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1 GSB MBA TM IV Strategic Management Unit III - Business Strategy

Business Strategy

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GSB MBA TM IVStrategic Management

Unit III - Business Strategy

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Business strategyFocuses on gaining, sustaining and improving the

competitive position of a co’s or business unit’s products or services within a specific industry or market segment that the co or bu serves. It is the industry where competitive advantage is won or lost - key factors determining choice of strategy -

> industry structure, >positioning of the firm in the

industryEg., MUL positions itself as aprovider of security, confidence,

reassurance, value-for-money, and good resale value. Business strategies of MUL combine lower cost and differentiation. Lower cost strategy by using a reliable network of suppliers, efficient manufacturing, jit inventory, extensive after-sales service network, realisation of economies of scale. Differentiation strategy in options to a customer by offering a car at each point difference of a fixed amount

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Business strategy can be;

Competitive, (battling against all competitors for advantage) or,

Cooperative (working with one or more competitors to gain

advantage against other competitors), or,

Both.

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What are competitive strategies?

Creates a defendable position so that a firm can out-perform competitors. The following questions are asked;

> should we opt for a low cost strategy? or,

> should we compete for the most sought after share of the market? or,

> should we opt for a niche, profitable, less sought after segment?

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Porter’s generic strategiesM. Porter proposed 2 generic strategies for out-

performing other corporations in a particular industry; lower cost and differentiation.

‘Generic’- can be pursued by any type or size of business firm, even by not-for-profit organisation.

> Lower cost strategy – the ability of a company or a business unit to design, produce, and market a comparable product more efficiently than its competitors.

> Differentiation strategy – ability to provide unique and superior value to the buyer in terms of product quality, special features ,or after–sale service.

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Generic strategies

Cost

Leadership Differentiation

Focused

Cost leadership

Focused differentiation

Competitive Scope

Broadtarget

Narrow target

Low cost product/services

Differentiated products/services

Competitive advantage

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Porter proposes that a firm’s competitive advantage is determined by its competitive scope ie., the breadth of the target-market of the company or business unit. Before choosing either of the strategies, the firm must choose the range of product varieties it will produce, the distribution channels it will employ, the types of buyers it will serve, the geographic areas in which it will sell and the related industries in which it will also compete. The co can choose either a broad target ie., aim at the middle of the mass market or a narrow target

i.e.,aim at a market niche.

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Combining these 2 mkts with the 2 competitive strategies results in 4 variations of generic strategies;

> when the lower cost and differentiation strategies have a mass-market target they are called cost leadership and differentiation.

> when the strategies are focused on a market niche (narrow target), they are called cost focus and differentiation focus.

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• Cost leadership is a low-cost competitive strategy that aims at the broad mass market and requires “ aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, reducing marginal customer accounts, and cost minimisation in areas like R&D, service, sales force, advertising, and so on.” This facilitates lower price than competitors, and still make adequate profits.

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Eg., Wal-Mart, SW Airlines, Timex, etc.

> The Gujarat Cooperative Milk Marketing Federation (GCMMF)

the country’s largest cooperative, (AMUL), operates in the branded ice cream market on the lower–cost platform. Backed by about 180 coop networks located across the country and an efficient supply-chain for the procurement of milk –a cold chain for supplying its refrigerated products through an efficient distribution network.

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> Tata Steel the lowest-cost steel producer has successfully competed against Posco of S.Korea.

Advs; > defence against rivals

> earn profits even during times of heavy competition

> High market share will give high bargaining power with suppliers

> Its low price will be a barrier to new entrants

> Because of the above they will earn

more than average ROI.

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How to achieve cost leadership?> accurate demand forecasting and high

capacity utilisation.> economies of scale> standardisation of products and uniform

package of services thro’ mass production

> Aim at average customer to serve the largest number

> invest in cost saving technologies> postpone differentiation as much as

possible.

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DifferentiationAims at the broad makt and involves the creation of a product or

service that is perceived as unique – can charge a premium price – can be associated with design, brand image, technology, features, dealer network or customer service.

Advs;> a viable strategy for earning above-average profit in

specific business because the resulting brand royalty lowers customers’ sensitivity to price.

> Increased cost can be passed on to the buyer.> Buyer loyalty serves as an entry barrier.

