8 – Business Level Strategies

Introduction

Every company should have its business strategy. A business strategy is a competitive strategy that focuses on how a company competes successfully in its chosen market. At the business unit level, strategic decisions focus on selecting products and markets, addressing consumer wants, protecting market share, gaining an advantage over competitors, exploiting or creating new opportunities, and earning profit. In a nutshell, a business strategy defines the competitive position of its activities in the industry.

The corporate strategy sets the direction for business strategy. Its established priorities serve as its guide. The strategy translates the corporate level’s direction and intent into objectives and strategies for specific business units.

Example: A multi-business organisation, such as ITC, prioritises its many businesses, such as cigarettes, vegetable oils, hotels, agro-based products, financial services, and so on, in its corporate strategy. These priorities guide the development of these units’ business strategy. Decisions at the business level also serve to bridge decisions at the corporate and functional levels.

8.1 Industry Organization

An industry is a group of businesses that provide goods or services that are close equivalents to one another. Alternatively, an industry comprises businesses that compete with each other. An industry can be defined broadly (the beverage industry) or more explicitly (the automotive sector) for industry analysis (the carbonated soft drink industry). The types of analysis to be undertaken influence how an industry is defined and circumscribed. It is often preferable to characterise an industry as precisely as possible in “industry analysis.”

Example: When addressing firms such as Coca-Cola and Pepsi, it is preferable to specify the boundaries of the “carbonated soft drink industry” rather than the “beverage sector.”

The number and size distribution of enterprises in a sector is called “industry structure.” An industry’s number of enterprises may range in the hundreds or thousands. A large number of enterprises in an industry diminishes prospects for industry-wide collaboration. As a result, the level of competition in a sector often rises with the number of enterprises in the field. The size and distribution of enterprises in an industry are significant in terms of both business and public policy.

The structure of the industry is made up of four components:

(a) Concentration

This refers to the extent to which a few firms dominate industry sales. The intensity of competition decreases with time in a highly concentrated industry, i.e. one in which a few firms dominate sales. High concentration is a barrier to entry into an industry by allowing enterprises to hold substantial market shares and gain significant economies of scale.

(b) Scale economies

This is a significant predictor of industry competition. Because of their reduced per-unit cost of production, firms that benefit from economies of scale can charge lower prices than their competitors. They can also erect entry barriers by temporarily or permanently lowering prices to discourage new firms from entering the field.

(c) Product differentiation

True perceived differentiation frequently increases competitiveness among existing competitors.

(d) Entry barriers

Entry barriers are the challenges that a company must overcome to enter an industry, and they largely determine the competition from new entrants.

These characteristics define the industry’s competitive dynamics. Trends affecting industry structure are significant factors to consider while developing a strategy.

8.2 Positioning of the Firm

Identifying the target audience is a critical strategic choice when starting a new company or introducing a new product. However, just because a suitable segment has been identified does not mean the organization’s strategy has been resolved. The competitive position inside the segment must then be investigated, as this is the only way to determine how the organisation will compete.

Thus, competitive positioning is the selection of the differential advantage that the product or service will have over its competitors. Competitive positioning enables a company to compete and survive in or part of a market. A two-stage procedure is proper to develop positioning: first, identify segment gaps, then identify positioning inside segments.

Identification of Segment Gaps and the Implications for Competitive Positioning

From a strategy standpoint, the most relevant strategy analysis frequently occurs by investigating where gaps exist in an industry’s sectors. The first step in this type of work is to map out the current segmentation position and then arrange businesses and their products into segments. It should then be clear where segments exist that are undersupplied or poorly served by current products.

Identifying the Segment’s Positioning

Some gaps may be more appealing from a strategic standpoint than others. They may, for example, have little competition or poorly supported items. Furthermore, some gaps may have a distinct advantage in terms of competitive positioning. Others might not.

The following is how the positioning procedure works:

1. Perceptual mapping:

An in-depth qualitative study on current and future clients is needed to determine how they make market decisions, such as strong versus weak, cheap versus expensive, and modern versus traditional.

2. Positioning:

Using the research measurements, brands or items are placed on the map.

3. Development of options:

Leverage old and new products’ strengths and shortcomings to create possible new positions on the map.

4. Testing:

Begin with simple assertions with consumers, then move on to the marketplace at a later point.

It will be clear that this is primarily a procedure that involves testing with existing and future clients.

