business level strategy. bases of competitive advantage three generic strategies – michael e...

Business Level Strategy

Bases of competitive advantage

Three Generic Strategies – Michael E Porter

• Overall cost leadership

• Differentiation

• Focus

Cost Leadership

• In this strategy the ability to deliver the same goods/ services sold by rivals at a lower price

• Generally suitable for commodity products

• Wal-Mart, Vanguard Group,

Cost Leadership

• Experience Curve Effect

• Aggressive construction of efficient scale facilities

• Vigorous pursuit of cost reduction

• Tight cost control

• Avoidance of marginal customer accounts

Causes of Experience Curve Effects

• Improved Productivity of labor

• Increased specialization

• Innovation in Production Methods

• Value Engineering and Fine Tuning

• Balancing Production line

Price based strategies

• Products / services are commodity like

• Price sensitive customers

• Buyers have high power / low switching costs

• Small number of providers with similar market shares

• Avoid major competitors

Potential pitfalls of Low cost strategy

• Margin reduction

• Inability to reinvest

• Low price strategy cannot be pursued without a low cost base

• Price war

Differentiation strategies

• Clear identification of the strategic customer

• Who are the competitors

Need for Differentiation

• To compete against rivals eg Southwest Airlines, eBay,

• To create entry barriers for newcomers by building a unique product

• To reduce threats arising out of substitutes

• To develop a differentiation dvantage

Types of Differentiation

• Tangible Differentiation – design , package, style, quality, composition

• Intangible Differentiation – Image, Brand, Company reputation , customer preferences.,

Sources of Differentiation

• Value Chain – Michael Porter

• Uniqueness – as below.

• Policy Choice – credit policy , ad spend

• Links – within the value chain

• Timing

• Location – accessibility

• Interrelationships – sales force in sister co

Cost of Differentiation

• Increased Expenditure on training

• Increased ad spend to promote

• Cost of hiring

• Use of more expensive material

Focus – a concept

• It is segment based and has narrow competitive scope

• Also known as niche strategy• Focus strategy has two variants – cost

focus & differentiation focus• Cost Focus – firms seek cost advantage in

the target segment• Differentiation Focus – firms seeks

differentiation in target segment

Focus strategy

• Market segment large enough

• Market segment has good growth potential

• Focuser has efficient resources

• Focuser able to choose from different segments

• Market segment is not significant to the success of major competitors

Risks of Generic Strategies

Cost Leadership

Differentiation Focus

Not sustained Not sustained Imitated

Technology changes

Competitors imitate

Target become

unattractive

Bases for cost leadership erod

Bases for differentiation change

Demand disappears

Cost focuser achieves lower

Differentiation focuser achieve

Sub segment of industry

Distinctive approach of two competitive strategies

Aspect Cost Leadership

Differentiation

Strategic Intent Broad c/s of market

Broad c/s of market

Basis of advantage

Lowest cost Unique product

Product line limited Wide variety

Prod emphasis Lo price hi Q Innovative , diff

Marketing emph Low price Premium price

The Strategy Clock – D’Aveni

1. No frills 2. Low Price3. Hybrid4. Differentiated5. Focused differentiation 6. Strategies destined for failure7. Strategies destined for failure8. Strategies destined for failure

Competitive Strategy options

• No Frills• Low Price• Hybrid• Differentiation without

price premium• Differentiation with

price premium

• Segment specific• Risk of price war• Low cost base• Perceived added

value by user• Perceived added

value sufficient to bear price premium

Competitive Strategy options

• Focused Differentiation

• Increased price/ standard value

• Increased price / low value

• Low value/ standard price

• PAV to a segment warranting price premium

• Higher margins if competitors do not follow

• Feasible in monopoly situations

• Loss of market share

Failure Strategy

• A Failure strategy is one that does not provide perceived value for money in terms of product features , price or both

Sustaining competitive advantage

• Sustaining price based advantage

• Prepare to accept reduced margins

• Sustain and win a price war

• Organization specific capabilities eg excellent operation facilities, low raw material cost, low distribution cost etc

• Focusing on market segments where low price is particularly valued

Sustaining competitive advantage

• Sustain differentiation based advantage

• Create difficulties in imitation

• Imperfect mobility of resources

- Many intangible assets such as brand image reputation

- Switching costs

- Co specialization

Competitive strategy in fragmented industry

• Low overall entry barriers• Absence of economies of scale • High transportation costs• High inventory costs• No advantage in dealing with suppliers or

buyers• High level of creative content• High product differentiation

Strategy formulation in fragmented industry

• Conduct industry wide analysis

• Identify what causes fragmentation

• Study causes of fragmentation

• Assess new situation when industry overcomes fragmentation

• Locate a defendable position and take advantage of industry consolidation

Competitive strategy in emerging industry

• Technological uncertainty

• Strategic uncertainty

• High initial cost but steep cost reduction

• Embryonic companies and spin offs

• First time buyers

• Short time horizon

• Subsidies

Strategy formulation in fragmented industry

• Shaping industry structure

• Externalities in industry development

• Changing roles of suppliers and channels

• Shifting mobility barriers

Competitive strategy in maturing industry

• Slowing growth rates

• Firms sell to experienced repeat buyers

• Competition is concentrated on cost and service

• International competition increase

• Manufacturing , marketing , research , distribution often undergo change

• Industry profits fall

Strategy formulation in emerging industry

• Sophisticated cost analysis

• Rationalizing the product mix

• Correct pricing

• Process innovation

• Competing internationally

• Buy cheap assets

• Increasing scope of purchases

Competitive strategy in declining industry

• Conditions of demand

• Exit barriers

• Volatility of rivalry

Strategy formulation in declining industry

• Leadership

• Niche

• Harvest

• Quick divestment