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Eg; Walt-Disney productions, Maytag Appliances, NIKE athletic shoes, Orient Fans, a Kolkotta based Birla group concern, offers premium ceiling fans based on product innovation and superior technology – extra-wide blades, heavy duty motor, low-wattage, max area coverage, etc.

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Gati, a multimodal transport company, differentiated its services in a highly competitive and uniform market with tangibles like a risk insurance offer for shipments, refund on failure to deliver on time, door to door pick up and delivery, time bound operations, and safer transportation.

In 1985, in a case, packaging became the differentiating factor for Parle Agro, when it launched Frooti, a non-aerated, natural fruit-based drink, in a tetrapack. Customers perceived glass bottled drink to be synthetic. Frooti became generic to the category of tetrapacked fruit drinks.

Research shows that differentiation is a better entry barrier and low cost strategy gives a larger market share.

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Cost focus- Is a low cost strategy which focuses on specific

buyer group or geographic market and attempts to serve only this niche – co seeks a cost advantage in this target segment – possible to keep overhead and R&D to the min.

Advs; able to serve a small market more efficiently than its

competitors.

Requires a trade-off between profitability and overall market share

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- A differentiation strategy that concentrates on a particular buyer group, product-line segment, or geographic market – seeks a differentiation in a targeted market segment – focuses efforts to serve the special needs of a narrow strategic market more effectively than its competition.

- E.g., branded jewellery business of Titan Industries operates in a highly fragmented industry. India has a tradition of highly skilled craftsmen in the jewellery trade. Designs vary across regions. Tanishq, the jewellery brand of Titan, adopts a differentiation strategy offering a range of gold, pearl, and diamond jewellery for women and men.

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Designs are made on the basis of continual feedback from its extensive retail network of showrooms. New designs are introduced every quarter. The brand projects itself as a reputed firm with a guarantee of purity.

> Price is an important consideration in a piracy-ridden industry such as recorded music in India. Nearly 70% of the music cassettes sold in India are Hindi film songs, a category that is highly price-sensitive. T-series created a low-end revolution in the 1980s by offering cheap cassettes of Hindi songs. HMV, Sony, Polygram, Tips, BMG, Venus, and Magnasound are the other major players. Niches in the recorded music market exist in the segments of Indipop, International, and Indian classical music. While Sony Music and Magnasound cater to the upper-end niche, Indipop lovers with recorded cassettes, Channel V and MTV offer videos. Times Music and Music Today cater to the urban, upwardly mobile, sophisticated listeners of Indian classical music. Both these companies operate on the basis of differentiation in niche products and premium pricing.

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> Premiere a high priced film magazine from the Zee group, was launched in 1988 as a niche publication in a market dominated by cheap, glossy magazines, which concentrated on gossip and private lives of film stars – focused on those readers who were bored with these gossips and who were a new breed of serious film viewers generated by watching TV at home. The differentiation was brought by excellent visuals, and professional features, such as film history.

> Pustak Mahal’s Rapidex series of books, particularly aimed at the niche market of Indians seeking to learn the English language, is a low priced publication keeping in view the highly price sensitive target audience and book piracy by small players in the unorganised sector.

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> Philips India ltd launched the flat TV with plasma technology that enables distortion free pictures and bright, accurate colours, and fitted with an integrated Dolby pro-logic sound system. The premium priced TV, with differentiation on technology basis, was targeted at the niche market of a selective, sophisticated, technology driven audience.

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Risks with competitive strategies

No specific strategy is guaranteed to achieve success, and some cos have said that they could not sustain the strategy.

> cost leadership can be imitated by competitors, especially when the basis of differentiation can be less important to buyers.

> focusers may be able to achieve better differentiation or lower cost in market segments, but they may also lose to broadly targeted competitors when the segment’s uniqueness fades or demand disappears.

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Issues in competitive strategiesAccording to Porter, to be successful, a co mustachieve one of the generic competitive strategies.

Otherwise it will be stuck in the middle of the competitive marketplace with no competitive advantage and is doomed to below average performance. Research supports this. However, there are cos which have simultaneously achieved low cost and differentiation position.

Eg., Toyota, Nissan, Honda. Porter argues that these may be temporary. Many different kinds of potentially profitable competitive strategies are possible.

