Strategic management

Business Level Strategies

 Introduction
• Business strategy focuses on improving the competitive position of a company’s or business
unit’s products or services within the specific industry or market segment that the company or
business unit serves.
• Business strategy is extremely important because research shows that business unit effects have
double the impact on overall company performance than do either corporate or industry effects.
• Business strategy can be competitive (battling against all competitors for advantage) and/or
cooperative (working with one or more companies to gain advantage against other competitors).
• Just as corporate strategy asks what industry(ies) the company should be in, business strategy
asks how the company or its units should compete or cooperate in each industry.
 Porter’s Competitive Strategies
• Competitive strategy raises the following questions:
1) Should we compete on the basis of lower cost (and thus price), or should we differentiate our
products or services on some basis other than cost, such as quality or service?
2) Should we compete head to head with our major competitors for the biggest but most
sought-after share of the market, or should we focus on a niche in which we can satisfy a less
sought-after but also profitable segment of the market?
• Porter proposes two “generic” competitive strategies for outperforming other corporations in a
particular industry: lower cost and differentiation.
• These strategies are called generic because they can be pursued by any type or size of business
firm, even by not for-profit organizations
 Cost Leadership
• Cost leadership is a lower-cost competitive strategy that aims at the broad mass
market and requires “aggressive construction of efficient-scale facilities, vigorous
pursuit of cost reductions from experience, tight cost and overhead control,
avoidance of marginal customer accounts, and cost minimization in areas like
R&D, service, sales force, advertising, and so on.”
• Because of its lower costs, the cost leader is able to charge a lower price for its
products than its competitors and still make a satisfactory profit.
• Although it may not necessarily have the lowest costs in the industry, it has lower
costs than its competitors.
 Cost Leadership
• Having a lower-cost position also gives a company or business unit a defense against
rivals.
• Its lower costs allow it to continue to earn profits during times of heavy competition.
• Its high market share means that it will have high bargaining power relative to its
suppliers (because it buys in large quantities).
• Its low price will also serve as a barrier to entry because few new entrants will be
able to match the leader’s cost advantage.
• As a result, cost leaders are likely to earn above-average returns on investment.
 Differentiation
• Differentiation is aimed at the broad mass market and involves the creation
of a product or service that is perceived throughout its industry as unique.
• The company or business unit may then charge a premium for its product.
• This specialty can be associated with design or brand image, technology,
features, a dealer network, or customer service.
• Differentiation is a viable strategy for earning above-average returns in a
specific business because the resulting brand loyalty lowers customers’
sensitivity to price.
 Differentiation
• Increased costs can usually be passed on to the buyers.
• Buyer loyalty also serves as an entry barrier; new firms must develop their own distinctive
competence to differentiate their products in some way in order to compete successfully.
• Examples of companies that successfully use a differentiation strategy are Walt Disney
Productions (entertainment), BMW (automobiles), Nike (athletic shoes), and Apple
Computer (computers and cellphones).
• Research does suggest that a differentiation strategy is more likely to generate higher
profits than does a low-cost strategy because differentiation creates a better entry barrier.
• A low-cost strategy is more likely, however, to generate increases in market share.
 Cost Focus
• Cost focus is a low-cost competitive strategy that focuses on a particular
buyer group or geographic market and attempts to serve only this niche, to
the exclusion of others.
• In using cost focus, the company or business unit seeks a cost advantage
in its target segment.
 Differentiated Focus
• Differentiation focus, like cost focus, concentrates on a particular buyer
group, product line segment, or geographic market.
• In using differentiation focus, a company or business unit seeks
differentiation in a targeted market segment.
• This strategy is valued by those who believe that a company or a unit that
focuses its efforts is better able to serve the special needs of a narrow
strategic target more effectively than can its competition.
 Competitive Tactics
• Studies of decision making report that half the decisions made in organizations fail because
of poor tactics.
• A tactic is a specific operating plan that details how a strategy is to be implemented in
terms of when and where it is to be put into action.
• By their nature, tactics are narrower in scope and shorter in time horizon than are strategies.
• Tactics, therefore, may be viewed(like policies) as a link between the formulation and
implementation of strategy.
• Some of the tactics available to implement competitive strategies are timing tactics and
market location tactics.
 Timing Tactics
• A timing tactic deals with when a company implements a strategy.
• The first company to manufacture and sell a new product or service is called the
first mover (or pioneer).
• Some of the advantages of being a first mover are that the company is able to
establish a reputation as an industry leader, move down the learning curve to
assume the cost-leader position, and earn temporarily high profits from buyers
who value the product or service very highly.
