Module V

Business Level Strategies

2 Topics

 Meaning

 Porters Generic Strategies

3 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 dynamic factors that determine the choice of a competitive strategy, according to Porter, are two
namely the industry structure, and the positioning of a firm in the industry.

 Positioning of the firm in the industry – It is to gain a sustainable competitive advantage and is based
on two variables – the competitive advantage and the competitive scope.

 Competitive advantage can arise due to two factors – Overall cost advantage and differentiation

 Competitive scope can be in terms of two factors – broad target and narrow target

 The source of competitive advantage for any business operating in an industry arises from the skilful
use of its core competencies.
4 Porter’s Generic Business Strategies

We could classify business strategies into the following three types:

 Cost leadership (lower cost / broad target market) When the competitive advantage of an
organisation lies in lower cost of products or services relative to what the competitors
have to offer, it is termed as cost leadership.

 Differentiation (differentiation / broad target market) When 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 then the strategy adopted is the
differentiation business strategy.

 Focus (lower cost or differentiation / narrow target market) They are niche strategies and
rely on either cost leadership or differentiation but cater to a narrow segment of the total
market.
5
Porter's Generic Business Strategies

Broad
Cost leadership Differentiation

(Where to compete)
target

COMPETITIVE
market

SCOPE Focussed cost Focussed

Narrow
target leadership differentiation
market

Low-cost Differentiated
products/services Products/services

COMPETITIVE ADVANTAGE
(How to compete)
6 Cost Leadership as a Business Strategy

 The basic objective in achieving cost leadership is to ensure that the cumulative costs across the
value chain is lower than that of competitors.
Strategies for achieving cost leadership
 Accurate demand forecasting and high capacity utilisation is essential to realise cost advantages.
 Attaining economies of scale leads to lower per unit cost of product / service.
 High level of standardisation of products and offering uniform service packages using mass production
techniques yields lower per unit costs.
 Aiming at the average customer makes it possible to offer a generalised set of utility in a product /
service to cover greater number of customers.
 Investments in cost-saving technologies can help an organisation to squeeze every extra paisa out of
the cost making the product / service competitive in the market.
 Withholding differentiation till it becomes absolutely necessary is another way to realise cost-based
competitiveness.
7
Reasons for Cost Leadership

Conditions under which cost leadership is used are mentioned below.

 The markets for the product / service operate in such a way that price-based competition
is vigorous making costs an important factor. (telecom, retail)
 The product/service is standardised and its consumption takes place in such a manner that
differentiation is superfluous. (Domestic air travel)
 Differentiation is not possible (utilities)
 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 standardised.
 The buyers may be large (powerful) and possess significant bargaining power to
negotiate a price reduction from the supplying organisation.
 Benefits of Cost Leadership
8

 Cost advantage is possibly the best insurance against industry competition.

 The threat of cheaper substitutes can be offset to some extent by lowering prices.

 Cost advantage acts as an effective entry barrier for potential entrants who cannot offer
the product / service at a lower price.
 Powerful suppliers possess higher bargaining power to negotiate price increase for inputs.
Organisations that possess cost advantage are less affected in such a scenario as they can
absorb the price increases to some extent.
 Powerful buyers possess higher bargaining power to effect price reduction. Organisations
that possess cost advantage can offer price reduction to some extent in such a case.
9 Limitations of Cost Leadership

 Cost advantage is ephemeral. It does not remain for long as competitors can imitate the cost
reduction techniques.

 Cost leadership can dilute customer focus and limit experimentation with product attributes.

 Depending on the industry structure, sometimes less efficient producers may not choose to
remain in the market owing to the competitive dominance of cost leader and scope for
product/service may get reduced affecting the cost leader.

