focus and differentiation
focus.

According to Michael Porter, competitive strategy is devised into following:

1. Cost Leadership
It is a low-cost competitive strategy that aims at the broad mass market. The objective of the
firm is to become the lowest cost producer in the industry and is achieved by producing in large
scale which enables the firm to attain economies of scale. If a firm can achieve and sustain
overall cost leadership, then it will be an above average performer in its industry, provided it
can command prices at or near the industry average High capacity utilization, good bargaining
power are some of factors necessary to achieve cost leadership. Because of its lower cost, the
cost leader is able to charge a lower price for its products than its competitors and still make
satisfactory profit. For eg. Ghari detergent, Anchor toothpaste. Wal-Mart is perhaps one of the
most well-known companies that use Cost Leadership as their business strategy.

2. Differentiation leadership
It aimed at the broad mass market and involves the creation of a product or service that is
perceived throughout its industry as unique. With this differentiation leadership, firms target
to achieve market leadership and firms may charge a premium price for the products (due to
high value-added features). The speciality can be associated with Superior brand and quality,
major distribution channels, consistent promotional support or customer services. E.g. BMW,
Apple MacBook.
3. Focus

The generic strategy of focus rests on the choice of a narrow competitive scope within an
industry. Focus does not mean a smaller market simply because the company is small – it
means that the company has chosen to add value to their products and offer them to a select
number of customers. Because the company who chooses a Focus strategy deals exclusively
with their client base, they develop a loyal relationship which can generate sales and profits for
the future. In this strategy the firm concentrates on a select few target markets. It is also called
a focus strategy or niche strategy. It is hoped that by focusing your marketing efforts on one or
two narrow market segments. The firm typically looks to gain a competitive advantage through
effectiveness rather than efficiency. The focus strategy has two variants:
(a) In cost focus a firm seeks a cost advantage in its target segment, Cost-focus refers to
organisations who seek to develop a lower-cost advantage, but only within a small market
segment. These products will generally be basic, similar to the average market-leading products
(though more popular products can be charged at a higher price) and will be acceptable to a
sufficient number of customers in order to make a profit. An example would be budget food
items or other household tools stocked only by small, local supermarkets. These products are
often referred to as "me too".

b) Differentiation-focus strategy, the organisation will look to develop product

differentiation, but only within one or a smaller number of market segments. For this strategy
to succeed, the organisation will have to first identify that a consumer group has a different set
of needs than does the wider market population. Alongside this, the organisation also must
ensure that another competitor is not already appealing to the specific and unique needs that
they have identified. This approach is the most common niche marketing strategy. Companies
can use this method to force themselves into a niche, developing unique products which can be
sold for higher prices than similar undifferentiated products, often due to specialist knowledge
or innovation compared with other businesses. For e.g. Harley Davidson has established itself
as an industry leader in the niche market of motorcycle riders.

USES OF GENERIC COMPETITIVE STRATEGY

The GCS is useful when a company is looking to gain an advantage over a competitor. If a
company wants to ‘win’ the advantage over other businesses, it does so by winning sales and
taking customers away from competitors. An advantage in business, though, does not come
easily.

In order to do this successfully, a company must implement a Generic Competitive Strategy.

Not confined to a specific industry or company, the methodology can be used in for-profit
companies of any kind, as well as not for profit organizations. No matter what type of business,
the principles behind the GCS are universal and can be applied to any company.

A GCS gives a company a blueprint to follow that will create the structure of the company.
Today’s global economy and workforce is a far from the environment that brought Generic
Competitive Strategies to the forefront. There is still a use for the GCS plan in today’s business
marketplace.
PITFALLS OF GENERIC STRATEGIES OR DISADVANTAGES OR DRAWBACKS

• Risk of cost leadership- Positioning a firm as a low-cost manufacturer or service

provider places a severe burden on the firm. Cost leadership is vulnerable to risks such
as: Technological change that erases past investments and outdates past learning. Lack
of attention to the needs and preferences of customer due to excessive concerns for cost
minimization.
• Risk of differentiation – A differentiation strategy is vulnerable to the following risks:
Increased cost differential between low cost producers and the differentiating firm will
motivate brand loyalty customers to switch brands. Thus, buyers would sacrifice some
additional features and image for huge savings in cost.
• Risk of focus- A focus strategy is vulnerable to the following risks: Increasing cost
differentiated between broad-range competitors and the focus firm might offset the
differentiation achieved through focus and turn the customers towards firms that offer
a broad range of products.

