Chapter 1 Competitive Strategy: The core concepts

Content
 Layers of business environment like, organization, industry, market etc. etc.  Concept of strategy, strategic management and the process of formulating strategy  All the types of strategy like, Corporate level, business level and operational level strategy  The structural analysis of industries: PESTEL industries: analysis and five force frame work  Basic generic strategies of business level like, cost leadership, differentiation and focus

Layers of business environment

1. Macro Environment: It Contains environmental Environment:

factors and PESTEL frame work. work. 2. Industry: It is the group of organization producing Industry: the same products or service. service. It contains Concepts like scenario, Five force concept and hyper competition. competition. 3. Sector: It is the idea through which the Concept of Sector: the industry can be extended in to the public services

The Macro Environment Industry or sector Strategic Groups

The organization

markets Organizational field

3.Strategic Groups: These are organizations within an Groups: industry that have similar characteristics to each other but are quite different from the those in other strategic groups. groups. 4.Organizational Field: These are networks of related Field: organizations which share common assumptions, values and way of doing things. things.

 Strategy: it is the direction and scope of an Strategy: organization over the long term, which achieves advantage for the organization through its configuration of resources within a changing environment and to fulfill stakeholder expectation. expectation.  Strategic management: the process by which management: managers choose a set of strategies for a company that will allow it to achieve superior performance. performance.

Strategy formulation process

Step 1: Developing strategic vision Step 2: Swot analysis Step 3: Setting objectives Step 4: Crafting a strategy to achieve the objectives and the vision  Step 5: implementing and executing the strategy  Step 6: Monitoring developments, evaluating performance, and making corrective adjustment  Revise each of the above step as needed due to changing condition, new opportunities and new ideas    

levels of strategy
1.Corporate level strategy: The company wide game strategy: plan for managing a set of businesses. businesses.  Generally formed by CEO and other senior executives. (Ex. executives. (Ex. New product launch). launch). 2.Business level Strategy: it is accounted for Strategy: strengthening market position and build competitive advantage  Actions to build competitive capabilities  Generally made by general managers and heads of functional area. (Price, promotion etc.) area. etc.

3.Functional level strategy

 Add relevant detail to the hows of overall business strategy. strategy.  Provide a game plan for managing a particular activity in a ways that support the overall business. business.  Generally crafted by the head of the functional departments in collaboration with the other key persons. persons.  Ex. To fix the price of the product and the Ex. promotional activities for the existing product. product.

4.Operational level strategy

 Add detail and competences to business and functional strategy  It manages generally day to day activities. activities.  Generally it is formulated by operating managers in association with the key employees. employees.  Ex. Activities like day to day data collection of sales, Ex. routine file work etc. etc.

The PESTEL Framework

 It describes the factors of surrounding environment affecting the organization. organization. 1. Political factors  Government Stability  Taxation policy  Foreign trade Regulation  Social Welfare Policy

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2. Economic Factors  Business Cycle  GNP trends  Interest Rates  Money supply  Inflation  Unemployment  Disposable income

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3. Sociocultural Factors  Population Demographics  Income distribution  Social Mobility  Lifestyle changes  Attitudes to work and leisure  Consumerism  Levels of education

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4.Technological Factors  Government Spending on research  Govt. and industry focus on technological effort Govt.  New discoveries/Development  Speed of technology Transfer  Rates of obsolescence

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5.Environmental factors  Environmental Protection laws  Waste Disposal  Energy Consumption

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6. Legal factors  Monopolies Legislation  Employment law  Health and Safety  Product Safety

Five Force frame work

 It gives idea about the sources of competition. competition.  However It must be used at the SBU and not at the level of whole organization. organization.  The five forces are not independent but dependent on each other. other.  Connection between the five forces and their drivers should be taken in to the consideration

1.The Threat of entry

      The new entrant have to overcome barriers like Economies of scale The capital requirement Access to Distribution network Experience and expected Retaliation Legislation or govt. Action govt. Differentiation

2.Threats of Substitute..
It reduces demand for particular class of the product as the customer switch to the alternatives. alternatives.  Threat of substitution is high when: when: 1. Good substitutes are already available in the market or growing rapidly. rapidly. 2. Substitutes are attractively priced. priced. 3. Substitutes have better performance. performance. 

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4.End users have low switching cost. cost. 5. End users are more comfortable with substitutes. substitutes. 3.The power of buyer: It is high in the situation buyer: where  Volume of the purchase is high  The supplying industry comprises large number of small operators. operators.

