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The Business Level

Strategy

Introduction

Approach to develop strategy - Where are we today? Where do we want to be tomorrow? How are we going to get from here to there.

In large organizations with several business unit, there could be several strategies running at any time.

The question is – are these strategies all working to achieving a common corporate objective? How well do these strategies align with corporate strategy?

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Introduction In Fortune 500 organizations, there are several different types of strategies, as

depicted below:

Corporate Strategy

• Is concerned with the overall purpose & scope of the business to meet stakeholders expectations.

• This is a crucial level since it is heavily influenced by investors in the business & acts to guide strategic decision-making throughout the business.

Business Strategy

• Is concerned more with how a business competes successfully.

• It concerns strategic decision about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities, etc.

Operational Strategy

• Is concerned with how each part of the business is organized to deliver the corporate and business-unit level strategic direction.

Corporate Strategy

Corporate strategy is concerned with overall

business to meet stakeholders, customers and

board’s expectations.

Corporate strategy is usually spelled out in

mission statement.

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Business Strategy

Business unit strategies include Marketing Strategy, HR Strategy, IT/Technology Strategy, Sales Strategy, etc.

The emphasis is on short and medium term plans and is limited to the domain of each department’s functional responsibility.

Some of these strategies even though focussed on achieving business unit objectives may include dimensions that are beyond the scope of a single business unit.

Business Strategy

Also, a lot depends on how these organizations/BU are structured – centralized, decentralized, or hybrid structure.

Say for example, if each business unit has its own Marketing department, it may make sense, or rather the business unit may have its own Marketing Strategy.

However, if the organization has centralized Marketing division, then a single cohesive organization-wide Marketing Strategy might exist.

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Operational Strategy

Operational Strategy works as silo of Business Unit

strategy with operational related activities and no

budget of its own.

Porter’s “What Is Strategy?”

Operational effectiveness is not strategy:

Operational effectiveness means performing

similar activities better than rivals. It is

necessary, but not sufficient, for competitive

advantage.

Strategic positioning means performing different

activities from rivals’ or performing similar

activities in different ways:

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Porter’s “What Is Strategy?”

Variety-based positioning (producing a subset of

products/services)

Needs-based positioning (serving needs of

particular group of customers)

Access-based positioning (using different ways to

reach customers)

Strategy involves trade-offs, choosing what not to

do.

Sustaining a Competitive Advantage

Consider…

The viability of a firm’s success is driven by both

the internal operations of the firm and the desires

and preferences of the market. Firms that

succeed have the appropriate resources and cost

structure to meet the needs of the environment.

They also have a strategy…

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Strategy and Competitive Advantage

An organization's core competencies should be

focused on satisfying customer needs or

preferences in order to achieve above average

returns - Business strategies.

Business-level strategy is concerned with a firm's

position in an industry, relative to competitors

and to the five forces of competition.

Strategy and Competitive Advantage

Business-level strategies require a choice:

How to overcome the five forces and achieve

competitive advantage?

Suggestion - use Porter’s three generic strategies:

Overall cost leadership

Differentiation

Focus

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Three Generic Strategies

Exhibit 5.1 Three Generic StrategiesSource: Adapted and reprinted with the permission of The Free Press, a division of Simon & Schuster Inc. from

Competitive Strategy: Techniques for Analyzing Industries and Competitors. Michael E Porter. Copyright © 1980, 1998 by

The Free Press. All rights reserved.

Three Generic Strategies

Overall cost leadership is based on:

Creating a low-cost position relative to a firm’s

peers

Managing relationships throughout the entire value

chain to lower costs

Differentiation implies:

Products and/or services that are unique & valued

Emphasis on non-price attributes for which

customers will gladly pay a premium

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Three Generic Strategies

A focus strategy requires:

Narrow product lines, buyer segments, or targeted

geographic markets

Advantages obtained either through differentiation

or cost leadership

Examples: Three Generic Strategies

Companies pursuing an overall cost leadership strategy:

McDonalds

Wal-Mart

Companies pursuing a differentiation strategy:

Apple

Target

Companies pursuing a focus strategy:

Ikea

Costco

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Three Generic Strategies

Exhibit 5.2 Competitive Advantage and Business Performance

Overall Low-Cost Leadership

Cost leadership involves:

Aggressive construction of efficient scale facilities

Vigorous pursuit of cost reductions from

experience

Tight cost & overhead control

Avoidance of marginal customer accounts

Cost minimization in all activities in the firm’s

value chain, such as R&D, service, sales force, &

advertising

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Overall Low-Cost Leadership

Cost leadership requires

Learning to lower costs through experience: the experience curve

With experience, unit costs of production processes decline as output increases

This strategy also requires competitive parity

Being “on par” with competitors with respect to low-cost, differentiation, or other strategic product characteristics

Permits cost leaders to translate cost advantages directly into higher profits

Improving Competitive Position vis-à-vis the

Five Forces

Protects a firm against

rivalry from competitors

Protects the firm against

powerful buyers

Provides more flexibility

to cope with demands

from powerful suppliers

who want to increase

input costs

Provides substantial

entry barriers due to

economies of scale

and cost advantages

Puts the firm in a

favourable position

with respect to

substitute products

An overall low-cost position

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Pitfalls of Low-Cost Leadership

Too much focus on one or a few value chain

activities.

Increase in the cost of the inputs on which the

advantage is based

The strategy is imitated too easily

A lack of parity on differentiation

Reduced flexibility

Obsolescence of the basis of a cost advantage

Differentiation

A differentiation strategy can take many forms:

Prestige or brand image

Technology

Innovation

Features

Customer service

Dealer network

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Differentiation

Differentiation requires:

A level of cost parity relative to competitors

Integration of multiple points along the value chain

Superior material handling operations to minimize damage

Accurate and responsive order processing

Personal relationships with key customers

Rapid response to customer service requests

Differentiation along several different dimensions at once

Improving Competitive Position vis-à-vis the

Five Forces

Creates higher entry

barriers due to

customer loyalty

Provides higher

margins that enable

the firm to deal with

supplier power

Reduces buyer power

because buyers lack

suitable alternatives

Establishes customer

loyalty and hence less

threat from

substitutes

An overall differentiation strategy

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Pitfalls of Differentiation

Uniqueness that is not valuable

Too much differentiation

Too high a price premium

Differentiation that is easily imitated

Dilution of brand identification through product

line extensions

Perceptions of differentiation may vary between

buyers and sellers

Focus

A focus strategy is based on the choice of a

narrow competitive scope within an industry.

A firm selects a segment or group of segments (or

niche) and tailors its strategy to serve them

A firm achieves competitive advantages by

dedicating itself to these segments exclusively

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Focus

A focus strategy has two variants:

Cost focus

Creates a cost advantage in its target segment

Exploits differences in cost behaviour

Differentiation focus

Differentiates itself in its target market

Exploits the special needs of buyers

Improving Competitive Position vis-à-vis the

Five Forces

Creates higher entry barriers due to cost leadership or differentiation or both

Can provide higher margins that enable the firm to deal with supplier power

Reduces buyer power

because the firm

provides specialized

products or services

Focused niches are

less vulnerable to

substitutes

An overall cost strategy

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Pitfalls of Focus

Erosion of cost advantages within the narrow

segment

Highly focused products and services are still

subject to competition from new entrants & from

imitation

Focusers can become too focused to satisfy buyer

needs

Combination Strategies: Integrating

Low-Cost & Differentiation

Integration of low-cost and differentiation

strategies makes it difficult for competitors to

duplicate or imitate strategy

The goal of a combination strategy is to provide

unique value in an efficient manner

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Combination Strategies: Integrating

Low-Cost & Differentiation

Combining overall low-cost and differentiation

strategies can take several forms:

Automated & flexible manufacturing systems

allow for mass customization

Exploitation of the profit pool concept creates a

competitive advantage

Using information technology, firms can integrate

activities throughout the extended value chain

Improving Competitive Position vis-à-vis the

Five Forces

Creates higher entry barriers due to both cost leadership & differentiation

Can provide higher margins that enable the firm to deal with supplier power

Reduces buyer power

because of fewer

competitors

An overall value

proposition reduces

threat from

substitutes

An integrated overall low-cost & differentiation strategy

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Pitfalls of Combination Strategies

Firms that fail to attain both overall low-cost &

differentiation strategies may end up with neither

and become “stuck in the middle”

Firms can also underestimate the challenges &

expenses associated with coordinating value-

creating activities in the extended value chain

Firms can also miscalculate sources of revenue

and profit pools in the firm’s industry

Thank You!