What is Business Level Strategy?
Business level strategy deals with how a particular business competes. The principal focus is on meeting competition, protecting market share and earning profit at the business unit level by performing activities differently, offering superior value to customers.
Table of Contents
- 1 What is Business Level Strategy?
- 2 Porter Competitive Strategy
- 3 Porter Generic Strategies
- 4 Competitive Advantages
- 5 Importance of Competitive Advantage
- 6 Relevant Advantage
- 7 Backbone of Strategy
- 8 Competitive Advantage Factors
- 9 Production
- 10 How to Build Competitive Advantage
A firm is able to deliver superior value to customers when it is in a position to perform an activity that is distinct or different from that of its competitors. This is popularly defined as a competitive advantage. Competitive advantage implies a distinct and sustainable advantage over competitors.
A useful approach to formulating business level strategies is based on Michael Porter’s ‘competitive analysis’ and three general alternative business strategies that are derived from it.
Porter Competitive Strategy
Michael Porter studied a number of business organisations and proposed that business-level strategies are the result of five competitive forces in the company’s environment.
According to porter, competitiveness within an industry is determined by the five competitive forces:
- New entrants or new companies within the industry;
- Products that might act as a substitute for goods or services that companies within the industry produce;
- The ability of suppliers to control issues like cost of materials that companies use to manufacture their products;
- The bargaining power that buyers possess within the industry;
- The general level of rivalry or competition among firms within the industry.
According to Porter, buyers, product substitutes, suppliers and potential new companies within the industry all contribute to the level of rivalry among industry firms.
Understanding the forces that determine competitiveness within an industry should help managers develop strategies that will enable individual companies within the industry to be more competitive.
Porter Generic Strategies
Porter suggested three generic strategies that managers might take up to make organisations more competitive.
Cost leadership is a strategy that focuses on making an organisation more competitive by producing its products more cheaply than competitors can.
The logic behind this strategy is that by producing products more cheaply than competitors, organisations can offer products to customers at lower prices than the competitors and thereby hope to increase market share.
It involves attempting to develop products and services that are viewed as unique in the industry. Successful differentiation allows the business to charge premium prices, leading to above-average profits.
It is a strategy that emphasises making an organisation more competitive by targeting a specific regional market, product line or buyer group. The organisation can use either a differentiation or low-cost approach, but only for a narrow target market.
The logic of this approach is that an organisation that limits its attention to one or a few market segments can serve those segments better than organisations that seek to influence the entire market.
Porter found that many firms did not consciously pursue one of these three strategies and were therefore, struck in the middle of the pack with no strategic advantage. Without a strategic advantage, the businesses earned below-average profits and therefore, were not in a position to compete successfully.
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals.
The goal of much of business strategy is to achieve a sustainable competitive advantage.
Michael Porter identified two basic types of competitive advantage:
- Cost advantage
- Differentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation advantage).
Thus, a competitive advantage enables the firm to create superior value for its customers and superior profits for itself.
Resources and Capabilities
A resource-based view emphasises that a firm utilises its resources and capabilities to create a competitive advantage that ultimately results in superior value creation.
The following diagram combines the resource-based and positioning views to illustrate the concept of competitive advantage:
According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors.
Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear. Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily.
The following are some examples of such resources:
- Patents and trademarks
- Proprietary know-how
- Installed customer base
- Reputation of the firm
- Brand equity
Importance of Competitive Advantage
Competitive advantage importance are discussed below:
Not Sustainable for Long
It is not always possible for companies to sustain individual sources of competitive advantage for long (rivals copy and do everything possible to wipe out the edge through their own innovations). So, the best way to maintain leadership is to continually seek new forms of advantage through constant experimentation, innovative efforts and investments in the latest technology.
In order to implement the chosen strategy, a firm must have the relevant competitive advantage. To become a global player, for example, a cement company can buy or take controlling stakes in competing firms (as in the case of Gujarat Ambuja Cements).
However, unless the company has some relevant competitive edge over its rivals (in terms of pricing, transport costs, distribution network, location of units in cement- deficit states etc) the acquisition strategy may not pay off in the long run.
In the rush to become a major player, a firm, therefore, should not throw caution to the wind and extend its arms over the market beyond a point (remember India Cements case in the Cement industry?).
Backbone of Strategy
A successful strategy is always built around the competitive advantage. Without such a distinct advantage, it is not possible to achieve corporate objectives successfully. It becomes difficult to outwit competitors. The firm may not be in a position to price its products in a flexible way.
Where there is a distinct edge, as in the case of Maruti Udyog Limited (for instance in terms of sales, price advantage, cost advantage owing to its massive scale of operations, monopoly status in the lower income segment etc.), the firm could breathe easily by playing on the price, cost, early bird status, monopoly position, brand image and a host of other factors.
Likewise Bajaj Auto in scooters, Telco in the heavy vehicles segment have acquired competitive advantages by building strong entry barriers (scale of operations, lower costs, etc.).
Competitive Advantage Factors
- Market Standing and Market Share
- Innovations in Marketing
- Customer Service
- New Product Development
- Distribution Channel
- Personnel Selling or Sales Force Effectiveness
- Product in terms of quality, design, technological strength, differentiation, brand image etc.
- Cash Flows
- Gearing and leverage
- Cost consciousness
Research and Development
- Research capabilities
- Research personnel
- Number of patents generated
- Speed of research efforts, leading to new product launches etc.
- Quality of personnel
- Satisfaction of personnel
- Labour costs
- Industrial relations
- Scale of operations
- Capacity utilization
- Extent of automation
- Locational benefits
How to Build Competitive Advantage
Firms usually build competitive advantage using various strategic routes such as:
- Innovation: Innovation is a new idea applied to initiating or improving a product, process or service. Today’s successful organisations must foster innovations and master the art of change or they will become candidates for extinction.
- Integration: Integration could be horizontal (adding one or more businesses that are similar usually by purchasing such businesses) or vertical (called as backward integration; here a business grows by becoming its own supplier).
- Alliances, Mergers, Acquisitions: During the past 20 months, Indian software firms have made over 25 overseas acquisitions and the trend promises to snowball in the coming years.
- Research and Development: Research and development is responsible for producing unique ideas and methods that will lead to new and improved products and services.
- Entry Barriers: The entry barriers created by Bajaj Auto in two- wheelers Maruti Udyog Limited in passenger cars have helped them remain at the top for a painfully long time in India. Entry barriers include large size, low investment, substantial cost advantage, formidable distribution network, powerful brand etc.
- Benchmarking: It is a way of comparing your own products and processes against the very best (rivals) in the world. The basic purpose of benchmarking is to initiate or improve upon the best practices of other companies.
- Value Chain Approach: According to Michael Porter the value chain approach also helps in identifying and building competitive advantage.
- Strategic Business Unit (SBU) Structure: Firms can also achieve competitive advantage by dividing their operations into separate strategic business units.