You are on page 1of 16

Chapter 07 Business Strategy Customer Needs Customer relationships are strengthened by offering them superior value.

This helps companies to develop a new competitive advantage and enhance the value of existing competitive advantages. Successful companies chart new competitive space in order to serve new customers as they simultaneously try to find new ways to better server existing customers. Competitive advantage can be developed along these dimensions: Reach - the firms access and connection to customers Richness - the depth and detail of the two-way flow of information between the firm and customers Affiliation - facilitating useful interactions with customers In selecting a business-level strategy, the firm determines who it will serve what needs those target customers have that it will satisfy how those needs will be satisfied Some customers have essentially the same needs as others Eg- while purchasing commodities like sugar, cotton or electricity. The sources of competitive advantage are limited for such products. Some customers have infinitely varied needs in hairdressing and consultancy services, where no two jobs are exactly ever the same. The sources of competitive advantage here are many and varied: type of service, quality of product, length of assignment etc Some companies will have lesser competitive advantage, because either the scale is low or there is little ddifferentiation possible. Eg coal mining represents an industry where products are easily imitated Competitive Advantage Low High Fragmented Strategies Specialized Strategies Stalemate Strategies Volume Strategies

Customer Needs Varied Same

Fragmented Strategies Cusomter needs are highly varied and provide some sources of competitive advantage, but the advantages they deliver are easily replicated (Speciality retailing, hairdressing and other small businesses)

Specialized Strategies There are special or corporate skills and proprietary products that are sold to many different customers who all have varied needs, often on a large scale. Eg major drug companies with carioed end markets and strongly patented products, and international consultancy companies Volume Strategies often based on economies of scale and branding but are sold to cusomters who basically want standard productswith little individual variation. Eg branded products, and some type of basic industrial chemicals. Stalemate Strategies these are for products that are easily imitated and most customer needs are essentially the same. The value therefore is difficult to raise and the customer can easily switch. Eg- commodities, staple foods Product Differentiation In marketing, product differentiation is the process of distinguishing a product/service/offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors products. Differentiation can be a source of competitive advantage. It is the process of describing the differences between products or services, in order to demonstrate the unique aspects of a firm's product and create a sense of value. The major sources of product differentiation are as follows. Differences in quality which are usually accompanied by differences in price Differences in functional features or design Ignorance of buyers regarding the essential characteristics and qualities of goods they are purchasing Sales promotion activities of sellers and, in particular, advertising Differences in availability (e.g. timing and location). The objective of differentiation is to develop a position that potential customers see as unique. Differentiation primarily impacts performance through reducing directness of competition: As the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition. A successful product differentiation strategy will move your product from competing based primarily on price to competing on non-price factors (such as product characteristics, distribution strategy or promotional variables) Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.

Customer Groups & Market Segmentation A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function. A true market segment meets all of the following criteria: it is distinct from other segments (different segments have different needs) it is homogeneous within the segment (exhibits common needs) it responds similarly to a market stimulus it can be reached by a market intervention The basic approach to retention-based segmentation is that a company tags each of its active customers with 3 values: Is this customer at high risk of canceling the company's service? One of the most common indicators of high-risk customers is a drop off in usage of the company's service. For example, in the credit card industry this could be signaled through a customer's decline in spending on his or her card. Is this customer worth retaining? This determination boils down to whether the post-retention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer. What retention tactics should be used to retain this customer? For customers who are deemed save-worthy, its essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing special customer discounts to sending customers communications that reinforce the value proposition of the given service. Consumer Markets Geographic: Land or region Rural or metropolitan area Demographic: Age, sex, marital status Income, occupation, education Religion, nationality, ethnical group Psychographic: Social status Lifestyle-type Personal type Behavioral: Intensity of product use Brand loyalty User behaviors

Industrial Markets / Business Markets Industry Intermediary or final consumer Type of corporation (public or private sector) Size of corporation Geographical location Intensity of product use Organization of purchasing function Centralized or decentralized Purchasing policies, rules and criteria Business-Level Strategy According to Michael Porter, the essence of business-level strategy is to perform activities differently or to perform different activities than rivals. The who, what, and how of selecting a business-level strategy are determined when a firm establishes (1) who will be served; (2) what needs those target customers have that it will satisfy; and (3) how those needs will be satisfied. Generic Strategy (Business Level Strategy) In order to achieve its fundamental purpose an organization needs to specify the means for doing so. This part of the statement should be made in such a way that the organization can differentiate itself from its competitors in the industry. According to Porter there are three potentially successful generic strategies to cope up with the five competitive forces as well as gain advantage. These are: Overall cost leadership Differentiation and Focus Business Level Strategy is an integrated & coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. The key issues being What good or service to offer customers How to manufacture or create the good or service How to distribute the good or service in the marketplace

