1. Business-level Strategy Alternatives: Managing a Competitive Profile
Chapter 10
Business-level Strategy Alternatives: Managing a Competitive Profile

2. Objectives 1
understand three generic competitive strategies that describe alternative approaches to competing in a given market
identify the major business-level strategies that can be used to gain sustainable competitive advantage
self explanatory
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

3. Objectives 2
explain how market leadership or ‘followership’ impacts on the choice of a competitive strategy
understand the influences of different industry environments on the choice of a competitive strategy.
self explanatory
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

4. Generic competitive strategies
cost leaders
differentiation
niche markets
Porter (1980) states that there are three major strategies which organisations can develop in terms of competing in the market:
Cost leader - supply product/service at the lowest feasible cost.
Differentiate - make the product/service have some differentiating factor which is important to the customer.
Niche Market - find a niche in the market and focus on its requirements.
Once having made a decision on which strategy to adopt the organisation will need to put all its efforts into developing that strategy.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

5. Choosing a generic strategy
STRATEGIC ADVANTAGE
Uniqueness perceived
Low cost
by the customer
position
Overall cost
Industry wide
Differentiation
leadership
STRATEGIC TARGET
This figure shows that unless the generic fundamentals of a strategy are right an organisation cannot be successful. Difficulties which will arise include:
inability to differentiate from competitors
inability to capture low cost market
inability to focus on a specific segment of customers
a blurred sense of purpose
Although Porter gives three specific categories, they are not mutually exclusive. It is possible to blend low cost and differentiation eg McDonalds's chain have captured the cheap fast food market.
Particular
Focus
segment only
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

6. Low-cost strategy Experience Curve Unit cost
The low cost strategy is based on what is commonly called the experience curve. This states that every time a total volume of production doubles, its costs fall at a constant and predictable rate.
The source of this saving is based on the following:
learning - the more often a task is performed the more efficiently it is carried out
technological improvements in production/operations - new and improved equipment cut costs and improve efficiency
product redesign- minor modifications can result in significant savings
Other cost savings can be made by:
finding a low cost supplier
operating on a global basis
lobbying for subsidies or tariffs on competing imports
Accumulated volume of production
Experience Curve
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

7. Economies of scale size technology is reducing optimum scale
is relative
does not mean having to own assets, skills or resource
reduces innovation
does not preclude global expansion
technology is reducing optimum scale
increasing the variety of customer needs mitigates against scale
even large organisations compete niche by niche
Size
is relative - a certain critical mass needs to be met and this varies considerably from case to case
does not mean having to own assets, skills or resource -small organisations can improve their position by strategic alliance, sub-contracting and networking
reduces innovation - large organisations need systems of rigid control creating conservatism, conformity and mediocrity. Effective large organisations keep components small, flexible and innovative.
does not preclude global expansion - small organisations can compete effectively on this level particularly since the wide spread use of modern technology and the Internet
Technology is reducing optimum scale - the increased speed of computers and greater mechanisation is reducing the optimum size of organisations.
Increasing the variety of customer needs mitigates against scale - customers are becoming more discriminating thus the advantage of scale is reducing.
Even large organisations compete niche by niche - large operations recognise that they operate in small discrete markets rather than towards an amorphous mass.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

8. Low cost, low price and competitive advantage
Stage 1 new competitor
Stage 2 differentiation
Stage 3 new competitor
Relying on low cost strategies generally makes for a weak competitive advantage. However analysis of industries indicates that price competition is an important factor at certain stages of industry growth.
Stage 1 - A new competitor enters the industry with a low-cost strategy based on some technological, process, service or production volume advantage.
Stage 2 - Over time competitors copy this strategy and there is a need to compete on some form of differentiation strategy.
Stage 3 - As this process continues there emerges a strategic gap at the lower end of the industry leaving room for a new competitor to restart the process. Generally as products/services become more successful they move away from the low cost strategy.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

9. Differentiation Strategy
idea of value
justify cost difference
successful product features
Differentiation strategy relies on the product or service having a degree of uniqueness which separates it from its competition. Differentiation creates competitive advantage through brand loyalty.
Idea of value - the success of this approach relies on creating the idea of value in the minds of customers. The value chain plays an important part in this process. Differentiation strategies fail when the customer fails to gain this perception. The value must be from the point of view of the customer not the organisation.
Justify cost difference - the customer must perceive that they are gaining value in their purchase of the differentiated product/service.
Successful product features - they must be sustainable and difficult for competitors to replicate. Opportunities to differentiate are available in both tangible, eg colour, size shape or intangible eg, service, quality advantage.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

10. Choosing a generic strategy
price leader
differentiation
focus strategy
It is generally accepted that generic strategies cannot be pursued simultaneously at the business level because each requires different skills and resources.
Price leaders focus on:
minimising scope and maximising scale
efficient integrated systems which reduce unit costs
standardised routines and simplicity of operation
driving costs down in the product itself and in related-services
In the differentiation strategy
scale is usually unimportant
systems cater for specific customer needs
customised routines create more complex operations, and
value is created through uniqueness in products/services
In focus strategy the most appropriate considerations should be:
what does the market want?
what are the competitors doing?
where do market gaps exist?
what are our key skills and resources
what are our core competencies
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

11. Value analysis and business level strategies
multifunctional team
determine differentiation
costs
market placement
Organisations at the business level have to add value and reduce costs to meet customer needs. Value analysis is useful to explain how this can be achieved.
Multifunctional teams - need to be established to identify customer wants and as part of this process identify the product in terms of:
core product - fundamental satisfaction the customer is seeking
tangible product - physical and technical characteristics
augmented product - financing, delivery, packaging etc
Determine differentiation - what differentiation does the customer not want? Don’t add for the sake of adding
Costs - what will be the cost of differentiating according to customer requirements and how can that cost be reduced?
Market placement - to identify the organisation's place it is necessary to:
identify competitor strategies
create strategy groups
analyse strategy
implement strategic actions
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

