Porters Generic Strategies / Business Level Strategies.

Business Strategies
Business strategy is dependent on Industry Structure and Positioning of firm in Industry. Classification of Business Strategies :
Cost Leadership (Lower Cost / Broad Target). Differentiation (Differentiation / Broad Target). Focus (Lower Cost or Differentiation / Narrow Target).

Cont

1. 2. 3. 4. 5.

Industry Structure :
Threat of new entrants. Threat of substitutes. Bargaining power of suppliers. Bargaining power of buyers. Market competition.

1. 2.

Positioning of firm :
Competitive Advantage. Competitive Scope.

Cost Leadership Strategy.

When Competitive advantage lies in its lower cost products relative to what competitors have. Higher profits in case competition also offers products at comparable prices. Provides additional leverage to the firm in case there is reduction of pricing in the market.

Achieving Cost Leadership.

Basic objective is to ensure that the cumulative costs across the chain is lower than that of competitors. It is essential to analyse the cost drivers and then identify the areas for optimisation of costs. Examples : Accurate demand forecasting and high Capacity Utilisation is necessary. Attaining economies of scale leads to lower per unit of product. Higher levels of standardisation. Aiming at the average customer makes it possible to offer a generalised set of utilities in a product service to cover greater number of customer. Investment on cost saving technologies. Withholding differentiation till it becomes necessary.

Conditions
Markets for the product operate in such a way that price based competition is vigourous, making costs an important factor. Product is Standardised. Buyers may be large in numbers and have bargaining power. There is lesser customer loyalty and cost of switching is less. There might be fewer ways of differentiation. Works best when product features are such that buyers are Price-Sensitive.

Benefits.
As an insurance against ill effects of Competition. Safeguard against bargaining power of Suppliers. Safeguard against bargaining power of Buyers. Threat of cheaper Substitutes can be offset to some extent. Acts as an effective Entry Barrier for potential entrants.

Risks Involved.
May not remain for long. Competitors can imitate the Cost Reduction techniques. Not a Market-friendly approach always. Might dilute your Customer focus and limit your product features. Sometimes the less efficient producers may opt out thereby making it difficult for the leader to have some sort of differentiation. Technological development may be a threat to the cost leader as some competitors might adopt cost efficient new technology. After Sale Service might get compromised though it should not happen.

Differentiation Business Strategy

Differentiation Strategy
When Competitive advantage of an Organisation lies in special features incorporated into the Product that is demanded by Customers and are ready to pay for the same. Organisation outperforms its Competitors who are not able or are willing to offer the special features. A Differentiated Product stands apart in the market and is distinguishable by the customers for its special features and attributes. Profits for the Differentiator Organisation come from the difference in the Premium price charged and additional cost incurred in providing the differentiation.

Achieving Differentiation
A firm can incorporate features that offer utility for the customer and match his preferences. A firm can incorporate features that lower the overall costs for the buyer in using product. A firm can incorporate features that raise performance of product OR increase buyer satisfaction in (non) tangible ways. A firm can incorporate the features that can offer the promise of high quality of product. A firm can offer full range of product that a customer requires for his satisfaction. List of these might include Superior after Sale Service, Quality Manufacturing, Customisation to individual needs, performance capability of the product.

Conditions
Market is too large to be catered by few firms offering a Standardised product. Customer needs and preferences are too diversified to be satisfied by Standardised products. It is possible for firm to charge a premium price for differentiation that is valued by the customer. Nature of product is such that the brand loyalty is possible to generate and sustain. There is ample scope for increasing the sale of the product on basis of differentiated features and premium pricing.

Benefits
Firms distinguish themselves successfully on basis of Differentiation, thereby lessening Competitive rivalry. Powerful suppliers can negotiate for better prices. Powerful buyers generally do not negotiate price decrease. New entrants are normally not in a position to provide Differentiation at comparable prices. So acts as an Entry Barrier to new entrants. Substitutes also provide a minimal threat to Established Firms.

Risks
In long term, Differentiated Products tend to become Commodities. If several firms adopt similar Differentiation tactics, the value gets lost. Differentiation fails if its basis is something that is not value by the customer. Price premium too has limits. So one has to be cautious going about charging the premium. Failure on part of Organisation to communicate the Differentiating Factor properly shall be harmful.

Focus Business Strategy

Focus Business Strategy

Rely on either Cost Leadership or Differentiation, but cater to a narrower segment of total market. Something like Niche Segments. Customer groups (Market Segment) may be divided on basis of Demographic Characteristics, Geographic Segmentation, Life Style etc.

Achieving Focus
Choosing specific niches by identifying gaps not covered by Cost Leaders and Differentiators. Creating superior skills and efficiency for catering to such niche markets. Achieving Low Cost / Differentiation as compared to competitors in serving niche markets. Developing innovative ways to manage the chain, that is different from the prevalent ways in the industry.

