Strategic Mangement CH 5-Business Strategies
Strategic Mangement CH 5-Business Strategies
Strategic Mangement CH 5-Business Strategies
A primary reason for pursuing forward, backward, and horizontal integration strategies is
to gain cost leadership benefits. Generally, cost leadership must be pursued in conjunction
with differentiation. A number of cost elements affect the relative attractiveness of generic
strategies, including economies or diseconomies of scale achieved, learning and experience
curve effects, the percentage of capacity utilization achieved, and linkages with suppliers
and distributors. Other cost elements to consider while choosing among alternative generic
strategies include the potential for sharing costs and knowledge within the organization,
R&D costs associated with new product development or modification of existing products,
labour costs, tax rates, energy costs, and shipping costs. This internal strategy of sharing
resources to build a competitive advantage is called synergy benefit.
Striving to be a low-cost producer in an industry can especially be effective,
when the market is composed of many price-sensitive buyers and
when there are few ways to achieve product differentiation.
Further, when buyers do not care much about differences from brand to brand, or when
there are a large number of buyers with significant bargaining power. The basic idea is to
underprice competitors and thereby gain market share driving some of the competitors out
of the market.
A successful cost leadership strategy usually permeates the entire firm, as evidenced by high
efficiency, low overheads, limited perks, intolerance of waste, intensive screening of budget
requests, wide span of controls, rewards linked to cost containment, and broad employee
participation in cost control efforts.
Some risks of pursuing cost leadership are;
that competitors may imitate the strategy, therefore driving overall industry profits
down;
that technological breakthroughs in the industry may make the strategy ineffective;
or that buyer interests may swing to other differentiating features besides price.
1.1. Achieving Cost Leadership Strategy
To achieve cost leadership, following actions could be taken:
1. Prompt forecasting of demand of a product or service.
2. Optimum utilization of the resources to achieve cost advantages.
3. Achieving economies of scale; thus, lower per unit cost of product/service.
4. Standardisation of products for mass production to yield lower cost per unit.
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Business Level Strategies
(Example of McDonald’s)
5. Invest in cost saving technologies and using advance technology for smart efficient
working.
6. Resistance to differentiation till it becomes essential.
1.2. Advantages of Cost Leadership Strategy
A cost leadership strategy may help to remain profitable even with: rivalry, new entrants,
suppliers’ power, substitute products, and buyers’ power.
1. Rivalry – Competitors are likely to avoid a price war, since the low-cost firm will
continue to earn profits even after competitors compete away their profits.
2. Buyers – Powerful buyers/customers would not be able to exploit the cost leader
firm and will continue to buy its product.
3. Suppliers – Cost leaders are able to absorb greater price increases from suppliers
before they need to raise prices for customers.
4. Entrants – Low-cost leaders create barriers to market entry through their continuous
focus on efficiency and cost reduction.
5. Substitutes – Low-cost leaders are more likely to lower the costs to induce existing
customers to stay with their products, invest in developing substitutes, and even
purchase patents.
1.3. Disadvantages of Cost Leadership Strategy
a) Cost advantage may not last long as competitors may imitate cost reduction
techniques.
b) Cost leadership can succeed only if the firm can achieve higher sales volume.
c) Cost leaders tend to keep their costs low by minimizing cost of advertising, market
research, and research and development, but this approach can prove to be
expensive in the long run.
d) Technological advancement is a great threat to cost leaders.
2. Differentiation:
Differentiation is a strategy aimed at producing products and services considered unique
industry-wide and directed at consumers who are relatively price-insensitive.
This strategy is aimed at broad mass market and involves the creation of a product or
service that is perceived by the customers as unique. The uniqueness can be associated
with product design, brand image, features, technology, dealer network or customer
service. Because of differentiation, the business can charge a premium for its product.
For example, Domino’s Pizza has been offering home delivery within 30 minutes or the order is
free, is a unique selling point that differentiates if from its rivals.
Differentiation does not guarantee competitive advantage, especially if standard products
sufficiently meet customer needs or if rapid imitation by competitors is possible. Durable
products protected by barriers to quick imitation by competitors is better. Successful
differentiation can mean greater product flexibility, greater compatibility, lower costs,
improved service, less maintenance, greater convenience, or more features. Product
development is an example of a strategy that offers the advantages of differentiation.
Differentiation strategy should be pursued only after a careful study of buyers’ needs
and preferences to determine the feasibility of incorporating one or more differentiating
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Business Level Strategies
features into a unique product that features the customers’ desired attributes. A successful
differentiation strategy allows a firm to charge a higher price for its product and to gain
customer loyalty, because consumers may become strongly attached to the differentiated
features. Special features that differentiate one’s product can include superior service,
spare parts availability, engineering design, product performance, useful life, gas
mileage, or ease of use. A risk associated with pursuing a differentiation strategy is that
the unique product may not be valued high enough by customers to justify the higher
price. When this happens, a cost leadership strategy will easily defeat a differentiation
strategy. Another risk of pursuing a differentiation strategy is that competitors may
develop ways to copy the differentiating features quickly. Firms must find durable
sources of uniqueness that cannot be imitated quickly or cheaply by rival firms. For
example, Amazon Prime offers deliver within two hours. This is quite difficult to imitate by its
rivals, and thus this differentiating factor helps it to lead the market.
There are several bases of differentiation, major being: Product, Pricing and Organization.
Product: Innovative products that meet customer needs can be an area where a
company has an advantage over competitors. However, the pursuit of a new
product offering can be costly – research and development, as well as production
and marketing costs can all add to the cost of production and distribution. The
payoff, however, can be great as customer’s flock to be among the first to have the
new product. For example, Apple iPhone, has invested huge amounts of money in R&D,
and the customers’ value that. They want to be among the first ones to try the new
offerings from the company.
Pricing: It fluctuates based on its supply and demand, and may also be influenced
by the customer’s ideal value for a product. Companies that differentiate based on
product price can either determine to offer the lowest price or can attempt to
establish superiority through higher prices. For example, Apple iPhone dominates the
smart phone segment by charging higher prices for its products.
Organisation: Organisational differentiation is yet another form of differentiation.
Maximizing the power of a brand or using the specific advantages that an
organization possesses can be instrumental to a company’s success. Location
advantage, name recognition and customer loyalty can all provide additional ways
for a company differentiate itself from the competition. For example, Apple has been
building customer loyalty since years and has a fanbase of consumers that are called “Apple
Fanboys/Fangirls”
2.2. Achieving Differentiation Strategy
To achieve differentiation, following strategies could be adopted by an organisation:
1. Offer utility to the customers and match products with their tastes and
preferences.
2. Elevate/Improve performance of the product.
3. Offer the high-quality product/service for buyer satisfaction.
4. Rapid product innovation to keep up with dynamic environment.
5. Taking steps for enhancing brand image and brand value.
6. Fixing product prices based on the unique features of product and buying
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Business Level Strategies
3. Focus Strategy:
Focus means producing products and services that fulfil the needs of small groups of
consumers with very specific taste.
A successful focus strategy depends on an industry segment that is of sufficient size,
has good growth potential, and is not crucial to the success of other major competitors.
Strategies such as market penetration (new product for existing customers) and market
development (new product for new customers) offer substantial focusing advantages.
Midsize and large firms can effectively pursue focusbased strategies only in conjunction
with differentiation or cost leadership-based strategies. All firms in essence follow a
differentiated strategy. Because only one firm can differentiate itself with the lowest cost,
the remaining firms in the industry must find other ways to differentiate their products.
Focus strategies are most effective when consumers have distinctive preferences or
requirements, and when the rival firms are not attempting to specialize in the same target
segment. Risks of pursuing a focus strategy include the possibility of numerous
competitors recognizing the successful focus strategy and imitating it, or that consumer
preferences may drift towards the product attributes desired by the market as a whole. An
organization using a focus strategy may concentrate on a particular group of customers,
geographic markets, or on particular product-line segments in order to serve a well-
defined but narrow market better than competitors who serve a broader market. For
example, Ferrari sports cars.
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Business Level Strategies
3.1. Focused cost leadership: A focused cost leadership strategy requires competing based on
price to target a narrow market. A firm that follows this strategy does not necessarily charge
the lowest prices in the industry. Instead, it charges low prices relative to other firms that
compete within the target market. Firms that compete based on price and target a narrow
market follow a focused cost leadership strategy.
For example, android flagship phones from OnePlus, Xiaomi, Oppo, Vivo, etc, are all rooting
for giving better quality at lowest prices to the customers. They are following the best-cost
provider strategy to penetrate market.
Questions:
Question 1:
Airlines industry in India is highly competitive with several players. Businesses face
severe competition and aggressively market themselves with each other. Luxury Jet is a
private Delhi based company with a fleet size of 9 small aircrafts with seating capacity
ranging between 6 seats to 9 seats. There aircrafts are chartered by big business houses and
high net worth individuals for their personalised use. With customised tourism packages
their aircrafts are also often hired by foreigners. Identify and explain the Michael Porter’s
Generic Strategy followed by Luxury Jet.
Question 2:
Gennex is a company that designs, manufactures and sells computer hardware and
software. Gennex is well known for its innovative products that has helped the company
to have advantage over its competitors. It also spends on research and development and
concerned with innovative softwares. Often the unique features of their product, that
are not available with their competitors helps them to gain competitive advantage. Gennex
using the strategy is consistently gaining its position in the industry over its competitors.
Identify and explain the Porter’s generic strategy which Gennex has opted to gain the
competitive advantage.
Question 3:
Sohan and Ramesh are two friends who are partners in their business of making biscuits.
Sohan believe in making profits through selling more volume of products. Hence, he
believes in charging lesser price to the customers. Ramesh, however, of the opinion
that higher price should be charged to create an image of exclusivity and for this, he
proposes that the product to undergo some change.
Analyse the nature of generic strategy used by Sohan and Ramesh.
Question 5:
Infant care is a successful store chain that caters products for expectant mothers and
new moms. They offer everything from nursing classes to strollers, toys, infant clothes,
diapers and baby furniture. Due to a one-stop shop for infants, they are charging a
premium for its products.
Identify and explain how the strategy adopted by infant care.
Question 6:
A century-old footwear company “Mota Shoes” had an image of being the footwear choice
for formal occasions. In an attempt to reinvent its brand, it tied up with a foreign footwear
giant “Buffrine” to manufacture and sell its Hideseek brand in the country. Putting its best
foot forward, it launched extra soft, casual and relaxed footwear for young. Aiming at a
brand and image makeover the “Mota Shoes” decided to price the Hide Seek products at
premium.
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Business Level Strategies
What kind of Michael Porter business level strategy is being used by “Mota Shoe
company”? State its advantages.
Question 7:
Eco-carry bags Ltd., a recyclable plastic bags manufacturing, and trading company has
seen a potential in the ever-growing awareness around hazards of plastics and the positive
outlook of the society towards recycling and reusing plastics.
A major concern for Eco-carry bags Ltd. are paper bags and old cloth bags. Even though
they are costlier than recyclable plastic bags, irrespective, they are being welcomed
positively by the consumers.
Identify and explain that competition from paper bags and old cloth bags fall under which
category of Porter’s Five Forces Model for Competitive Analysis?
Question 8:
Baby Turtle is a children's clothing brand that has been created a new age demand for
washable diapers. The major benefit for the brand has been that not many companies have
shown interest in the product, thinking it is not viable, however, customers, majorly
working mothers are loving their product. The core material needed for production is
also used in many other water proofing products in various industries. Baby Turtle sources
this material from a renowned supplier at comparatively low prices. Which of the five
forces of competitive pressure would Baby Turtle experience due to above setup and what
are major factors that create such pressure for a product? Do you think Baby Shark has an
advantage in some way to fight off this pressure?
Question 9:
Domolo is a premium cycle and cycling equipments brand which targets high spending
customer with a liking for quality and brand name. Their cycles range from rupees
fifteen thousand to rupees one lac. The recent trend of fitness through cycling has created
humongous demand for cycles and peripherals like helmets, lights, braking systems,
fitness applications, etc. The customer base has grown 150% in the last three months.
Mr. Vijay, who is an investor wants to tap in this industry and bring about cheaper options
to people who cannot spend so much. Which business level strategy would best suit for
Mr. Vijay’s idea and what are the major sub-strategies that can be implemented to
capture maximum market?
Question 10:
ABC Ltd. is a beverage manufacturing company. It chiefly manufactures soft drinks. The
products are priced on the lower side which has made the company a leader in the
business. Currently it is holding 35 percent market share. The R & D of company
developed a formula for manufacturing sugar free beverages. On successful trial and
approval by the competent authorities, company was granted to manufacture sugar free
beverages. This company is the pioneer to launch sugar free beverages which are sold at
a relatively higher price. This new product has been accepted widely by a class of
customers. These products have proved profitable for the company. Identify the strategy
employed by the company ABC Ltd. and mention what measures could be adopted by the
company to achieve the employed strategy.
Question 11:
Spacetek Pvt. Ltd. is an IT company. Although there is cut throat competition in the IT
sector, Spacetek deals with distinctive niche clients and is generating high efficiencies for
serving such niche market. Other rival firms are not attempting to specialize in the same
target market. Identify the strategy adopted by Spacetek Pvt. Ltd. and also explain
the advantages and disadvantages of that strategy.