8.3 Generic Strategies

Michael Porter of Harvard Business School pioneered generic tactics in two publications. In 1980, it was “Competitive Strategy,” and in 1985, it was “Competitive Advantage.” The concept was slightly altered in the second book. The original version can be found here.

Michael Porter assumed that any firm can only pursue three essential strategies. In the 1980s, they were recognised as being at the vanguard of strategic thinking. According to some, they may still have a role to play in the creation of strategic alternatives in the twenty-first century.

According to Professor Porter, the three primary methods available to any organisation are:

1. Cost leadership

2. Differentiation Strategy

3. Focus

These basic strategies can overcome the five competitive forces and allow the firm to outperform rivals in the same industry. They are referred to as ‘generic’ strategies since they may be used in a wide range of circumstances and sectors at varying stages of growth.

1. Cost leadership:

Cost leadership is a strategy in which a company strives to supply its product or service at a lower price than its competitors. The firm achieves overall cost leadership by maintaining the lowest production and distribution costs within an industry and selling “no-frills” products. This method necessitates large-scale production economies and constant attention to efficiency and running expenses. The company focuses on decreasing direct input and overhead costs by selling no-frills products. Deccan Airways, Timex, and Nirma are a few examples.

A cost leadership strategy is more likely to succeed when the product is standardised, competition is mainly based on price, and consumers can move between providers. However, a low-cost basis will not provide a competitive advantage in and of itself. Consumers must consider the product equivalent or acceptable. Engineering, purchasing, manufacturing, and physical distribution must be practical for companies following this strategy. Marketing is less crucial because the consumer knows the product’s features.

A low-cost position also provides a corporation with a defence against competitors. Its lower expenses enable it to maintain profits in the face of intense competition. Because of its large market share, it will have a lot of negotiating power with its suppliers. Its low price also acts as a barrier to entry because few new entrants can match the leader’s cost advantage. As a result, cost leaders are more likely to earn higher-than-average returns on investment.

Companies that pursue a cost leadership strategy must sustain ongoing efforts to lower their costs (compared to competitors’ expenses) and produce value for customers. Cost leadership necessitates:

-Rapid building of large-scale facilities on a small scale.

-The constant search of cost-cutting opportunities based on experience

-Cost and overhead management

-Avoidance of low-value customer accounts

-Cost-cutting in all operations throughout the firm’s value chain, such as R&D, services, sales force, advertising, etc.

Implementing and maintaining a cost leadership plan necessitates considering its value chain of primary and secondary activities and its successful linking with a crucial focus on efficiency and cost reduction. McDonald’s Restaurants, for example, achieved cheap prices through uniform products, centralised purchasing of materials for the entire country, and so on.

How Does Low-Cost Leadership Produce Above-Average Profits?

According to the assumption underlying their profit advantage, low-cost leaders should be able to sell their goods for prices close to the market average. If such products are not considered similar or their performance is not acceptable to buyers, a cost leader will be obliged to lower prices below the competition to obtain sales.

Following this strategy choice, an organisation will prioritise cost reduction at all stages of its processes. However, price leadership does not always guarantee reduced prices. The corporation might charge a fair price and reinvest the extra revenues.

2. Differentiation Strategy:

Differentiation entails providing a product or service that the customer perceives as unique or distinctive. Customers will pay more for what they perceive to be a better product, allowing enterprises to obtain a premium price or keep buyer loyalty. Because of the premium price, a differentiation approach may be more profitable than a cost-leadership plan.

Products can be distinguished in a variety of ways to distinguish them from standardised products:

-Excellent quality

-Special or distinguishing characteristics

-Increased client responsiveness

-New technologies

-The dealer networks.

-Hero Honda, Nike athletic shoes, Sony, Asian Paints, Mercedes-Benz, and BMW are a few examples.

Nokia differentiates itself by the unique design of its products, whereas Sony differentiates itself through outstanding reliability, service, and technology. Mercedes-Benz distinguishes itself by emphasising a distinct product-service image, whereas Coca-Cola distinguishes itself by developing a globally recognised brand. This strategy frequently includes significant investments in advertising and promotion to maintain the brand’s identity.

McDonald’s distinguishes itself through its brand name and its ‘Big Mac’ and ‘Ronald McDonald’ products and visuals. Porter suggested that to differentiate a product, the producer must spend additional resources, such as advertising a brand and, therefore, differentiating it.