Conditions
There is something unique in the Segment. There are specialised requirements for using the product that the common customer cannot fulfil. Niche market is big enough to be profitable for the firm. Major players are not interested in that niche market. There is a promising potential for growth in the niche market. Firm has the necessary skill and expertise to serve the niche segment.

Benefits
Focussed Organisation is protected from the competition to certain extent. Focussed firms generally buy in small quantities and hence powerful suppliers may not show much interest. Powerful buyers are less likely to shift loyalties. The specialisation that the focussed Organisation is able to achieve acts as a powerful barrier to substitutes.

Risks
Development of such distinctive competitiveness may be a difficult process. Commitment to a narrow segment only. Costs for firm are higher as the markets are limited and economies of scale are difficult to achieve. Niches may disappear due to technology or market factors.

Analysing Company Resources in Competitive Position.

Analyse Present Strategy.

Is Company adopting Low Cost or Differentiation or Narrow Market Niche Strategy. Firms Competitive Scope within Industry. Companys Functional Strategies. Any change in any of the above Strategies. Logic behind each Competitive move and functional approach.

Evaluation of Strategy
Whether firms sales are growing faster, slower or at same pace as the market as whole. Whether firm is acquiring new customers at an attractive rate as well as retaining existing customers. Whether firms profit margins are increasing or decreasing in relation to market. Trends in other Financials of the firm in relation to industry. Whether firm can have improvement in other internal performance measures. How Shareholders view the firm based in relation to market. Firms image and reputation with its customers in relation to market. Whether the firm is regarded as leader in Technology, product innovation, quality, pricing, R&D etc. Weaker financial performance and market standing demonstrates Weak Strategy as of now.

Companys SWOT
SWOT analysis gives an idea whether a firms business position is fundamentally healthy or not. SWOT analysis basic principle is that strategy making efforts must aim at producing a good fit between a firms resource capability (net of S and W) and its external situation.

Identify Strengths and Resource Capabilities

A skill or important expertise, valuable physical assets, valuable human assets, valuable organisational assets, valuable intangible assets, competitive capabilities, alliances or cooperative ventures, an achievement. The caliber of firms ability to mobilise them in a manner calculated to result in competitive advantage are biggest determinants of how well the firm shall perform in prevailing industry.

Identifying Weaknesses and Resource deficiencies

What shall be possible weaknesses. Internal weaknesses are shortcomings in a firms complement of resources. Weaknesses can be fatal for firm in case not taken care of immediately. A firms weaknesses suggest a need to review its resource base. What needs to be done to augment the firms future resource base.

Identifying Company Competency and Capability

Identifying and evaluating what a firm is really good at doing and what capabilities it has for competing is a critical component of assessing a firms situation. A Company Competency is the product of experience, accumulation of learning over time and build over time and are bundles of skills, resources, technology as opposed to a single discrete skill. May be some skills like expertise in specific technology, selection of good locations for outlets, inventory management.

Cont
A firms Competence becomes Competitive Capability when customers deem the Competence valuable and beneficial, when it helps differentiate a firm from its competitors and when it enhances its competitiveness. However all the Capabilities are not equal. Some are necessary for mere survival, where others get the firm ahead.

Core Competency
A competitively important internal activity that a firm performs better than other competitively important internal activities is known as Core Competency. It is central to competency of a firm. Core Competency gives a firm the competitive capability and thus qualifies as a strength and resource for the firm. Generally firms Core Competence resides in its people and intellectual capital rather than assets on balance sheet.

Distinctive Competence
A Distinctive Competence is something that a firm does well in comparison to its competitors. Core Competence becomes basis for Competitive Advantage when it becomes a Distinctive one. Importance of Distinctive Capability to Strategymaking rests with : 1. Competitively valuable capability it gives to firm. 2. Potential for being a cornerstone of strategy. 3. Competitive edge it can have in market place.

Competitive value of Company Resources.

For a particular firms Resources to qualify as basis for Sustainable Competitive advantage, we have to check whether : Is the Resource hard to copy. How long does the Resource last. Is the Resource really Competitively superior. Can the Resource be trumped by different Resources of Competitors.

1. 2. 3. 4.

Matching Strategy to Firms Resource Strengths and Weakness

A firms Strategy should be tailored to fit its resources taking both Strengths and Weaknesses into account. One should build Strategy around exploiting and leveraging the firms capabilities and avoid Strategies that place heavy demands on areas where the Company is weak or has unproven ability. So one has to select the Competencies and Capabilities to concentrate on.

Identifying Companys Market Opportunities

Market Opportunities most relevant to a Company are those that offer important avenues for profitable growth, those where a Company has most potential for competitive advantage and those that match up well with Companys financial and Organisational Resource capabilities. Not every Industry Opportunity is a Company Opportunity.

Identify Threats to Companys Future Profitability

Take actions to defend against External threats to the Company. Pursue market Opportunities well suited to the Companys Resource Capabilities. Cheaper or Better Technology, Introduction of new products by competitors, new unwanted regulations, unfavourable demographic shifts etc might be some of the examples.