Implementing Competitive Strategy

A company or business unit can implement a competitive strategy either offensively or
defensively. These are also known as competitive Tactics. A tactic is a specific operating plan
detailing how a strategy is to be implemented in terms of when and where it is to put into action.
An offensive tactic usually takes place in an established competitor’s market location. A
defensive tactic usually takes place in the firm’s own current market position as a defence
against possible attack by a rival.

➢ OFFENSIVE TACTICS: It involves direct and indirect attacks by taking away the
market share of the competitors. The primary focus of this strategy is to be a first mover
and a proactive market leader and to protect itself by standing one step ahead of the
competitors and allowing them to follow. A firm who wants to lead the markets need
to improve the speed of cost reduction, improved customer relations, value added
performance characteristics and quality.

➢ DEFENSIVE TACTICS: The principle of this strategy is to make difficult for the
competitors to acquire the market share and the new entrants to access the market.
According to Porter it aims to lower the probability of attack.
Various offensive strategies:

1. Frontal attack: A frontal attack is attacking a competitor head by head, by producing

similar products with same pricing and promotional channels. It is generally
expensive tactics. In the frontal attack, firms concentrate on competitor’s strengths
rather than weaknesses. For e.g. Maggi and Yippee.

2. Flank attack: Also known as Flanking Maneuver in which a firm may attack a part of
the market where the competitor is weak. It is to attack the blind spot of the competitor.
Large company offers wide range of products and services but they may not be leader
in every category. Flank attack is used to replace the competitor’s not so strong product
or service from the market. For e.g. the Japanese company canon uses flank attack and
took over the half of the market share of Xerox in 1978.

3. Encirclement attack: It is the combination of both frontal and flank attacks. Here the
challenging firm attacks the competitor firm on its entire major fronts i.e. strengths and
weaknesses. The attacking firm must be adequate in its resources, then only it will be
able to launch a grand attack on several fronts of the competitor. For e.g. ITC and HUL.
There are two strategies that can be used under the encirclement attack.

a) Product encirclement: In this strategy, the challenger firm introduces different types
of products with varied features, quality and price.
 b) Market encirclement: In market encirclement strategy the challenger firm introduces
the products into the new market segments which are left untapped by the competitor’s
firms.
4. Bypass attack: Bypass attack is the most indirect form of marketing strategy in which
challenging firms produce next generation products to occupy the competitor’s market share.
Challengers may diversify into unrelated products with new technology or may enter into new
geographical markets. The challenger firm performs a thorough research and produces next
generation products in order to attract the more customers this strategy is also called as
leapfrogging strategy. For e.g. launch of iPod, mobile phone overtook landlines.
5. Guerrilla attack: The guerrilla attack or warfare is a ‘hit and run strategy’. It is
characterized by the use of small, intermittent attack on different market segments held by the
competitor. This strategy is known to demoralize the competitors and helps attacker company
to secure market share. In this marketer use creative, imaginative and unconventional
marketing tactics to get success. For e.g. Coca Cola happiness machine.

Various defensive strategies:

1. Position defense:

It is a simplest defensive strategy; it involves trying to hold the current position in the market
by building brand image and customer loyalty by investing in the current markets. The only
problem with this strategy is that company can easily targeted by new entrants to the market.
For e.g. HUL increased its ad-spend on sun silk shampoo and through price reduction.

2. Mobile defense:

This defense involves expanding territories to new market areas by diversifying. This can
involve introducing new products, entering new markets or simply making changes to existing
products. This constant moving between strategies requires a flexible business that can adjust
to change. For e.g. Patanjali Ayurveda.

3. Flanking defense:

This strategy both guards the market position of leading brands and develops niche segments
to serve as defensive corner to protect the company. For e.g. Colgate toothpaste.

4. Counter-offensive defense:

Counter-offensive defense is to protect company from the counter attacks of the competitors.
The counter-offensive defense is a retaliatory strategy. When a competitor attacks your
business, you strike back with your own attack. For instance, if you operate a bakery that only
produces gluten-free products and a competitor who produces regular bread also begins
producing gluten-free products, you could hit back at it by introducing regular bread products.
 5. Contraction defense:

This defense strategy is often used by the market leader. In this the market leader retrench
(withdraw) from one segment of the market where it is not strong, to that segment where
chances of success are high. For example, imagine that your company manufacture’s two
products: liquid soap and bar soap. If you find that you can no longer compete in the bar soap
market, then it makes sense to retreat from that market and focus on liquid soaps.