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Industry structure and competitive strategyPorter’s competitive strategies ma be used in any

industry, in some instances, some strategies are more likely to succeed than others. In a fragmented industry, where, many small and medium sized firms compete for small shares of the local market focus strategies will dominate.

Fragmented industries are typical for products in the early stages of their life cycle and for products adapted to local tastes.

Eg., Until Pizza Hut used advtg to differentiate itself from local competitors, the pizza business was a fragmented industry, composed primarily of locally owned pizza parlors, each with its own distinctive product and service offering. Subsequently Domino’s used the cost leader strategy to achieve US national market share.

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As industry matures, fragmentation is overcome industry tends to become consolidated, dominated by a small number of large companies – in due course, a few large cos obtain large market share- when product stds become established for min quality and features, competition shifts to a greater emphasis on cost and service – slower growth combined with overcapacity and knowlegeable buyers put a premium on a firm’s ability to achieve cost leadership or differentiation along the dimensions most desired by the market.

R&D shifts from product to process improvementsOverall product quality improves and costs are lowered.

-cost leadership and differentiation are combined in various degrees. Low price alone will not fetch high market share. Buyers are more sophisticated and demand a certain min quality for the price paid.

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Hyper competition and competitive strategies

D‘Aveni in his book, Hypercompetition, proposes that it is difficult to sustain a competitive advantage for long. “Market stability is threatened by, short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders, repositioning by incumbents, and tactical redefinitions of market boundaries as diverse industries merge. A firm will have to constantly work to improve its competitive advantage – not enough to be a cost leader – continuous improvement programs will reduce cost for all – firms to reduce costs and add value”.

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• When firms become hypercompetitive, they go through escalating stages of competition – initially, firms compete on cost or quality till an abundance of high quality, low priced goods result – next, competitors move into untapped markets – others imitate – entry barriers to limit competitors ; economies of scale, distribution agreements, strategic alliances, etc., make it almost impossible for a new firm to enter .

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next, the remaining firms attack and destroy the strongholds of other firms – global competitors work their way to a situation where no one has any advantage and profits are minimal – no sustainable competitive advantage – the only way a firm can keep its competitive advantage is through a continuous series of multiple short term initiatives to replace current successful products with new generation products before competitors can do so. Eg., INTEL and MS.

Hyper competition views competition as a series of waves on what used to be a calm stretch of water – requires continuous maneuvering – risk of too much emphasis on tactics than on long term sustainable competitive advantage.

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Competitive tactics

A tactic is a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action – narrower in scope and shorter in time horizon than strategies – link between the formulation and implementation. Tactics to implement competitive strategies are;

> Timing tactics, and,

> Market location tactics

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Timing tacticsFirst mover – pioneer – advantages;

> reputation as leader> assume cost leader position through

the learning curve> temporary high profits from buyers who value the product or service very highly.

Disadvantages – (advantages of late movers)Late movers enter the market only after product

demand has been established. Imitate others’ technological advances (keep R&D costs low), minimise risks by waiting until a new product is established – take advantage of the natural inclination of the first mover to ignore market segments

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Market location tactics

• Offensive tactic – attempts to take the market share from an established competitor’s – takes place in an established competitor’s location.

• Defensive tactic – attempts to keep off a competitor from one’s market. Takes place within a co’s current market position as a defence against possible attack by a rival.

• Offensive tactics> Frontal assault –matshes competitor in every

category from price to promotion to distribution channel – must have superior resources but also be willing to persevere – expensive, may serve to wake up a sleeping giant, depress profits for all.

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> Flanking maneuvre; attack part of the market where the competitor is weak – must be patient and willing to expand out of the relatively undefended market niche or else face retaliation by competition.> Encirclement; encircles the competitor’s position in terms of the products or markets or both. Encircler has greater product variety, or serves more markets or both. Honda adopted this tactic in motor cycles by taking every market segment except for the heavyweight segment in the US controlled by Harley-Davidson - must have a wide variety of abilities and resources necessary to attack multiple market segments.

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> Bypass attack; Change the rules of the game –cut the market out from under the established defender by poffering a new product that makes the competitor’s product unnecessary. Eg., Instead of competing directly against MS Windows 95/97 OSs, Netscape chose to use Java ‘applets’ in its Internet browser so that an OS and specialized programs were no longer necessary to run applications on a pc.

