Business level strategies
Simply put competing and satisfying consumer needs
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• Could you name some real Indian entrepreneurs who started from scratch?
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• Let us take some examples- Airtel, Reliance telecom, Haldiram & Nirma
• What is special about them?
• What made them successful?
Karsanbhai Patel started Nirma in 1969
• One man company of 1969 have now 14000 employees and Rs. 2500 crore turnover
• What is your perception of their business model?
Nirma story
• India is a one of the largest consumer economy, with burgeoning middle class. Nirma aptly concentrated all its efforts towards creating and building ‘value-for-money’ products.
• Pre Nirma, the domestic detergent market had only premium segment, dominated by MNCs.
• In 1969, Karsanbhai Patel started door-to-door selling of Nirma, priced at an astonishing Rs. 3 per kg, against cheapest brand @ Rs. 13 per kg.
• Nirma was an innovative product – with indigenous process, packaging and low-profiled marketing, which changed the habit of Indian housewives’
Nirma is success story of low cost focus strategy
• Nirma was adjudged as ‘Marketing Miracle’ of 80s . Nirma routed Surf, the pioneer from Hindustan Lever.
• Nirma captured the market share by offering value-based marketing mix of four P’s, i.e. a perfect match of product, price, place and promotion.
• In 2004 Nirma’s annual sales touched 800,000 tones, making it one of the largest volume sales with a single brand name in the world.
• Nirma stepped into toilet soaps in 1990 and achived volume of 100,000 per annum. This makes Nirma the largest detergent and the second largest toilet soap brand in India with market share of 38% and 20% respectively.
• Nirma pioneered value creation in consumer products. To leverage it, Nirma did backward integration along with expansion and modernization
• Nirma’s six production facilities, located at different places, have state-of-art technologies.
Nirma is success story of low cost focus strategy
• Nirma has always been practiced ‘value-for-money’ plank. Nirma plans to extend the same philosophy in categories as commodity food products, personal care products and packaged food. Distinct market vision and robust infrastructure allowed Nirma to have cost leadership. Apart from this, lean distribution network, umbrella branding and low profile media promotions allowed it to offer quality products, at affordable prices.
• In present scenario, an inspiring 59-year-old persona, Dr. Karsanbhai K. Patel, leads Nirma, playing role of key strategic decision-maker, whereas his next generation has already skilled management capabilities. Shri Rakesh K Patel – a qualified management graduate, is spearheading the procurement, production and logistic functions, whereas Shri Hiren K Patel – a qualified Chemical engineer and management graduate, heads the marketing and finance functions of the organisation. Shri Kalpesh Patel, Executive Director, leads the professional organisational structure.
Nirma is success story of low cost focus strategy
• Dr. Karsanbhai Patel received- – Udyog Ratna by Federation of
Association of Small-Scale Industries of Gujarat
– Outstanding Industrialist of Eighties by Gujarat Chamber of Commerce and Industry, (1990)
– Gujarat Businessman Award (1998) by Gujarat Chamber of Commerce and Industry,
– Excellence in Corporate Governance Award by Rotary International
– Honorary Doctorate by Florida Atlantic University, USA (2001) for exceptional accomplishments.
• Dr. Karsanbhai Patel has also served as-– Chairman - two terms to the
Development Council for soaps and detergents,
– Member of Bureau of Indian Standards Committee for Soaps and Detergent Industries and
– President of Gujarat Detergent Manufacturers Association.
Foundations of business strategies
Corporate-level strategies lay down the framework in which business strategies operate.
The function of corporate-level strategy is to deal with a portfolio of businesses in such a manner that the overall returns are optimised.
• Business strategies are the courses of action adopted by an organisation for each of its businesses separately to-– serve identified customer groups and provide value to
the customer by satisfying their needs. &– To create value- profit, growth and reputation for
organisation
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What do you think is the main activity at business level?
Scope of SM at business level
• Firms compete directly with each other at the business level of strategic management
• Competition and overall success is key to SM
• Competitive advantage is main area of SM at business level
• BLS is all about competition and creating more value to company than competitors do
• SM is concerned to create strategies that result in competitive advantage
• How to win competition?
How to win competition?