Differentiation takes numerous forms in different industries. Equipment durability, spare parts availability, and service will be highlighted in the construction business, whereas sophistication and exclusivity will be highlighted in the cosmetics industry. The goal of differentiation is to appeal to the broad mass market. It is a realistic method for generating above-average earnings because the increased brand loyalty reduces customers’ price sensitivity. Buyer loyalty also functions as an entrance barrier because new entrants must build their particular competency to differentiate their items in some way.

The differentiated product’s premium price must surpass the differentiation cost for this strategy to succeed. The following are essential for the differentiation approach to be implemented successfully:

-Inventiveness

-Engineering Abilities

-R&D abilities

-Creative marketing abilities

-Incentives for innovation

-Corporate reputation for quality or technological prowess

How does differentiation produce above-average profits?

The expenses of differentiated products will be higher than those of competitors. The producer of the differentiated product then benefits from its pricing: with its distinctively differentiated product, it can charge a premium price, i.e., one higher than its competitors. Following the differentiation strategy will result in above-average profits for the company.

However, there are two issues with differentiation strategies:

1. It is difficult to predict whether the additional costs of differentiation can be recovered from the client by charging a higher price.

2. Successful differentiation may entice competitors to replicate the distinct product and enter the market segment.

Although neither of the issues above is insurmountable, they do lessen the attractiveness of this alternative.

3. Focus strategy:

A focus strategy arises when a company concentrates on a specific market niche and achieves a competitive advantage by selling products specifically designed for that niche. The strategy is aimed at a certain consumer category (e.g., teenagers, babies, the elderly, etc.) or a regional market (urban areas, rural areas, etc.).

As a result, the focus strategy selects an industry sector or collection of segments and tailors its approach to service them to the exclusion of others. The focuser aims to achieve a competitive advantage in its target segments by optimising its approach for the targets, even though it does not generally have a competitive advantage.

According to Porter, whereas the low-cost and differentiation strategies strive to achieve their objectives across the market, the entire focus strategy is designed around servicing a specific target very well.

According to Porter, it is sometimes impossible for an organisation to pursue low-cost leadership and differentiation strategies across the whole market.

Example: The costs of obtaining low-cost leadership may necessitate large sums of money that are not readily available.

Similarly, differentiation costs may be prohibitively expensive when serving a mass market of clients. If the differential is based on quality, providing high-quality and low-cost products under the same brand name may be untrustworthy. As a result, a new brand name must be created and supported. For these and other reasons, a focus strategy may be preferable.

There are two versions of the focus strategy:

1. Cost focus: A company focuses solely on achieving a low-cost position in its target segment.

2. Differentiation focus: A company aims to differentiate its products only within its target market.

The essence of a focus strategy is to exploit distinctions between a narrow target and the rest of the industry. Focus creates a competitive advantage through high specialisation and resource concentration in a certain niche. A focus strategy can meet the needs of a niche segment

(a) by discovering gaps that incumbent players are not filling and

b) by developing better capabilities or efficiency while servicing such small segments.

It should earn higher-than-average profits by targeting a small, specialised set of buyers, either by charging a premium price for excellent quality or by selling a cheap, cheerful, low-priced product. Rolls-Royce and Ferrari are niche players in the global automobile market. They have a little share of the global market. Their speciality is premium products at premium prices.

The focus strategy assumes the firm can serve its tiny strategic target more effectively and efficiently than competitors who compete on a broader scale. As a result, the firm gains differentiation by better matching the needs of the specific target, reducing costs in serving this target, or both. Even though the focus strategy does not accomplish low cost or distinction across the board, it does so in its small market goal.

The focused approach necessitates the same characteristics for success as cost leadership and differentiation, but they are directed at a specific target market. Examples of focus strategies in the Indian context are Ayur Herbal Brand, Anjali Kitchenware, Anchor toothpaste, T-series Cassettes, and so on.

However, there are some issues with the emphasis strategy:

-The niche is, by definition, minor and may not be large enough to warrant attention.

-Cost focus may be challenging in a sector where economies of scale are vital, such as the automobile industry.

-The niche is specialised in nature and may fade away with time.

None of these issues are insurmountable. Many small and medium-sized businesses have discovered this is the most beneficial investigation method.

8.3.1 Risks in Competitive Strategies

No single competitive strategy guarantees victory. Some businesses that successfully executed one of Porter’s competitive strategies discovered that they were unable to continue with the approach. Each of these basic solutions comes with its own set of dangers.

