PAN African e-Network Project

Diploma in Business Management

Strategic Management
Semester - I
Session - 7

Vivek Singh Tomar

1

Business Level Strategies

Learning Objectives
1.
2.
3.
4.
5.
6.

Determine why a business would choose a low-cost,

differentiation, or speed-based strategy
Explain the nature and value of a market focus
strategy
Illustrate how a firm can pursue both low-cost and
differentiation strategies
Identify requirements for business success at different
stages of industry evolution
Determine good business strategies in fragmented and
global industries
Decide when a business should diversify

Levels of Planning at General Electric

Levels and Types of Planning

What Is Business-Level Strategy?

Business-level strategy
A plan of action to use the firms resources and
distinctive competencies to gain competitive
advantage.

Abells Business Definition process

Customer needs product differentiation (what)
Customer groups market segmentation (who)
Distinctive competencies competitive actions (how)

Choosing a Generic Business-Level Strategy

Product/Market/Distinctive-Competency Choices and Generic

Competitive Strategies

Cost Leadership

Differentiation

Focus

Product
Differentiation

Low
(principally
by price)

High
(principally by
uniqueness)

Low to high
(price or
uniqueness)

Market
Segmentation

Low
(mass market)

High
(many market
segments)

Low
(one or a few
segments)

Distinctive
Competency

Manufacturing
and materials
management

Research and
development, sales
and marketing

Any kind of
distinctive
competency

Types of Business-Level Strategies

FIGURE 6.1

Choosing a Business-Level
Strategy
Cost-leadership strategy success is
affected by:
Competitors producing at equal or lower
costs.
The bargaining strength of suppliers.
Powerful buyers demanding lower prices.
Substitute products moving into the market.
New entrants overcoming entry barriers.

Choosing a Business-Level
Strategy
Differentiation strategy success is achieved
through:
An emphasis on product or service quality.
Innovation in providing new features for which
customers will pay a premium price.
Responsiveness to customers after the sale.
Appealing to the psychological desires of customers.

Choosing a Business-Level
Strategy
Differentiation strategy success is affected by:
Competitors imitating features and services.
Increases in supplier costs exceeding differentiators
price premium.
Buyers becoming less brand loyal.
Substitute products adding similar features.
New entrants overcoming entry barriers related to
differentiators competitive advantage.

Choosing a Business-Level
Strategy
Focus strategy success is affected by:
Competitor entry into focusers market segment.
Suppliers capable of increasing costs affecting only the
focuser.
Buyers defecting from market segment.
Substitute products attracting customers away from
focusers segment.
New entrants overcoming entry barriers that are the
source of the focusers competitive advantage.

Strategic Groups and BusinessLevel Strategy

Implications for business-level strategy
Immediate competitors are companies pursuing same
strategy within the same strategic group.
Different strategic groups can have a different
standing with respect to the effects of the five
competitive forces.

First mover advantage

Benefits are first choice of customers and suppliers,
setting standards, building entry barriers.

Choosing an Investment Strategy

at the Business Level
Investment strategy
The resources (human, functional, and financial)
required to gain sustainable competitive advantage.

Competitive position
Market share is an indicator of competitive strength.
Distinctive competencies are competitive tools.

Life Cycle Effects

An industrys life cycle stage affects its attractiveness
to investment prospects.

Choosing an Investment Strategy at the Business

Level
Stage of the
Industry Life Cycle

Strong Competitive
Position

Weak Competitive
Position

Embryonic

Share building

Share building

Growth

Growth

Market concentration

Shakeout

Share increasing

Market concentration or
harvest/liquidation

Maturity

Hold-and-maintain or profit

Harvest or
liquidation/divestiture

Decline

Market concentration or
harvest (asset reduction)

Turnaround, liquidation,
or divestiture

Evaluating and Choosing Business Strategies:

Seeking Sustained Competitive Advantage

The two most prominent sources of

competitive advantage can be found in the
businesss cost structure and its ability to
differentiate the business from competitors
Businesses that have one or more
sources/capabilities that let them
operate at a lower cost will
consistently outperform their
rivals that dont

Evaluating Cost Leadership

Opportunities

Business success built on cost

leadership requires the business to be
able to provide its product or service at a
cost below what its competitors can
achieve

Sustainable Low-Cost Activities

1. Some low-cost advantages reduce the
likelihood of buyers pricing pressure
2. Truly sustained low-cost advantages may
push rivals into other areas
3. New entrants competing on price must face
an entrenched cost leader
4. Low-cost advantages should lessen the
attractiveness of substitute products

Sustainable Low-Cost Activities

1. Higher margins allow low-cost producers to
withstand supplier cost increases
2. Many cost-saving activities are easily
duplicated
3. Exclusive cost leadership can be a trap
4. Obsessive cost cutting can shrink other
competitive advantages
5. Cost differences often decline over time

Evaluating Differentiation

Differentiation requires that the business

have sustainable advantages that allow it to
provide buyers with something uniquely
valuable to them
Differentiation usually arises from one or more
activities in the value chain that create a
unique value important to buyers
Strategists use benchmarking and consider the
5 forces in considering differentiation

Evaluating Speed as a Competitive

Advantage

Speed-based strategies, or rapid

response to customer requests or market
and technological changes, have
become a major source of competitive
advantage for numerous firms in todays
intensely competitive global economy

Speed can be created by:

Customer responsiveness
Product development cycles
Product or service improvements
Speed in delivery or distribution
Information Sharing and Technology

Risks of Speed-based Strategy

Speeding up activities that havent been conducted in a

fashion that prioritizes rapid response should only be
done after considerable attention to training,
reorganization, and/or reengineering
Some industries may not offer much advantage to the
firm that introduces some forms of rapid response
Customers in such settings may prefer the slower pace
or the lower costs currently available, or they may have
long time frames in purchasing

Evaluating Market Focus as a Way to

Competitive Advantage

Market focus: the extent to which a business

concentrates on a narrowly defined market
Small companies, at least the better ones,
usually thrive because they serve narrow
market niches
Market focus allows some businesses to
compete on the basis of low cost,
differentiation, and rapid response against
much larger businesses with greater resources

Risks of Market Focus

The risk of focus is that you attract major

competitors who have waited for your
business to prove the market
Managers evaluating opportunities to build
competitive advantage should link
strategies to

Resources
Capabilities
Value chain activities that exploit low cost,
differentiation, and rapid response

Stages of Industry Evolution and

Business Strategy Choices

The requirements for success in industry

segments change over time
Strategists can use these changing
requirements, which are associated with
different stages of industry evolution, as a way
to isolate key competitive advantages and
shape strategic choices around them

Emerging Industries

Emerging industries are newly formed or reformed industries that typically are created by
technological innovation, newly emerging
customer needs, or other economic or
sociological changes
There are no rules of the game

Business Strategies in
Emerging Industries

Technologies that are most proprietary to the pioneering firms and

technological uncertainty will unfold
Competitor uncertainty because of inadequate information about
competitors, buyers, and the timing of demand
High initial costs but steep cost declines
Few entry barriers
First-time buyers requiring initial inducement to purchase
Inability to obtain raw materials and components until suppliers
gear up to meet the industrys needs
Need for high-risk capital because of the industrys uncertain
prospects

Emerging Industries

For success in this industry setting, business strategies require

one or more of these features:
The ability to shape the industrys structure
The ability to rapidly improve product quality and performance
features
Advantageous relationships with key suppliers and promising
distribution channels
The ability to establish the firms technology as the dominant one
The early acquisition of a core group of loyal customers and then
the expansion of that customer base
The ability to forecast future competitors

Competitive Advantages and Strategic

Choices in Growing Industries

Rapid growth brings new competitors into the

industry
At this stage, growth industry strategies that
emphasize brand recognition, product
differentiation, and the financial resources to
support both heavy marketing expenses and
the effect of price competition on cash flow can
be key strengths

Growth Industries

For success in this industry setting, business strategies

require one or more of the following features:

The ability to establish strong brand recognition

The ability and resources to scale up to meet increasing
demand
Strong product design skills to be able to adapt products and
services
The ability to differentiate the firms product[s] from
competitors entering the market
R&D resources and skills to create product variations
The ability to build repeat buying from established customers
Strong capabilities in sales and marketing

Competitive Advantages and Strategic

Choices in Mature Industries

As an industry evolves, its rate of growth eventually

declines
Firms working with the mature industry strategies
sell increasingly to experienced, repeat buyers who are
now making choices among known alternatives
Competition becomes more
oriented to cost and service
as knowledgeable buyers
expect similar price and features

Mature Industries

Strategy elements of successful firms in maturing

industries often include the following:

Product line pricing

Emphasis on process innovation that
permits low-cost product design,
manufacturing methods, and distribution
synergy
Emphasis on cost reduction
Careful buyer selection to focus on
buyers who are less aggressive, more
closely tied to the firm, and able to buy more from the firm
Horizontal integration to acquire rival firms whose weaknesses can
be used to gain a bargain price
International expansion to markets where attractive growth and
limited competition still exist

Competitive Advantages and Strategic

Choices in Declining Industries

Declining industries are those that make products or services

for which demand is growing slower than demand in the economy
as a whole or is actually declining
Focus on higher growth
or a higher return
Emphasize product innovation
and quality improvement
Emphasize production and
distribution efficiency
Gradually harvest the business

Competitive Advantage in
Fragmented Industries

A fragmented industry is one in which no firm has a

significant market share and can strongly influence
industry outcomes
Tightly managed decentralization
Formula facilities
Increased value added
Specialization
Bare bones/no frills

Competitive Advantage in
Global Industries

A global industry is one that comprises firms

whose competitive positions in major
geographic or national markets are
fundamentally affected by their overall global
competitive positions

License foreign firms to produce and distribute the firms

products
Maintain a domestic production base and export products to
foreign countries
Establish foreign-based plants and distribution to compete
directly in the markets of one or more foreign countries

Four Generic Global

Competitive Strategies

Broad-line global competition

Global focus strategy
National focus strategy
Protected niche strategy

Grand Strategy Selection Matrix

Model of Grand Strategy Clusters

Building Value as a Basis for Choosing

Diversification or Integration

The grand strategy selection matrix and

model of grand strategy clusters are
useful tools to help dominant product
company managers evaluate and narrow
their choices among alternative grand
strategies

Dominant product company managers who

choose diversification or integration eventually
create another management challenge

Cooperative Strategy
Overview: Seven content areas
Cooperative strategies and why firms use them
Three types of strategic alliances
Business-level cooperative strategies & their use
Corporate-level strategies in diversified firms
Cross-border strategic alliances importance as
an international cooperative strategy
Two approaches to manage cooperative
strategies

Cooperative Strategies at IBM

350,000 employees who design, manufacture, sell
and service advanced information technologies
including computer and storage systems, software
and microelectronics.
3 core biz units: Systems & financing; software;
services
3 growth means: internal development (primarily
innovation); mergers & acquisitions; cooperative
strategies
By cooperating with other companies can leverage
core competencies to grow and improve
performance

Cooperative Strategies at IBM

(Contd)

Cooperative strategies include strategic

alliance and joint ventures (JVs);
cooperative relationships with competitors
(I.e., Sun Microsystems); collaboration
(I.e., SAP); global alliance (I.e., Lenovo)

Introduction
Cooperative strategy
Firms work together to achieve a shared
objective

Primary Type of Cooperative Strategy:

Strategic Alliances
Introduction: Strategic Alliance
Cooperative strategy in which firms combine resources and
capabilities to create a competitive advantage

Three types of strategic alliances

1. Joint venture
2. Equity strategic alliance
3. Nonequity strategic alliances, which include
Licensing agreements
Distribution agreements
Supply contracts
Outsourcing commitments

Primary Type of Cooperative Strategy:

Strategic Alliances
(Contd)

1. Joint venture
Two or more firms create a legally independent company to share
resources and capabilities to develop a competitive advantage

2. Equity strategic alliance

Two or more firms own a portion of the equity in the venture they have
created

3. Nonequity strategic alliance

Two or more firms develop a contractual relationship to share some of
their unique resources and capabilities to create a competitive advantage

Primary Type of Cooperative Strategy:

Strategic Alliances
(Contd)

Many reasons firms implement cooperative

strategies and specifically, strategic alliances
Competitive market conditions would include
1. Slow-cycle markets
2. Fast-cycle markets
3. Standard-cycle

Primary Type of Cooperative Strategy:

Strategic Alliances
(Contd)

Why firms might develop strategic alliances

Most firms lack the full set of resources and capabilities
needed to reach their objectives
Cooperative behavior allows partners to create value that they
couldn't develop by acting independently
Aligning stakeholder interests (both inside and outside of the
organization) can reduce environmental uncertainty
Alliances can
provide a new source of revenue
be a vehicle for firm growth
enhance the speed of responding to market opportunities,
technological changes, and global conditions
allow firms to gain new knowledge and experiences to increase
competitiveness

Primary Type of Cooperative Strategy:

Strategic Alliances
(Contd)

In summary, strategic alliances

can reduce competition and enhance a firms competitive
capabilities and
create avenue for firm to gain access to resources
allow firm to take advantage of opportunities, build strategic
flexibility and innovate

The competitive conditions

1. Slow-cycle markets
2. Fast-cycle markets
3. Standard-cycle

Primary Type of Cooperative Strategy:

Strategic Alliances
(Contd)

In summary, strategic alliances

can reduce competition and enhance a firms competitive
capabilities and
create avenue for firm to gain access to resources
allows firm to take advantage of opportunities, build strategic
flexibility and innovate

The competitive conditions - 1. Slow-cycle markets

2. Fast-cycle markets
3. Standard-cycle

Primary Type of Cooperative Strategy:

Strategic Alliances
(Contd)

1. Slow-cycle markets
Privatization of industries and economies
Rapid expansion of the Internet's capabilities
Quick dissemination of information
Speed with which advancing technologies permit imitation of even
complex products

2. Fast-cycle markets
3. Standard-cycle

Business-Level Cooperative Strategy

Introduction
Complementary strategic alliances (SA)
2 Types of CSA: (1) vertical & (2) horizontal
Competition response strategy
Uncertainty-reducing strategy
Competition-reducing strategy
Business-level cooperative strategies assessment

Business-Level Cooperative
Strategy
(Contd)

Introduction: Business level

cooperative strategies used to grow
and improve firm performance in
individual product markets. Achieved
through
Complementary Strategic Alliances (CSA)

Business-Level Cooperative Strategy

(Contd)

Complementary Strategic Alliances (CSA)

Firms share some of their resources and capabilities in
complementary ways to develop competitive advantages
Partners may have different
Learning rates
Capabilities to leverage complementary resources
Marketplace reputations
types of actions they can legitimately take

Some firms are more effective at managing alliances and deriving

benefits from them
Two forms include vertical and horizontal

Business-Level Cooperative
Strategy
(Contd)

2 Types of CSA: (1) vertical & (2) horizontal

1. Vertical CSA
partnering firms share resources & capabilities from
different stages of the value chain to create a competitive
advantage.
2. Horizontal CSA
partnering firms share resources & capabilities from the
same stage of the value chain to create a competitive
advantage
commonly used for long-term product development and
distribution opportunities

Business-Level Cooperative
Strategy
(Contd)

Competition response strategy

Competitors
initiate competitive actions to attack rivals
launch competitive responses to their competitors actions

Strategic alliances (SA)

can be used at the business level to respond to competitors
attacks
primarily formed to take strategic vs. tactical actions
can be difficult to reverse
expensive to operate

Business-Level Cooperative Strategy

(Contd)

Uncertainty-reducing strategy
For example, entering new product markets, emerging
economies and establishing a technology standard are
unknown areas so by partnering with a firm in the respective
industry, a firms uncertainty (risk) is reduced
Uncertainty reduced by combining knowledge & capabilities

Competition-reducing strategy
Collusive strategies (CS) differ from strategic alliances in
that CS are usually illegal
Two types of CS: 1. explicit and 2. tacit collusion

Business-Level Cooperative
Strategy
(Contd)

Competition-reducing strategy: 2 Collusive

Strategies
1. Explicit collusion
direct negotiation among firms to establish output levels
and pricing agreements that reduce industry competition

2. Tacit collusion
indirect coordination of production and pricing decisions
by several firms, which impacts the degree of competition
faced in the industry
Mutual forbearance firms do not take competitive actions
against rivals they meet in multiple markets

Business-Level Cooperative Strategy

(Contd)

Assessment of Business-level cooperative strategies

Used to develop competitive advantages (CA) for contributing to
successful positions & performance in individual product markets
Developing a CA using a strategic alliance, the integrated
resources and capabilities must be valuable, rare, imperfectly
imitable and nonsubstitutable
Vertical alliances have greatest probability of creating CA;
horizontal are sometimes difficult to maintain since they are usually
between rivaling competitors
SAs designed to respond to competition and reduce uncertainty
are more temporary in comparison with complementary (horizontal
and vertical) strategic alliances
Competition-reducing has lowest probability of creating a
sustainable CA

