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STRATEGIC MANAGEMENT

FOURTH EDITION

Chapter 7
BUSINESS-LEVEL
STRATEGIES

AZHAR KAZMI & ADELA KAZMI


Learning objectives
• Describe how corporate-level strategies, business definition, and
business model act as the foundations for business strategies
• Identify how industry structure and positioning of the firm in the
industry help to determine the competitive advantage
• Discuss and give examples of achieving cost leadership,
differentiation, and focus generic business strategies, conditions
under which each of these are used, their benefits and risks
• Explain the two types of tactics used for business strategies:
timing and market location
• Indicate business strategies for four different industry conditions
• Demonstrate leveraging home country advantages and
organisation-specific advantages for international business
strategies
© Azhar Kazmi & Adela Kazmi, 2015 2
The Foundations of Business-level
Strategies
Business-level strategies are an important level at which companies set their
strategies.

Corporate-level strategies: are basically about the decisions related to allocating


resources among the different businesses of an organisation, transferring resources
from one set of businesses to others, and managing and nurturing a portfolio of
businesses such that overall corporate objectives are achieved.

Business definition of a company consists of three dimensions of customer needs,


customer groups, and alternative technologies.

Business model: is “a representation of a firm's underlying core logic and strategic


choices for creating and capturing value within a value network.”

Corporate-level strategies, business definition, and business model act as the


foundations for business strategies.
S. M. Shafer, H. J. Smith and J. C. Linder, "The power of business models," Business Horizons Elsevier, 48, no. 3, (2005): 199-207.
C. A. Montgomery and M. E. Porter, Strategy: Seeking and Securing Competitive Advantage (Boston, MA: Harvard Business School Publishing,1991): xiv.

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Business-level Strategies
• Business strategies are the courses of action adopted by an
organisation for each of its businesses separately to serve identified
customer groups and provide value to the customer by satisfaction of
their needs.
• The source of competitive advantage for any business operating in an
industry arises from the skilful use of its core competencies.
• The dynamic factors that determine the choice of a competitive
strategy, according to Porter, are two namely the industry structure,
and the positioning of a firm in the industry.
• A combination of organisational behaviour and resources ultimately
leads to the development of capabilities that an organisation uses to
build competencies.
• An organisation can attempt to define and establish an approach to
compete in their industry through a competitive strategy. 4
Industry Structure and
Positioning of Firm in Industry
• Industry structure is determined by the competitive forces
which are five in number:
1. the threat of new entrants;
2. the threat of substitute products or services;
3. the bargaining power of suppliers;
4. the bargaining power of buyers; and
5. the rivalry among the existing competitors in an industry. according to
Porter.
• Porter considers positioning as the overall approach of the firm
to competing. It is designed to gain sustainable competitive
advantage based on competitive advantage and competitive
scope
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Competitive Advantage and
Competitive Scope
• Competitive advantage can arise due to two factors: lower cost
and differentiation:
i. Lower-cost is based on the competence of an organisation to design, produce,
and market a comparable product more efficiently than its competitors.
ii. Differentiation is the competence of the firm to provide unique and superior
value to the buyer in terms of product quality, special features, or after-sale
service.
• Competitive scope can be in terms of two factors: broad target
and narrow target:
i. Broad targeting: The firm can offer a full range of products / services to a
wide range of customer groups located in widely-scattered geographical area.
ii. Narrow targeting: The firm can choose to offer a limited range of products /
services to a few customer groups in a restricted geographical area.
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Generic Business Strategies
We could classify business strategies into the following three types:

• Cost leadership (lower cost / broad target market) When the competitive
advantage of an organisation lies in lower cost of products or services
relative to what the competitors have to offer, it is termed as cost
leadership.
• Differentiation (differentiation / broad target market) When the
competitive advantage of an organisation lies in special features
incorporated into the product / service which is demanded by the customers
who are willing to pay for it then the strategy adopted is the differentiation
business strategy.
• Focus (lower cost or differentiation / narrow target market) They are
niche strategies and rely on either cost leadership or differentiation but
cater to a narrow segment of the total market.
• Quick Response (Responding to the market needs faster than your rivals).