 Technological shifts are a great threat to cost leader as these may change the ground rules on
which an industry operates.
11 Differentiation

 When the competitive advantage of the firm lies in special features incorporated into the
product, which is demanded by the customer, who are willing to pay for it, then the strategy
adopted is called differentiation

 Singapore Airlines, British Airways

 Lindt, Ferrero Rocher

 Volkswagen, Hilton
12 Differentiation

 Incorporate features to raise the performance of the product

 Incorporate features that offer additional utility

 Incorporate features that claim distinctiveness (status and prestige)

 Service can be a differentiation point

 Differentiation can be at any point in the value chain from sourcing to manufacturing to
pricing to distribution to even promotions and after sales service
13 Differentiation
Benefits Limitations
 Organisations distinguish themselves successfully on the basis of  In a growing market, products tend to become commodities.
differentiation thereby lessening competitive rivalry. Customer Long-term perceived uniqueness - the basis for differentiation
brand loyalty too acts as a safeguard against competitors. Brand - is difficult to sustain.
loyal customers are also generally less price-sensitive.
 In the case of several differentiators adopting similar
 Powerful suppliers can negotiate price increases that the differentiation strategies the basis for distinctiveness is
organisation can absorb to some extent as it has brand loyal gradually lessened and ultimately fades away.
customers typically less sensitive to price increase.  Differentiation fails to work if its basis is something that is
 Powerful buyers do not usually negotiate price decrease as they not valued by the customer.
have fewer options with regard to suppliers and generally have no  Price premium too have a limit. Charging too high a price for
cause for complain as they get the special features and attributes
differentiated features may cause the customer to forego the
demanded. Owing to its nature, differentiation is a market- and
additional advantage from a product / service on the basis of
customer-focussed strategy.
her own cost-benefit analysis.
 Differentiation is an expensive proposition. Newer entrants are not  Failure on the part of the organisation to communicate
normally in a position to offer similar differentiation at a
adequately the benefits arising out of differentiation or over
comparable price. In this manner, differentiation acts as a
relying on the intrinsic product attributes not readily apparent
formidable entry barrier to new entrants.
to a customer may cause the differentiation strategy to fail.
 For similar reasons, as in the case of newer entrants, substitutes
product / service supplier too pose negligible threat to established
differentiator organisations.
14 Focus Business Strategy
 Focus strategy is concerned with identifying a narrow target in terms of markets and customers. The
organisation seeking to adopt a focus strategy has to locate a niche in the market where the cost
leaders and differentiators are not operating.
 Going beyond the confines of the industry, innovative organisations could also explore the ‘blue
ocean’ segments that they could create and take advantage of.

Achieving Focus Strategy

 Choosing specific niches by identifying gaps not covered by cost leaders and differentiators.
 Creating superior skills for catering to such niche markets.
 Creating superior efficiency for serving such niche markets.
 Achieving lower cost / differentiation as compared to competitors in serving such niche markets.
 Developing innovative ways in managing the value chain different from the prevalent ways in
an industry.
15 Focus Business Strategy

 Focus strategies essentially rely on either differentiation or cost leadership but cater
to a narrow segment of the total market.
 Focused cost leadership - Aravind Eye Hospital
 Arunachalam Muruganathan’s Jayshree Industries
 Social Entrepreneurs usually follow focused cost leadership
 Focused differentiation - Gucci, Rolls Royce, Bentley, Build a bear, Palace on
wheels
 Reasons for Focus Business Strategy
16

Conditions for the adoption of a focus strategy are:

 There is some type of uniqueness in the segment which could either be geographical, demographic,
or based on lifestyle.
 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 major players in the industry are not interested in the niche as it may not fit into their own plans
or not be crucial to their own success.
 The focussing organisation has a required skill/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 it has developed and its acknowledged superiority in serving the niche
segments.
17 Benefits and Risks Associated with Focus
Strategy
Benefits
 The competitors who have broader target market do not possess competitive ability required for a
niche market
 Powerful barrier for substitute products
 Loyal Customers
 Low threat of new entrants
 Price increase can be passed on

Risks
 Serving niche markets requires development of distinctive capabilities
 Cost of production is high and may be difficulty to achieve economies of scale
 Commitment to a Niche, difficult to move to other segments
 Niches are often transient. The may disappear due to technology or market factors
 Niches may become attractive for large players