36 Business level strategy

R. Swaranalatha

Glueck defines strategy as a unified, comprehensive and integrated plan relating the strategic advantages of the firm to challenges of the environment. It is designed to ensure that the basic objectives of the enterprise are achieved.

Alfred Chandler defines strategy as the determination of the basic, long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for achieving those goals.

Michael Porter has defined strategy as the “creation of a unique and value position involving a different set of activities, and thus, a company that is strategically positioned performs different set of activities from its rivals or performs similar activities in different way.

Hence, strategy is the process of translating perceived opportunity into successful outcomes, by means of purposive action sustained over a significant period of time.

It is goal directed, long term plan of action, meant to fulfil organisational goals and objectives, taking into account the firm’s key strengths, weakness, environmental threats and opportunities.

Levels of strategy

Strategy operates at different levels

1. Corporate strategy

It is the top level decision making and covers decisions dealing with the objectives of the firm, acquisition and allocation of resources and co-ordination of strategies of various strategic business units(SBU) for optimal performance.

The nature of strategic decisions are value-oriented, conceptual and future oriented.

The corporate strategy sets the long-term objectives of the firm and the broad constraints and policies within which a SBU operates. The corporate level will help the SBU define its scope of operations and also limit or enhance the SBUs operations by the resources the corporate level assigns to it.

2. Business strategy

It operates at each SBU level, wherein each SBU formulates its own strategy to achieve its goals and objectives within the purview of its resource availability and business environment and it requires different strategies for its different product groups

At such a level, strategy is a comprehensive plan providing objectives for SBUs, allocation of resources among functional areas and coordination between them for making optimal contribution to the achievement of corporate-level objectives. Such strategies operate within the overall strategies of the organization.

3. Functional strategy

It involves decision making at each functional department and activities involved in it.

They are tactical decisions, which are supported by corporate and business strategy.

Risk involved is less and has short time horizon to achieve the goals and objectives. They have low flexibility but high adaptability.

Functional strategy, as is suggested by the title, relates to a single functional operation and the activities involved therein.

Decisions at this level within the organization are often described as tactical. It is guided and constrained by some overall strategic considerations.

Functional strategy deals with relatively restricted plan, providing objectives for specific function, allocation of resources among different operations within that functional area and coordination between them for optimal contribution to the achievement of the SBU and corporate-level objectives.

4.Operational strategy

These are the bottom most level of strategy, which involves actions relating to various sub-functions of a major department.

This is the stage where the strategies formulated are actually implemented with the support of operational work force.

Below the functional-level strategy, there may be operations level strategies as each function may be divided into several sub functions.

For example, marketing strategy, a functional strategy, can be subdivided into promotion, sales, distribution, pricing strategies, customer service and so on, with each sub function strategy contributing to functional strategy.

Business Strategy alternatives

Business strategy deals with the planned decisions used by a business unit to compete in that industry.

If the organisation is a single company, which operates within only one industry, the business strategy and corporate strategy are the same. If the business firms have many number of strategic business units (SBU), corporate strategy will be the same for all units and business strategy will be unique and different for each SBU.

Selecting business strategic alternatives involves several tasks.

1. Determine the Critical Success Factors (CSF) in the particular business.

Critical Success Factors are those unique characteristics of an organisation, which are essential for competitive advantage.

For example- CSF of Walmart is Everyday Low Pricing (EDLP) and that of APPLE is innovation in its products and services.

2. Identify the organisational strengths and weakness.

3. Search for an effective competitive advantage.

Competitive advantage refers to the success factor that gives a superior edge and lead for the business firm in its performance over their competitor.

4. Assess the opportunities and threats in particular markets for particular products.

5. Evaluate rival organisation’s competitive strategies.

6. Match organisational strengths with the business opportunities available in the market to improve the business performance.

7. Select the best business strategy and implement it with the support of organisational work force.

Approaches / models in selection of business strategy

Three approaches are viewed to choose the best alternative business strategy by the firm.

1. The contingency theory approach

2. The Generic theory approach

3. Mile’s and Snow’s Adaptation Model

4. Product life cycle model

5. Descriptive Characteristics Approach Approaches in detail are

1. The Contingency approach

The contingency approach to strategy formulation suggests that a best strategy exists for the given set of circumstances.

This approach is mainly concerned with the grand strategies, including brand action strategies, manufacturing, marketing and other functional strategies.

This contingency approach is mostly used in profit oriented business and in the future it can be used for forming strategies in non-profit business also.

This approach indicates that there are alternative strategies for different situations. One element considered for formulating strategy according to contingency approach is Product life cycle. Based on the demand for the product and growth of the product in the market, strategies are formulated.

The next situation can be to identify a strategy based on the cash inflow position and cost advantages.

2. The Generic Theory Approach

The generic approach to strategy formulation is based on the fact that successful firms participate in similar, identifiable patterns of behaviour.

According to Michael E.Porter, a Harvard Business School Professor, there are three strategies that can be adopted at the business level namely Cost leadership, Differentiation and Focus. These are called ‘generic strategies’, because they can be used in a variety of situations, across diverse industries at various stages of development.

These industries can be manufacturing, service or non-profit enterprises.

Generic strategies are illustrated as below.

a. Cost leadership

This strategy seeks to attain lower costs of production than the competitors by improving upon the efficiency of production, distribution or other organisational systems.

By cutting costs without sacrificing quality, managers can beat the competition and thus gains market share with higher profits.

Because the costs are lower, a cost leader is able to charge lower prices than its competitors without compromising the profit potential.

Cost advantage can be obtained by the following factors:

1. High capacity utilisation

If the capacity of production is not fully utilised, then the cost of production will be higher, because the fixed costs are spread over fewer units of production.

On the other hand, when the production capacity is fully utilised, the unit costs are lower.

A Cost leader ensures high utilisation of capacity either through more accurate demand forecasting or by limited capacity utilisation or by pursuing aggressive pricing policies.

High capacity utilisation is especially necessary in capital intensive industries because of high capital costs.

2. Economies of scale

It is generally associated with the size of the facility. Production costs per unit in large firms are comparatively less, when compared to small sized firms.

Other costs such as quality control, purchasing, labour charge and so on are comparatively lower per unit in a large firm when compared to the small sized firm.

3. Technological advancements

Updated and sophisticated technology improves the efficiency of operations resulting in low cost of production.

Online retailers have made the product purchase and business transaction easier and flexible at the doorstep of customers.

Automation, Robotics, Nanotechnology, Artificial intelligence, Cloud computing, smart phones and applications, etc., has enabled the firms to improve their efficiency and get cost advantage.

4. Skill and experience

Highly skilled workforce can improve the work efficiency and are likely to commit less mistakes, leading to reduced cost.

Work force with rich experience specialises in their tasks, which also improves the quality of work and contributes to efficiency, leading to cost advantage.

While the low cost leaders have the advantage of price flexibility in making a competitive advantage, cost reduction should not be achieved at the cost of quality or safety.

(b) Differentiation

The second generic strategy is differentiation, which helps a firm to differentiate its products or services from those of its competitors.

When customers feel that the product or service is of good quality, unique and has value, they are willing to pay extra for it. They identify a factor, which differentiates the product from its competitor.

This in turn, leads to customer loyalty and sustaining profits in the market.

Such differentiation can be created in a number of ways such as

1. Quality of the product

Higher quality of the product is always a differentiating factor. Quality is not only adhering to standards, but more a measure of customer satisfaction.

Business firms follow Total quality management Programmes, which focus on improving the quality of the product through following streamlined procedures, process and systems.

This leads to better quality of the product and customer satisfaction.

2. Standardised process and systems

Process innovation improves the operational and production efficiency leading to improved productivity, less wastage and low production cost. This acts as a differentiator factor to differentiate the product from its competitor.

3. Product innovation

Product innovation has been a significant differentiation factor, contributing to the success of the business firm. Arrival of new products improves the customer satisfaction and thereby to customer loyalty.

4. Image of the company

A good image and goodwill differentiates a company from its competitors. It may be associated with quality, cost advantage, product or service innovation, excellent customer service, easy availability and so on.

(c) Focus

Focus strategy involves special attention to a product or a narrow line of products or to the segment of the market that gives the company a competitive edge.

The objective of focus is to serve the target market with products and services that meets their need and gives them satisfaction.

The target market can be classified into dimensions such as

demographics – age,gender,education,religion,income, work experience, and so on.
psychographics – attitude, fashion, trends, life style and so on.
geographic – local, regional, national, international, multinational and global market.

After the target market has been clearly identified, the focus strategy based on differentiation (differentiation focus) or lowest cost (cost focus), is selected and the customers in that segment are served to give them satisfaction.

Differentiation Focus

The differentiation approach to focus strategy is aimed at a selected segment of the market.

For example; Porsche sports car competes with other sports cars produced by Nissan and other company, and does not compete in the entire car market. This can help Porsche to serve its small segment of customers with few products, can develop new innovations faster than a large differentiator can.

Cost Focus

Business firms concentrate on production efficiency, waste reduction, timely schedule and delivery, optimum resource utilisation and so on to reduce cost of production.

For example: Walmart is able to offer price advantage to the customers through its efficient supply chain practices and reduced cost in operation.

3. Miles and Snow’s Adaptation model

This approach believes that business organisations should relate their business strategies to their environment and should meet the challenges of risk and uncertainty in the external environment through adaptation.

The four such business level strategies are

a. Defender

The business firm concentrates on its existing line of business and its market share through aggressively practicing efficient internal operations rather than focusing on external environment.

For Example:

SPIC focuses on agricultural fertilizers and machinery, involves in improving its business performance and maintains its competitive edge.

b. Prospector

A Prospector seeks and exploits new product and new market opportunities.

The firm following this strategy is very receptive to changes in external business environment and is prepared to take risks in its business.

A prospector innovates new products and services responding to the changing needs of the customer and maintains the competitive edge.

c. Analyser

It is the combination of defender and prospector strategies.

The business firm maintains the firm base of existing products and customers while selectively responding to opportunities for innovation and change.

An analyser analyses the new business ideas thoroughly and usually follows the direction that prospectors pioneer by imitating their successful ideas. This way, they do not take unnecessary and high risks.

The organisation following this strategy remains flexible to responds to environmental changes but also maintains stability to profit from a stable environment.

d. Reactor

This strategy is not proactive in nature and organisations pursuing this strategy are primarily responding to competitive pressures in order to survive.

They lack a set of consistent mechanisms for adaptation and only respond to environmental changes in hazy manner.

Reactors are not able to respond to these environmental changes fast enough, due to lack of resources or capabilities or inability to exploit their available resources and capabilities.

A reactor usually has a poor strategic direction.

4. Product life-cycle model

This model provides a direction for the managers to formulate the strategy over the time of the product life.

Any product undergoes through four stages

1. Introduction

2. Growth

3. Maturity

4. Decline

When the product is developed and introduced into the market, the customers get to know and use the product. If they are satisfied, they buy it next time and refer it to their friends. If they are not satisfied, they stop buying the product and switch over to another product.

Once the customer starts buying the product it takes up a rapid growth. The product sales gets maximum to reach the maturity stage. Once, next version of the product or an innovative product enters the marker, the existing product loses its market and starts declining.

Product life cycle approach advocates that different business strategies should be adopted to support product sales in different stages of their life cycle.

Introductory stage

Skimming strategy – Entering the market with high price and intense promotion.

Penetration strategy- Entering the market with low price

Growth stage

Concentrate on improving the quality

Focus on entering new markets

Resort to intensive promotion techniques

Reduction in price of the product

Maturity stage

Focus on untapped market segments

Re-introducing the product with improved quality, new features and new style.

Improving efficiency of production or marketing to reduce costs. *Decline stage

Develop alternate products with growth potential (turnaround strategy)

Divest the unit.

Other generic Strategies

Hamermesh et al has suggested the following guidelines for organisations who are competing in stagnant industries.

Identify and exploit growth segments in the given industry
Improvise product quality
Improvise efficiency of production and distribution.
Intensify research and Development efforts to bring out new products.
Develop in incremental steps.

Philip Kotler suggests the following strategies for firms that are dominant in a given industry.

Retain the existing position and market share.
Practice innovation to bring out new variants of the product, which keeps the firm ahead of the competitor. (Fortification strategy)

5. Descriptive Characteristics Approach to strategy formulation

All business strategies are meant to improve the business environment for its success.

According to Peters and Waterman, those successful characteristic factors that contribute to the growth and performance of a business firm are called ‘characteristics of excellence’. They have identified eight characteristics, instrumental for the success of the business firm.

1. A Bias for Action:

Successful business firms have strong orientation towards taking intelligent actions at right time. They face the problems boldly and yield solutions for the same at correct time.

2.Closeness to customer

Successful business firms deliver quality products and services to consumers at the right time and at the right price, adding value to their money and driving satisfaction in their minds.

3.Autonomy and Entrepreneurship

Successful business firms encourage innovation and creativity among its workforce. They bring about new products and services that satisfy customers.

4.Productivity through People

Excellent business firms treat their people with diligent care, respect and concern. The employees enjoy autonomy and feel pride in doing their work. The bonded culture and attitude of the employees improve the work productivity and overall performance of the firm leading to excellence.

5.Value driven culture

Employees understand the company vision, mission, values and philosophy. They work as a team and understand their responsibility. Value driven culture reinforces discipline and morale among the workforce.

6.Bonded to their business

Excellent business firms remain glued to their business and focus on their domain business. They do not get involved in any business, that they are not familiar.

7.Lean organisational structure

Proven business firms have lean organisational structure with few managerial experts to guide employees. They ensure proper communication and direction to the work force.

8.Balanced control

Business firms give both autonomy and responsibility to the work force for accomplishing their tasks. In turn, employees take accountability for their actions and work better.

Hence, all these business strategies discussed above, focus on improving the business performance and adding competitive advantage to the business firm.

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References:

NitishSengupta and Chandan.J.S. (2003). Strategic Management-Contemporary Concepts and Cases, First Edition, Vision Books, New Delhi, p. 19-28.
AbassF.Alkhafaji, (2008), Strategic Management-Formulation, Implementation and Control in a dynamic environment , First Edition, Jaico Publishing House, Mumbai, p. 3-80.
Prasad.L.M, (2008), “Strategic Management”, Fifth edition, Sultan Chand & Sons, New Delhi, p. (35-39).
Jeyarathnam, M. (2012), “Strategic Management”, fourth edition, Himalaya Publishing House, New Delhi.
Vipin Gupta, Kamala Gollakota, Srinivasan, (2005), Business Policy and Strategic Management, Prentice hall of India Pvt. Ltd., New Delhi.
Ghosh.P.K., (2010), “Strategic Planning and management”, Sultan Chand & Sons, New Delhi.
Michael Porter, (1980), “Competitive Strategy”, The Free Press, New York.

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