GSB MBA TM IV

Strategic Management
Unit III - Business Strategy

1
 Business strategy
Focuses on gaining, sustaining and improving the
competitive position of a co’s or business unit’s
products or services within a specific industry or
market segment that the co or bu serves. It is the
industry where competitive advantage is won or lost -
key factors determining choice of strategy -
> industry structure,
>positioning of the firm in the industry
Eg., MUL positions itself as aprovider of security, confidence,
reassurance, value-for-money, and good resale value.
Business strategies of MUL combine lower cost and
differentiation. Lower cost strategy by using a reliable network
of suppliers, efficient manufacturing, jit inventory, extensive
after-sales service network, realisation of economies of scale.
Differentiation strategy in options to a customer by offering a
car at each point difference of a fixed amount
2
Business strategy can be;
Competitive, (battling against all
competitors for advantage) or,
Cooperative (working with one or more
competitors to gain advantage
against other competitors), or,
Both.

3
 What are competitive strategies?
Creates a defendable position so that a firm
can out-perform competitors. The following
questions are asked;
> should we opt for a low cost strategy?
or,
> should we compete for the most sought
after share of the market? or,
> should we opt for a niche, profitable,
less sought after segment?
4
 Porter’s generic strategies
M. Porter proposed 2 generic strategies for out-
performing other corporations in a particular industry;
lower cost and differentiation.
‘Generic’- can be pursued by any type or size of
business firm, even by not-for-profit organisation.
> Lower cost strategy – the ability of a company or
a business unit to design, produce, and market a
comparable product more efficiently than its
competitors.
> Differentiation strategy – ability to provide unique
and superior value to the buyer in terms of product
quality, special features ,or after–sale service. 5
 Generic strategies

Broad Cost
target Differentiation
Leadership

Competitive Focused Focused

Scope Cost leadership differentiation
Narrow
target

Low cost Differentiated

product/services products/services

Competitive advantage 6
Porter proposes that a firm’s competitive
advantage is determined by its competitive
scope ie., the breadth of the target-market of
the company or business unit. Before choosing
either of the strategies, the firm must choose
the range of product varieties it will produce,
the distribution channels it will employ, the
types of buyers it will serve, the geographic
areas in which it will sell and the related
industries in which it will also compete. The co
can choose either a broad target ie., aim at the
middle of the mass market or a narrow target
i.e.,aim at a market niche. 7
Combining these 2 mkts with the 2
competitive strategies results in 4
variations of generic strategies;
> when the lower cost and
differentiation strategies have a mass-
market target they are called cost
leadership and differentiation.
> when the strategies are focused on a
market niche (narrow target), they are
called cost focus and differentiation
focus.
8
• Cost leadership is a low-cost competitive
strategy that aims at the broad mass market
and requires “ aggressive construction of
efficient-scale facilities, vigorous pursuit of
cost reductions from experience, tight cost
and overhead control, reducing marginal
customer accounts, and cost minimisation
in areas like R&D, service, sales force,
advertising, and so on.” This facilitates
lower price than competitors, and still make
adequate profits.
9
Eg., Wal-Mart, SW Airlines, Timex, etc.
> The Gujarat Cooperative Milk Marketing
Federation (GCMMF)
the country’s largest cooperative, (AMUL),
operates in the branded ice cream market on
the lower–cost platform. Backed by about 180
coop networks located across the country and
an efficient supply-chain for the procurement of
milk –a cold chain for supplying its refrigerated
products through an efficient distribution
network.
10
> Tata Steel the lowest-cost steel producer has
successfully competed against Posco of S.Korea.

Advs; > defence against rivals

> earn profits even during times of heavy
competition
> High market share will give high bargaining
power with suppliers
> Its low price will be a barrier to new
entrants
> Because of the above they will earn more
than average ROI.
11
How to achieve cost leadership?
> accurate demand forecasting and high
capacity utilisation.
> economies of scale
> standardisation of products and uniform
package of services thro’ mass production
> Aim at average customer to serve the
largest number
> invest in cost saving technologies
> postpone differentiation as much as
possible.

12
Differentiation
Aims at the broad makt and involves the creation of a product or
service that is perceived as unique – can charge a premium
price – can be associated with design, brand image,
technology, features, dealer network or customer service.
Advs;
> a viable strategy for earning above-average profit in
specific business because the resulting brand royalty lowers
customers’ sensitivity to price.
> Increased cost can be passed on to the buyer.
> Buyer loyalty serves as an entry barrier.

