Role of Business Level Strategies in Developing an Organization’s Competitive Advantage
Business Level Strategies:
A plan of action to use the resources of firms, capabilities and distinctive competencies to gain competitive advantage over it’s rivals in a market or industry. It involves Selecting and managing the domain of the organization will compete in and positioning the organization so that it can use its resources and abilities to manage its specific and general environments to protect and enlarge that domain.
Business level strategies is an actions which is taken to provide value to the customers and gain a competitive advantage by exploiting competencies in specific, individual product or service markets. Business-level strategy is concerned with a firm’s position in an industry, relative to competitors. These 3 decisions are the basis for choosing business level strategies: 1. customer needs, or what is being satisfied;
2. customer groups, or who is being satisfied;
3. Distinctive competencies or how customer needs are satisfied.
Formulating the Business Model:
Customer Needs and Product Differentiation
Customer Needs: Desires, wants, or cravings that can be satisfied by means of product attributes or characteristics. There are two factors that determine which product a customer chooses to satisfy their needs, first the way a product is differentiated from other product and secondly, the price of the product. For example, some companies aim to satisfy customer needs by offering a low-priced product and they do not engage in much product differentiation. Other companies that seek to create something unique about their products to satisfy customer needs in which other companies cannot. Uniqueness may relate to the following: * Physical characteristics like quality or reliability
* Psychological need of customers like status or prestige * The number
of models in company’s product range
* The development of a distinctive competency like such as service
Product differentiation: It is the process of designing the product to satisfy the needs of the customers. A competitive advantage is obtained only when it creates, design and supply the products that better satisfies the customer needs than rivals do. A product can be differentiated by innovation, excellent quality, responsiveness to customers, or by reducing cost which leads to increase in reliability and efficiency. Product differentiation generates economic value by offering a product that customers prefer over competitors’ product.
Formulating the business model: Customer groups and market segmentation Customer groups: They are the set of people who share the similar needs for a particular product. Many different customer groups normally exist in the market as a particular product can satisfy different kinds of desires and needs. Company performs research to discover the group of people based on the primary need of the product, how will they use it and their buying power. Once a group of customers who share a similar or specific need for a product is identified, this group is treated as the market segment.
Market segmentation: There are three approaches to market segmentation: * Ignore differences in customer segments: Here the customer responsiveness is at minimum and competitive advantage is achieved through low price, not differentiation. * Recognize differences between customer groups: It develop a product that meets the needs of customer groups. Here the customer responsiveness is high and competitive advantage is achieved through differentiation, not low price. * Target specific segments: Serve only one or few market segment, Here the competitive advantage may be obtained through low price or differentiation.
Competitive Positioning at the Business Level
Maximizing the profitability of the company’s business model is about making the right choices with regard to value creation through differentiation, costs, and pricing.
Wal-Mart’s Business Model:
Wal-Mart has consistently been more profitable than its rivals for over a decade. Wal-Mart’s superior profitability reflects a competitive advantage that is based on the successful implementation of a number of strategies. Walton choose strategies to increase efficiency such as having low product differentiation and targeting the mass market. In 1962 it was one of the first to apply the self-service supermarket business model developed by grocery chains to general Merchandise.
Its rivals went for urban and sub-urban locations, Sam focused on small southern towns that were ignored by its rivals. It grew quickly by pricing lower than other retailers, often putting them out of business. By the time its rivals realized that small towns could support a large discount general merchandise store, Wal-Mart has preempted them. These towns large enough to support one discount retailer, but not two, provided a secure profit base for Wal-Mart.
However there is far more to the Wal-Mart story than location strategy. The company was also an innovator in information systems, logistics and HR practices. Taken together, these strategies resulted in higher productivity and lower cost than rivals, which enabled the company to earn a high profit while charging low prices. Wal-Mart led the way amongst the American retailers in developing and implementing sophisticated product tracking systems using bar-code technology and checkout scanners. This IT enabled it to track what was selling and adjust its inventory accordingly so that the products found in a store matched local demand. By avoiding overstocking, it did not have to hold periodic sales to shift unsold inventory. Over time it linked this IT system to a nationwide network of where inventory was stored and shipped to stores within a 300 mile radius on a daily basis. The combination of distribution centers and IT enabled it to reduce the inventory and devote that space to selling and reducing the amount of capital it had tied up in inventory.
With regard to HR, Sam believed that employees should be respected and rewarded to help improve profitability. He referred to employees as ‘associates’. He established a profit sharing scheme for all employees, and after company went public in 1970, he initiated a program that enabled employees to purchase stock at discount to market. It further resulted in high productivity which translated in lower operating costs and higher profitability.
Wal-Mart shared its sales information with suppliers on daily basis, enabling them to gain efficiencies by configuring their own production schedules to sales at Wal-Mart.
Generic Business Level Strategy
A successful business model is the result of the way a company formulates and implements a set of strategies to achieve a fit between differentiation, cost and pricing options. A business level strategy deals with the question that how a company would compete in the industry to which it belongs to. It seems to be a very generic question but it’s not. The simple reason is that there could be several answers to this question. If we take an example of a person who lives where he has all the restaurants like Mc Donald’s, Pizza Hut, Taco Bell or any other such restaurants each of them has placed themselves with some unique feature in the taste of the food. Each one has to compete with each other by developing a business model which is somewhat unique.
So a manager may lose most of the time in thinking about business strategy and may not think about a long term picture. The solution to this is to think about business level strategy in terms of generic strategy. Business level strategies help a company in its action in various distinct line of business they are in. It helps a company to decide on various issues like who the company would serve, with what product it will serve and how will they serve. A firm may be in different line of business and each may require different strategies at different levels. Say for instance a company can focus on Quality, cost or providing something Niche or different to the customers. Quality
A company whose focus is on the premium end of market it will chose Quality
over cost it will emphasize less on its cost structure and more inclined towards brand, quality, loyalty of customer and reliability. The company may adopt strategies like Six Sigma or Total Quality Management or focusing on employ loyalty so that they produce good quality of products using PR activities or advertisements to create a good image in the market. Cost
This could be another strategy where company focuses on cost structure so that the end user may get lower price to pay or improving supply chain and improve processes of cost minimization. More machine oriented production reducing labor costs or procuring a low cost material or from place where transportation cost is less and thus providing the product at lowest price they can to the end user. Niche
Giving the products to a niche market can reward a company very good financially. It may capture a good market share. Quality again get an importance here where the customers become so use to your product that they would not prefer anything else and company can charge a premium price for it. As discussed earlier different set of strategies like differentiation, cost and pricing options can be used to develop a business model. We can further explain it by a diagram given below.
The vertical and the horizontal axis represents the decision of the manager how he position the company’s product to make a tradeoff between differentiation of product or be a cost leader. The curve connecting this two axis is called as value creation frontier, which tells that the maximum amount of value that the product of different companies in an industry can give to its customer at any one time using different business models. We can see that innovation is the first factor as it is an expensive process and it leads to a unique product and is nearest to the differentiation axis followed by quality, customer responsiveness and quality, efficiency, and so on.
So to reach value creation frontier a company must formulate and implement a model on one of the three generic business level strategies which gives a company a competitive position and advantages over its rival. A generic strategy is a general way of positioning a company within an industry. It can be adopted by anyone irrespective whether it’s manufacturing, service or a non- profit organization. They are also called generic because they can be adopted across different kind of industries.
By this all the manager has to focus on the core elements of firm’s business level strategies. So characteristics of Generic Business level strategies are: 1. Can be pursued by all businesses regardless of whether they are manufacturing, service, or nonprofit. 2. Can be pursued in different kinds of industry environments. 3. Results from a company’s consistent choices on product, market, and distinctive competencies.
The Four basic generic level Business Strategies are
1. Cost Leadership: Where attention is paid to lowest cost structure versus competitors allowing flexibility in prices and higher profitability. 2. Focused Cost Leadership: It is in selected market niches where it has unique or a local cost advantage 3. Differentiation: Here features are important to customers and how different a company product is as compared to competitors which gives a chance of premium pricing to the company and earn and increase profit. 4. Focused Differentiation: Distinctiveness in niches of selected market where it meets the needs of customer as compared to broad differentiators. 1) COST LEADERSHIP
A company which chooses a Cost Leadership strategy does everything that allows them to provide goods and services at lower unit costs than its competitors. This strategies not only includes financial but also operational aspects also. And in the value creation frontier position itself as close to lower prices axis. There are two advantages first it would be more profitable than competitors because same products offered at lower cost than competitors to same set of customers. Second it gains a competitive advantage because company is able to charge a lower price than its competitor because of its lower cost structure by this it would attract many customers though lower price here volume of sale becomes important which leads to more profits. Even after some competitor starts reducing prices still this company would withstand because of its low cost structure. Cost leadership includes the following things
* Building State o Art of efficient facilities.
* Maintaining tight control over production and overhead costs. *
Minimizing cost of Sales, R&D and Services.
Competitive Positioning Decisions:
The basic strategy which a cost Leader chooses is a low to moderate level of Product differentiation as compared to its competitors. As differentiation is expensive so a cost leader aims for a sustainable level of differentiation which is achievable at a lower cost. For e.g.: Wal-Mart it doesn’t focus on store design to create an attractive shopping experience but focus on what customer wants by stepping into the shoes of the customer and satisfying their demands.
Cost Leaders are such that they often wait for customers demand and then providing it. Cost leaders often ignore many different market segments in an industry. Their main focus is on average customer to avoid high costs by developing something niche. The main goal is to provide smallest number of products and attract large customers. For example Dell PC’s or Wal-Mart. With these brands though the customer may not get exactly what he wants but they would be attracted by the low prices. To implement this strategy they must choose or focus on efficiency and lowering the cost structure compared with the competitors. This can be achieved by either focusing on IT or improving processes of manufacturing or efficient supply chain or going for efficient way of procuring raw material or increase inventory turnover or reducing cost of goods sold. Hence we can say that a low cost strategy implies that less number of managers in the hierarchy and rigorous use of budgets to control production and selling costs. Advantages:
The cost leader has an advantage over its competitor because of its low cost structure which means that it would be less affected by the increase in the price of inputs if there are powerful supplier and less affected by lower prices it can charge if powerful buyers exist. Since the market capture is high a cost leader would buy huge qualities from its supplier which gives him the bargaining power. If the substitute’s product begins to come into the market the cost leader can reduce its price and hold on to its market share. The other advantage is barrier to entry because other competitors are unable to match the low cost of the cost leader they refrain from coming to the industry. Disadvantages:
The real danger arises when the rivals find a way out to beat the cost leader in the market. Suppose because of the change in technology rivals may get a technology which produces the good much cheaper that than the cost leader than he would lose his share in the market. If it is a global competitor than it may have advantage of lower labor cost and can beat the cost leader in its own game. Competitors ability to imitate cost leaders method is another threat for example China routinely take apart electronic products of Japanese companies like Sony and Panasonic and analyzed how it is made and then did cloning of the component and produced the same product at lower and cheaper rate and flooded the market with Chinese product and due to lower prices people get attracted to buy these products.
China did same thing in India with mobiles buy giving same features for Rs.2000 in a mobile they snatched the market from the mobile companies which they use to sell for Rs.5000-6000/-. Sometimes in the race of lowering costs the quality of the product gets affected as a result decline in market share. For example gateway PC’s in order to compete with the Dell PC’s to reduce costs they made a policy not to serve the customer who install the PC’s on their own with this they lost their customer because customers were annoyed with this they lost their market within 6 months they again had to take back their decision. Thus this could be one of the strategy by which one can get a competitive advantage over its rivals. 2) FOCUSED COST LEADERSHIP
Focused cost leadership talks about the strategies company adopt for gaining market share in any environment. It tells about cost being used as a tool for strategic advantage. The right way of positioning products in a market leads to a competitive edge over the competition. Focused cost leadership places itself on narrow market segment, which can be described with respect to time, geography, customers, customer preferences, products, etc. Focused cost leaders compete with other cost leaders but when concerned with local market the focused cost leader may have a home turf advantage over national competitors. His costs will be less than those of national competitor. In adopting a narrow focus, the company ideally focuses on a few target markets (also called a segmentation strategy or niche strategy). These should be distinct groups with specialized needs.
The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency. It is most suitable for relatively small firms but can be used by any company. A focused strategy should target market segments that are less vulnerable to substitutes or where a competition is weakest to earn above-average return on investment. Examples of firm using a focus strategy include Southwest Airlines, which provides short-haul point-to-point flights in contrast to the hub-and-spoke model of mainstream carriers. There are ways in which companies can adopt a focused cost leadership strategy as described below:
a) Brand loyalty: Company can create it through continuously advertising of products, brand names, patents protection product, product innovation.
b) It will be achieved by company R & D program. Brand loyalty can also emphasize on high product quality and after sales service Significant brand loyalty makes it difficult for new entrants to take market share away from established company
To be branded, product must be differentiated. Differentiation is a way by which you make separate identity for your product it may be by anything superior quality, customer service or value added service. The sole purpose is to create unique product which customer perceives is different and distinct in some way or the other. Certain benefits of differentiating your product are: * It gives company a competitive advantage over its competitor and it is hard for them to imitate. * The company can also charge a premium of the added services provided. * This also helps the company during inflation even cost leaders find to difficult to manage the cost during inflation but the company offering differentiated product could easily pass on the added cost to the customer. The offering of a company can be differentiated in three categories namely * Product
It is changes which a company brings in its offerings it may be in its * Form- form includes shape, size or physical structure of the product. For example Aspirin is an essential commodity but company differentiates it in terms of dosage size, color coating, shape or action time. * Features- another parameter of differentiation is the features of the offering. The company needs to check cost of offering the service and the customer value. And also whether competitor can easily copy it or not. For example Zen Estilo VXi which had air bags as compared to its other models. * Customization-the differentiation can also be done by customization i.e. making the product customized for every individual. For example NIKE you can log on to their website and customize your own shoe.
