What is Business Level Strategy?
Business level strategy refers to the set of actions and decisions that a business undertakes to achieve a competitive advantage in a particular industry or market segment. It involves developing and implementing strategies that enable a business to create value for its customers, while also achieving sustainable profitability.
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 Content
- 1 What is Business Level Strategy?
- 2 Porter Competitive Strategy
- 3 Porter Generic Strategies
- 4 Competitive Advantage Strategies
- 5 Cooperative Strategies
- 6 Importance of Competitive Advantage
- 7 Competitive Advantage Factors
- 8 How to Build Competitive Advantage
- 9 Business-level Strategies and Industry Life Cycle
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.
Business-level strategies are usually made by larger organizations as they often have different business units with several departments and operations. Business-level strategies work as individual strategies practiced by organizations for each of their business units separately. Here, each business unit is termed a Strategic Business Unit (SBU). Every SBU has its unique business-level strategy, which provides guidelines to run the business unit.
A business-level strategy focuses on three factors, which include:
- Determining the target customers to be served by the SBU
- Defining the type of customer need that requires being satisfied
- Deciding the method for satisfying the customer’s need
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.
Competitive Advantage Strategies
Apart from these dimensions of competitive advantage, an organization requires to focus on its scope of operations. The scope of operations explains whether the organization wants to target customers in general or attract a particular customer segment. Based on the decision, an organization can target either a broad or a narrow segment of the market. When two generic competitive dimensions are combined with two types of the target market; they result in four types of generic strategies.
Let us now discuss these four generic strategies in detail:
Cost leadership is the generic competitive strategy under which an organization delivers its products or services at a cost lower than its competitors, and targets a broad market segment. To become a cost leader, the organization needs to have an efficient production system and greater control over overhead costs.
Therefore, continuous effort is required to minimize the cost of production and distribution. Further, the organization needs to minimize costs in areas such as advertising, promotion, sales force, and Research and Development (R&D).
A cost leader in the industry can charge customers a lower price for its products than its competitors charge, and still make a significant amount of profit. Some organizations, which have successfully adopted the cost leadership strategy, are Dell, Walmart, and Southwest Airlines.
Differentiation is a generic competitive strategy under which an organization provides unique products or services to its customers. The uniqueness of a product or service can be achieved by providing more features, creating a brand image stronger than the competitors, better service, and more value for money.
A differentiation strategy helps in building customer loyalty, which, in turn, increases the sales of the product or the service. An organization may charge a premium price from its customers for offering unique products or services. Nike, BMW, and Apple have successfully adopted the differentiation strategy. Following are some widely used differentiating factors of products or services:
- Product warranties (example: Sears tools)
- Strong brand image (example: Nike)
- Technological innovation (example: Apple, Sony)
- Value (example: The Walt Disney Company)
- Service (example: Makita Power Tools)
Apart from cost leadership and differentiation strategies, which emphasize wider market segments, there are two other types of focus strategies. The focus strategy is also called the niche strategy, which concentrates on a narrow segment and within that segment aims at achieving either a cost advantage or differentiation. Such a strategy is often followed by smaller organizations in terms of either a cost focus or a differentiation focus strategy. Let us now discuss them.
Organizations with a cost focus aim at being the lowest-cost producer in the niche segment. In other words, cost focus is the strategy in which an organization focuses on a small segment of the market. The cost-focus strategy helps the organization in achieving a cost advantage in a small market segment. This strategy is mostly adopted by start-up organizations, which can afford neither a wide-scope cost leadership nor a wide-scope differentiation strategy.
The differentiation focus strategy signifies the generic competitive strategy in which an organization offering unique products or services focuses on a small segment of the market. For example, DS Group adopted this strategy when the organization launched Catch, a bottled natural spring water brand. The organization positioned to catch as a zero-calorie flavored soda water and targeted the high-end market.
For gaining a competitive advantage, Porter argues that an organization must adopt any of the four competitive strategies. Otherwise, it would be stuck in the middle, and perform below average in a highly competitive industry. K-Mart is an example of how an organization gets stuck in the middle. K-Mart invested huge amounts of money in adopting both Walmart’s cost leadership strategy and Target’s differentiation strategy.
