18 Business Level Strategies

1.1 Learning Objectives

1.2 Introduction

1.3 Business Level Strategy

1.4 The Purpose Of A Business-Level Strategy

1.4 A Whom To Serve?

1.4 B Defining The What:

1.4 C Defining The How

1.5 Generic Strategies:

1.5 A . Cost Leadership

1.5b. . Differentiation

1.5 D  Focused Differentiation

1.5 E  Integrated Low Cost And Differentiation Strategy

1.5 F Economic Drivers Of Strategic Positioning

1.6 Summary

1.1 Learning Objectives

Following are learning objectives of the lesson

1.    Define business-level strategy.

2.    Discuss the relationship between customers and business-level strategies in terms of who, what, and how.

3.    Explain the differences among business-level strategies.

4.    Explain two most popular constructs for business level strategies.

1.2 Introduction

Strategic Management is the process of strategic decision-making that sets the long-term direction for the organization. The main objective of strategic management is to achieve sustainable competitive advantage and above average rate of return. The detailed process of strategic management has been discussed in earlier lessons but the steps can be aggregated into three clusters i.e.

Strategic Management is the process of designing a coherent, coordinated, integrated and unified strategy that sets the degree to which a firm globalizes its strategic behaviors in different countries through standardization of offerings, configuration and coordination of activities in different countries, and the integration of competitive moves across countries.

In order to carry out strategy process in an Organization, it is carried out at various levels of management i.e. top level management, middle level management and first level management. These three levels of strategies are referred to as corporate level strategies, business level strategies and functional level strategies.

In brief these are

i. Corporate level strategy looks for the development of whole of the organization, beginning with mission, goals, to determining the business plan, resources and finally implementing different strategies in order to achieve a desired goal.

Example: Godrej which deals with wide range of businesses like soaps, furniture, edible oil, Information Technology, real estate.

ii.  Business Level strategy deals with translation of goals to form individual businesses. For example big bazaar follows a cost leadership strategy while Pantaloon follows a product differentiation strategy.

iii. Functional Level strategy deals with specific business functions or operations like human resources, product development, customer service etc

1.3 Business level strategy

Business level strategies are strategies which are made at the middle level management for a specific Strategic business unit. These are by a SBU keeping in mind the external environment and internal environment of the SBU to achieve sustained competitive advantage and above average returns. In simplest terms these are strategies which are formulated within the premise of a company’s vision and mission statement to deal with opportunities and threats being faced by the business unit while obtaining sustained competitive advantage and above average rate of return.

Strategic positioning refers to the ways mangers place their SBU relative to other incumbents in the industry. Therefore, a business level strategy is all about competitive interactions and how a company deals with those interactions. Competitive actions can generate a wide range of competitive responses. Competitive interaction theory suggests that a SBU or a company’s managers predict reactions to its actions and determine the best course of action given competitors’ likely reactions. Business-level strategy refers to the plan of action that strategic managers adopt for using a company’s resources and distinctive competencies to gain a competitive advantage over its rivals in a market or industry.

These business level strategies deal are usually based on core competencies of a firm and are concerned with identifying the customers’ needs and satisfying them to best of their ability. Business-level strategy is related with the basis on which a SBU decides to compete with its competitors and in its industry and also how it decides to position itself in the market. It is important to note here that we are referring to a business unit and every brand or a business unit could have different business level strategy but belong to a same conglomerate. For example Ariel is a product of P&G which follows product leadership while Tide is the product of same conglomerate which is more inclined towards cost leadership.

Therefore, business level strategy is all about “what”, “who” and “how” i.e . what is being satisfied, who is being satisfied and how are they being satisfied. The what refers to the definition of the customer needs, who refers to the market segmentation and targeting strategies and basis of the company and how refers to the companies decision regarding what distinctive competencies to target to differentiate itself from the competitors or other incumbents in the industry.

1.4 The Purpose of A Business-Level Strategy

There are two basis of distinctiveness in business level strategies.

1.   deciding to do same activities in the process of value addition (value chain analysis) as everyone else in the industry but do them differently – cost leadership.

2.  deciding to do different activities – product leadership.

New competitors with new business models create disruptive change — strategies that are both different from and in conflict with those of incumbents. These disruptions have several common characteristics: these firms emphasize different product attributes; they start as rather low margin businesses; these firms can grow into significant companies taking market share; and new firms’ business models cannot be easily imitated in the short run.

Deciding to perform activities differently or to perform different activities than competitors is the essence of business-level strategy. Therefore, the company’s business-level strategy is a deliberate choice about how it will execute the value chain’s primary and support activities in ways that create exclusive value.

Fit among activities is a key to the sustainability of competitive advantage for all firms. As Michael Porter observes, “strategic fit among many activities is fundamental not only to competitive advantage, but also to the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities.”1

Three dimensions of Business Level Strategy  – what who and how

As discussed above Business Level Strategies are strategies which define the sequence of actions employed by a SBU to add value to product and services, and to attain sustained competitive advantage by utilizing core competencies. Business-level strategies pertain to the way a company positions itself in an industry with respect to its rivals. The consumers are the basis or core-focus of a company’s business-level strategies. There are three dimensions to Business level strategies. Without considering these the business cannot even start to design the business level strategies- who the customers of the SBU are, what needs of the customers are the SBU or the product or service being offered is covering and how are those customer needs being satisfied i.e. the basis of value addition.

1.4 a Who to serve?

This refers to the market segmentation and targeting strategies being adopted by the SBU. Market Segmentation: segmentation is a process of organizing customer into groups with similar kind of properties, product preference or expectations.

Segments are done on the basis of customers,(a) demographic factor.(b) psychographic factor,(c) past purchase behavior (d) desired benefits from product/ services. It is used to identify the target customers, and provide supporting information for marketing key elements such as positioning to achieve certain marketing key objectives. Various tools are used to determine market segment like factor analysis, cluster analysis and Discriminant analysis. Current lessons talks about these dimensions. Market segmentation is dividing a larger market into smaller groups based on shared characteristics and then the marketers can develop a message that is much more powerful in reaching that group. Market segmentation is done by businesses to develop an ideal set of characteristics for who, ultimately, their customers are.Businesses cannot target their products at everyone in their marketing efforts because their products don’t mean the same thing to all people. The purpose of market segmentation is to develop a target market which is a group of people most likely to purchase the product being offered by the company and then focusing on that particular group. There are a number of different ways in which we can segment a market.

1.4 b Defining the What: Which goods and/or services do potential consumers ultimately need?

This refers to identifying the needs of the customers. The ability to successfully envisage and satisfy future consumer needs is crucial to the company’s success. This stage of business level strategies refers to understanding customer needs which nothing but desires that can be satisfied by attributes of a product. This stage refers to understanding the offering a company is entering in the market with in order to satisfy the needs of the targeted customers.

1.4 c Defining the How: How can we satisfy the consumers’ needs?

Firms must determine the unique combination of resources and capabilities that make up its core competencies, and further utilize them to fulfill consumer needs by executing strategies aimed at creating value. In past couple of years the dimensions of product value have been defined to invoice Performance, Features, Conformance with specifications, Reliability, Durability, Serviceability, Fit and finish. Perceived quality can be defined as the customer perception of the overall quality or superiority of a product with respect to its intended purpose, relative to alternatives (Jain 1990)2. However, the quality of the product is greatly influenced by type of product. There are multiple configurations used to define type of products. Researchers have used either time or effort spent by the consumer on purchasing the product, or type of consumer or end use of the product as a basis to categorize the product a company is dealing in.

On basis of time and effort spent on purchasing the product by the consumer the product may be categorized as convenience, shopping or specialty product. Convenience being the category of products in which consumers spend minimum time in seeking out of exploring a product wise specialty product means that the consumer would go to any lengths to find what they want. In convenience goods price and ease of availability is a decisive factor while for specialty goods customization is the only factor.

On basis of type of consumer products may be categorized as industrial goods or consumer goods. Industrial goods are products which are purchased as raw materials for value addition while consumer goods are products which are purchased for household consumption.

The type of product determines the product mix as well as the trade-off a company does between standardization and adaptation of the product mix.

Therefore, a Business level strategy is all about what, who and how. One of the most popular models of Business level strategies is the Porters generic strategies model.

1.5 Generic Strategies:

The first model for business level strategies was given by Michael Porter’s and is also referred to as generic strategy model. The purpose of strategic positioning is to reduce the effects of rivalry and thereby improve profitability. Managers use the model to stake out a position for their SBU relative to its rivals in ways that reduce the effects of intense rivalry on profitability.

Porter’s generic strategies identify four strategic positions to deal with the incumbents and competitive intensity or rivalry —low-cost, differentiation, focused cost leadership and focused differentiation. Selecting an intended generic strategic position gives the firm a head start and guidance on making specific choices. Business level strategy includes mainly four generic strategies which can be used to give competitive edge to a firm over its rivals. Companies have two options to compete i.e. either in whole target market or a focused market. There is also an additional fifth strategy at business level i.e. integrated strategy. However, two key factors affect the economic logic of competitive advantage: having a lower cost structure than competitors and having a product or service that customers perceive as differentiated from other products in the industry. A firm, then, can gain an advantage over rivals in one of two ways:

1. Produce an essentially equivalent product at a lower cost than its rivals.

2. Produce a differentiated (unique) product and charge higher prices to more than offset the added costs of differentiation.

1.5 a . Cost Leadership

In this strategy, price is the basis of competition. Every firm determines price of its offering on the basis of its internal efficiency. The process are set so that the SBU can have a reasonable margin one that will allow the SBU to gain above average profit and the comparative lower price will allow the customer to purchase the products of the company. This strategy is mostly used when the products and services offered by company are standardized and generic goods that have a wide customer base so that the company can offer at lowest price while still making above average profit. For implementing cost leadership company should make continuous efforts to reduce the cost of it’s per unit products. It can be understood as even if all rivals mark up same price of their product, cost leader will have maximum profit because it’s cost is minimum. In order to achieve this the managers of a SBU have to make sure that every activity in its value chain is working with a philosophy of reducing the cost and increasing efficiency.

In case of price war like situation the competitors who have high price are usually the ones who are driven out of the market or forced to reduce the prices. Companies can follow cost leadership by reducing costs in all activities of its value chain such as inbound logistics R&D, marketing and process innovation etc.

For Examples –

Wal-Mart

Wal-Mart Stores Inc. has everyday low prices and it has adopted the low cost leadership strategy to attract more and more customers. The concept of everyday low price is to provide goods at low price in regular basis; the motive behind this is not just sales. The main reason behind the Wal-Mart’s success in implementing low cost leadership strategy is its efficient supply chain management and procuring goods in cheaper rates. The raw material procurement is done from less expensive domestic suppliers or from cheap foreign countries in term of labor and other products. This method allows the company to charge lower prices to its customers while still making good profit.

Porter’s five forces analysis-

We can define porter’s five forces in favor of low cost leadership firms.

Rivalry – Competitors mostly do not want situation of price war, because the low cost leaders will gain profits even in price war situation while the competitors compete by letting their profits go away. Rivalry is on basis of cost of production but the attempt is to keep away from price war.

Customers –Bargaining power of customers is low as cost is less .i.e. the strategy helps a SBU gain the bargaining power back from the customers.

Suppliers – Firms with cost leadership strategy can be profited from supplier side and transferring this benefit in form of less price to customers.

Entrants – Low cost leader firms create high entry barriers for the new entrants by keeping the prices low.

Substitutes – Low cost companies attract the customers to purchase its products and not to switch on the substitute products which might be expensive.

1.5b. . Differentiation

Product differentiation is a generic strategy for business level decisions in which company produce its products in different way whether it be different designs, different technology, unique services so that it can stand out from its competitors. Value is provided to customers by providing those unique features in company’s products and not charging the lowest price. Differentiation can be achieved through high quality, features, high customer service, image management.

Companies can differentiate its products by:

Lowering buyers’ costs –it can be achieved by providing high quality products, providing enough after sale services

Rapid and continuous Innovation in products and services offered.

Fulfilling buyer’s need in a better way by customizing its products.

Sustainability –Generating high entrance barriers for new entrants by making image of being unique so that creating high switching costs for customers by its uniqueness and differentiation of products offered to them.

Examples of differentiation

Apple

Apple has developed itself into a prominent electronics company that offers everything ranging from personal electronics to televisions. As innovation and unique designing is a key feature of Apple’s products, it also differentiates its products via unique marketing and advertising techniques.

2.  Rolex as a prestige and luxury brand watches.

3.  Domino Pizza claiming that “home delivery in 30 minutes or free”

1.5 c Focused Low Cost

This strategy is adopted by companies which offers its products at low cost but sells its products only in a small market or niche market. For example electrician & technician services provider only provides Panjab university campus at lower cost. The companies that are following this strategy may not compete with whole of the industry for lowest price but competitors within same market place.

1. Giant

The goal of Giant is to keep retail prices low in some small target area. Even the company make some claim that “if any other company giving the lower price than us, customers can pay with the lowest.

2. Redbox

The company places vending machines outside its physical and retail stores to give DVD on rent for very less amount of money and this is for a small target market of vicinity area.

1.5 d Focused differentiation

In this strategy firms does not only compete on the basis of differentiation but they also select a small segment or niche of the market to sell the good and service. A niche is a market where the size of the market potential is so small that other firms do not view it as a lucrative market to enter.

Example: Kazzo toys

This toy company targets to those customers who not only want unique products but also want to have unique services provided with the toys. This strategy gives a niche market which wants to have unique products.

1.5 e Integrated low cost and differentiation strategy

This strategy is a combination of providing both low price and differentiated goods to customers, but the firm choosing this strategy should be careful enough so that it would not stuck in between that means not being capable of lowering the cost and not bringing the differentiation in product.

Example:  ZARA

Zara adopted both low cost and product differentiation strategy, as Zara is not constrained to limited age groups but it offers every age group a variety of fashionable clothes. Zara targets young and stylish people who want to follow the trend and fashion.

Firms that attempted to exploit both low-cost and differentiation strategies were often described as “stuck in the middle” – meaning they aimed to do both but did neither very well. Some firms are eventually able to achieve an integrated position. Integrated positions are achieved when elements of one position support a strong standing in the other. The tradeoffs required to achieve superior level on one dimension make it hard to succeed on the other.

1.5 F Economic Drivers Of Strategic Positioning

Choices in strategic positioning are influenced by economic logic. It is important to identify the different economic drivers that encourage strategic positions and foster their success to understand the logic behind different strategic positions.

i. Drivers of low cost advantages

Firms have different production costs. These include economies of scale, learning, production technology, product design, and location advantages for sourcing inputs. A successful low-cost strategy means that a firm is proficient at exploiting some of these drivers.

ii. Economies of scale

Economies of scale exist during a given period of time if the average total cost for a unit of production is lower at higher levels of output. Economies of scale result from a variety of efficiencies: spreading fixed costs over greater volume, specializing in a specific production process, practicing superior inventory management, exercising purchasing power, spending more effectively on advertising or R&D.

iii. Diseconomies of Scale

Size does not automatically ensure economies of scale. Diseconomies of scale occur when average total cost increases at higher levels of output and can result from bureaucracy, high labor costs, inefficient operations, and inflexibility.

iv. Minimum Efficient Scale

Costs may decline at some ranges of production but increase at others. Total average cost can be represented by a U-shaped curve that has a minimum point. The output level that delivers the lowest possible costs is the minimum efficient scale (MES). Operating below or above MES leads to a cost disadvantage. MES is the smallest scale necessary to achieve maximum economies of scale.

MES & Technology MES is a function of technology. With some technologies, MES is reached only at relatively low levels of production, and although there’s no scale advantage at higher levels, neither is there any disadvantage.

v. The Learning Curve

Incremental production costs decline at a constant rate as production experience is gained. The steeper the learning curve, the more rapidly costs decline. Two firms of the same scale may have significantly different operating costs due to the learning curve.

1.7 Summary

Business Level Strategies define the sequence of actions employed to impart value to consumers, and to attain a long-term, sustained competitive advantage by utilizing core competencies, or individual service or product markets. Business-level strategies pertain to the way a company positions itself in an industry with respect to its rivals, and to Porter’s five forces of industry competition. Deciding to perform activities differently or to perform different activities than competitors is the essence of business-level strategy. Therefore, the company’s business-level strategy is a deliberate choice about how it will execute the value chain’s primary and support activities in ways that create exclusive value. The consumers are the basis or core-focus of a company’s business-level strategies. It aims to answer the questions- who are we serving, what needs do we need to meet, and how will those needs be satisfied.

Porter’s generic strategies identify four positions—low-cost, differentiation, focused cost leadership and focused differentiation. Porter’s generic strategies are referred to as strategic positions. Selecting an intended generic strategic position gives the firm a head start and guidance on making specific choices regarding the five elements of the strategy diamond. Miles and Snow3 have shaped a veritable trove of business-level strategies. As opposed to the focus of a corporate-level strategy, which is, namely, on choices related to what businesses the firm should be in, a business-level strategy is related to how the firm competes in a selected industry .

• 3 Miles, R. E., & Snow, C. C. (2001). Fit, failure & the hall of fame. Free Press.