12. Choosing a cost / differentiation position
Below industry
performance
High cost
Low cost
Low
High
Industry average
Better than industry performance
Value added
Cost position
Although it is generally accepted that generic strategies are mutually exclusive there is a view that organisations can select a unique combination of generic strategies. This view is based on the fact that all products and service have both a cost and have some differentiation.
According to this figure the organisation needs to choose a combination of low cost and differentiation that will give it a favourable position in the market. This stance can be varied according to the needs of the organisation, eg luxury cars are high value added /high cost.
In general terms the organisation should be looking to reach an average point on the industry performance line.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

13. Competitive strategies for market leaders
competing aggressively
competing defensively
harvesting
Once having become a market leader, the position is jealously guarded. Traditionally market leaders have reached that position either through long-term strategies or through entering a relatively stable market with a clear competitive advantage. Another trend which has arisen relatively recently is the ‘category killer’. These groups typically combine a low-cost strategy with a high level of differentiation. An example is Toys R Us, a specialist toy shop which has taken over the position previously held by small shops and department stores.
The most common strategies pursued by market leaders are:
Competing aggressively - a strategy which requires organisations to outperform their competitors. Of most value in a growth market, however, often pursued out of habit rather than necessity.
Competing defensively - requires organisations to maintain and protect their position. Requires organisations to have long-term availability of inputs, establish patents and introduce new brands to retain sales levels. This approach is particularly useful in a mature market.
Harvesting - is designed to channel funds from one product into better investment opportunities. Market share is deliberately allowed to slip and minimal investments are made in the area. This strategy is useful when the long-term prospect for the market is unattractive or the organisation is changing its focus.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

14. Competitive strategies for market followers
market segmentation
challenging the market leader
innovation
The term market followers covers a wide group from those competing to become market leaders to those who are barely surviving in the industry. A wide variety of strategies is available including:
Market segmentation - finding segments of the market which are ignored by market leaders because they are too small or the market has specialist needs. It is important to ensure that the segment is not going to disappear and its needs can be met at a reasonable cost.
Challenging the market leader - a strategy which needs to be both inventive and sustainable. This is a high risk strategy in that the leader has a considerable advantage. The long term objective of this strategy is to become the market leader.
Innovation - requires the follower to identify a new segment within the market where customers' needs are not being met. This strategy requires both understanding of the market and entrepreneurial flair.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

15. Strategies for weak competitors
harvesting
cost reduction
retain brand-loyal customers
increase profitability
turnaround strategies
evaluation
cutting
building
Weak organisations are normally faced with withdrawal of resources and ultimately closure or an immediate closure by abandoning or selling the product/service. The two competitive strategies most appropriate in this case are harvesting and turnaround strategies.
Harvesting - is most appropriate when the product shows few prospects for the future, is too costly to rejuvenate, funds are required elsewhere and when reduced investment will not seriously prejudice the performance of the product.
Once it has been decided that harvesting is the correct approach the following tactics are useful, severe cost reduction, maintaining profile in the market to hold brand loyal customers and gradual raising of prices to increase profitability.
Turnaround strategies - in some cases a product has sufficient advantage to make it worthwhile to revitalise the product/service/ rather than harvesting the area. In order to determine the course of action, evaluation of future prospects and past causes of the problems needs to be undertaken. Based on this evaluation excess or inappropriate activities need to be cut. After this process has been undertaken it is possible to rebuild, based on new priorities and objectives.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

16. Competitive strategies in different industrial contexts
new markets
consolidating markets
growth markets
mature markets
declining markets
global markets
Organisations involved in new markets in the development stage should restrict commitment of resources to specialised use, limit the level of fixed costs, spend time becoming street wise, and scan for technology alternatives.
Once the initial stage of development is passed the organisation begins to consolidate and move into a sustained growth phase. During this phase organisations should avoid haphazard growth, segment the market and target specific groups within it, focus on the internal value chain, and perform some ‘blue skies’ planning.
Once consolidation has taken place the market moves into a time of sustained growth. At this point the critical factor is the organisation's ability to outperform competitors. Once again the focus shifts, this time towards building market share to dominate a major segment of the market, further develop market segments, re-organise distribution channels, lock in suppliers and select target competitors.
At all stages of development the organisation needs to be assessing its capabilities and preparing for the future.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

17. Competitive strategies in the public sector
strategies for public service leaders
strategies for public service followers
strategies for those in a 'weak position'
As with all other areas of strategic management the public sector is able to use and where necessary adapt strategies currently in play. There are, however, some differences between public and private sector organisations.
The public sector is unable to simply divest or harvest programs in line with the needs of the Department but must rely on the decisions of their Minister. It is also important to remember that public sector organisations take on those areas which are not attractive to the private sector but are for the public good. Decision making within the public sector always has to take into account the predetermined objectives of that particular element as specified by the government.
Strategies for public sector leaders - those organisations which hold a favoured position within the public service need to retain that position by providing evidence of superior performance and establishing strong networks.
Public sector follower refers to the ‘middle of the pack’ position. In order to become leader they need to raise the profile of the organisation, and innovate to improve customer service.
Strategies for those in a weak position include turnaround where a Department is dealing with an ongoing issue, and divestment eg Sydney 2000 Olympic games.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

18. Choosing a competitive strategy
Choice of generic strategy
Organisational Status
Market Conditions
Identification of feasible competitive strategies
Strategy selection and implementation
Sustainable Competitive Advantage
This figure shows the interrelationship between variables and generic strategies. A full description of both organisational status and market conditions are in the text Figure 10.6.
Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia