Module 4

Competitive Strategy / Business Level Strategy

Notes
Course Outcome (CO) 4
The student will be able to design/develop business level strategies for
any organization.
MBA Semester 3
Course – Strategic Management

Topics Covered
1. Competitive Strategy: Meaning
2. Porter’s Competitive Strategies
3. Resource Based Theory
4. Competing for Tomorrow’s Market

Strategic Management (Module 4) – Compiled by Prof. Devendra Bisen 1

 Module – 4
Competitive Strategy / Business Level Strategy

1. Competitive Strategy - Meaning

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 is 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. Understanding competition, studying customer needs, evaluating
their strengths & weakness etc are all an important aspect of marketing strategy.
Companies can study & evaluate on the basis of their market share, SWOT analysis etc,
which would eventually help them drive business & sales revenue.

2. Porter’s Competitive Strategy

Michael Porter suggested four “generic” business strategies that could be adopted in order
to gain competitive advantage. The four strategies relate to the extent to which the scope
of business’ activities is narrow versus broad and the extent to which a business seeks to
differentiate its products. The four strategies are summarized in the figure below.

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 The differentiation and cost leadership strategies seek competitive advantage in a broad
range of market or industry segments. By contrast, the differentiation focusses and cost
focus strategies arc adopted in a narrow market or industry.

1. Strategy—Differentiation:

This strategy involves selecting one or more criteria used by buyers in a market-and then
positioning the business uniquely to meet those criteria. This strategy is usually
associated with charging a premium price for the product-often to reflect the higher
production costs and extra value-added features provided for the consumer.

Differentiation is about charging a premium price that more than covers additional
production costs, and about giving customers clear reasons to prefer the product over
other less differentiated products. Examples of Differentiation Strategy: Mercedes cars:
Bang & Olufsen.

2. Strategy-Cost Leadership:

With this strategy, the objective is to become the lowest-cost producer in the industry.
Many (perhaps all) market segments in the industry are supplied with emphasis placed
minimising costs. If the achieved selling prices can at least equal (or near) the average for
the market, then the lowest-cost producer will (in theory) enjoy the best profits. This
strategy is usually associated with large-scale businesses offering “standard” products
with relatively little differentiation that are perfectly acceptable to the majority of
customers.

Occasionally, a low-cost leader will also discount its product to maximise sales,
particularly if it has a significant cost advantage over the competition and, in doing so, it
can further increase its market share.

Examples of Cost Leadership: Nissan: Tesco: Dell Computers.

3. Strategy-Differentiation Focus:

In the differentiation focus strategy, a business aims to differentiate within just one or a
small number of target market segments. The special customer needs of the segment
mean that there are opportunities to provide products that are clearly different from
competitors who may be targeting a broader group of customers.

The important issues for any business adopting this strategy is to ensure that customers
really do have different needs and wants in other words that there is a valid basis for
differentiation and that existing competitor products are not meeting those needs and
wants.

Examples of Differentiation Focus: Any successful niche retailers: (e.g., the Perfume
Shop): or specialist holiday operator (e.g., Carrier).

4. Strategy-Cost Focus:

Here a business seeks a lower-cost advantage in just on or a small number of market

segments. The product will be basic-perhaps a similar product to the higher-priced and
featured market leader, but acceptable to sufficient consumers. Such products are often

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 called “me-too s”.

Examples of Cost Focus: Many smaller retailers featuring own-label or discounted label
products.

3. Resource Based Theory

In spite of the enormous proliferation of competing scheme in the business strategy
literature, there are two fundamental paradigms that have emerged as the most influential
in the last two decades. First, competitive positioning, as proposed by Michel Porter, and,
second, the Resource-Based View of the organization that evolved during the 1990s. C.K.
Prahalad and Gary Hamel popularized the approach in their now classic paper, “The Core
Competence of the Corporation”, Harvard Business Review, May-June, 1990.

The central focus of strategic attentions the industry, according to Porter. These arguments
are drawn from the work of organizational economists. According to Porter’s framework,
structural characteristics of an organization’s industry best explain variations in
organization performance. Porter sees good industries. Such as pharmaceuticals, where most
players enjoy high margins; he also sees bad industries, such as trucking, where most
participants suffer from low profitability. Therefore, a successful organization is one that
appropriates monopolistic rents. In other words, in the industry as a whole or in a segment
of the industry, the organization establishes itself as the dominant (or sole) competitor.

Instead of looking at the industry as the source of profitability, the Resource-Based View of
the organization argues that the attention should turn to the organization.

Porter’s framework and the Resource-Based View of the organization basically perceived the
primary role of strategy as achieving a unique competitive advantage. In both these
approaches ‘competitive’ is the common principle. The objective of strategy becomes beating
your competitor either by excelling in the activities of your value chain that allows you to
establish a dominant position in your industry, or through the mobilization of unique
resources and capabilities.

Although these frameworks have often been presented as conflicting views, they in fact
jointly contribute to the development of strong business strategy. Since they emphasize
different dimensions of strategy, they can richly complement each other.

The Resource-Based View of the Organization:

The Resource-Based View of the organization represents a major departure from Porter’s
approach that is based on market-driven factor considerations. According to Porter, industry
structure plays a central role in creating opportunities for superior profitability. The
Resource-Based View, on the other hand, argues that the central forces of competitive
advantage are factor-driven; that is. They depend on the organization’s development of
resources and capabilities.

1. Competitive advantage is created when resources and capabilities owned exclusively by

the organization can generate unique core competencies.

2. The advantages that result from generating core competencies can be sustained due to the
lack of substitution and imitation capacities by the organization’s competitors.
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 3. As the core competencies are unique, the benefits derived from these advantages are
retained inside the organization: they are not appropriated by others.

4. The timing of the acquisition of the necessary resource and capabilities is so opportune
that their cost will not offset the resulting benefits.

If all these conditions are met, then the competitive advantage that is created will generate
economic value for the organization. We will now explore the components of the Resource-
Based View as have been shown in the Figure, in greater details.

Unique Competencies

The organization’s resources and capabilities are the sources of its unique competencies.
Resources can be tangible (e.g., financial and physical assets) or intangible (e.g., reputation,
customer orientation, high quality, and technological superiority).

Resources are converted into capabilities when the organization develops the necessary
routines to use them effectively. Often, resources and capabilities are the results of
investment in durable, specialized, and non-tradable factors. Pankaj Ghemawat has defined
these factors as commitment. In his view, commitment explains the persistence in an
individual organization’s performance, and the differences in profitability enjoyed by
different organization competing in the same industry. These investments represent both
factors that have durability and are not easily lost to competition, and the stakes put up by
the organization that also are not easily reversed.

Sustainability

The organization has to develop its resources so that they reflect the uniqueness of the
organization and they continue to remain within the organization. For a business unit’s

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 competitive advantage to be sustainable, its resources must be valuable, scarce, and difficult
to imitate or substitute.

Appropriability

In order to generate economic value, appropriation is strategy that is both unique and
sustainable. The issue of appropriability addresses the question of who will capture that
value. It is not always necessary that the owners of the business appropriate all the value
created. This is because of a gap between ownership and control. Non-owners might control
complementary and specialised factors that divert the cash proceeds away from the business.
This type of dissipation of value is called ‘holdup’. An example of hold-up is in the personal
computer industry. Intel and Microsoft captured 80% of the total market value of the
industry. Though the economic value was created by the computer industry, this value was
lost to it and appropriated by Inter and Microsoft.

The second issue related to the appropriability of economic value is referred to as ‘slack’. It
measures losses in the economic value. It has often been seen that the extent to which a
business realizes economic value is significantly lower than what it could have been. This is
due to slack. Slack is often the result of inefficiencies or unwarranted benefits that prevent
the accumulation of economic rents by a business. One of the major sources of slack through
large parts of the world has been confrontations between management and labour unions.
For example, it has been reported that one US corporation alone, General Motors, losses $2
billion on its profits annually due to strikes.

These two factors reduce that level of generation of economic value to the organization.
While ‘hold- up’ changes the pattern of distribution of the total wealth created, ‘slack’ reduces
the overall size of this wealth.

Opportunism and Timing

The cost of implementing the strategy should be less than the value generated by it. This is
the final necessary-if obvious-condition for competitive advantage. The cost of implementing
the strategy is measured in terms of the cost to the establishment of superior resource
position. In other words, the cost incurred in acquiring the resources must be lower than the
value created by them.

C.K. Prahalad and Gary Hamel established three main ideas. First, that competitive advantage
arises from an ability of an organization to build, less expensively and more rapidly than
competitors, the core competencies that generate unanticipated products. The real source of
advantage is to be found in management’s ability to consolidate company-wide technologies
and production skills into competencies that empower individual businesses to adapt quickly
to changing opportunities.

Second, the evident link between identified core competencies and end products are the core
products. The core products are the physical embodiments of one or more core
competencies.

And third, strategic architecture is a necessary requirement for building and enhancing the
core competencies of the organization. The most important function of senior management
is to develop a corporate strategic architecture that establishes objectives for competency
building. They should spend a significant amount of their time to do this. Strategic
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 architecture is the road map to the future; it helps determine which core competencies to
build and helps identify their constituent technologies.

