Business Policy and Strategic Analysis Unit 5

Business Level Strategies

Or
Competitive Strategies
Or
Generic Business Strategies
Introduction:
Business strategies are the course of action adopted by an organization for each of its
businesses separately to serve identified customer group and provide value to the customer by
satisfaction of their needs. In the process the organization uses its competencies to gain,
sustain and enhance its strategic or competitive advantage.
Business strategy is dependent on the industry structure and the positioning of the
firm in the industry. Industry structure is dependent on the five forces operating in the market
place. Positioning is based on the competitive advantage and the competitive scope.
Competitive advantage is derived from two approaches of lower cost and differentiation.
Competitive scope could be a broad target or narrow target. When competitive advantage and
competitive scope is put side by side, what results is matrix of the types of business
strategies. Porter uses this matrix to suggest that there could be basically three types of
competitive strategies.

Porter’s generic business strategies

Broad
Cost Leadership Differentiation
Target
Competitiv
e
Scope
Narrow Focused Cost Focused
Target Leadership Differentiation

Low Cost Differentiated

Products/Services Products/Services
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Competitive advantage
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Relying on the typology suggested by porter, we could classify Business Strategies into the
following three types:
1. Cost Leadership (Lower cost/ Broad target)
2. Differentiation (Differentiation/ Broad target)
3. Focus (Lower cost or Differentiation/ Narrow target)

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Cost Leadership Strategy

Introduction:

When the competitive advantage of an organization lies in its lower cost of product or
services relative to what the competitor have to offer, it is termed as cost leadership. The
organization out performs its competitor by offering products or services at a lower cost than
the competitor. Customers prefer a lower cost product particularly if it offers the same utility
to them as comparable products available in market do. When all organizations offer products
at a comparable price, the cost leader organization earns higher profit due to the low cost of
its production. Cost leadership offers a margin of flexibility to the organization to lower the
price if the completion become stiff and yet earn more or less the same level of profit.

Achieving Cost Leadership:

Several actions could be taken to achieve cost leadership. They are

1. Accurate demand forecasting and high capacity utilization is essential to realizes cost
advantages.
2. Attaining economies of scale leads to lower per unit cost of product/ services.
3. High level of standardization of products and offering uniform service packages using
mass production techniques, yield lower per unit costs.
4. Aiming at the average customer makes it possible to offer a generalized set of utilities
in a product/ service to cover greater number of customers.
5. Investment in cost saving technologies can help an organization to squeeze every
extra paisa out of the cost, making the product/ service competitive in the market.
6. With holding differentiation till it becomes absolute necessary is another way to
realize cost based competitiveness.

Conditions under which cost leadership is used:

1. The market for the product/ service operate in such a way that price based competition
is vigorous making costs an important factor.
2. The product/ service are standardized and its consumption takes place in such a
manner that differentiation is unnecessary.
3. The buyers may be large and posses a significant bargaining power to negotiate a
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price reduction from the supplying organization.

4. There is lesser customer loyalty and the cost of switching from one seller to another is
low. This is often seen in the case of commodities or products that are highly
standardized.
5. There might be few ways available for differentiation to take place. Alternatively,
whatever ways for differentiation are possible, do not matter much to the customer.

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Benefits associated with cost leadership strategy:

1. Cost advantage is possibly the best insurance against industry competition. An

organization is protected against the ill effects of competition if it has a lower cost
structure for its products and services.
2. Powerful supplier possesses higher bargaining power to negotiate price increases for
inputs. Organizations that posses cost advantage are less affected in such a scenario as
they can absorb the price increases to some extent.
3. Powerful Buyers possesses higher bargaining power to effect a price reduction.
Organizations that possess a cost advantage can offer price reduction to some extent
in such case.
4. The threat of cheaper substitute can be offset to some extent by lowering price.
5. Cost Advantage acts as an effective entry barrier for potential entrants, who cannot
offer the product/ service at a lower price.

Risks faced under cost leadership strategy:

1. Cost advantage is short-lived. It does not remain for long as competitors can imitate
the cost reduction technique easily. Duplication of cost reduction techniques makes
the position of the cost leader vulnerable from competitive threats.
2. Cost leadership is obviously not a market friendly approach. Often, severe cost
reductions can dilute customer focus and limit experimentation with product
attributes. This may create a situation where cost reduction is done for its own sake
and the interests of the customers are ignored.
3. Depending on the industry structure, some times less efficient producers may not
choose to remain in the market owing to the competitive dominance of the cost leader.
In such situation, the scope for production service may get reduced, affecting even the
cost leader adversely.
4. Technological shifts are a great threat to the cost leader as these may change the
ground rules on which an industry operates. For instance, a technological
development may lead to the creation of a cheaper process or product, which adopted
by newer competitors. The older player in the industry may be left with an outdated
technology that now proves to be costlier. In this way, technological breakthrough can
upset cost leadership.
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Business Policy and Strategic Analysis Unit 5

Differentiation Business Strategy

Introduction:

When the competitive advantage of an organization lies in special features incorporated into
the product/ service which are demanded by the customers who are willing to pay for it, then
the strategy adopted is the differentiation strategy. The organization out performs its
competitors who are not able to offer the special features that it can and does. Customers
prefer a differentiated product/ service when it offers them utility that they value and thus are
willing to pay more for getting such utility. A differentiated product or service stands apart in
the market and is distinguishable by the customers for its special features and attributes. A
differentiator organization can charge a premium price for its products/ services, gain
additional customers who value the differentiation and command customer loyalty. Profit for
the differentiator organization come from the difference in the premium price charged and the
additional cost incurred in providing the differentiation.
To the extent the organization is able offer differentiation by maintaining a balance
between its price and costs, it succeeds. But it may fail if the customers are no longer
interested in the differentiated features or are not willing to pay extra for such features.

Achieving Differentiation:

Measures that a differentiator organization can adopt are given below.

1. An organization can incorporate feature that offers utility for the customer and match
her tastes and preferences.
2. An organization can incorporate features that lower the overall cost for the buyer in
using the product/service.
3. An organization can incorporate features that raise the performance of the product.
4. An organization can incorporate features that increase the buyer satisfaction in
tangible or non tangible ways.
5. An organization can incorporate features that can offer the promise of a high quality
of product/ service.
6. An organization can incorporate features that enable the customer to claim
distinctiveness from other customers and enhance her status and prestige among the
buyer community.
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7. An organization can offer the full range of product and/ or service that a customer
requires for her need satisfaction.

Conditions under which differentiation is used:

The major conditions under which differentiation business strategies could be employed are
given below.
1. The market is too large to be catered to by few organizations offering a standardized
product/ service.

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2. The customer needs and preferences are too diversified to be satisfied by a

standardized product/ service.
3. It is possible for the organization to charge a premium price for differentiation that is
valued by the customer.
4. The nature of the product/ service is such that brand loyalty is possible to generate
and sustain.
5. There is ample scope for increasing the sale of the product/ service on the basis of
differentiated features and premium pricing.

Benefits associated with differentiation strategy:

1. Organizations distinguish themselves successfully on the basis of differentiation, there

by lessening competitive rivalry. Customer brand loyalty too acts as a safeguard
against competitors. Brand loyal customers are also generally less price-sensitive.
2. Powerful suppliers can negotiate price increases that the organization can absorb to
some extent as it has brand loyal customers, who are typically less sensitive to price
increase.
3. Powerful buyers do not usually negotiate price decrease as they have fewer options
with regard to suppliers and generally have no cause for complaint, as they get the
special features and attributes demanded.
4. Differentiation is an expensive intention. Newer entrants are not normally in a
position to offer similar differentiation at a comparable price. In this manner,
differentiation acts as a formidable entry barrier to new entrants.
5. For similar reasons, as in the case of new entrants, substitute’s product/ service
suppliers to pose a negligible threat to established differentiator organizations.

Risks faced under differentiation strategy:

1. In a growing market, as is the case with the markets of most industries in India,
products tend to become commodities. In long term perceived uniqueness, the basis
for differentiation, is difficult to sustain. There is an imminent threat from competitors
who can imitate the differentiation strategy. In this sense, the first mover advantages
associated with the differentiation strategy are limited.
2. In the case of several differentiators adopting similar differentiation strategies, the
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basis for distinctiveness is gradually lessened and ultimately lost.

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3. Differentiation fails to work if its basis is something that is not valued by the
customer. This often happens in case where unnecessary features are added for
differentiation. Such things also occur when over differentiation is done, carrying
little tangible benefits for the customer.
4. Price premiums to have a limit. Charging too high price for differentiated features
may cause the customer forego the additional advantage from a product/ service on
the basis of her own cost benefit analysis.

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Business Policy and Strategic Analysis Unit 5

5. Failure on the part of the organization to communicate adequately the benefits arising
out of differentiation or over relying on the intrinsic product attributes not readily
apparent to a customer may cause the differentiation strategy to fail.