• Two ways- ways adopted by- – Haldiram- Differentiation and – Nirma- cost leadership
Competitive scope & advantage matrix
Cost leadership
Differentiation
Focussed Cost
leadership
Focussed differentiation
Broad target
Narrow target
Low-cost products/services
Differentiated products/services
COMPETITIVE ADVANTAGE
CO
MPETIT
IVE S
CO
PE
exploring competition- some models
• Generic strategies- environment based- by Prof. Michael Porter,
• he opined that that there are only 3 fundamental strategies which any firm could undertake-– Cost leadership– Differentiation– Focus (Niche)
• These were in forefront during 80s. Still valuable.
• Market options-– Market- present, new– Product- present, new
• Expansions- part of corporate strategy
• Resource based- strategists consider generic as historic– assets, – capabilities, – competencies) generic
Generic strategies- 3
• Porter says that every firm need to select one of the three to compete and develop competitive advantage. Three options could be explained by considering two aspects– Source of competitive Advantage-
differentiation and low cost– Competitive scope of target customers- broad
covering most of market or narrow- covering a segment or specializing in niche
Generic strategies- 3
• 1- Low Cost leadership-• When the competitive advantage of an organisation lies
in lower cost of products or services relative to what the competitors have to offer, it is termed as cost leadership.
Achieving cost leadership- value chain. Give sustainable competitive advantage
They market standard, no frill products. Economies on scale, specialisation and low cost intensive distribution.
They concentrate on core area and sell around average price of market. Depend on volume for profits.
Cost leadership do not imply low prices. Prices are base on value of offerings
Value Chain Activities: Examples of Overall Cost Leadership
Few management layers to reduce overhead costs
Firm Infra-structure
Standardized accounting practices to minimize personnel required
Human Resource
Management
Minimize costs associated with employee turnover through effective policies
Effective orientation and training programs to maximize employee productivity
Technology development
Effective use of automated technology to reduce scrappage rates
Expertise in process engineering to reduce manufacturing costs
ProcurementEffective policy guidelines to ensure low cost raw materials (with acceptable quality levels)
Shared purchasing operations with other business units
Efficient layout of receiving dock operations
Effective use of quality control inspectors to minimize rework on the final product
Effective utilization of delivery fleets
Purchase of media in large blocks
Sales force utilization is maximized by territory management
Thorough service repair guidelines to minimize repeat maintenance calls
Inbound Logistics
Operations Outbound Logistics
Marketing and Sales
Service
Use of single type of repair vehicle to minimize maintenance costs
Margin
Margin
Sep 14th 2009 From Economist.comThe more experience a firm has in producing a
particular product, the lower its costs
• The experience curve is an idea developed by the Boston Consulting Group (BCG) in the mid-1960s while working with a leading manufacturer of semiconductors,
• consultants noticed that the company’s unit cost of manufacturing fell by about 25% for each doubling of the volume that it produced. This relationship they called the experience curve: the more experience a firm has in producing a particular product, the lower are its costs.
• Bruce Henderson, the founder of BCG, put it as- Costs characteristically decline by 20-30% in real terms each time accumulated experience doubles. The decline is fast if growth is fast and slow if growth is slow.
• There is no fundamental economic law that can predict the existence of the experience curve, even though it has been shown to apply to industries across the board.
• it had been known since the second world war that it applied to direct labour costs. Less labour was needed for a given output depending on the experience of that labour. In aircraft production, for instance, labour input decreased by some 10–15% for every doubling of that labour’s experience.
• The strategic implications of the experience curve came closer to shattering earth. For if costs fell (fairly predictably) with experience, and if experience was closely related to market share (as it seemed it must be), then the competitor with the biggest market share was going to have a big cost advantage over its rivals.
• This was the logical underpinning of the idea of the growth share matrix (see article). The experience curve justified allocating financial resources to those businesses (out of a firm’s portfolio of businesses) that were (or were going to be) market leaders in their particular sectors. This, of course, implied starvation for those businesses that were not and never would be market leaders.
• different products had different curves and different cost reduction. A study by the Rand Corporation found that “a doubling in the number of [nuclear] reactors [built by an architect–engineer] results in a 5% reduction in both construction time and capital cost”.
• Part of the explanation for this discrepancy was that different products provided different opportunities to gain experience. Large products (such as nuclear reactors) are inherently bound to be produced in smaller volumes than small products (such as semiconductors). It is not easy for a firm to double the volume of production of something that it takes over five years to build, and whose total market may never be more than a few hundred units.
• In theory, the experience curve should make it difficult for new entrants to challenge firms with a substantial market share.
• In practice, new firms enter old industries all the time, and soon become major players in their markets. This is often because they have found ways of bypassing what might seem like the remorseless inevitability of the curve and its slope. For example, experience can be gained not only first-hand, by actually doing the production and finding out for yourself, but also second-hand, by reading about it and by being trained by people who have first-hand experience. Furthermore, firms can leapfrog over the experience curve by means of innovation and invention.
• All the experience in the world in making black and white television sets is worthless if everyone wants to buy colour ones.
Comparing Experience Curve Effects
Cos
t p
er U
nit
0 units 1 millionunits
2 millionunits
4 millionunits
Cumulative Volume
$1
90¢
80¢
70¢
60¢
81¢
64¢
49¢
36¢
72.9¢
51.2¢
34.3¢
21.6¢
90% original cost
80% original cost
70% original cost
64% original cost
Generic strategies
low-cost leadership: limitations• If the option is to seek low-cost leadership, then how
can more than one company be the single leader?• Radical technological change may undermine cost
leadership• Cost leaders may also need to lead on price if they are
to stay ahead but permanent price reduction by the cost leader may damage its market positioning.
Generic strategies
• Differentiation business strategy• When the competitive advantage of an organisation lies
in special features incorporated into the product / service • Firms, in such cases adopt differentiation business
strategy. • Their products meet customer needs better than
competitors. • Extra features cost extra. But Customers are willing to
pay higher for features• Firm sell above market average. Depend on extra price
for profits
Value Chain : for Differentiation
Firm Infra-structure
Human Resource Management
Technology Development
Procurement
Superior material handling operations to minimize damage
Quick trans-fer of inputs to manufacturing process
Inbound Logistics
Superior MIS – To integrate value-creating activities to improve quality
Facilities that promote firm image
Programs to attract talented engineers and scientists
Provide training and incentives to ensure a strong customer service orientation
Superior material handling and sorting technology
Excellent applications engineering support
Purchase of high quality components to enhance product image
Use of most prestigious outlets
Flexibility and speed in responding to changes in manufacturing specifications
Low defect rates to improve quality
Accurate and responsive order processing
Effective product replenishment to reduce customer’s inventory
Creative and innovative advertising programs
Fostering of personal relationship with key customers
Rapid response to customers’ service requests
Operations Outbound Logistics
Marketing and Sales
Service
Complete inventory of replacement parts and supplies
Margin
Margin
Widely respected CEO enhances firm reputation
differentiation: limitations• Some forms of differentiation are not based on price: the
option is therefore over simplistic• Identifying the need for differentiation solves nothing: it
is the precise form that matters and is not so easy to determine
• Differentiation is not necessarily accompanied by higher prices: it may be used to build market share and lower profits.
Generic strategies
Generic strategies
• Focus business strategies-• Achieving either differentiation or cost leadership may
not be possible for many less resourced firms • Some smaller companies could find better to serve local,
smaller or specialised client age• Porter argued that a nicher could rely on either cost
leadership or differentiation but cater to a narrow segment of the total market.
• Emphasis is on exploitation of a narrow targets differentiations from major segments
• Firm could depend upon extra than normal margins
focus or niche:• Distinction between broad and narrow targets is
unclear, making the benefit difficult to evaluate• Although the need for a market niche strategy may
have been identified, there is no guidance on the more difficult aspect of identifying which niche.
Stuck-in-the-middle• Empirical evidence that some companies pursue both
low-cost leadership and differentiation.
Generic strategies
elements of competition
• Players- • Added values• Rules• Tactics• Scope
• Players- entities that form competitive network of rivals- include your own company, suppliers, customers, competitors, substitutes- existing and potential
• Smart players view it from other players view point and understand how powerful five forces- customers, suppliers, competitors, new entrants and substitutes- will act and react
• Then act backward for your action
BLS?
• NutraSweet was patented premium sweetener and used by all including Coke and Pepsi.
• NutraSweet earning hefty margins• Users feel pride when they write they use
NutraSweet• Patent is to expire and anybody could produce
and market• You too wanted to supply it to coke and Pepsi in
India on much lower prices?• What will be your strategy?
elements of competition
• Players- • Added values• Rules• Tactics• Scope
• Added values- the value reduction caused by removing one player.
• Calculate total value created by all player then value remaining after removing the player
• Success is directly proportional to value it creates
• Competition do not allow you to collect more value from market than you create.
elements of competition
• Players- • Added values• Rules• Tactics• Scope
• Rules- structure and system within which competition exists- laws, customs, culture
• Written or unwritten• Rules could be re written
by govt. or new practices could be started by players- – new education policy, SC
rulings for capitation fees, reservations, grading systems
– Reliance entry into telecom– Tatas unlimited locals
elements of competition
• Players- • Added values• Rules• Tactics• Scope
• Tactics- maneuvers taken for competitive advantage- preemption, attack, response, deterrent
• Could be a matrix of - – Offensive- preemption &
attack – Defensive- deterrence,
response– Anticipatory- preemption,
deterrence– Tactics of engagement-
attack, response
elements of competition- Tactics
• Offensive tactics- are more proactive- new launches of original products- nano, dish TV
• Give better control• Defensive tactics-
protect status quo• Reaction to events- new
launches in response to competition products-
• Anticipatory tactics- directed to avoid head to head competition
• Cold war of business for upper hand without engaging enemy
• Engagement tactics- thrust and parry of actual combat. Open war
• Hyundai and Suzuki in small cars in India
Anticipatory tactics Engagement tactics
Offensive tactics
PreemptionPioneering
Intimidation
capture
Attack-Frontal assault
Flanking
Seige warfare
guerilla warfare
Defensive tactics
DeterrenceRaising barriers
Increase retaliation
Lowering inducements for attack
Diplomatic peace keeping
ResponseCounterattack
Fast follower
Retrenchment
withdrawal
elements of competition- offensive Tactics
• Preemption- proactive- offensive & anticipatory techniques
• Aimed to keep ahead- smart way• Pioneering in 4 Ps, Strategic
alliances, integrations, leadership action to be followed by others- give first mover advantage
• Intimidation- to scare off would be followers, Kellogg start huge capacity in developing markets, to develop wrong impression about economy size
• Capture- assets, rights, resources to put followers at disadvantage- patents through R&D, real estates at prime locations
• Attack- active engagements• Flanking- to avoid face to face.HP
left PC market to IBM and came to printers,
• Frontal assault- on any strategic point of competitor- key customers, channels, price, image, comparative ads of autos
• Seige warfare- encirclement, attacking on multiple fronts- price wars by super stores- they earn in volumes and purchases
• Guerilla warfare- selective attacks, snatching a key account, new discount scheme, extended warranty for limited period
elements of competition- defensive Tactics
• Deterrence- influencing calculations' of opponents to their gain on attacking you
• Aimed to deter competitors from attacking or competition
• Raising structural barriers• Increasing expected
retaliation to attacks• Lowering inducement to
attack• Diplomatic peace keeping
• Response• Counterattack • Fast Follower • Retrenchment • Withdrawal
elements of competition
• Players- • Added values• Rules• Tactics• Scope- boundaries of
competition-• Neither prescribed nor agreed • Depend upon each players
definition of its own business- AC co. decides to serve only industrial customers
• Clarifies nature of business and competition-
• Establishes focal points for effort and horizons for growth- trying every opportunity is not good
• Facilitate strategic analysis- scope define the customer base or segment which help focused analysis
• Ambani brothers could consider government liaisons as important activity of business
Dimensions used to define Scope-
Supply perspective Demand perspective
Functions provided Good and services provided by co.
Customers needs met by business
Technology
employed
Means by which goods & services are provided
how firms process fit into customer needs
Customers served target markets Customers who has the need to be fulfilled
Dimensions used to define Scope
• Two different ways to define any business– Based on firms perspective- known as supply
perspective- UPSRTC as Bus service provider-
– Based on customers view point- known as demand perspective UPSRTC is transport providers- lost edge with development of other modes
Dimensions used to define Scope
• Firms definitions emerge along 3 dimensions X 2 perspectives
• 3 dimensions • Functions provided- what
firm does-– what it sells /– what customer needs it fulfill
• Technologies employed- how part? – How a firm produces and
provide goods /– how firms process fit into
customer needs
• Customer served- 2 perspectives are- – the target market / – who has the need that can be
met-
• a finance co. could select high net worth people as target market / large number of middle income group need it- this led to explosive growth
Dimensions used to define Scope
• managers normally view things as what they do. Instead they must look as what value they create for customers
• Demand perspective could be superior but it alone wont suffice
• Railways provide– Rail operation
• From customers perspective rails provide-– Transportation (Passenger,
Goods, Parcel, mail)
• Rails are competing with road transport, airlines, taxis, telecom, email, courier cos.