• A successful first mover can also set the standard for all subsequent products in the
industry.
 Timing Tactics: When to Compete
• A company that sets the standard “locks in” customers and is then able to offer further products based
on that standard.
• Research does indicate that moving first or second into a new industry or foreign country results in
greater market share and shareholder wealth than does moving later.
• Being a first mover does, however, have its disadvantages.
• These disadvantages can be, conversely, advantages enjoyed by late-mover firms. Late movers may
be able to imitate the technological advances of others (and thus keep R&D costs low), keep risks
down by waiting until a new technological standard or market is established, and take advantage of
the first mover’s natural inclination to ignore market segments.
• Research indicates that successful late movers tend to be large firms with considerable resources and
related experience.
Market Location Tactics: Where to Compete

• A market location tactic deals with where a company implements a

strategy. A company or business unit can implement a competitive
strategy either offensively or defensively.
• An offensive tactic usually takes place in an established competitor’s
market location.
• A defensive tactic usually takes place in the firm’s own current market
position as a defense against possible attack by a rival.
 Offensive Tactics
• Some of the methods used to attack a competitor’s position are:
Frontal assault:
• The attacking firm goes head to head with its competitor.
• It matches the competitor in every category from price to promotion to distribution
channel.
• To be successful, the attacker must have not only superior resources, but also the
willingness to persevere.
• This is generally a very expensive tactic and may serve to awaken a sleeping giant,
depressing profits for the whole industry.
 Offensive Tactics
Flanking maneuver:
• Rather than going straight for a competitor’s position of strength with a frontal
assault, a firm may attack a part of the market where the competitor is weak.
Bypass attack:
• Rather than directly attacking the established competitor frontally or on its
flanks, a company or business unit may choose to change the rules of the game.
• This tactic attempts to cut the market out from under the established defender by
offering a new type of product that makes the competitor’s product unnecessary.
 Offensive Tactics
Encirclement:
• Usually evolving out of a frontal assault or flanking maneuver,
encirclement occurs as an attacking company or unit encircles the
competitor’s position in terms of products or markets or both.
• The encircler has greater product variety (e.g., a complete product line,
ranging from low to high price) and/or serves more markets (e.g., it
dominates every secondary market).
 Offensive Tactics
Guerrilla warfare:
• Instead of a continual and extensive resource-expensive attack on a competitor, a firm or
business unit may choose to “hit and run.”
• Guerrilla warfare is characterized by the use of small, intermittent assaults on different market
segments held by the competitor.
• In this way, a new entrant or small firm can make some gains without seriously threatening a
large, established competitor and evoking some form of retaliation.
• To be successful, the firm or unit conducting guerrilla warfare must be patient enough to
accept small gains and to avoid pushing the established competitor to the point that it must
respond or else lose face.
 Defensive Tactics
• According to Porter, defensive tactics aim to lower the probability of
attack, divert attacks to less threatening avenues, or lessen the intensity of
an attack.
• Instead of increasing competitive advantage per se, they make a
company’s or business unit’s competitive advantage more sustainable by
causing a challenger to conclude that an attack is unattractive.
• These tactics deliberately reduce short-term profitability to ensure long-
term profitability.
 Defensive Tactics
Raise structural barriers.
• Entry barriers act to block a challenger’s logical avenues of attack. Some of the most important,
according to Porter, are to:
1. Offer a full line of products in every profitable market segment to close off any entry
• points;
2. Block channel access by signing exclusive agreements with distributors;
3. Raise buyer switching costs by offering low-cost training to users;
4. Raise the cost of gaining trial users by keeping prices low on items new users are most
likely to purchase;
 Defensive Tactics
5. Increase scale economies to reduce unit costs;
6. Foreclose alternative technologies through patenting or licensing;
7. Limit outside access to facilities and personnel;
8. Tie up suppliers by obtaining exclusive contracts or purchasing key locations;
9. Avoid suppliers that also serve competitors; and
10. Encourage the government to raise barriers, such as safety and pollution
standards or favorable trade policies.
 Defensive Tactics
Increase expected retaliation:
• This tactic is any action that increases the perceived threat of retaliation for
an attack.
• For example, management may strongly defend any erosion of market share
by drastically cutting prices or matching a challenger’s promotion through a
policy of accepting any price-reduction coupons for a competitor’s product.
• This counterattack is especially important in markets that are very important
to the defending company or business unit.
 Defensive Tactics
Lower the inducement for attack:
• A third type of defensive tactic is to reduce a challenger’s expectations of
future profits in the industry.