13
Eg; Walt-Disney productions, Maytag
Appliances, NIKE athletic shoes,
Orient Fans, a Kolkotta based Birla group
concern, offers premium ceiling fans
based on product innovation and superior
technology – extra-wide blades, heavy
duty motor, low-wattage, max area
coverage, etc.

14
Gati, a multimodal transport company, differentiated its
services in a highly competitive and uniform market
with tangibles like a risk insurance offer for
shipments, refund on failure to deliver on time, door to
door pick up and delivery, time bound operations, and
safer transportation.
In 1985, in a case, packaging became the differentiating
factor for Parle Agro, when it launched Frooti, a non-
aerated, natural fruit-based drink, in a tetrapack.
Customers perceived glass bottled drink to be
synthetic. Frooti became generic to the category of
tetrapacked fruit drinks.
Research shows that differentiation is a better entry
barrier and low cost strategy gives a larger market
15
share.
 Cost focus
- Is a low cost strategy which focuses on specific
buyer group or geographic market and attempts
to serve only this niche – co seeks a cost
advantage in this target segment – possible to
keep overhead and R&D to the min.
Advs;
able to serve a small market more efficiently than its
competitors.
Requires a trade-off between profitability and overall
market share

16
- A differentiation strategy that concentrates on a
particular buyer group, product-line segment, or
geographic market – seeks a differentiation in a
targeted market segment – focuses efforts to serve
the special needs of a narrow strategic market more
effectively than its competition.
- E.g., branded jewellery business of Titan Industries
operates in a highly fragmented industry. India has a
tradition of highly skilled craftsmen in the jewellery
trade. Designs vary across regions. Tanishq, the
jewellery brand of Titan, adopts a differentiation
strategy offering a range of gold, pearl, and diamond
jewellery for women and men.
17
Designs are made on the basis of continual feedback from its
extensive retail network of showrooms. New designs are
introduced every quarter. The brand projects itself as a reputed
firm with a guarantee of purity.
> Price is an important consideration in a piracy-ridden
industry such as recorded music in India. Nearly 70% of the
music cassettes sold in India are Hindi film songs, a category
that is highly price-sensitive. T-series created a low-end
revolution in the 1980s by offering cheap cassettes of Hindi
songs. HMV, Sony, Polygram, Tips, BMG, Venus, and
Magnasound are the other major players. Niches in the
recorded music market exist in the segments of Indipop,
International, and Indian classical music. While Sony Music and
Magnasound cater to the upper-end niche, Indipop lovers with
recorded cassettes, Channel V and MTV offer videos. Times
Music and Music Today cater to the urban, upwardly mobile,
sophisticated listeners of Indian classical music. Both these
companies operate on the basis of differentiation in niche
products and premium pricing.
18
 > Premiere a high priced film magazine from the
Zee group, was launched in 1988 as a niche
publication in a market dominated by cheap, glossy
magazines, which concentrated on gossip and private
lives of film stars – focused on those readers who
were bored with these gossips and who were a new
breed of serious film viewers generated by watching
TV at home. The differentiation was brought by
excellent visuals, and professional features, such as
film history.
> Pustak Mahal’s Rapidex series of books,
particularly aimed at the niche market of Indians
seeking to learn the English language, is a low priced
publication keeping in view the highly price sensitive
target audience and book piracy by small players in
the unorganised sector.
19
 > Philips India ltd launched the flat TV with
plasma technology that enables distortion free
pictures and bright, accurate colours, and fitted with
an integrated Dolby pro-logic sound system. The
premium priced TV, with differentiation on technology
basis, was targeted at the niche market of a
selective, sophisticated, technology driven audience.