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 Alternative source of supplier  Material cost is high percentage of total cost. cost.  The cost of Switching supplier is low. low.  Threat of backward integration by buyer. buyer. 4.Supplier Power: It is high in the situation where Power:  There is concentration of supplier

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 Switching cost from one supplier to another is high  The brand of the supplier is powerful  Threat of forward integration by supplier  Customer fragmentation. fragmentation.

5.Competitive rivalry
 It is seen between the organizations with the similar product and services aimed at the same customer group. group.  The factors affecting are  The extent to which competitors are balance  Market growth rate  High fixed cost in the industry (high capital Requirement)  Differentiation  High Exit barriers

Generic competitive strategies: business level

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 Competitive strategies help firm to gain profitability in their respective business. business.  For this purpose firm have to get competitive advantage over rivals. rivals.  However competitive advantage can be achieved through either cost advantage or differentiation. differentiation.  These two terms are the roots of the all competitive strategies of the business level. level.  Focus is also one of the main strategies for achieving the competitive advantage. advantage.

1. Cost leadership
 It is the clearest of the three generic strategies. strategies.  Here firm sets target of overall low cost producer in the industry or compare to the close rival. rival.  However there are different sources for achieving cost advantage, but among them there are some main like, Economy of scale, experience curve, supply cost and product and process design. design.  Even though for cost leadership approach it is necessary to count differentiation also to gain higher profits. profits.

Or scope !!

2. Differentiation
The essence of a broad differentiation strategy is to be unique in ways that are valuable to a wide range of customer. customer.  Here firm studies the need of the buyers and what they value and based on that provides features in the product or service. service.  Successful differentiation allows firm to 1. Command a premium price for its product. product. 2. Increase unit sales 3. Gain buyer loyalty to its brand. brand. 

Types of differentiation themes

 Differentiation can be from many angles like, unique taste( Dew), Multiple features ( Microsoft), Wide selection and one stop shopping ( Amazon.com), Amazon. Superior Service (Fed ex), Spare parts Availability ( Hundai), Engineering design and performance (BMW, Mercedez), Prestige and distinctiveness (Rolex), Product reliability (Johnson and johnson baby product), Quality manufacture (honda), Technological Leadership (Intel), Full range of service, complete line of product and top of the line image and reputation

Focused or market niche strategies

 What makes focused strategies apart from low cost leadership or broad differentiation strategies is concentrated attention on a narrow piece of total market. market.  The target market or niche can be defined by geographic uniqueness, specialized requirement in the product or special product attributes that appeal to relatively small number of buyers. buyers.  Ex. E bay (online auctions), google ( specialist in Ex. internet searching. searching.

3. A focused low cost strategy

 It is based on low cost aims at securing a competitive advantage by serving buyers in the target market niche at lower cost and lower price than rival competitors. competitors.  Here firm aims to serve only limited number of buyers with overall low cost approach. approach.  Firm can also use focused low cost strategy against big firms because they have overall low cost in each of the department like production, marketing, distribution and advertising. (Maruti 800) advertising. 800)

4. A focused differentiation strategy

 It aims at securing a competitive advantage by offering niche members a product they perceive as well suited to their own unique taste and preference. preference.  The main idea behind this strategy is that most markets contain a buyer segment willing to pay a big price premium for the finest item available. available.  If firm is capable of differentiating their product or service from the rivals they can have premium price. price.  Ex. Mercedez, BMW Ex.

5. Stuck in the middle

 A firm that engages in each generic strategy but fails to achieve any of them is stuck in the middle. middle.  It has no competitive advantage. advantage.  Firm generally uses this strategy because the cost leader, differentiator, or focuser are better positioned to compete in any segment. segment.  A firm that is stuck in the middle will earn attractive profits only if the industry structure is positive. positive.

Pursuit of more than one generic strategies

There are three conditions when firm can simultaneously achieve both cost leadership and differentiation. differentiation. 1. Competitors are stuck in the middle. middle. 2. Cost is strongly affected by share or interrelationships. interrelationships. 3. A firm pioneers a major innovation 

Risks of generic strategies

1.      Risks of cost leadership Cost leadership is not sustained because: because: Competitors imitate Technology changes Other bases for cost leadership erode Cost focuses achieve even lower cost in segment

Risk of differentiation
 Differentiation is not sustained because: because:  Competitors imitate  Bases for differentiation becomes less important to buyers  Differentiation focusers achieve even greater differentiation in segment

Risks of focuses
  1. 2.  1. 2.  The focus strategy is imitated The target segment becomes structurally unattractive due to : Structure erodes Demand disappear Broadly targeted competitors overwhelm the segment due to: to: The segments differences from other segments narrow The advantage of broad line increase New focusers sub segment the industry