Corporate-Level Cooperative
Strategies
(Contd)

Introduction
Corporate-level cooperative strategies (CLCS)
help firm to diversify itself in terms of products
offered, markets served or both
Common CLCS forms (N=3)

Corporate-Level Cooperative Strategies

(Contd)

Common CLCS forms (N=3)

1. Diversifying strategic alliance
Firms share some of their resources & capabilities to diversify into new product or
market areas

2. Synergistic strategic alliance

Firms share some of their resources & capabilities to create economies of scope

3. Franchising
Firm uses a franchise as a contractual relationship to describe and control the sharing
of its resources and capabilities with partners

Franchise: contractual agreement between two legally independent

companies whereby the franchisor grants the right to the franchisee to sell
the franchisor's product or do business under its trademarks in a given
location for a specified period of time

Corporate-Level Cooperative Strategies

(Contd)

Assessment of corporate-level cooperative

strategies
Costs incurred regardless of type selected
Important to monitor expenditures!

In comparison w/ business-lvl strategies

Usually broader in scope
More complex
and therefore more costly

Can develop useful knowledge and,

in order to gain maximum value should organize and verify proper
distribution with those involved with forming and using alliances

International Cooperative Strategy

Cross-Border Strategic Alliance
International cooperative strategy in which firms with
headquarters in different nations combine some of their
resources and capabilities to create a competitive advantage

Why cross-border strategic alliances?

Multinational corporations outperform firms that operate only
domestically
Due to limited domestic growth opportunities, firms look
outside their national borders to expand business
Some foreign government policies require investing firms to
partner with a local firm to enter their markets

International Cooperative Strategy

(Contd)

Why cross-border strategic alliance?

International cooperative strategy in which firms with
headquarters in different nations combine some of
their resources and capabilities to create a
competitive advantage
May be through a mergers and acquisition (which is
riskier)

International Cooperative Strategy

(Contd)

Risks
Partners may choose to act opportunistically
Partner competencies may be misrepresented
Partner may fail to make available the
complementary resources and capabilities that
were committed
One partner may make investments specific to the
alliance while the other partner may not

Network Cooperative Strategy

Network Cooperative Strategy
Cooperative strategy wherein several firms agree to
form multiple partnerships to achieve shared
objectives
Very effective when formed by geographically
clustered firms (I.e., Silicon Valley in N. California)
Effective social relationships and interactions among
partners, while sharing resources and capabilities increase
likelihood of success, including innovation
Japans keiretsus

Can be problematic - could lock firm in with partners

and exclude development of alliances with others

Network Cooperative Strategy

(Contd)

Alliance network types: Set of strategic alliance

partnerships resulting from use of a network
cooperative strategy (N=2)
1. Stable alliance network
Formed in mature industries where demand is relatively constant
and predictable
Directed primarily toward developing products at a low cost

2. Dynamic Alliance Networks

Used in industries characterized by environmental uncertainty,
frequent product innovations, and short product life cycles
Directed primarily toward continued development of products that
are uniquely attractive to customers

Managing Competitive Risks in

Cooperative Strategies

Competitive Risks with

Cooperative Strategies
Risks: Partner(s) may .
choose to act opportunistically
misrepresent competencies
fail to make available the complementary
resources and capabilities that were
committed
make investments specific to the alliance
while the other partner may not

Managing Cooperative Strategy

Two primary approaches
1. Cost minimization
2. Opportunity maximization

Managing Cooperative Strategy

(Contd)

1. Cost minimization
Relationship with partner is formalized with contracts
Contracts specify how cooperative strategy is to be
monitored and how partner behavior is to be controlled
Goal is to minimize costs and prevent opportunistic
behaviors by partners
Costs of monitoring cooperative strategy are greater
Formalities tend to stifle partner efforts to gain maximum
value from their participation

Managing Cooperative Strategy

(Contd)

2. Opportunity Maximization
Focus: maximizing partnership's value-creation opportunities
Informal relationships and fewer constraints allow partners to
take advantage of unexpected opportunities
learn from each other
explore additional marketplace possibilities
Partners need a high level of trust that each party will act in the
partnership's best interest, which is more difficult in international
situations

Thank You
Please forward your query
To: vstomar@amity.edu