STRATEGIC MANAGEMENT

Fifth Edition

AZHAR KAZMI & ADELA KAZMI

Chapter 7
BUSINESS-LEVEL STRATEGIES
Learning Objectives

Describe how corporate-level strategies, business definition, and business

model act as the foundations for business strategies
Identify how industry structure and positioning of the firm in the industry
help to determine the competitive advantage
Discuss and give examples of achieving cost leadership, differentiation,
and focus generic business strategies, conditions under which each of
these are used, their benefits and risks
Explain the two types of tactics used for business strategies: timing and
market location
Indicate business strategies for four different industry conditions
Demonstrate leveraging home country advantages and organisation-
specific advantages for international business strategies

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Foundations of Business-Level Strategies

Corporate-level strategies lay down the framework in which

business strategies operate.
Corporate-level strategies are basically about the decisions
related to allocating resources among the different businesses of
an organisation, transferring resources from one set of
businesses to others.
Each business in a company can be defined along three
dimensions of customer needs, customer groups, and alternative
technologies.
The business definition lays down the framework within which
businesses can operate. The business definition also provides the
direction in which businesses can expand or retrench.
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Business-Level Strategies

Business strategies are the courses of action adopted by an

organisation for each of its businesses separately to serve
identified customer groups and provide value to the customer by
satisfaction of their needs.
The organisation uses its competencies to gain, sustain, and
enhance its strategic or competitive advantage.
Competitive advantage results in above-average returns to the
company.

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Factors Determining the Choice of a
Competitive Strategy
Industry structure: According to Porter, industry structure is
determined by the competitive forces. These forces are five in
number: the threat of new entrants; the threat of substitute
products or services; the bargaining power of suppliers; the
bargaining power of buyers; and the rivalry among the existing
competitors in an industry.

Positioning within the industry. Porter considers positioning as the

overall approach of the firm to competing. It is designed to gain
sustainable competitive advantage and is based on two variables:
the competitive advantage and the competitive scope.

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Competitive Advantage

Low cost Differentiation

Lower cost is based on the Differentiation is the competence
competence of an organization to of the firm to provide unique and
design, produce and market a superior value to the buyer in
comparable product more terms of quality, features or service
efficiently than it competitors
Marketing relatively higher priced
Offering mass produced products products of limited variety but
distributed through mass intensely focused on identified
marketing thereby resulting in customer groups who are willing to
lower cost per unit. pay a higher price.

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Competitive Scope

Breadth of an organization’s target within its industry.

The range of products to offer, the customers groups to cater to,
the distribution channels to employ, and the geographical areas to
serve.
Depending on the scale of an organisation's operations, we could
say that the firm can either adopt a broad target approach or a
narrow target approach.
Under broad targeting, the firm can offer a full range of
products/services to a wide range of customer groups
In narrow targeting, the firm can choose to offer a limited range of
products/services to a few customer groups

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 Generic Business Strategies

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Cost Leadership

When the competitive advantage of an organisation lies in lower

cost of products or services relative to its competitors, it is termed
as cost leadership.
The organization can offer these products or services at a lower price
since it produces them at lower costs.
Customers prefer a low price product if it offers the same utility to them as
other products in the market.
When all organizations offer products at comparable price, the cost leader
earns higher profit owing to its low costs
Cost leadership offers a margin of flexibility to the organization to lower
price if the competition becomes stiff, yet earn more profit

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Cost Leadership

Achieving Cost Leadership

Ensure that the cumulative costs across the value chain is lower than that
of competitors
Analyse cost drivers and identify areas for optimisation of costs
• high capacity utilisation and economies of scale
• Accurate demand forecasting
• high level of standardization of products and offering uniform service
packages using mass production techniques
• targeting the average customer, offer generalised set of utility in a
product/service
•Invest in cost-saving technologies

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 Cost Leadership
Achieving Cost Leadership
Firm Cost effective MIS Relatively few management Simplified planning practices
Infrastructure layers to reduce overhead costs to reduce planning costs

Human Resource Policies to reduce Training to improve employee

Management employee turnover efficiency

Technology Develop easy-to-use manufacturing

Development technologies

Procurement Systems and procedures to find lowest cost (with acceptable quality) RM suppliers

Efficient systems to Efficient-scale Economical A small, Proper product

link supplier with production facilities delivery methods highly trained installation to
firm’s production Economies of scale Low-cost sales-force reduce
processes to reduce transportation frequency of
Reduce inventory production costs recalls

Inbound logistics Operations Outbound Marketing Service

logistics & Sales 11

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Cost Leadership

Conditions under which cost leadership is used:

• Price-based competition is vigorous, making costs an important
factor.
• Price sensitive customers - low price more important than features or
quality
• The product/service is standardised and differentiation is
superfluous.
• The buyers may be large and possess significant bargaining power
to negotiate a price reduction.
• There is lesser customer loyalty and low switching cost - seen in
case of commodities or highly standardised products
• Few avenues for differentiation, or possible means of differentiation
do not matter to customers
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Cost Leadership