20
 Risks with competitive strategies
No specific strategy is guaranteed to achieve
success, and some cos have said that they
could not sustain the strategy.
> cost leadership can be imitated by
competitors, especially when the basis of
differentiation can be less important to buyers.
> focusers may be able to achieve better
differentiation or lower cost in market segments,
but they may also lose to broadly targeted
competitors when the segment’s uniqueness
fades or demand disappears.
21
 Issues in competitive strategies
According to Porter, to be successful, a co must
achieve one of the generic competitive strategies.
Otherwise it will be stuck in the middle of the
competitive marketplace with no competitive
advantage and is doomed to below average
performance. Research supports this. However,
there are cos which have simultaneously
achieved low cost and differentiation position.
Eg., Toyota, Nissan, Honda. Porter argues that
these may be temporary. Many different kinds
of potentially profitable competitive strategies
are possible.
22
 Industry structure and competitive strategy
Porter’s competitive strategies ma be used in any
industry, in some instances, some strategies are more
likely to succeed than others. In a fragmented
industry, where, many small and medium sized firms
compete for small shares of the local market focus
strategies will dominate.
Fragmented industries are typical for products in the
early stages of their life cycle and for products
adapted to local tastes.
Eg., Until Pizza Hut used advtg to differentiate itself
from local competitors, the pizza business was a
fragmented industry, composed primarily of locally
owned pizza parlors, each with its own distinctive
product and service offering. Subsequently Domino’s
used the cost leader strategy to achieve US national
market share. 23
As industry matures, fragmentation is overcome
industry tends to become consolidated, dominated by
a small number of large companies – in due course, a
few large cos obtain large market share- when product
stds become established for min quality and features,
competition shifts to a greater emphasis on cost and
service – slower growth combined with overcapacity
and knowlegeable buyers put a premium on a firm’s
ability to achieve cost leadership or differentiation
along the dimensions most desired by the market.
R&D shifts from product to process improvements
Overall product quality improves and costs are lowered.
-cost leadership and differentiation are combined in
various degrees. Low price alone will not fetch high
market share. Buyers are more sophisticated and
demand a certain min quality for the price paid.
24
 Hyper competition and competitive strategies
D‘Aveni in his book, Hypercompetition, proposes
that it is difficult to sustain a competitive
advantage for long.
“Market stability is threatened by, short product
life cycles, short product design cycles, new
technologies, frequent entry by unexpected
outsiders, repositioning by incumbents, and
tactical redefinitions of market boundaries as
diverse industries merge. A firm will have to
constantly work to improve its competitive
advantage – not enough to be a cost leader –
continuous improvement programs will reduce
cost for all – firms to reduce costs and add value”.
25
• When firms become hypercompetitive, they
go through escalating stages of competition
– initially, firms compete on cost or quality
till an abundance of high quality, low priced
goods result – next, competitors move into
untapped markets – others imitate – entry
barriers to limit competitors ; economies of
scale, distribution agreements, strategic
alliances, etc., make it almost impossible for
a new firm to enter .
26
next, the remaining firms attack and destroy the
strongholds of other firms – global competitors work
their way to a situation where no one has any
advantage and profits are minimal – no sustainable
competitive advantage – the only way a firm can keep
its competitive advantage is through a continuous
series of multiple short term initiatives to replace
current successful products with new generation
products before competitors can do so. Eg., INTEL
and MS.
Hyper competition views competition as a series of
waves on what used to be a calm stretch of water –
requires continuous maneuvering – risk of too much
emphasis on tactics than on long term sustainable
competitive advantage. 27
 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 be put into action –
narrower in scope and shorter in time horizon
than strategies – link between the formulation
and implementation. Tactics to implement
competitive strategies are;
> Timing tactics, and,
> Market location tactics

28
 Timing tactics
First mover – pioneer – advantages;
> reputation as leader
> assume cost leader position through
the learning curve
> temporary high profits from buyers
who value the product or service
very highly.
Disadvantages – (advantages of late movers)
Late movers enter the market only after product
demand has been established. Imitate others’
technological advances (keep R&D costs low),
minimise risks by waiting until a new product is
established – take advantage of the natural inclination
29
of the first mover to ignore market segments
 Market location tactics
• Offensive tactic – attempts to take the market share
from an established competitor’s – takes place in an
established competitor’s location.
• Defensive tactic – attempts to keep off a competitor
from one’s market. Takes place within a co’s current
market position as a defence against possible attack
by a rival.
• Offensive tactics
> Frontal assault –matshes competitor in every
category from price to promotion to distribution
channel – must have superior resources but also be
willing to persevere – expensive, may serve to wake
up a sleeping giant, depress profits for all. 30
> Flanking maneuvre; attack part of the
market where the competitor is weak – must be
patient and willing to expand out of the
relatively undefended market niche or else face
retaliation by competition.
> Encirclement; encircles the competitor’s
position in terms of the products or markets or
both. Encircler has greater product variety, or
serves more markets or both. Honda adopted
this tactic in motor cycles by taking every
market segment except for the heavyweight
segment in the US controlled by Harley-
Davidson - must have a wide variety of abilities
and resources necessary to attack multiple
market segments. 31
> Bypass attack; Change the rules of the game
–cut the market out from under the established
defender by poffering a new product that
makes the competitor’s product unnecessary.
Eg., Instead of competing directly against MS
Windows 95/97 OSs, Netscape chose to use
Java ‘applets’ in its Internet browser so that an
OS and specialized programs were no longer
necessary to run applications on a pc.

