Chapter 5-Kapil Doshi

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Chapter 5Business Level Strategy



Business Level Strategy - Outline

• Strategic business units.

• Competitive advantage (strategy clock)

– Price-based

– Differentiation – Hybrid and focus

• Sustainability of competitive advantage.

• Competition & Collaboration.

• Game theory in competitive strategy.



Business-Level Strategy

An integrated and coordinated set of commitmentsand actions the firm uses to gain a competitiveadvantage by exploiting core competencies in

specific product markets



In selecting a business-level strategy, the firm

determines

Customer needsWHAT is to be satisfied?

Customer groups WHO is to be satisfied?

Distinctive competencies HOW customers are to be satisfied?

Contd….



SBUStrategies

Business-Level Strategy



Strategic Business Units

It is a part of an organisation for whichthere is a distinct external market for

goods or services that is different fromanother SBU



Identifying SBUs

• External Criteria- Marketplace for different parts of the

organisation.

• Internal Criteria

- Strategic Capabilities

- Recourses

- Competence



Bases of Competitive Advantage



The strategy clock: competitive strategy options

1. Low price/low added value likely to be segment specific

2. Low price risk of price war and low margins/need tobe cost leadeer

3. Hybrid low cost based and reinvestment in lowprice and differentiation

4. Differentiation

(a) without price premium perceived added value by user, yelding

market share benefits

(b) with price premium perceived added value sufficient to bearprice premium

5. Focused differentiation perceived added value to a particularsegment, warranting price premium

6. Increased price/standard value higher margins if competitors do not

follow/risk of losing market share

7. Increased price/low value only feasible in monopoly situation

8. Low value/standard price loss of market share




4. Differentiation

5. Focused

differentiation

6,7,8, strategies

destined for ultimatefailure

3. Hybrid

2. Low price

1. ‘no frills’

High

High

Low Price

P e r c e i v e d a

d d e d v

a l u e

1. ‘no frills’ Likely to be

segment specific

2. Low price Risk of price war

and low margins;

need to be cost

leader

3. Hybrid Low cost base and

reinvestment inlow price and

differentiation

4. Differentiation

a) Without price premium

Perceived added

value by user,

yielding market

share benefits

b) With price premium

Perceived added

value sufficient

to bear price

premium




4. Differentiation

5. Focused

differentiation

6,7,8, strategies

destined for ultimatefailure

3. Hybrid

2. Low price

1. ‘no frills’

High

High

Low Price

P e r c e i v e d a

d d e d v

a l u e

5. Focused differentiation

Perceived added

value to a

particular

segment,

warranting price

premium

segment specific

6. Increased price/ low value

Higher margins if

competitors do

not follow; risk

of losing market

share

7. Increased price/standard value

Only feasible inmonopoly

situation

8. Low value/standard price

Loss of market

share



Price based Strategy (Routes 1 & 2)

An integrated set of actions designed to produce ordeliver goods or services at the lowest cost, relative

to competitors with features that are acceptable to

customers

– relatively standardized products

– features acceptable to many customers

– lowest competitive price



Cont…

1. No frills strategy- a low price , low perceived product/ services benefits and a focus on a price sensitivemarket segment

2. The low price strategy- it seeks to achieve a lowercompetitors whilst trying to maintain similar perceivedproducts or service benefits to those offered bycompetitors



Differentiation Strategy (Route 4)

This strategy seeks to provide products or servicesbenefits that are different from those of competitors andthat are widely valued by buyers.

– price for product can exceed what the firm’s targetcustomers are willing to pay

– no standardized products

– customers value differentiated features more than

they value low cost



Goal is to provide value to customers through unique features andcharacteristics of a firm’s products.

Differentiators focus or concentrate on product innovation and

developing product features that customers value. Productsgenerally cost more (offset cost of differentiation).

Can’t completely ignore costs.

Differentiation Strategy (Route 4)



Focus Strategies: (Route 5)

A focused differentiation strategy seeks to provide highperceived product/ services benefits justifying a substantial pricepremium , usually to a selected market segment (niche)

Primary goals of a focused strategy:

• Focus on a particular buyer group, segment of the market, etc.