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Porter's Generic Business Strategies

Broad
(Where to compete)
Overall Broad
COMPETITIVE

target
Cost leadership differentiation
market
SCOPE

Narrow Focussed cost Focussed


target leadership differentiation
market

Low-cost Differentiated
products/services Products/services

COMPETITIVE ADVANTAGE
(How to compete)

Source: Adapted from M.E. Porter, Competitive Advantage: Creating and Sustaining Superior
Performance (New York: Free Press, 1985): 12.

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Cost Leadership as a Business Strategy
• The basic objective in achieving cost leadership is to ensure that
the cumulative costs across the value chain is lower than that of
competitors.
• Several actions could be taken for achieving cost leadership as
mentioned below:
– Accurate demand forecasting and high capacity utilisation is essential to realise
cost advantages.
– Attaining economies of scale leads to lower per unit cost of product / service.
– High level of standardisation of products and offering uniform service
packages using mass production techniques yields lower per unit costs.
– Aiming at the average customer makes it possible to offer a generalised set of
utility in a product / service to cover greater number of customers.
– Investments in cost-saving technologies can help an organisation to squeeze
every extra paisa out of the cost making the product / service competitive in the
market.
– Withholding differentiation till it becomes absolutely necessary is another way
to realise cost-based competitiveness. 9
Reasons for Cost leadership
• Conditions under which cost leadership is used are mentioned
below.
– The markets for the product / service operate in such a way that price-based
competition is vigorous making costs an important factor.
– The product / service is standardised and its consumption takes place in such a
manner that differentiation is superfluous.
– The buyers may be large and possess significant bargaining power to negotiate
a price reduction from the supplying organisation.
– There is lesser customer loyalty and the cost of switching from one seller to
another is low. This is often seen in the case of commodities or products that
are highly standardised.
– There might be few ways available for differentiation to take place.
Alternatively, whatever ways for differentiation are possible do not matter
much to the customers.

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Conditions under which Cost
Leadership is Used
• The markets for the product / service operate in such a way that price-based
competition is vigorous making costs an important factor.
• The product / service is standardised and its consumption takes place in
such a manner that differentiation is superfluous.
• The buyers may be large and possess significant bargaining power to
negotiate a price reduction from the supplying organisation.
• There is lesser customer loyalty and the cost of switching from one seller to
another is low. This is often seen in the case of commodities or products
that are highly standardised.
• There might be few ways available for differentiation to take place.
Alternatively, whatever ways for differentiation are possible do not matter
much to the customers.

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Benefits of Cost Leadership
• Cost advantage is possibly the best insurance against industry competition.
An organisation is protected against the ill effects of competition if it has a
lower-cost structure for its products and services.
• Powerful suppliers possess higher bargaining power to negotiate price
increase for inputs. Organisations that possess cost advantage are less
affected in such a scenario as they can absorb the price increases to some
extent.
• Powerful buyers possess higher bargaining power to effect price reduction.
Organisations that possess cost advantage can offer price reduction to some
extent in such a case.
• The threat of cheaper substitutes can be offset to some extent by lowering
prices.
• Cost advantage acts as an effective entry barrier for potential entrants who
cannot offer the product / service at a lower price.

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Limitations of Cost Leadership
• Cost advantage is ephemeral. It does not remain for long as competitors can
imitate the cost reduction techniques. Duplication of cost reduction techniques
makes the position of cost leader vulnerable from competitive threats.
• Cost leadership can dilute customer focus and limit experimentation with product
attributes. This may create a situation where cost reduction is done for its own
sake and the interests of the customers are ignored.
• Depending on the industry structure, sometimes less efficient producers may not
choose to remain in the market owing to the competitive dominance of cost leader
and scope for product/service may get reduced affecting the cost leader.
• Technological shifts are a great threat to cost leader as these may change the
ground rules on which an industry operates. For instance, technological
development may lead to the creation of a cheaper process or product which is
adopted by newer competitors. The older players in the industry may be left with
an obsolete technology that now proves to be costlier. In this way, technological
breakthroughs can upset cost leadership strategies.

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Differentiation Business Strategy
The key to achieving differentiation is to create value for the customer that
is unmatched by the competitors at the price at which the differentiator
organisation offers its products

A differentiated product or service stands apart in the market and is


distinguishable by the customers for its special features and attributes.

Measures that a differentiator organisation can adopt in its product features


are:
– Offer utility for the customer and match her tastes and preferences.
– Lower the overall cost for the buyer in using the product / service.
– Raise the performance of the product.
– Increase the buyer satisfaction in tangible or non-tangible ways.
– Offer the promise of high quality of product / service.
– Enable the customer to claim distinctiveness from other customers and enhance
her status and prestige among the buyer community.
– Offer the full range of product /service that a customer requires for her need
satisfaction. 14
© Azhar Kazmi & Adela Kazmi, 2015
Conditions for Differentiation
The major conditions under which differentiation business strategies could
be employed are given below:
• The market is too large to be catered to by a few organisations offering a
standardised product / service.
• The customer needs and preferences are too diversified to be satisfied by a
standardised product / service.
• It is possible for the organisation to charge a premium price for differentiation that
is valued by the customer.
• The nature of the product / service is such that brand loyalty is possible to generate
and sustain.
• There is ample scope for increasing sale for the product / service on the basis of
differentiated features and premium pricing.

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Benefits for Differentiation
• Organisations distinguish themselves successfully on the basis of differentiation
thereby lessening competitive rivalry. Customer brand loyalty too acts as a
safeguard against competitors. Brand loyal customers are also generally less price-
sensitive.
• Powerful suppliers can negotiate price increases that the organisation can absorb to
some extent as it has brand loyal customers typically less sensitive to price increase.
• Powerful buyers do not usually negotiate price decrease as they have fewer options
with regard to suppliers and generally have no cause for complain as they get the
special features and attributes demanded. Owing to its nature, differentiation is a
market- and customer-focussed strategy.
• Differentiation is an expensive proposition. Newer entrants are not normally in a
position to offer similar differentiation at a comparable price. In this manner,
differentiation acts as a formidable entry barrier to new entrants.
• For similar reasons, as in the case of newer entrants, substitutes product / service
supplier too pose negligible threat to established differentiator organisations.

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Limitations of Differentiation
• In a growing market, products tend to become commodities. Long-term
perceived uniqueness - the basis for differentiation - is difficult to sustain.
• In the case of several differentiators adopting similar differentiation
strategies the basis for distinctiveness is gradually lessened and ultimately
fades away.
• Differentiation fails to work if its basis is something that is not valued by
the customer.
• Price premium too have a limit. Charging too high a price for differentiated
features may cause the customer to forego the additional advantage from a
product / service on the basis of her own cost-benefit analysis.
• Failure on the part of the organisation to communicate adequately the
benefits arising out of differentiation or over relying on the intrinsic
product attributes not readily apparent to a customer may cause the
differentiation strategy to fail.

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Focus Business Strategy
• Focus strategy is concerned with identifying a narrow target in terms of markets
and customers. The organisation seeking to adopt a focus strategy has to locate a
niche in the market where the cost leaders and differentiators are not operating.
• Going beyond the confines of the industry, innovative organisations could also
explore the ‘blue ocean’ segments that they could create and take advantage of.
• The basis for an organization in adapting focus strategy are:
– Choosing specific niches by identifying gaps not covered by cost leaders and
differentiators.
– Creating superior skills for catering to such niche markets.
– Creating superior efficiency for serving such niche markets.
– Achieving lower cost / differentiation as compared to competitors in serving such niche
markets.
– Developing innovative ways in managing the value chain different from the prevalent
ways in an industry.