32
Guerilla warfare; “hit and run” –involves
small, intermittent assaults on a
competitor’s different market segments – a
new comer can make some gains without
seriously threatening a large, established
competitor and evoking some form of
retaliation – must be patient enough to
accept small gains and to avoid pushing the
established competitor to the point of
making a response or lose face.

33
 Defensive tactics
According to Porter, defensive tactics aim at
lowering the probability of an attack, divert
attacks to less threatening avenues, or
lessen the intensity of an attack – make a
co’s competitive advantage more
sustainable by causing a challenger to
conclude that an attack is unattractive –
deliberately reduce short term profitability
to ensure long term profitability.
34
 > Raise structural barriers – block a challenger’s
logical avenues of attack;

- offer a full line of products in every possible

market segment to close off any entry point,
- block channel access by signing exclusive
agreements with distributors,
- raise buyer switching costs by offering low cost
training to users,
- raise the cost of gaining trial users by keeping
prices low on items new users most likely will
purchase,
- increase scale economies to reduce unit costs,
- foreclose alternative technologies through
patenting or licensing. 35
- limit outside access to facilities and
personnel
- tie up suppliers by obtaining exclusive
contracts or purchasing key locations,
- avoid suppliers that also serve
competitors, and
- encourage the govt to raise barriers
such as safety and pollution stds or
favourable trade policies.

36
 > Increase expected retaliation; eg.,
management may strongly defend any erosion of
market share by drastically cutting prices or
matching a challenger’s promotion through a
policy of accepting any price-reduction coupons
for a competitor’s product.
> Lower the inducement for the attack;
reduces a challenger’s expectations of future
profits in the industry – a co can keep prices low
and constantly invest in cost cutting measures –
keeping the price very low, gives a new entrant
little profit incentive.

37
 Cooperative strategies
- Used to gain competitive advantage within an
industry by working with rather than against
other firms. Other than collusion, which is
illegal, the primary type of cooperative strategy
is the strategic alliance.
- Strategic alliance - “a partnership of 2 or
more corporations or business units formed to
achieve strategically significant objectives that
are mutually beneficial.” – short term or lasting
long enough for establishing a beachhead in a
new market. Others are longer lasting and may
even be the prelude to a full merger between 2
cos.
38
Reasons for SAs;
> to obtain technology
> manufacturing capabilities
> Access to specific markets
> to reduce financial or political risk
> to achieve competitive advantage
Cooperative arrangements between cos may
range from weak and distant to strong and
close – the types of alliances range from
mutual service consortia to JVs and
licensing arrangements to value chain
partnerships 39
 Mutual service consortium
“A partnership of similar cos in similar industries
who pool their resources to gain a benefit that is
too expensive to develop alone such as access to
advanced technology.”
Eg, IBM of USA, Toshiba of Japan and Siemens of
Germany formed a consortium to develop a new
generation of computer chips. IBM then
transferred the new technology to a facility in the
US.
– fairly weak and distant alliance – very little interaction
or communication among the partners.

40
 Joint Ventures
A cooperative business activity, formed by 2 or more
separate organisations for strategic purposes,
that creates an independent business entity and
allocates ownership, operational responsibilities,
and financial risks and rewards to each member,
while their separate identity and autonomy.
Along with licensing arrangements, JVs lay at the mid
point of the continuum and – are formed to pursue an
opportunity that needs a capability from 2 cos , such
as technology of one and the distribution channels of
the other.- most popular form of SAs. – occur
because, cos involved do not want to or cannot legally
merge. – JVs provide a way to temporarily combine the
different strengths of partners to achieve an outcome of value
to both. 41
• Very popular in FT – because of financial
and political-legal constraints – a convenient
way to work together without losing
independence.
• Disadvantages – loss of control, lower
profits, probability of conflicts with partners,
likely transfer of technological advantage to
the partner – largely temporary – high rate
of failure – successful if both partners have
equal ownership and are mutually
dependent.
42
 Licensing arrangements
• An agreement in which the licensing firm grants
rights to another firm in another country or
market to produce or sell a product – licensee
pays compensation to the licensing firm for
technical help or market to produce or sell a
product – licensee pays compensation to the
licensing firm for technical expertise – useful if
the brand or TM is well known – If FDI is difficult
– danger - the licensee may become competitor-
distinctive competence should not be licensed.
43
 Value-Chain partnership
• One co forms a long term arrangement
with a key supplier or distributor for mutual
advantage – popular as cos outsource
activities

44