Focus Business Strategy

Introduction:

Focus business strategies essentially rely on either cost leadership or differentiation, but cater
to a narrow segment of the total market. In terms of the market, therefore, focus strategies are
niche strategies. The more commonly used bases for identifying customer groups are the
demographic characteristics (age, gender, income, occupation, etc.), geographic segmentation
(rural/ urban or northern India/ southern India) or life style (traditional/ modern). For the
identified market segment, a focused organization uses either the lower cost or differentiation
strategy.

Achieving focus:

Measures that a focused organization can adopt are given below.

1. Choosing specific niches by identifying gaps not covered by cost leaders and
differentiators.
2. Creating superior skills for catering to such niche markets.
3. Creating superior efficiency for serving such niche markets.
4. Achieving lower cost/ differentiation as compared to competitors in serving such
niche markets.
5. Developing innovative ways in managing the value chain, which is different from the
prevalent ways in an industry.

Conditions under which focus strategies are used:

Some of the major conditions are mentioned below.

1. There is some type of uniqueness in the segment which could either be geographical,
demographic or based on life style. Only specialized attributes and features could
satisfy the requirements of such a segment.
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2. There are specialized requirements for using the product or services that the common
customers cannot be expected to fulfill.
3. The niche market is big enough to be profitable for the focused organization.
4. There is promising potential for growth in the niche segment.
5. The major players in the industry are not interested in the niche as it may not be
crucial to their own success.
6. The focusing organization has the necessary skill and expertise to serve the niche
segment.

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7. The focusing organization can guard its turf from other predator organizations on the
basis of customer relations and loyalty it has developed and its acknowledged
superiority in serving the niche segments.

Benefits associated with focus strategies:

1. The focused organization is protected from competition to the extent that the other
organizations having broad target, do not possess the competitive ability to cater to
the niche markets. In other words, a focused organization provides products/ services
that the other organizations cannot provide or would not find it profitable to provide.
2. The focused organizations buy in small quantities and so powerful suppliers may not
evince much interest. But price increments to a certain limit can be absorbed and
passed on to the loyal customers.
3. Powerful buyers are less likely to shift loyalties as they might not find others willing
to cater to the niche markets as the focused organizations do.
4. The specialization that focused organization is able to achieve in serving a niche
market acts as a powerful barrier to substitute products/ services that might be
available in the market.
5. For the same reason as above, the competences of the focused organization acts as an
effective entry barrier to potential entrants to the niche markets.

Risks associated with focus strategies:

1. First of all, serving niche markets requires the development of distinctive

competencies to serve those markets. The development of such distinctive
competencies may be long drawn and difficult process.
2. Being focused means commitment to a narrow market segment. Once committed, it
may be difficult for the focused organization to move to other segment of the market.
3. A major risk lies in the cost configuration for the focused organization. Typically, the
costs for the focused organization are higher as the markets are limited and the
volume of production and sales small.
4. Niches are often transient. They may disappear owing to technology or market
factors. For instance new technology may make the process of making the niche
products easier or there might be shift in customers’ needs and preferences causing
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them to move to other products. Sometimes, the rising costs of niche products may
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cause the customer to move to the lower priced products of cost leaders.
5. Niches may sometimes become attractive enough for the bigger players to shift
attention to them. The rising competition in the markets for cost leaders and
differentiator organizations may cause them to look at niche markets with greater
interest, thereby posing a threat to the focused organizations.
6. Finally, rivals in the market may sometimes out focus the focused organization by
devising ways to serve the niche markets in a better way.

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Business Policy and Strategic Analysis Unit 5

Entry, Exit and Mobility Barriers

Entry Barriers

Introduction:

Entry barriers are barriers that restrict the new firms to enter an industry. Entry barriers are
significant de motivators. The concept of entry barriers implies that there are substantial costs
involved in entering into a new industry. So, higher entry barriers serve to keep out potential
entrants into an industry.