Benefits of cost leadership strategy (against industry forces):

• The best insurance against industry competition
• Powerful suppliers possess high bargaining power to negotiate price
increase for inputs. Cost leadership strategy allows organization to
absorb the price increase
• Organizations that possess cost advantage can offer price reduction
to powerful buyers who bargain to bring down the price.
• The threat of cheaper substitutes can be offset
• Cost advantage acts as an effective entry barrier for potential
entrants who cannot offer the product at a lower price

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Cost Leadership

Risks of cost leadership strategy:

• Cost advantage may be temporary. Competitors can imitate the cost
reduction strategies easily.
• Severe cost reduction can dilute customer focus and limit
experimentation with product attributes.
• Too much focus on cost reduction versus competitive levels of
differentiation
• Innovations by competitors can eliminate cost advantage
• New market developments - declining buyer sensitivity to price,
buyer interest in added features or service, etc.
• Technological shifts may lead to the creation of a cheaper process or
product

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Differentiation
Integrated set of actions designed by a firm to produce or deliver goods or
services, that customers perceive as being different/ unique, in ways that
are important to them, at an acceptable cost.
The competitive advantage of an organisation lies in special features
incorporated into the product / service which is demanded by the
customers who are willing to pay for it.
Profits for the organization come from the difference in the premium price
charged and the additional cost incurred in providing the differentiation
If the organization is able to offer differentiation by maintaining a
difference between price and costs, it will succeed. It may fail if the
customers are no longer interested in the differentiated features or are not
willing to pay extra for such features.

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Differentiation
Achieving Differentiation
• Create value for the customer that is unmatched by the competitors
• Incorporating features and attributes valued by the customer
• Lower the overall cost for the buyer in using the product/service
• Raise performance of the product
• Increase buyer satisfaction in tangible or intangible ways
• Offer the promise of high quality of product/service
• Enable customer to claim distinctiveness from other customers and enhance his
status
• Offer full range of products/services that a customer requires for his need
satisfaction
• Using high quality raw materials, superior process technology, speedy and reliable
distribution, better after-sale support, strong brand name..

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Differentiation

Conditions under which differentiation strategy is used:

• The customer needs and preferences are too diversified to
be satisfied by a standardised product / service.
• Customers prefer a differentiated product/service that offers
them utility that they value and are willing to pay more for
getting that value.
• The nature of the product / service is such that brand loyalty
is possible to generate and sustain.
• There is ample scope for increasing sales of the
product/service on the basis of differentiated features and
premium pricing.

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Differentiation

Benefits of differentiation strategy:

• Organizations distinguish themselves, thereby reducing competitive
rivalry. Customer brand loyalty also acts as a safeguard against
competitors.
• Powerful suppliers can negotiate price increase that the organization
can absorb up to some extent as it has brand loyal customers less
sensitive to price increase
• Customers do not usually negotiate price decrease as they get the
special features and attributes that they want.
• Differentiation is expensive, new entrants are not normally in a
position to offer similar differentiation at a comparable price. Hence
differentiation acts as formidable entry barrier.
• Substitute products pose negligible threat

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Differentiation

Risks of differentiation strategy:

• In a growing market, products tend to become commodities. Long-term perceived
uniqueness is difficult to sustain.
• Competitors can imitate the differentiation strategy
• If several differentiators adopt similar differentiation strategies, the basis for
distinctiveness is gradually lessened and ultimately fades away.
• Differentiation fails to work if its basis is not valued by customers, often when
unnecessary features are added for differentiation. Also when over differentiation
is done carrying little tangible benefit for the customer.
• Price premium too has a limit. Charging too high a price for differentiated features
may cause the customer to forego the additional advantage on the basis of
his/her own cost-benefit analysis
• Failure to communicate the benefits or relying on the intrinsic product attributes
not readily apparent to the customer may cause the differentiation strategy to fail.

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Focus Business Strategies

Focus business strategies essentially rely on either cost

leadership or differentiation but cater to a narrow segment of the
total market. Thus, in terms of the market, focus strategies are
niche strategies.

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Focus Business Strategies
Focus strategy examples
• Buyer groups
• Product line segments
• Geographic markets
Examples:
 Ferrari, Aston Martin, Porsche, Rolls Royce
 Ezee , liquid detergent from Godrej, for woolen clothes
 TV Channels like sports, religion and regional based .
 Neem Active – Herbal Toothpaste
 Krack Cream

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Focus Business Strategies

Conditions under which this strategy is used:

• Only specialised attributes and features could satisfy the
requirements of such a segment.
• There are specialised requirements for using the products or
services that the common customers cannot be expected to fulfil.
• The niche market is big enough to be profitable for the focussed
organisation.
• There is a promising potential for growth in the niche segment.
• The focussing organisation has the necessary skill and expertise to
serve the niche segment.
• The focussing organisation can guard its turf from other predator
organisations on the basis of customer relations and loyalty.