• Like Southwest Airlines, a company can deliberately keep prices low and
constantly invest in cost-reducing measures.
• With prices kept very low, there is little profit incentive for a new entrant.
 Cooperative Strategies
• A company uses competitive strategies and tactics to gain competitive
advantage within an industry by battling against other firms.
• These are not, however, the only business strategy options available to a
company or business unit for competing successfully within an industry.
• A company can also use cooperative strategies to gain competitive
advantage within an industry by working with other firms.
• The two general types of cooperative strategies are collusion and strategic
alliances.
 Collusion
• Collusion is the active cooperation of firms within an industry to reduce
output and raise prices in order to get around the normal economic law of
supply and demand.
• Collusion may be explicit, in which case firms cooperate through direct
communication and negotiation, or tacit, in which case firms cooperate
indirectly through an informal system of signals.
• Explicit collusion is illegal in most countries and in a number of regional
trade associations.
 Collusion
• Collusion can also be tacit, in which case there is no direct communication among competing firms.
Tacit collusion in an industry is most likely to be successful if
(1) there are a small number of identifiable competitors,
(2) costs are similar among firms,
(3) one firm tends to act as the price leader,
(4) there is a common industry culture that accepts cooperation,
(5) sales are characterized by a high frequency of small orders,
(6) large inventories and order backlogs are normal ways of dealing with fluctuations in demand, and
(7) there are high entry barriers to keep out new competitors.
 Strategic Alliances
• A strategic alliance is a long-term cooperative arrangement between two or more independent
firms or business units that engage in business activities for mutual economic gain.
• Alliances between companies or business units have become a fact of life in modern
business.
• Some alliances are very short term, only lasting long enough for one partner to establish a
beachhead in a new market.
• Over time, conflicts over objectives and control often develop among the partners. For these
and other reasons, around half of all alliances (including international alliances) perform
unsatisfactorily.
• Others are more long lasting and may even be preludes to full mergers between companies.
 Strategic Alliances
• Many alliances do increase profitability of the members and have a positive effect on firm
value.
• Research reveals that the more experience a firm has with strategic alliances, the more likely
that its alliances will be successful.
• Companies or business units may form a strategic alliance for a number of reasons, including”
• 1. To obtain or learn new capabilities:
• 2. To obtain access to specific markets
• 3. To reduce financial risk:
• 4. To reduce political risk:
 Types of Alliances
• The types of alliances range from mutual service consortia to joint
ventures and licensing arrangements to value-chain partnerships.
Mutual Service Consortia
• A mutual service consortium is a partnership of similar companies in
similar industries that pool their resources to gain a benefit that is too
expensive to develop alone, such as access to advanced technology.
• For example, IBM established a research alliance with Sony Electronics
and Toshiba to build its next generation of computer chips.
 Types of Alliances
Joint Venture
• A joint venture is a “cooperative business activity, formed by two or more separate
organizations for strategic purposes, that creates an independent business entity
and allocates ownership, operational responsibilities, and financial risks and
rewards to each member, while preserving their separate identity/autonomy.”
• Along with licensing arrangements, joint ventures lie at the midpoint of the
continuum and are formed to pursue an opportunity that needs a capability from
two or more companies or business units, such as the technology of one and the
distribution channels of another.
 Types of Alliances
• Joint ventures are the most popular form of strategic alliance.
• They often occur because the companies involved do not want to or
cannot legally merge permanently.
• Joint ventures provide a way to temporarily combine the different
strengths of partners to achieve an outcome of value to all.
• Extremely popular in international undertakings because of financial and
political–legal constraints, forming joint ventures is a convenient way for
corporations to work together without losing their independence.
 Types of Alliances
Licensing Arrangements.
• A licensing arrangement is an agreement in which the licensing firm grants rights
to another firm in another country or market to produce and/or sell a product.
• The licensee pays compensation to the licensing firm in return for technical
expertise.
• Licensing is an especially useful strategy if the trademark or brand name is well
known but the MNC does not have sufficient funds to finance its entering the
country directly.
 Types of Alliances
Licensing Arrangements
• This strategy also becomes important if the country makes entry via
investment either difficult or impossible.
• The danger always exists, however, that the licensee might develop its
competence to the point that it becomes a competitor to the licensing firm.
• Therefore, a company should never license its distinctive competence,
even for some short-run advantage.
 Types of Alliances
Value-Chain Partnerships.
• A value-chain partnership is a strong and close alliance in which one
company or unit forms a long-term arrangement with a key supplier or
distributor for mutual advantage.
• Research suggests that suppliers that engage in long-term relationships are
more profitable than suppliers with multiple short-term contracts.