Sources of entry barriers:

There are six major sources of entry barriers. They are

1. Economies of scale:
Economies of scale in production and sale of products leading to lower cost for
existing firm may act as entry barrier for new entrant.
2. Capital requirement:
Capital requirement being very high may prevent new entrants from making
investment.
3. Switching costs:
Switching costs from the existing products or services to a new one may discourage
customers from making new commitments owing to the cost incurred in buying new
ancillary equipment, retraining employees or establishing a new network of
relationships.
4. Product differentiation:
Product differentiation by existing firm based on perceived distinctiveness by the
customers based on effective advertising, reputation as a service provider or some
such other factor may act as a barrier for new entrant.
5. Access to distribution channels:
Access to distribution channels can be monopolized by the existing firms on the basis
of their long term relationship with the distributor. It acts as a barrier for new entrant
to enter that industry.
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6. Cost disadvantage independent of scale:

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Cost disadvantages independent of scale may rise from proprietary products,

technology, and exclusive access to raw materials, favorable location and benefit of
governmental subsidies
7. Government policies:
Government policies through licensing and other means can prevent the entry of new
firm to an industry.

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Exit Barriers

Introduction:
Exit barriers restrict the firm in an industry and prevent them from leaving, even though the
returns might be low or might even be sometimes negative. i.e. Exit Barriers are obstacles in
the path of a firm which wants to leave a given market or industrial sector. These obstacles
often cost the firm financially to leave the market and may prohibit it doing so. If the barriers
of exit are significant; a firm may be forced to continue competing in a market, as the costs of
leaving may be higher than those incurred if they continue competing in the market
Implication:
As more firms are forced to stay in a market, competition increases within that market. This
negatively affects all firms in the market and profits may be lower than in a perfectly
competitive market.
Types of exit barriers:
The factors that may form a barrier to exit include:
1. Economic factors:
Economic factors could be high investments committed to plan and equipment that
have no alternative usage and high fixed costs of exit, such as high retrenchment
costs or high severance pay owing to labor agreements.
2. Strategic factors:
Strategic factors could be inter linkage between the different businesses of
accompany such as affirm being its own supplier or buyer or different businesses
sharing a common pool of resources.
3. Emotional factors:
Emotional factors could be sentimental attachment to a business, it being ancestral
business or one founded by the entrepreneur himself, or unwillingness to part with a
business owing to loyalty to employees and distributors.

Mobility Barriers

Introduction:
Intra-industry mobility barriers mean difficulties of moving the company from one strategic
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group to another. A strategic group is a concept used in strategic management that groups

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companies within an industry that have similar business models or similar combinations of

strategies. For example, the restaurant industry can be divided into several strategic groups
including fast-food and fine-dining based on variables such as preparation time, pricing, and
presentation. The number of groups within an industry and their composition depends on the
dimensions used to define the groups. Strategic management professors and consultants often
make use of a two dimensional grid to position firms along an industry's two most important
dimensions in order to distinguish direct rivals (those with similar strategies or business
models) from indirect rivals. This means that the company is not competing with companies
of similar profiles, but with those companies that produces products in the same price group

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and quality. Study of intra-industry mobility barriers is of particular importance to predicting

the development of the sector and changes in competition.

Implication of mobility barriers:

1. Low intra-industry mobility barriers:

 It means that it is easy to move company from one to another strategic group,
 The least attractive sector groups can be a threat to other groups.

2. The high intra-industry mobility barriers:

 It means the stability of the structure of competition and security within the
group.
 Strategic groups protected by high barriers to mobility have good conditions
for development.

Types of mobility barriers

1. A symmetric barrier to intra-industry mobility - moving to another group is just a

matter of investment.
2. Asymmetrical barriers to intra-industry mobility - companies must have specific
skills.

Economies of Scale

Introduction:

The simple meaning of economies of scale is doing things efficiently. Economies of scale
always lead to lower costs for existing firm. i.e. Economies of scale are the cost advantages
that an enterprise obtains due to expansion. There are factors that cause a producer’s average
cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run
concept and refers to reductions in unit cost as the size of a facility and the usage levels of
other inputs increase.
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Sources of economies of scale:

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. The common sources of economies of scale are

1. Purchasing (bulk buying of materials through long-term contracts),
2. Managerial (increasing the specialization of managers),
3. Financial (obtaining lower-interest charges when borrowing from banks and having
access to a greater range of financial instruments),
4.  Marketing (spreading the cost of advertising over a greater range of output in media
markets), and

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Business Policy and Strategic Analysis Unit 5

