Strategic Management-7

Business level strategies

 Strategies occur at multiple levels- Corporate and Business unit Corporations often function through their business units Corporate level strategies provide a broad direction to the firm, but it is at the level of the business where most competitive interaction occurs and where competitive advantage is ultimately won or lost Business-level strategies are an important level at which companies set their strategies

 Business definition is at the core of business strategies Each business in a firm can be defined along three dimensions of customer needs, customer groups and alternate technologies By defining the what, who and how of a business the business definition seeks to provide direction

 What- deals with customer needs Who- deals with target segments How- deals with technologies (not just technical but all processes)

 Business strategies are the courses of action pursued by an organization to serve identified customer groups and to provide value to customers by satisfaction of their needs In the process the organization uses its core competencies to gain, sustain and enhance its competitive advantage The source of competitive advantage comes from skillful use of its core competencies

Michael Porter on strategy

The dynamic factors that determine the choice of a competitive strategy are: industry structure and position of the firm in the industry

Industry structure is determined by competitive forces These forces are: threat of new entrants; threat of substitute products or services; bargaining power of suppliers; bargaining power of buyers and rivalry among existing players in the industry

 The second factor that determines a firms competitive strategy is a firms positioning within the industry Positioning is the overall approach of the firm towards competing It is designed to gain a competitive advantage and is based on: competitive advantage and competitive scope

 Competitive advantage can arise due to: lower cost and differentiation Competitive scope can arise due to : broad target and narrow target

 Competitive advantage can be gained by producing standardized product through mass production techniques (lower cost) and distributing them through mass marketing OR Through high value high priced offerings to a select audience through specialized distribution channels-niche marketing

 Competitive scope refers to the range of products and services that a company offers Under broad targeting it can offer a full range of products and services to a wide range of customers Under narrow targeting it can choose to serve a limited number of customers in a restricted geographical area with a limited range of products

Generic business strategies

Broad target Narrow target Cost leadership Focussed cost leadership Low cost products Differentiation Focussed differentiation Differentiated products

 Cost leadership-offers a margin of flexibility to the organization to lower the price if the competition becomes stiff and yet earn the same profit Examples: Gujarat cooperative Milk Marketing Federation Moser- Baer India Tata Steel Reliance Communications

Achieving cost leadership

Accurate demand forecasting High capacity utilization High level of standardization of products Investments in cost saving technologies

Cost leadership- when?

Cost leadership strategies work best in price sensitive markets; where buyers possess a significant bargaining power; differentiation is superfluous or does not matter much to customers; low customer loyalty

Cost leadership- Benefits and Risks

Benefits- cost leadership is a high entry barrier. Others cannot copy it easily Best insurance against competition

Risks-Severe cost reduction can result in dilution of customer focus Technological shifts are a great threat; newer technology possessed by newer entrants may be more efficient as compared to obsolete technology

Differentiation strategy
Useful when the competitive advantage of an organization lies in its special features incorporated in its product which customers are willing to pay for This allows it to charge a premium for its products. But differentiation also adds costs The key is to maintain a balance between price and costs

Achieving differentiation
Incorporate valuable feature and benefits Increase non-tangible components of the product Increase variety offered Better design Offer a complete range of products that the customer needs

Differentiation-when?
Customer needs and preferences are too diversified Customers willing to pay for differentiated services The market is too large to be satisfied by a few players offering standardized products

Differentiation-benefits and risks

Benefits- Differentiation allows branding which leads to loyalty Differentiation can be a sustainable entry barrier Risks- fails when the basis of differentiation is not/ no longer valued by the customer

Focus strategy
For an identified segment, a focussed organization uses either low cost or differentiation strategy Examples Indian music: Tips created a revolution with a low cost strategy in audio cassettes Times Music and Music Today cater to upwardly mobile , sophisticated music lovers based on differentiation and premium pricing Tanishq- Offers a differentiated product for highincome customers Software companies- LOB strategy

Achieving focus
Identify specific niches Create superior skills to serve this segment Develop innovative ways of managing the value chain

Focus strategies-when?
There is a niche which is prepared to pay for a higher value The niche is large enough and has growth potential The major players in the industry are not interested in the niche; it is not crucial for them There is some uniqueness associated with the chosen segment

Focus strategies-benefits and risks

Focus build loyalties; this can be an entry barrier Could even transfer price increases (within limits) to the customer

Niches can be transient; markets may change rapidly If a niche becomes large enough it will attract competitors Being focussed means committing to a narrow market segment, may hinder movement to other segments