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Strategic Management-7
Business level strategies
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Strategies occur at multiple levels- Corporate andBusiness unit
Corporations often function through theirbusiness units
Corporate level strategies provide a broaddirection to the firm, but it is at the level of thebusiness where most competitive interactionoccurs and where competitive advantage isultimately won or lost
Business-level strategies are an important level atwhich companies set their strategies
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Business definition is at the core of business
strategies
Each business in a firm can be defined along
three dimensions of customer needs,
customer groups and alternate technologies
By defining the what, who and how of a
business the business definition seeks to
provide direction
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What- deals with customer needs
Who- deals with target segments
How- deals with technologies (not just
technical but all processes)
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Business strategies are the courses of actionpursued by an organization to serve identifiedcustomer groups and to provide value to
customers by satisfaction of their needs In the process the organization uses its core
competencies to gain, sustain and enhance itscompetitive advantage
The source of competitive advantage comesfrom skillful use of its core competencies
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Michael Porter on strategy
The dynamic factors that determine the choice ofa competitive strategy are: industry structure andposition of the firm in the industry
Industry structure is determined by competitiveforces
These forces are: threat of new entrants; threatof substitute products or services; bargaining
power of suppliers; bargaining power of buyers
and rivalry among existing players in the industry
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The second factor that determines a firms
competitive strategy is a firms positioning
within the industry
Positioning is the overall approach of the firm
towards competing
It is designed to gain a competitive advantage
and is based on: competitive advantage and
competitive scope
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Competitive advantage can arise due to: lower
cost and differentiation
Competitive scope can arise due to : broad
target and narrow target
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Competitive advantage can be gained by
producing standardized product through mass
production techniques (lower cost) and
distributing them through mass marketing
OR
Through high valuehigh priced offerings to a
select audience through specialized
distribution channels-niche marketing
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Competitive scope refers to the range ofproducts and services that a company offers
Under broad targeting it can offer a full range
of products and services to a wide range ofcustomers
Under narrow targeting it can choose to serve
a limited number of customers in a restrictedgeographical area with a limited range ofproducts
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Generic business strategies
Broad target Cost leadership Differentiation
Narrow target Focussed cost
leadership
Focussed
differentiation
Low cost products Differentiatedproducts
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Cost leadership-offers a margin of flexibility tothe organization to lower the price if thecompetition becomes stiff and yet earn the same
profit Examples:
Gujarat cooperative Milk Marketing Federation
Moser- Baer India
Tata Steel
Reliance Communications
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Achieving cost leadership
Accurate demand forecasting
High capacity utilization
High level of standardization of products Investments in cost saving technologies
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Cost leadership- when?
Cost leadership strategies work best in price
sensitive markets; where buyers possess a
significant bargaining power; differentiation is
superfluous or does not matter much tocustomers; low customer loyalty
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Cost leadership- Benefits and Risks
Benefits- cost leadership is a high entry barrier.Others cannot copy it easily
Best insurance against competition
Risks-Severe cost reduction can result in dilutionof customer focus
Technological shifts are a great threat; newer
technology possessed by newer entrants may bemore efficient as compared to obsoletetechnology
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Differentiation strategy
Useful when the competitive advantage of anorganization lies in its special featuresincorporated in its product which customers
are willing to pay for This allows it to charge a premium for its
products.
But differentiation also adds costs The key is to maintain a balance between
price and costs
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Achieving differentiation
Incorporate valuable feature and benefits
Increase non-tangible components of the
product
Increase variety offered
Better design
Offer a complete range of products that thecustomer needs
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Differentiation-when?
Customer needs and preferences are too
diversified
Customers willing to pay for differentiated
services
The market is too large to be satisfied by a few
players offering standardized products
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Differentiation-benefits and risks
Benefits- Differentiation allows branding
which leads to loyalty
Differentiation can be a sustainable entry
barrier
Risks- fails when the basis of differentiation is
not/ no longer valued by the customer
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Focus strategy
For an identified segment, a focussed organization useseither low cost or differentiation strategy
Examples-
Indian music: Tips created a revolution with a low cost
strategy in audio cassettes Times Music and Music Today cater to upwardly mobile
, sophisticated music lovers based on differentiationand premium pricing
Tanishq- Offers a differentiated product for high-income customers
Software companies- LOB strategy
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Achieving focus
Identify specific niches
Create superior skills to serve this segment
Develop innovative ways of managing thevalue chain
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Focus strategies-when?
There is a niche which is prepared to pay for ahigher value
The niche is large enough and has growth
potential The major players in the industry are not
interested in the niche; it is not crucial for
them There is some uniqueness associated with the
chosen segment
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Focus strategies-benefits and risks
Focus build loyalties; this can be an entry barrier
Could even transfer price increases (within limits) tothe customer
Niches can be transient; markets may change rapidly
If a niche becomes large enough it will attract
competitors Being focussed means committing to a narrow market
segment, may hinder movement to other segments