5. Technological (taking advantage of returns to scale in the production function).

Each of these factors reduces the long run average costs (LRAC) of production by shifting
the short-run average total cost (SRATC) curve down and to the right. Economies of scale are
also derived partially from learning by doing.
Relationship between Economies of scale and Returns to scale:
Economies of scale are related to and can easily be confused with the theoretical economic
notion of Returns to scale. Where economies of scale refer to a firm's costs, returns to scale
describe the relationship between inputs and outputs in a long-run (all inputs variable)
production function. A production function has constant returns to scale if increasing all
inputs by some proportion results in output increasing by that same proportion. Returns
are decreasing if, say, doubling inputs results in less than double the output, and increasing if
more than double the output. If a mathematical function is used to represent the production
function, and if that production function is homogeneous, returns to scale are represented by
the degree of homogeneity of the function. Homogeneous production functions with constant
returns to scale are first degree homogeneous, increasing returns to scale are represented by
degrees of homogeneity greater than one, and decreasing returns to scale by degrees of
homogeneity less than one. If the firm is a perfect competitor in all input markets, and thus
the per-unit prices of all its inputs are unaffected by how much of the inputs the firm
purchases, then it can be shown that at a particular level of output, the firm has economies of
scale if and only if it has increasing returns to scale, has diseconomies of scale if and only if it
has decreasing returns to scale, and has neither economies nor diseconomies of scale if it has
constant returns to scale. In this case, with perfect competition in the output market the long-
run equilibrium will involve all firms operating at the minimum point of their long-run
average cost curves (i.e., at the borderline between economies and diseconomies of scale).

Learning or Experience curve Analysis

Introduction:

The concept of the experience curve is a kin to a learning curve, which explains that
efficiency increases as learning is gained by workers through repetitive productive work.

Phenomenon:
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The experience curve is based on the commonly observed phenomenon that unit cost that cost
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declines as the firm accumulates experience in terms of the cumulative volume of the
production. In simple terms, the more accompany produces, the more experience it
accumulates.

Theory:

According to the experience effects theory, if a business produces and sells more units than
its competitors, it should also be honing its ability to produce better than its competitors. By
producing better means that the product are of better quality and are also produced at lower

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Business Policy and Strategic Analysis Unit 5

comparative cost. With lower costs, pricing can be done competitively, thus attracting greater
volumes of sale, which in turn, would further lower the costs. In this manner, a beneficial,
self perpetuating cycle results that bring in more sales to the experienced producer

Logic:

The Logic of experience curve dictates that lower costs lie in focusing on mass markets.

Strategy:

Firms that employ the business strategies of being the first movers in industry and
capitalizing on their experience to lower costs and garner higher market share than their
competitors are destined to gain higher competitive advantage. These firms adopt the
business strategy of cost leadership in the industry.

Implication:

The implication is that larger firms in industry would tend to have lower unit costs as
compared to smaller companies, thereby gaining a competitive cost advantage.

Factors resulting experience or learning curve:

An experience curve results from variety of factors. They are

1. Learning effect
2. Economies of scale
3. Product redesign and
4. Technological improvements in production.

Advantages:

1. The experience curve is considered to be barrier for new firms contemplating entry in
an industry.
2. It is also used to build market share and discourage competition.

Limitation:
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However an experience curve has limited appeal since specialization offers an alternative
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route to lower cost. Firms employing the differentiation business strategy rely on narrow
range of products and markets, specializing in catering to niche market which is not found
viable by the larger players in the industry. Such firms are often second movers or late
movers to an industry.

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Business Policy and Strategic Analysis Unit 5

Competitive Advantage

Introduction:

A significant edge over the competition in dealing with competitive forces is known
Competitive advantage. Competitive advantage is a special case of strategic advantage
(competitive advantage is subset of strategic advantage) where there is one or more identified
rivals against whom the rewards or penalties could be measured. So, outperforming rivals in
profitability or market standing could be a competitive advantage for an organization.
Competitive advantage is relative rather than absolute and it is to be measured and compared
with respect to other rivals in an industry.

Sources of competitive advantage:

1. In the field of finance through low cost finance (cost of capital lower than one’s
competitors)
2. Cost effective production,
3. High quality trough low wastage,
4. Proper inventory management,Purchase and Store control.

Approaches for competitive advantage:

1. Lower cost approach:

One type of positioning approach may be of offering mass products, distributed
through mass marketing, there by resulting in lower cost per unit. According to porter,
lower cost is based on the competence of an organization to design, produce and
market a comparable product, more efficiently than its competitors.

2. Differentiation approach:
The other type of positioning approach could be marketing relatively higher priced
products of a limited variety, but intensely focused on identified customer groups who
are willing to pay higher price. This firms does it to differentiate its products or
services on some tangible basis from what its rivals have to offer so that customers
purchases the products even at premium pricing. Differentiation is the competence of
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the firm to provide unique and superior value to the buyer in terms of product quality,
special features or after sales service.
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