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Guerilla warfare; “hit and run” –involves small, intermittent assaults on a competitor’s different market segments – a new comer can make some gains without seriously threatening a large, established competitor and evoking some form of retaliation – must be patient enough to accept small gains and to avoid pushing the established competitor to the point of making a response or lose face.

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Defensive tactics

According to Porter, defensive tactics aim at lowering the probability of an attack, divert attacks to less threatening avenues, or lessen the intensity of an attack – make a co’s competitive advantage more sustainable by causing a challenger to conclude that an attack is unattractive – deliberately reduce short term profitability to ensure long term profitability.

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> Raise structural barriers – block a challenger’s logical avenues of attack;

- offer a full line of products in every possible market segment to close off any entry point,

- block channel access by signing exclusive agreements with distributors,

- raise buyer switching costs by offering low cost training to users,

- raise the cost of gaining trial users by keeping prices low on items new users most likely will purchase,

- increase scale economies to reduce unit costs,

- foreclose alternative technologies through patenting or licensing.

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- limit outside access to facilities and personnel

- tie up suppliers by obtaining exclusive contracts or purchasing key locations,

- avoid suppliers that also serve competitors, and

- encourage the govt to raise barriers such as safety and pollution stds

or favourable trade policies.

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> Increase expected retaliation; eg., management may strongly defend any erosion of market share by drastically cutting prices or matching a challenger’s promotion through a policy of accepting any price-reduction coupons for a competitor’s product.

> Lower the inducement for the attack; reduces a challenger’s expectations of future profits in the industry – a co can keep prices low and constantly invest in cost cutting measures – keeping the price very low, gives a new entrant little profit incentive.

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Cooperative strategies- Used to gain competitive advantage within an

industry by working with rather than against other firms. Other than collusion, which is illegal, the primary type of cooperative strategy is the strategic alliance.

- Strategic alliance - “a partnership of 2 or more corporations or business units formed to achieve strategically significant objectives that are mutually beneficial.” – short term or lasting long enough for establishing a beachhead in a new market. Others are longer lasting and may even be the prelude to a full merger between 2 cos.

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Reasons for SAs;

> to obtain technology

> manufacturing capabilities

> Access to specific markets

> to reduce financial or political risk > to achieve competitive advantage

Cooperative arrangements between cos may range from weak and distant to strong and close – the types of alliances range from mutual service consortia to JVs and licensing arrangements to value chain partnerships

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Mutual service consortium“A partnership of similar cos in similar industries

who pool their resources to gain a benefit that is too expensive to develop alone such as access to advanced technology.”

Eg, IBM of USA, Toshiba of Japan and Siemens of Germany formed a consortium to develop a new generation of computer chips. IBM then transferred the new technology to a facility in the US.

– fairly weak and distant alliance – very little interaction or communication among the partners.

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Joint VenturesA cooperative business activity, formed by 2 or more

separate organisations for strategic purposes, that creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while their separate identity and autonomy.

Along with licensing arrangements, JVs lay at the mid point of the continuum and – are formed to pursue an opportunity that needs a capability from 2 cos , such as technology of one and the distribution channels of the other.- most popular form of SAs. – occur because, cos involved do not want to or cannot legally merge. – JVs provide a way to temporarily combine the different strengths of partners to achieve an outcome of value to both.

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• Very popular in FT – because of financial and political-legal constraints – a convenient way to work together without losing independence.

• Disadvantages – loss of control, lower profits, probability of conflicts with partners, likely transfer of technological advantage to the partner – largely temporary – high rate of failure – successful if both partners have equal ownership and are mutually dependent.

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Licensing arrangements

• An agreement in which the licensing firm grants rights to another firm in another country or market to produce or sell a product – licensee pays compensation to the licensing firm for technical help or market to produce or sell a product – licensee pays compensation to the licensing firm for technical expertise – useful if the brand or TM is well known – If FDI is difficult – danger - the licensee may become competitor- distinctive competence should not be licensed.

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Value-Chain partnership

• One co forms a long term arrangement with a key supplier or distributor for mutual advantage – popular as cos outsource activities