1. Cost leadership risks:

a. Cost leadership may not be sustained;

-Competitors may emulate

-If technology evolves;

-If other cost leadership grounds degrade.

b. Proximity is lost in differentiation.

c. Cost focusers achieve even lower segment expenses.

Proximity in difference indicates that organisations that pick a cost leadership strategy must offer relatively standardised products with customer-acceptable traits or attributes. To put it another way, the company must provide minimal differentiation at the lowest competitive price. If this level of differentiation is lost, the cost leadership approach will fail.

2. Differentiation risks:

a. Differentiation may not be sustained;

-Competitors may mimic.

-If differentiating traits become less relevant to buyers.

b. Cost closeness is sacrificed.

c. Firms that use a focus strategy may achieve even more significant segment distinction.

d. Product-line dilution of brand identity.

A company that uses a differentiation strategy must ensure that its higher price for its more excellent quality is not priced too far above the competition. Otherwise, customers would not consider the extra quality worth the extra cost. In other words, if the price difference between standardised and differentiated products is too significant, the company risks providing more uniqueness than buyers are ready to pay for.

3. Risks of Focus:

The competitive risks associated with the focused approach are similar to those previously identified for cost leadership and differentiation strategies, with the following additions:

a. A focus strategy will fail if competitors duplicate it.

b. The target sector could become structurally unappealing.

-If the structure deteriorates.

-If demand vanishes.

c. Competitors may be able to successfully focus on an even smaller section of the market, outfocusing the focuser or focusing just on the most profitable slice of the focuser’s chosen segment.

d. An industry-wide competitor may perceive the appeal of the focus segment and deploy superior resources to satisfy the segment’s needs better.

e. The restricted segment’s preferences and needs may become more similar to those of the larger market, lowering or eliminating the advantage of specialization.

Squeezed in the Middle

Professor Porter finished examining what he referred to as the primary generic strategies by implying that there are actual risks for a corporation that engages in severe generic strategy but fails to achieve any of them. As a result, he highlighted the significance of precise positioning, i.e., cost leadership or distinction. Firms that do not have a clear strategic orientation and make decisions that include a few components of multiple strategies (i.e., some parts of differentiation and some elements of cost leadership) are referred to as stuck in the middle, according to him. He claimed that such businesses do not create a successful competitive advantage. However, being stuck in the centre has been a source of contention.

Several commentators, including Kay, Stopford, Baden-Fuller, and Miller, have criticised this study component. They cite examples of successful businesses that used more than one generic strategy.

As previously stated, proper empirical evidence now shows that some businesses pursue both differentiation and low-cost strategies simultaneously. They leverage their low costs to generate more outstanding distinctiveness and reinvest the revenues to reduce their costs further.

Benetton (Italy), Toyota (Japan), and BMW are three examples (Germany)

Later, Porter (1994) clarified: “A corporation cannot fully neglect quality and distinction in the presence of cost advantages, and vice versa.” Progress against both forms of advantage can be made simultaneously.” He does, however, point out that these are trade-offs between the two and that businesses should “keep a firm commitment to superiority in one of them.”

8.3.2 Critical Assessment of Generic
Strategies

When we consider an industry stable, the generic business-level methods outlined above are effective. In practice, however, the business environment is dynamic, and successful organisations must adapt their plans to changing conditions.

According to More (2001), each generic strategy provides a corporation with some form of defence against the five competitive factors.

For example, cost leadership can erect hurdles for supplier cost rises.

Differentiation based on strong brand loyalty can create an entry barrier and shelter the firm from competition. However, there are risks involved.

For example, if a price premium is perceived as too high, consumer loyalty may suffer, and differentiation may be lost due to competitor imitation of a product.

The other dangers have already been addressed in the preceding sections.

8.3.3 Response to Porter’s Generic Strategies

Hendry II and others have identified the logic and empirical evidence difficulties connected with generic techniques that limit its absolute value. We can sum them up as follows:

1. Low-cost Leadership:

1. How can more than one company be the low-cost leader if the option is to seek low-cost leadership? Having the option of low-cost leadership may appear to be a contradiction in terms.

2. Because competitors might cut their costs in the long run, how can one company hope to keep its competitive advantage without risk?

3. Cost-cutting per unit of output should be coupled with low-cost leadership. However, this concept is restricted in its applicability.