4. Competing for Tomorrow’s Market

Recovery from the economic downturn attributed to the COVID-19 pandemic calls for an
inclusive and sustainable economic transformation capable of economic growth that is
conducive to the broader societal and environmental objectives to be achieved over the
coming decade. The impact of the pandemic has exacerbated the social crises prevalent in
many parts of the world before its onset and created new ones to the extent that the risk
today is not only to see decades of progress in fighting poverty around the world
obliterated, but also public and private leadership retracting on commitments and actions
taken to protect the environment at a time when the very opposite is needed: economic
transformation that can provide economic growth while meeting the needs of society and
the environment. Building the “markets of tomorrow” to achieve such economic
transformation requires a creative combination of breakthrough technological and socio-
institutional innovation.

Economic value is produced by means of the technological capabilities available and

organized and distributed through the formal and informal institutions that have been
developed to structure behaviour: from public policies and procedures to habits and
norms, shared beliefs and perceptions. Each market of tomorrow is a subset of the
broader technological and socio-institutional systems most closely linked to the exchange
of a specific good, service or asset. Conceptually, a new market builds on and replaces
previous ones and can become a piece of a new paradigm, driving economic
transformation. The goal of such innovation would be to produce not only more or better,
but to transform economies by establishing new technological and institutional systems
to resolve the most pressing societal issues. Twenty markets of tomorrow are considered
promising in that they could support inclusive and sustainable revival of growth. The
establishment of some will rely on advances in breakthrough technological innovation
(e.g., broad-spectrum antivirals, space flights), others will require radically new social and
institutional structures (e.g., skills capital, water rights and quality credits), others still a
combination of both (e.g., data, genes and DNA sequences). Each of these markets could
offer potential benefits across multiple dimensions, for example, by helping to increase
well-being and empower people (e.g., precision medicines and orphan drugs, EdTech and
reskilling services), advance human knowledge and understanding (e.g., artificial
intelligence, satellite services) and protect the environment (e.g., electric vehicles,
hydrogen). Some of them have a global (e.g., greenhouse gas allowances) and others might
have a stronger national (e.g., skills capital) or local component (e.g., water rights and
quality credits).

Each of the markets of tomorrow requires seven key conditions to develop to maturity: –
A new product must be invented that can be sustainably produced (invention) – A set of
companies is able and willing to produce and market it (production) – Product demand is
sufficient to sustain a commercially viable market (demand) – A set of market standards
for the new product has emerged among actors in the ecosystem (standards) – Society is
aligned on how to value the new product (value) – The legal frameworks allow to identify,
hold and exchange the new product (codification) – The necessary infrastructure

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 (physical, digital, intangible) to exchange, distribute and store the new product needs to
be in place (infrastructure). The markets of tomorrow may be supported by government
incentives, private investment and public-private collaboration. Coalitions at the country
and global levels can together pursue the establishment of these conditions. The creation
of new markets can occur only when sufficient public and private stakeholders join forces,
together with civil society and research institutions.

The existing landscape influences the possibility for these actors to succeed. It includes all
the elements that are structural or the result of long-term processes and cannot be easily
influenced by the actors that pursue the creation of a new market. These elements can
suddenly or slowly change over time, and this can play a key role in allowing new niches
to emerge and replace established paradigms.

The COVID-19 disruption represents a unique opportunity to pilot breakthrough

technological and socio-institutional innovations that have the potential to grow into
entire new markets. Countries in which actors will be able to mobilize and coordinate, and
where market concentration in industries adjacent to the new markets is not too high –
those that can either participate or otherwise be affected by them – are likely to benefit
the most. For optimal societal outcomes, the markets of tomorrow should be designed
around fair and sustainable ways of producing and distributing value, for example
through tighter collaboration between the public and private sectors and innovative
models of financing research and development, managing intellectual property and
designing the public sector’s risk-taking into the new ventures. Especially at the country-
level, public institutions have a key role to play in catalysing public-private collaboration
and creating the systemic conditions for selected markets to emerge. Preliminary
mapping of country readiness reveals that countries with advanced technological
capabilities, strong social capital and public institutions that shape future oriented visions
are likely to be better placed to successfully create a broader range of markets for
economic transformation. However, global coordination and cross industry collaboration
may be needed to realize the markets of tomorrow. Global coordination – where the
business community is increasingly asked to play a more proactive role thanks to the
nature of their activities and value chains – should reinforce country-level action and
remains indispensable for the successful creation of many of the markets of tomorrow,
particularly those with a global scope. Cross-industry coalitions can pool the know-how
of multiple innovation chains and focus on creating specific conditions for some of the
markets of tomorrow.

Businesses have a strategic interest in co-creating markets of tomorrow and participating

in the transformation of global and national economies. Companies should consider what
role they could play in the use cases and the market ecosystems that are being created
around them, how these will affect their current activities and business models, and what
threats and opportunities might arise as the new niches grow into established markets.
Thinking about the new markets that can trigger an economic transformation should be
part of the private-sector approach to fore sighting and strategic investments. This
framework could be used by industry associations and other private sector research
institutions to inform the decision making of businesses.

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