W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy: How to create Uncontested Market Space and Make Competition Irrelevant (Boston, MA:
Harvard Business Review Press, 2005).
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Reasons for Focus Business Strategy
Conditions ripe for the adoption of a focus strategy are:
• There is some type of uniqueness in the segment which could either be
geographical, demographic, or based on lifestyle.
• There are specialised requirements for using the products or services that the
common customers cannot be expected to fulfil.
• The niche market is big enough to be profitable for the focussed organisation.
• There is a promising potential for growth in the niche segment.
• The major players in the industry are not interested in the niche as it may not fit into
their own plans or not be crucial to their own success.
• The focussing organisation has a required skill/expertise to serve the niche segment.
• The focussing organisation can guard its turf from other predator organisations on
the basis of customer relations and loyalty it has developed and its acknowledged
superiority in serving the niche segments.

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Benefits for Focus Business Strategy
• The focussed organisation is protected from competition to the extent that
the other organisations having a broader target do not possess the
competitive ability to cater to the niche markets.
• The focussed organisations buy in small quantities and so powerful
suppliers may not evince much interest.
• Powerful buyers are less likely to shift loyalties as they might not find
others willing to cater to the niche markets as the focussed organisations
do.
• The specialisation that focussed organisations is able to achieve in serving
a niche market acts as a powerful barrier to substitute products / services
that might be available in the market.
• For the same reason as above, the competence of the focussed organisation
acts as an effective entry barrier to potential entrants to the niche markets.

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Limitations for Focus Business Strategy
• Serving niche markets requires the development of distinctive
competencies to serve those markets and their development may be a long-
drawn difficult process.
• Being focussed means commitment to a narrow market segment. Once
committed, it may be difficult for focussed organisation to move to other
segments of markets.
• A major risk lies in the cost configuration for a focussed organisation as the
costs are higher and markets are limited and the volume of production and
sales small.
• Niches are often transient and may disappear owing to technology or
market factors.
• Niches may sometimes become attractive enough for the bigger players to
shift attention to them.
• Rivals in the market may sometimes out-focus the focussed organisations
by devising ways to serve the niche markets in a better manner.
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Stuck-in-the-Middle Positioning
• Organisations that clearly are cost leaders, differentiators or focusers there
are some who are not clear about their positioning and end up doing
something of everything resulting in doing nothing substantial. These are
the organisations that are `stuck in the middle'. Clearly such organisations
do not possess a competitive advantage and have a below-average
performance.
• Positioning through stuck-in-the-middle is failure to develop business
strategy on the basis of one of the three generic strategies of cost
leadership, differentiation or focus.
• Depending on a firm’s resources and capabilities, a firm stuck in the middle
should endeavour to move either towards one of the three generic strategies
positioning.

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Stuck-in-the-Middle Positioning

Superior
Advantage due to Low cost with

Relative ability to
differentiation differentiation

differentiate
advantage

Inferior
Stuck-in-the- Advantage due to
middle low cost

Inferior Superior

Relative ability to reap cost


advantage
Source: Based on ideas in M.E. Porter, Competitive Advantage: Creating and Sustaining
Superior Performance (New York: Free Press, 1985).

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Best-Value Provider Positioning

• Strategic positioning organisations adopt by being primarily cost leaders,


differentiators, or focusers is open to risks.
• Purpose of managing an organisation strategically is to be alive to the
changes taking place in the environment.
• Best value: is the relatively lower price charged compared to that charged
for a competitor’s products with similar attributes.
• Providing value for money: Cost leaders and differentiators can adopt a
best-value provider positioning when they offer products and services to
customers at the best price-value available on the market.

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Integrating Cost Leadership and
Differentiation
• Integrating cost leadership and differentiation: is possible
through providing product/service at low cost through
technologies that enable differentiation through focus on niche
segments.
• Mass customisation is possible through the use of Computer -
Assisted (or - Aided) Design (CAD) and Computer-Assisted (or
- Aided) Manufacturing (CAM) and robot technology resulting
in manufacturing of small batch of products at low cost.
• Flexible manufacturing systems, using mass customisation,
allow low-volume production at relatively lower costs.

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Tactics for Business Strategies
Tactic is "a specific operating plan detailing how a strategy is
to be implemented in terms of when and where it is to be put
into action. The two tactics of timing (when) and market
location (where) used in formulating and implementing
business strategies.
• Timing : When to make a business strategy move is often as important as
what move to make.
• First movers and late movers: The first company to manufacture and sell a
new product or service is called the pioneer or the first mover organisation.
The organisations which enter the industry subsequently are late mover
organisations
J. D. Hunger and T. L. Wheelen, Strategic Manasgement (Reading, Mass.: Addison Wesley, 1999): 121.

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Benefits for First Mover Tactics
• They can establish position as market leader. They can establish business
models and gain valuable experience that can help them in attaining cost
leadership.
• Moving first in an industry results in early commitments to suppliers of raw
materials, new technology, and distribution channels creating cost
advantages over late movers.
• They develop an image of being a pioneer that helps build image and
reputation. First movers create standards in different areas for all
subsequent products and services in the industry.
• Moving first constitutes a pre-emptive strike and creates a lead for the first
movers. For the late movers, imitation may be difficult and risky.
• First time customers are likely to remain loyal.

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Limitations for First Movers
• Being a pioneer is often costlier than being a follower. Pioneering
organisations have to spend resources on creating customer awareness and
education for the products especially if these are new products.
• Late movers face lesser risks when the markets are developed.
• Late movers can imitate technological advances, skills, know-how and
marketing approaches easily negating the advantages that first movers are
likely to have.
• Technological change is often rapid creating obsolescence for the first
movers. Late movers can jump the technological thresholds and use the
latest technology available.
• Customer loyalty is not guaranteed and can often prove to be ephemeral.
Late movers can snatch market share from the first mover.

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Market Location Tactics
• Market location business tactic deals with the issue of where to compete. On the
basis of the role that organisations play in the target market, market location tactics
could be of four types: leader, challenger, follower, and nichers.
• Market leaders are organisations that have the largest market share in the relevant
product market and usually lead the industry in factors such as technological
developments, product and service attributes, price benchmarks, or distribution
channel design.
• Market challengers are organisations that have the second or lower ranking in the
industry. These organisations can either challenge the market leader or choose to
follow them.
• Market followers are organisations that imitate the market leaders but do not upset
the balance of competitive power in the industry.
• Market nichers are organisations that carve out a distinct niche that is left
uncovered by the other organisations in the industry or a niche that is of little or no
interest to others.

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Approach for a Market Leader

• Expanding the total market through new users, new uses, and more usage.

• Defending the market share through position defence, flank defence,


counteroffensive defence, mobile defence and contraction defence.

• Expanding the market share through enhancement of operational


effectiveness by means such as new product development, raising
manufacturing efficiency, improving product quality, providing superior
support services or increasing marketing expenditure.

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Approach for a Market Challenger
• Frontal attack involving matching the opponent in terms of the product,
price, promotion, and distribution.
• Flank attack involving challenging the opponent's weak or uncovered
geographical or segmental areas.
• Encirclement attack is a grand move to capture the opponent's market share
through launching an advertising blitzkrieg, making an unbeatable product-
related offering, or presenting a unique service guarantee.
• Bypass attack involving ignoring the opponent and attacking the easier
markets by means such as diversifying into unrelated products, moving into
new geographical areas or leapfrogging into new technologies.
• Guerrilla attack involving small, intermittent attacks to harass and
demoralise the opponent organisation and eventually secure an organisation
foothold in the industry. This could be done by means such as price cuts,
price discounts, intensive comparative advertising or initiating legal action.

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Approach for a Market Follower
• Counterfeiter strategy involving duplicating the market
leader's product and packaging and selling it in the black
market.
• Cloner strategy involving emulating the market leader's
products, name, and packaging.
• Imitator strategy involving copying some things from the
market leader while retaining some other features such as
pricing, packaging or advertising.
• Adapter strategy involving adapting one's own products to
those of the market leader and selling them in different
markets.

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Approach for a Market Nicher
• Creating niches involving looking for ways and means by
which niches can be identified or created in an industry.

• Expanding niches involving enhancing the coverage of present


niche to include similar market niches or new niches.

• Protecting niches involving shielding the niches served from


attacks by other organisations in the industry.

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Business Strategies for Different
Industry Conditions
• Industry life cycle means that industries typically pass through
different stages of their life cycle starting from embryonic
through decline stages.
• Business strategies are addressed to a particular industry and
markets.
• Conditions vary through different stages of industry life cycle
requiring adaptation of business strategies

© Azhar Kazmi & Adela Kazmi, 2015


34
Four Stages of Industry Life Cycle
MARKET SIZE

Embryonic Growth Maturity Decline

TIME

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Embryonic Stage
In the embryonic stage of the industry life cycle the conditions are as below. Under
these conditions, the business strategies need to help organisations to help set up
their base, develop competencies, and build market share. Early movers may be
able to establish market share.
– Investment and capital needs are highest as the industry has just started. Returns are
low and uncertain.

– Companies are first movers and fast followers who have to generate capital internally or
attracted outside capital usually from venture capitalists.

– Technology is yet unproven and not standardised.

– Demand is being established; customers lack information and are hesitant to try out new
products or services

– Business models are unproven; business uncertainty is high and managerial decisions
involve high risks

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Growth Stage

In the growth stage of the life cycle the conditions are as mentioned below.
Under these conditions, the strategies could be either low-cost or
differentiation
– Investment and capital needs decrease but gradually. Returns are high.
– Technology gains a firm footing and standardisation increases.
– Demand is established, customers gain information and learn to differentiate
between the product offerings
– Business models take shape and business is on more secure footing and
managerial decisions involve moderate risks
– Market share of incumbent companies increases; new bases for market
segmentation emerge

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Maturity Stage

In the maturity stage of the industry life cycle the conditions are as below.
Under these conditions, business strategies of all three types: cost
leadership, differentiation, and focus are in use.

– Investment and capital decrease significantly. Returns are lower and stabilise.
– Technology developments are few and standardisation is high.
– Demand is stable, customers are well-aware of options available, and have
learnt to choose and differentiate.
– Business models are well established.
– Market shares of companies are steady and jealously guarded
– Industry gets consolidated and is dominated by small number of large
companies

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Decline Stage

In the decline stage of the industry life cycle the conditions present are as
below. Under these conditions, business strategies of low-cost tend to
gain an upper hand.

– Investment and capital practically cease. Returns decline.


– Technological developments become superfluous.
– Demand shrinks and it becomes difficult to attract new customers.
– Products tend to become commodities and lose their brand power.
– Market shares reduce in size as industry demand shrinks.
– Industry faces movement of firms through retrenchment strategies.

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Business Strategies and
Internationalisation
• There are four types of international corporate strategies that
organisations adopt - international, multi domestic, global, and
transnational strategies.
• It must be clear that organisations adopt the business strategies
of cost leadership, differentiation and focus at the international
level too. Again, leveraging national and organisation-specific
advantages play a significant role in business strategies.
• The model of competitive advantage of nations tells us that
four determinants of a nation’s competitive advantage are:
factor conditions, demand conditions, related and supporting
industries, and firm strategy, structure, and rivalry.

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Industry Location and Home Country
Advantages
• The model of competitive advantage of nations tells us that four
determinants of a nation’s competitive advantage are: factor conditions,
demand conditions, related and supporting industries, and firm strategy,
structure, and rivalry.
• These four determinants help us to locate the industries in which a nation
can possess competitive advantage with respect to other nations. Home
country advantages, thus, become important basis for competitive
advantage for an organisation when they choose to operate abroad. But this
can happen only when the organisation formulates and implements a
strategy that is designed to reap the advantages of home country.
• It is for this reason that home country advantages become important when
business strategies of cost leadership, differentiation and focus are
implemented internationally.

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