• To serve a narrow target or market segment more effectively thanbroad-based competitors can due to core competencies.

• Select target segments which are the least vulnerable to substitutes orwhere competitors are the weakest.



Business Level Strategies

Focus Strategies:

• Focused low-cost strategies:

• Requirements for usage similar to low-cost strategies.

• Defense against the five forces similar to differentiation strategies.• Examples: Rally’s, Martin Brower, White Castle.

- Rally’s (no frills service, limited menu, no dine-in).- Martin Brower- 3rd largest food supplier, serves fast food

chains by:

Gearing to their purchasing cycles.Locating warehouse locations based on their locations.Stocking products only for these 8 firmsMeeting their specialized needs.



Hybrid Strategy (Route 3)

A firm that successfully uses an Hybrid costleadership/differentiation strategy should be in abetter position to:

– adapt quickly to environmental changes

– learn new skills and technologies more quickly

– effectively leverage its core competencies whilecompeting against its rivals



Benefits of Hybrid Strategy

• Successful firms using this strategy haveabove-average returns

• Firm offers two types of values to customers – some differentiated features (but less than

a true differentiated firm)

– relatively low cost (but not as low as thecost leader’s price)



Failure strategy( Route 6, 7,& 8)

• It’s the strategy that does not provide perceived value for

money in terms of product features , price or both



Sustaining Competitive Advantage



Sustaining Competitive Advantage

Sustaining

Competitive

Advantage

Differentiation

•Create difficulties of imitation

•Achieve imperfect mobility

(of resources/competences)

•Reinvest margin

Price –

Based Strategies•Accept reduced margin

•Reduce costs

•Focus on specific segments

Lock in•Achieve size/market

dominance

•First- mover advantage

•Reinforcement

•Rigorous enforcement



Sustaining Price- Based Advantage

• Reduced margin: either by selling volumes or cross

subsidizing.

• Win a price war: either by lower cost structure or deeper

pockets.

• Reduce costs: down cost through out the value chain and

exploit all sources.

• Focusing on market segments:

e.g.: grocery in supermarkets.



Sustaining Differentiation-Based Advantage

• It is central to the strategy of ones organization.

• Being different not enough- if customer don’t value.



Conditions to Sustain through Differentiation

• Create difficulties of imitation

• Imperfect mobility:

a) Intangible assets

b) Switching costs

c) Co- specialization

• Reinvest margins



The Delta Model & Lock in

• Lock in is where an organization achieves a proprietary

position in its industry; it becomes an industry standard.

• It may not be the best product.

e.g.: Microsoft – Apple Macintosh.



Factors determining Lock in

• Size or market dominance

• First- mover advantage

• Reinforcement

• Rigorous enforcement



Competitive Strategies in

Hypercompetitive Conditions



Competitive Strategies in HypercompetitiveConditions

• HyperCompetitive advantage relates to

– Organisation’s ability to change

– Speed

– Flexibility – Innovation

COMPETITIVE STRATEGIES IN HYPERCOMPETITIVE



CompetitiveStrategies inHypercompetitive

Conditions.

COMPETITIVE STRATEGIES IN HYPERCOMPETITIVECONDITIONS



REPOSITIONING

• Targeting the existing products into new markets ornewer market segments

• For e.g. When Tata Sumo introduced in the market butdue to competitions from Toyota’s Qualis Tata sumo

didn’t work in rural market. Tata Sumo repositioned as amulti utility vehicle in urban market with better Exterior,Soundproof the cabin and added power steering andcentral locking to make the Sumo attractive in urban

segment



OVERCOMING COMPETITORS’ MARKET-BASED MOVES

• Blocking first-mover advantages:

For e.g. Mocha was first Hukka bar in Ahmedabad

• Imitate competitor’s product/market moves: For e.g. Sony entered the software side of the

entertainment business with Columbia Pictures - butimitated by Matsushita



OVERCOMING COMPETITOR’S

BARRIERS

• By shorter life cycles:

For e.g. Pager and mobile phones

Due to technology changes the pager phones has anshorter life cycle

• Undermining competitors’ strongholds:

For e.g. If any company is having stronghold in the

market by having strong distribution channel then newentrants will form different channels like e-business



Cont….

• Countering competitors’ Deep Pockets:

Some competitors may have substantial surplusresources, which they can use during competitive war

For e.g. Smaller firms may avoid direct competition byconcentrating on niches market.



INGREDIENTS OF SUCCESSFULHYPERCOMPETITIVE STRATEGIES

• Pre-empt competition:

An organization always have to be prepare of beingimitated by its competitors for particular Method orStrategy.

• Attacking competitors’:

Attacking competitors weakness can be unwise as they

learn about how their strengths and weakness areperceived and build their strategies accordingly.



Cont….

• A series of smaller moves:

Smaller step is more effective and flexible where as longterm direction gives later reaction to compete with thecompetitors

• Disruption of markets:

If a company introduces something that is different fromthe constant pattern or method followed in the industry ormarket, it may act as its core competence



Cont….

• Predictability is dangerous:

For any organization it is dangerous that its competitorpredict next step

So the managers must learn ways of appearingunpredictable to the external world and think for thestrategies internally

• Misleading competitors:



Competition and Collaboration



Competition and Collaboration

• Collaboration may help to achieve advantage or avoidcompetition

• Organisations may compete in some markets and

collaborate in others• Collaboration can be

– between potential competitors or – between buyers and sellers



Competitiveness

might be improvedby collaboration

to achieve

Decreased RiskOf Substitution

IncreasedSelling Power

Increased

Buying Power

IncreasedBarriers to Entry

Entry to NewMarkets

Shared Workwith Customer

Stakeholderexpectations

Organization in an

industry might buildclose link with

customers

Faced with threatened

entry or substituteproducts, org may

collaborate.

Faced with threatened

entry or substituteproducts, org may

collaborate.

Org seeking to develop

beyond traditionalboundaries may

collaborate with others.

Move-towards more co-production with clients.To gain more leverage

for investments.

Mafg. Supplier

ERP

GAME THEORY



GAME THEORY

• Game theory provides a basis for thinking throughcompetitors’ strategic moves in such a way tocounter them.

• Game theory is concerned with theinterrelationships between the competitive movesof a set of competitors.



CONT….

CORE ASSUMPTIONS

1. The competitor will behave rationally andalways try to win to their own benefit.

2. The competitor is in an interdependentrelationship with other competitors.

3. A greater or lesser extent competitors areaware of the interdependencies that exist andof the sorts of move that competitors could

take.

TWO KEY PRINCIPLES



A ‘PRISONER’S DILEMMA’

Heavy marketingspend

Low marketingspend

Heavy marketingspend

B = 5

A = 5

B = 12

A = 2

Low marketingspend

B = 2

A = 12

B = 9

A = 9

Competitor A

C o m p e t i t o r B

SIMULTANEOUS GAMES



CONT….

• Dominant Strategy

• Dominated Strategy

• Equilibrium



LOW HIGH

LOW

DOLLA = 3

INNOVA = 4

DOLLA = 4

INNOVA = 2

HIGH DOLLA = 2

INNOVA = 3

DOLLA = 1

INNOVA = 1

DOLLA INVESTMENT

INNOVA

INVESTMENT

A SIMULTANEOUS MOVE GAME



SEQUENTIAL GAMES

In sequential games later players have some knowledgeabout earlier actions. This need not be perfectinformation about every action of earlier players; it might

be very little knowledge. The study of sequential gamesalso tells us when it is an advantage to move first andwhen second.

CONT



CONT….

INNOVA

DOLLA

DOLLA

DOLLAINNOVA

1 1

3 22 4

4 3

A

B

C

D

Pay-off

High

High

High

Low

Low

Low



REPEATED GAMES

By repeated games the equilibrium outcome is much

more likely to favor cooperation from both parties.

Implicit Co-operation depend upon number of factors.

• The number of competitors• Small competitors

• Substantial differences between organizations

• Lack of transparency



CHANGING THE RULES OF THE GAME

If market dominated by price-based strategies thenrules of games towards:

• Bases of differentiation• Making pricing more transparent

• Building incentives for customer loyalty.



Chapter 5-Kapil Doshi

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