4. Low-cost leadership implies that technology is reasonably predictable, even though it is constantly evolving. Radical change can significantly alter the cost positions of current and potential competitors.

5. Cost reductions only create a competitive advantage when customers compare prices. This means that the low-cost leader must also lead in price cuts, or competitors can catch up, even if it takes years and at a lower profit margin. On the other hand, permanent price cuts by the cost leader may hurt the market placement of its product or service, limiting its usefulness.

2. Differentiation:

1. Differentiated items are believed to be more expensive. This is probably oversimplified. Higher prices may not be possible with this type of distinction.

2. The corporation may want to grow its market share, in which case it may employ differentiation to match competitors’ reduced prices.

3. Porter analyses differentiation as if the form it will take in any market is pronounced. The true challenge for strategy options is not identifying the need for distinction but determining the form of differentiation to appeal to the customer. Generic strategy alternatives shed no light on this topic. They merely make the problematic premise that once differentiation is chosen, it is evident how the product should be differentiated.

3. Focus:

1. The line between wide and narrow aims might sometimes be hazy. Are they distinguishable by market size? Or by the type of customer? What benefit does attention serve if the distinction between them is unclear?

2. It is certainly helpful for many companies to recognise that it would be more productive to pursue a niche strategy away from the broad markets of the market leaders. That is the simple part of the reasoning. The tricky part is determining which niche is likely to be profitable. Generic plans do not provide any significant information in this regard.

3. As markets splinter and product life cycles shorten, broad aims may become obsolete.

Fast-moving Markets

In dynamic markets, such as those driven by new internet technology, generic strategies will almost certainly miss out on significant new market opportunities. The generic strategy approach cannot identify them.

When confronted with this veritable onslaught against generic tactics, one might expect Professor Porter to admit that the notion has some flaws gracefully.

However, Porter responded in 1996 by distinguishing between basic strategy and what he termed “operational effectiveness”—the former is concerned with the key strategic decisions that any organisation faces. In contrast, the latter concerns TQM, outsourcing, re-engineering, etc. He made no concessions but broadened his approach to investigate how corporations may employ market positioning within the context of generic strategies.

Despite these critiques, the concept of generic strategies should not be dismissed. When used as part of a more considerable analysis, it can be a valuable tool for generating basic possibilities in strategic analysis. It necessitates the investigation of two critical areas of business strategy: the function of cost reduction and the deployment of differentiated products concerning customers and rivals. However, it is merely the beginning of the creation of such choices. When a market rapidly expands, it may supply no relevant routes. The entire methodology generally takes a highly prescriptive approach to strategic action.

8.4 Business Tactics

Tactics should be used in conjunction with a company’s strategy. They are the collection of prerequisites required for the plan to be implemented. A tactic is a tool a company uses to accomplish the objectives outlined in its strategy. Strategy and tactics should always be considered together because tactics are the collection of activities required to carry out your strategy.

-Tactics are the means through which goals are attained.

-Advertising and marketing are examples of tactics.

-Tactics are the steps utilised to accomplish an objective.

Management of a Brand

Strategic brand management is a strategy that practically every company uses. Firms must devise a plan for communicating their products and business philosophy to prospective customers. Over time, a company’s brand name can develop a reputation that gives it an advantage over less well-known competitors.

Brand management entails using good advertising and public relations to project an image compatible with the company’s mission and vision. A corporation may also undertake research or survey the general public to determine how it is perceived and what improvements are required.

Specialization and diversification

Diversification and specialisation are two business strategies that deal with a company’s scope. A company can diversify by increasing its products and services, such as establishing a new division or merging with or acquiring another company.

Diversification is the inverse of specialisation. It refers to narrowing a company’s product offerings to focus on a more focused product. By focusing limited resources on a narrower product range, a company may attempt to improve the quality of its remaining items or just sell itself an unproductive product.

Development and Research

Some businesses employ R&D investments as a primary strategy to stay ahead of the competition. This is especially true in the manufacturing industry, where innovative product innovations can save money while producing products that thrill customers. Smaller businesses may not have the funds or in-house talent to invest directly in R&D. Still, for more giant corporations, the ability to innovate might mean the difference between success and failure.

Management of Risks

Risk management is a strategy that each company uses in its own unique way. Starting a business is risky in and of itself because industry trends and client behaviour can be difficult to forecast. For a well-established company, risk management entails making sound decisions about where to spend capital and what types of products to focus on.