301 213 Business Level Strategies

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%

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4%

6%

8%

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12%

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Stars

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Question Marks

Relative Market Share