• Opting demand perspectives, rails could think about entering these.
• But competencies of rail or different.
• So rails should visualize how their resources fit into various customer need- like travel packages, chartered freighting, fast parcels, container movements, catering, speed, local passenger services
elements of competition
• Players- • Added values• Rules• Tactics• Scope- boundaries of
competition- broadly tell- – Purpose- what firm do– Technology- resources-
tangible non tangible– Customer served- target
markets
• Firms have options of-– Narrow competitive scope-
Focusing on a segment- differentiation or smaller segments- niches
– broader competitive scope- serving many segments- mass marketing,
• Similarly firms could opt for competitive advantage by-– Differentiation in offering– Cost leadership
Market options
• Product and market options- including withdrawal and diversifications into unrelated markets
• Market is made of customers, who buy products• A customer could buy many products• Options to firm are-
– Withdrawal– Market penetration– Market development using existing products– Product development for existing markets– Diversification-
• Related market• Unrelated markets
Market options matrix: • Useful in structuring the problem, but little value in
identifying which option to choose• Many options require significant funds: only suitable for
those organisations with substantial resources.
Expansion method matrix:• Useful at structuring the options • But offers very limited guidance on choosing between
them.
Market options
Resource-based strategic options
Sources of value added: upstream and downstream
• Value chain based- already discussed in organisation analysis- assets, capabilities and competencies
• Upstream: those activities that add value early in the value chain with options including
– low-cost raw materials bought in bulk– standardised products at low cost– process innovations to reduce production costs.
• Downstream: those activities that add value later in the value chain with options including
– differentiated products– advertising and marketing to promote non-standardised items– high levels of special service.
Resource-based capability options
• Resource-based options need to offer sustainable competitive advantage or at least distinctiveness over competitors
• In developing options, one method would be to consider them against three criteria and examine implications:
• Architecture: the network of relationships and contracts inside and outside the organisation
• Reputation: the favourable impression generated by the organisation
• Innovation: the organisation’s capacity to develop new products and services
• New options in these areas might take lengthy periods to develop.
The Hierarchy of Competencies
Exhibit 3.2 The hierarchy of competencies
Routes to cost reduction – 1
• Designing-in cost reduction: before the product ever reaches the factory floor, redesign of its components may save substantial costs.
• Supplier relationships: negotiating better prices for the same quality will reduce costs for a manufacturer.
• Economies of scale: unit costs may reduce as the size of the plant increases.
• Economies of scope: it may be possible for different products to share some functional costs, e.g. common services, and so reduce costs.
• The Experience Curve: as a company becomes more experienced at production, it should be able to reduce costs.
• Capacity utilisation: where plant has a high fixed cost, there may be cost reductions from running the plant as close to capacity as possible.
Routes to cost reduction – 2
Resource-based options in some special types of organisations – 1
Small businesses: unlikely to have at their disposal the resource range of larger companies so options:
• Employ outside advisers to act as consultants• Concentrate resources on particular tasks likely to yield added
value and competitive advantage• Offer superior service.
Not-for-profit organisations: charities have two unique resources:
1. Beliefs that drive the organisation forward2. Voluntary workers who often devote exceptional effort to
the organisation.
Not-for-profit organisations: government funded institutions:
• often highly professional resources• but may be exceptionally bureaucratic• culture important in devising options.
Diversified multi-product groups: totally different resources in unrelated markets
• each subsidiary has its own resources• corporate headquarters – the parent – will also provide a
resource: needs careful consideration.
Resource-based options in some special types of organisations – 2
Competitive advantage across market life cycle
• 4 stages• Not intended to be short term
forecasting device but provide a framework for what changes might occur over time- it do not specify as when it will occur
• Life cycles are reversible and repeatable
• Introduction- timing of move, pioneers,
• Growth- easy to gain share, less price pressure. Less promotional costs, developed markets
• Maturity- sensitivity to price, price cuts do not give long term advantage, price cuts are stable and base for further cuts, entering mature markets risky.
• Decline- harvest, divest, Niche, invest for leadership
Business strategies under different industry conditions
TIME
Embryonic Growth Maturity Decline
MA
RK
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SIZ
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The BCG Portfolio Matrix
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0 .5 X
0 .4 X
0 .3X
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1.5X 1X10X 4X
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16%
10%
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4%
6%
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20%
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12%
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Cash Cows Dogs
Question Marks
Relative Market Share