We have discussed that competitive strategies are adopted to attain a competitive advantage by combating other organizations in an industry. However, an organization can also work in alliance with other organizations to obtain a competitive advantage.
In cooperative strategies, an organization forms partnerships and alliances with other organizations in the industry. Cooperative strategies can be categorized into the following two types namely the strategy of collusion and strategic alliance. Let us discuss these two types of cooperative strategies in detail.
Strategy of Collusion
The strategy of collusion is a type of cooperative strategy in which different organizations in an industry cooperate to raise the prices of products or services by deliberately reducing the output. Prices of commodities rise with a reduction in output due to the interaction between forces of demand and supply. Collusion may be an explicit or an implicit one.
In explicit collusion, organizations directly communicate with one another and negotiate. Most countries disallow this form of collusion and have declared it illegal. On the other hand, in implicit collusion, there is no direct communication between organizations. According to Barney, implicit or tacit collusion can happen successfully in the presence of the following factors in the industry:
- A small number of competitors
- The similar cost structure of different organizations
- Cooperative industry culture
- High entry barriers
- Large inventories and order backlogs
- Single price leader in the industry
Generic Electric (GE) is a classic example of implicit collusion. The organization advertised in different forms of media, claiming that it would not increase the price of its steam turbine. GE even claimed that if it reduces the price of its steam turbine in the future, it would refund previous customers an amount equal to the price reduction.
Westinghouse, GE’s major competitor in the steam turbine industry received the message well and did not reduce the price of turbines. As a result, the price of the steam turbines remained unchanged for the next 10 years.
A strategic alliance is another type of cooperative strategy in which two or more organizations or business units in an industry engage in a long-term partnership to carry out their business activities. This is done for gaining mutual benefit. Nowadays, a strategic alliance is more common than a strategy of collision. IBM’s agreement with Wipro for serving customers in India and the Asia Pacific region is an example of a strategic alliance. The basic objectives of a strategic alliance are as follows:
- Obtaining new capabilities
- Securing market access
- Combating various risks, such as financial risks and political risks
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.
Business-level Strategies and Industry Life Cycle
The industry life cycle theory suggests that every industry passes through different stages in its entire life cycle. There are four stages in the life cycle of an industry: embryonic stage, growth stage, maturity stage, and decline stage.
Business-level strategies adopted in these stages are as follows:
The embryonic stage is the starting stage or take-off stage of an industry’s life cycle. For example, the industry of manufacturing solar devices is in the embryonic stage. An industry is considered to be in an embryonic stage if it:
- gives low returns but its need for investment and capital are high
- uses a technology that is not standardized
- and fails to provide enough information to customers; therefore, unable to establish demand
- suffers from high business risk
In the embryonic stage, business-level strategies aim at developing competency and building market share. The possibility of gaining market share is easy for the first movers. However, if an organization fails to attract capital and acquire customers, it should exit the industry in the embryonic stage itself.
It refers to the stage in which an industry strives to expand. The growth stage involves technological developments, product developments, and high demand for the product. For example, the retail industry is in its growth stage. An industry is said to be in the growth stage if it:
- gives a practical shape to its business models
- increases its market share
- establishes demand by providing product information to customers
In the growth stage, the industry adopts low-cost and differentiation strategies. The experience of the industry leads to an addition to the learning curve of the associated organizations and helps in establishing low-cost positions. This is a good stage for the entry of late movers, as they can imitate the strategies and technologies of market leaders.
It refers to the stage in which an industry becomes fully developed. For example, in India, the steel, textiles, and oil and gas industries have attained maturity. The intensity of competition in these industries is very large. An industry is said to be in the maturity stage if it:
- provides stable returns and decreases investments
- uses established business models
- enjoys stable market share
- characterizes stable and satisfactory demand
Industries in the maturity stage use cost leadership, differentiation, and focus strategies. The demand in the industry first increases and then falls when more organizations enter the industry.
It refers to the stage in which the industry’s performance starts declining. For example, in India, mining industries are in their decline stage. An industry is said to be in a decline stage if organizations under the industry:
- suffer from the declining market share
- provide low returns because of falling demand
- lose brand identity for its products
- wish to exit the industry