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Stuck-in-the-Middle Positioning

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Best-Value Provider Positioning

Best-value is a concept popular in government and bureaucracy to

denote choice in procurement of public services based not on
absolute lowest cost but lowest cost at a predetermined level of
acceptable quality.
When government agencies, such as a municipality, contract out a
service it is usually the contractor who offers the lowest price gets the
contract. This is because it is easy to compare prices specified in
quantitative terms and it seems fair to compare bids on the basis of
price and award the contract to the lowest bidder.
Cost leaders and differentiators can adopt a best-value provider
positioning when they offer products and services to customers at the
best price-value available on the market.

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Integrating Cost Leadership and
Differentiation
Integrating cost leadership and differentiation is possible through
providing product/service at low cost through technologies that
enable differentiation through focus on niche segments.
Developments in process technology have made it possible to
offer a wider variety of products and yet keep the cost low. An
organisation that produces through mass production but can use
technological means to create variety in the product / service can
sometimes combine the benefits of low-cost and differentiation.
Flexible manufacturing systems, using mass customisation, allow
low-volume production at relatively lower costs are some of the
means to adopt this strategy.

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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 into action.
By their nature, tactics are narrower in their scope and shorter in
their time horizon than are strategies.
There are two kinds of tactics: timing (when) and market location
(where) used in formulating and implementing business
strategies.

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Timing Tactics

When to make a business strategy move is often as important as

what move to make. It is here that timing of the application of a
business strategy becomes important. 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.
First movers and late movers: The first company to manufacture
and sell a new product or service is called the pioneer or the first
mover organisation. The organisations which enter the industry
subsequently are late mover organisations. Sometimes an
intermediate category of second-movers is also considered to
include those organisations which react immediately to the first-
movers.

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Market Location Tactics

This aspect deals with the issue of where to compete. By this is

meant the target market the organisation aims at in applying its
business strategies.
Market location could be classified according to the role that
organisations play in the target market and the type of business
tactics they adopt to play such a role.
On the basis of the role that organisations play in the target
market, market location tactics could be of four types: leader,
challenger, follower, and nichers.

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Market Location Tactics: Types

Market leaders are organisations that have the largest market

share in the relevant product market and usually lead the industry
in factors such as technological developments, product and
service attributes, price benchmarks, or distribution channel
design.

Market challengers are organisations that have the second or

lower ranking in the industry. These organisations can either
challenge the market leader or choose to follow them. When they
seek to challenge the market leader they do so in the hope that
they would be able to gain market share.

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Market Location Tactics: Types

Market followers are organisations that imitate the market leaders

but do not upset the balance of competitive power in the industry.
They prefer to avoid direct attack, keep out of the way of other
organisations, and reap the benefits of the innovations made by
the market leaders through imitation.

Market nichers are organisations that carve out a distinct niche

that is left uncovered by the other organisations in the industry or
a niche that is of little or no interest to others. The niche strategies
are akin to focus business strategies as they target a market
position that is small and unique and require special
competencies in order to be served.

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Four Stages of Industry Life Cycle

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Four Stages of Industry Life Cycle:
Embryonic Stage
Investment and capital needs are highest as the industry has just
started. Returns are low and uncertain.
Companies are first movers and fast followers who have to
generate capital internally or attracted outside capital usually from
venture capitalists.
Technology is yet unproven and not standardised.
Demand is being established; customers lack information and are
hesitant to try out new products or services
Business models are unproven; business uncertainty is high and
managerial decisions involve high risks

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Four Stages of Industry Life Cycle: Growth
Stage
Investment and capital needs decrease but gradually. Returns are
high.
Technology gains a firm footing and standardisation increases.
Demand is established, customers gain information and learn to
differentiate between the product offerings.
Business models take shape and business is on more secure
footing and managerial decisions involve moderate risks.
Market share of incumbent companies increases; new bases for
market segmentation emerge.

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Four Stages of Industry Life Cycle: Maturity
Stage
Investment and capital decrease significantly. Returns are lower
and stabilise.
Technology developments are few and standardisation is high.
Demand is stable, customers are well-aware of options available,
and have learnt to choose and differentiate.
Business models are well established.
Market shares of companies are steady and jealously guarded.
Industry gets consolidated and is dominated by small number of
large companies.

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Four Stages of Industry Life Cycle: Decline
Stage

Investment and capital practically cease. Returns decline.

Technological developments become superfluous.
Demand shrinks and it becomes difficult to attract new customers.
Products tend to become commodities and lose their brand
power.
Market shares reduce in size as industry demand shrinks.
Industry faces movement of firms through retrenchment
strategies.

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Business Strategies and Internationalisation

Leveraging home country advantages for businesses: India possesses

significant home country advantages in three industries: automobile parts
and components, IT services, and generic pharmaceuticals. We look
forward to developing international competitive advantage in some other
industries such as services (e.g. healthcare) and entertainment (e.g.
motion pictures).
Leveraging organisation specific advantages for businesses: Many of the
organisations in other industries have to rely on their own competitive
advantages to internationalise. Many FMCG sector companies in India
have adopted internationalisation strategies in the developing countries in
Africa and Asia on basis of their competitive advantages in terms of low
cost and other capabilities.

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