* Performance quality and conformance quality- the company can also differentiate based on performance quality by giving the customer a high quality product which becomes hard for competitor to imitate. the conformance quality is the quality which a buyer expect the degree to which all the product units company produce are identical. For example PORSCHE 911 is designed to 60 miles per hour in 10 sec now if every PORSCHE does the same it means it have a high conformance quality. * Durability, Reliability and Reparability- durability is expected life of the product under normal or stressful circumstances for example Duracell advertize itself as longest battery life and hence command a premium. Reliability on the other hand is the probability that the product will not malfunction during its life time. For example Toyota makes car which have high quality and a high reliability. Reparability is the ease of getting the product repaired when the product malfunction.
It is easy for a competitor to copy the changes the company brings in its product after the product becomes standardized or the patent period is over but those company which brings changes in its services are difficult to imitate and copy. Certain differentiations which a company can bring in are
* Ordering ease- it is the ease by which a customer can place an order with the company. * Delivery- it includes how well the product or service is brought to the customer in terms of speed, accuracy and care throughout the process. For example pizza delivered in half an hour. * Installation-the ease by which the heavy machines can be easily installed in the plant. Goods such as television, air conditioner are installed and working is also explained. * Customer training-it refers to training customer for using machines of the company properly and efficiently. * Customer consulting-it refers to information, data, and advice offered to customer by the company. Design
Design is the totality of features that affects how customer perceives of the looks, feel and functions in terms of its requirements.
4) FOCUSED DIFFERENTIATION
Focused differentiation is to combine differentiation and focused generic business level strategy and specializing in making distinctive product for one or two market segment. This approach does not aim to cater needs and demands of all the segments of the market and it restricts itself to certain segment of the society. They basically aims at forming a niche market for themselves in which large player and competitor find it difficult to compete and satisfy customer as the company following focused differentiation approach is following. For example PORSCHE, a focused differentiator competes with Toyota and BMW in only sports car and luxury SUV segment of the car market.
The focused differentiator, who selects the market segment means the decision to focus on only one type of customer, such as serving only the rich, or very young. A focused differentiator possesses a better knowledge about the market and about the taste and preferences of the people. Such information helps company to quickly make changes in its pattern of doing things. The only disadvantage is a focused differentiator cannot easily more to other segment if the taste and preference of the customer changes or if the technology changes in the industry. For example Maruti cars have a focused approach in serving the customer with small cars. Now when it is trying to target other segment of the society with SUV it is not able to generate that faith in the minds of people. The Dynamics of
This section has three aspects
* Another Business Model
* How the Business Model pursues places in a strategic group and its major affect on profitability * Failures in Competitive Positioning
ANOTHER BUSINESS MODEL:
Apart from the differentiators and cost leaders, there is a new business model which has been followed by many international companies like Panasonic, etc, that is broad differentiators. Broad Differentiators: Companies that have developed business-level strategies to better differentiate their products and lower their costs simultaneously.
The below graph explains this.
How the Business Model pursues place in a Strategic Group and its major affects on profitability * New Developments changing the face of the industry
* Technological innovations that permits increased product differentiation * The identification of new customer groups and market segments * The discovery of superior ways to lower cost structure * Strategic Group Analysis – Involves identifying and charting the business models and business-level strategies that industry rivals are pursuing * Implications of Strategic Group Analysis
* Map the competitors with respect to a specific business model * Identify the differences among strategies of each competitor who pursue the same business model * Identify the opportunities and threats
Failures in Competitive Positioning:
Successful competitive positioning requires a complete synchronization between the business-level strategies and business model. * Why do companies fail in competitive positioning
* They do not work continuously to improve their business model * They do not perform strategic group analysis
* They often fail to identify the opportunities and threats in the industry environment * They have lost sources competitive advantage
* Their rivals have found ways to push out the value creation frontier and leave them behind * They lose control of their business model in pursuance of becoming large
People Express, a United States airline, was the first close leader to emerge after deregulation of the United States airline industry. It started out as a specialized air carrier serving a narrow market niche: low priced travel on the eastern seaboard. In pursuing focused cost leadership, it was very successful, but in its rush to expand to other geographic regions it decided to take over other airlines. These airlines were differentiators that had never pursued cost leadership.
This strategy raised People Express’ cost structure, and it lost its competitive advantage against other national carriers and was taken over. Herb Kelleher, the founder of Southwest Airlines, watching how People Express had failed, struck to the cost-leadership business model. He took 20 years to build his rational airline, but he never deviated from the strategies necessary to turn his company from a focused cost leader into the cost leader in the United States airline industry.