Real Value of SWOT analysis

How the Companys Strategy can be matched to both its Resource Capabilities and Market Opportunities. How urgent it is for Company to correct which particular resource weakness and guard against which particular External Threats. It also involves thinking about the Future part as well.

Companys Prices and Costs.

Does the Company have Competitive Prices and Costs as related to market. Even in Differentiated Market, Price is an important factor. Differences in prices paid for raw materials, technology, maintenance costs, production costs, marketing costs, transportation costs, forward channel distribution costs etc contribute to this factor.

Strategic Cost Analysis and Value Chain

Strategic Cost Analysis involves comparing
how a Companys unit Costs stack up against the unit Costs of key Competitors Activity by Activity, thereby pinpointing which Internal activities are a source of Cost (dis)advantage.

Value Chain identifies separate Primary

activities and business processes that create value for customers and related support activities. It starts from procurement of Raw Materials and continues till Retailing or even afterwards. Need for Cost Analysis of same.

Value Chain for Industry

A Companys cost Effectiveness depends not only on costs of Internally performed activities, but also on costs in the value chain of its suppliers and forward distribution allies. Anything a Company can do to reduce its Suppliers costs or improve Distribution costs can enhance own Competitiveness.

Developing data for Strategic Cost Analysis.

Break down departmental cost accounting data into costs for performing specific activities. Activity based costing entails defining expense based on Specific Activities being performed. Aim is to compare the various Activity based Costs (particularly those of Key Activities) against those of Competitors. Size of Companys cost (dis)advantage can vary from product to product, one geographical area to another, across different customer groups.

Strategic Options for achieving Cost Competitiveness

Strategic actions to eliminate a cost disadvantage need to be linked to location in Value Chain where the cost differences originate. 1. Attack the High Costs of items procured from Suppliers. 2. Attack Cost disadvantage in Forward part of Value Chain. 3. Attack High Costs of Internally performed activities.

Value Chain Activities to Competitive Advantage

Strategic Management Principle says that
performing Value Chain activities in ways that gives a Company the capabilities to outmatch rivals is a source of competitive advantage. Mere Products or Services can never be a dependable basis for sustained Competitive advantage as they can always be copied. Sustaining a Companys competitive edge is best grounded in competencies critical to market success and to pleasing customers factors that others may not be able to match soon.

How Strong is Companys Competitive Position.

Companys Competitive Position

In addition to Value Chains, Strategic Cost Analysis we need to have a look at Companys Competitive position and strength.
Whether the firms market position shall improve or deteriorate in case present strategy is continued. How the firm ranks on each key success factor and each relevant measure of Competitive Strength and Advantage. Whether the firm enjoys a Competitive Advantage over rivals or is currently as Disadvantage. Firms ability to sustain against competition in view of industry driving forces. One has to add up the sum of Competitive Strengths and Weaknesses.

Signs of Competitive Strengths

Important Resource Strengths, Core Competencies, Competitive Capabilities. Distinctive Competence in an important Value Chain. Strong Market share. Distinctive Strategy that is hard to copy by rivals. Better known brand than rivals. Growing consumer base. Well positioned in attractive market segments. Strongly Differentiated products. Cost Advantages. Above average Profit Margins. Ample Financial Resources.

Competitive Strength Assessment

Competitor Analysis provide a basis for judging Strengths and capabilities of rivals on Competitively important factors :
1. 2. 3. 4. 5. 6. 7. 8. 9. Cost. Product Quality. Customer Service. Image and reputation. Financial Strength. Technological Skills. Speed to market. Distribution Capability. Possession of Competitively important resources.

Process.
1. Make a list of Industrys key success factors and most important measures of Competitive Strength. 2. Rate the firm and its rivals on each factor in terms of numerical values. 3. Sum up the individual ratings to get an overall score for each firm. 4. Draw conclusions about Companys net Company advantage and disadvantage.

Cont
Can be carried out by Unweighted or Weighted Rating Scale. Weighted Competitive Strength Analysis is stronger than the other on account of inherent weakness in assuming that all Strength measures are equally important. Highly Competitive Strength Ratings vis--vis Competitors signals opportunity for a Company to improve its long term market position.

Strategic Issues faced by a Company

Final analytical task is to come to zero in on Strategic challenges that stand as obstacles to Companys future success. This involves using results of both the Company situation analysis and Industry Analysis to identify the Strategic issues confronting the Company. Final aim is to find How to combat the obstacles, whether to invest more, what to do about the factors not in your control.

Possible thinking about

Is present Strategy adequate for protecting and improving Companys market position in light of competitive forces. Is Company vulnerable to Competitive efforts of rivals. Should the present Strategy be adjusted to better respond to the Driving Forces in Industry. Is the present Strategy closely matched to Industrys Future Key success factors. Does the present Strategy adequately capitalise on Companys Resource Strengths and Capabilities. Where are Strong and Weak points in current Strategy. How important it is for Company to correct its Resource Weakness. How can company reduce External threats. Does the Company have Competitive Advantage or must it work to offset Competition Disadvantage.