Advantage Target Scope Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy

Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (low cost)

Focus Strategy

The Cost Leadership strategy An integrated set of actions designed to produce or deliver 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 In this strategy company makes all possible attempts to achieve the lowest costs in production and marketing. The aim is to gain a large market share. Efficiency is the keyword guiding all decisions to keep the costs low. Option 1: Use lower-cost edge to under-price competitors and attract price-sensitive buyers in enough numbers to increase total profits Option 2: Maintain present price, be content with present market share, and use lower-cost edge to earn a higher profit margin on each unit sold,thereby increasing total profits Factors that drive costs Economies of scale Asset utilization Capacity utilization pattern o Seasonal, cyclical Interrelationships Order processing o and distribution

Value chain linkages o Marketing & sales o Logistics & operations o Service Product features Performance Mix & variety of products Service levels Small vs. large buyers Process technology Wage levels Product features Hiring, training, motivation

Cost saving actions required Efficient facilities Efficiency & simplification of operations Tightly controlled production costs, overhead Minimize costs of sales, R&D, service Monitor costs of activities provided by outsiders Include features and services in product offering that buyers consider essential Examples of companies following cost leadership strategy Maruti Udyog Limited - Reliable network of suppliers, JIT inventory, Efficient manufacturing, Economies of scale, size of operations, Stringent waste management & control, Fully depreciated manuf. Plants, High labor productivity, After Sales Service Gujarat Co-operative Milk Marketing Federation- Lower cost strategy in branded ice-cream category, Large co-operative dairy network, efficient procurement and supply chain, Effective cold chain, Penetrative distribution Moser Baer India - Noida based co- Recordable and entertainment CDs, Worlds 3rd largest CD manufacturer, Low cost strategy, economies of scale, low material and labor rates in efficient factory Tata Steel - Benchmarked against global standards, Resource advantage in captive iron mines, Finished product made close to point of consumption anywhere in the world, Acquisition strategy for economies of scale

Reliance Communication- Low cost mobile phones (Rs. 501), Entry level handsets for rural & semi-urban markets Air Deccan - Affordable, No frills airline, low operating costs, Large market segment of first time fliers, Penetrates 75% of rural and small town India, Online ticketing, call centres Nirma - Dramatically low cost of production via SSI concessions, Consistent low price policy for price conscious buyers Baja Auto Limited and TELCO appear to be following this strategy in India. Advantages of Cost Leadership Strategy & the Five Forces of Competition Rivalry Among Competing Firms - Competitors avoid price wars with cost leaders, Creates higher profits for the entire industry Bargaining Power of Buyers - Reduces buyers power, Prices far below competitors causes them to exit, Shifts power of buyers back to the firm Bargaining Power of Suppliers - Reduces suppliers power, able to absorb cost increases due to low cost position, able to make very large purchases, reducing chance of supplier using power Threat of New Entrants - Can frighten off new entrants due to: their need to enter on a large scale in order to be cost competitive, the time it takes to move down the learning curve Threat of Substitute Products - Cost leader is well positioned to: make investments to be first to create substitutes, buy patents developed by potential substitutes, lower prices in order to maintain value position When Does a Low-CostStrategy Work Best? Price competition is vigorous Product is standardized or readily available from many suppliers There are few ways to achieve differentiation that have value to buyers Most buyers use product in same ways Buyers incur low switching costs Buyers are large and have significant bargaining power Industry newcomers use introductory low prices to attract buyers and build customer base

Pitfalls of Low-Cost Strategies Being overly aggressive in cutting price Low cost methods are easily imitated by rivals Becoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is used

Technological breakthroughs open up cost reductions for rivals Processes used by the cost leader to produce and distribute its good or service could become obsolete because of competitors innovations Too much focus by the cost leader on cost reductions may occur at the expense of trying to understand customers perceptions of competitive levels of differentiation Competitors may learn how to successfully imitate the cost leaders strategy

Reliance became number one company of India because of its cost leadership strategy. Presently it is the lowest-cost polyester producer in the world. Reliances project management skills, among the best in its business anywhere in the world, and its competencies in mobilizing large amount of low-cost finance enables them to set up world scale plants at the highest speeds and lowest capital costs.

Sumantra Ghoshal profoundly remarks. Ranbaxy laboratories, number two most competitive company of India (after Reliance) attained cost leadership through upgrading technology, vertical integration and benchmarking against international competitors.

Differentiation Rather than costs, a firm using the differentiation strategy tries to invest in and develop features that differentiate its goods or services in ways that customers value. Commonly recognized differentiated goods include Toyotas Lexus, Ralph Lauren clothing, and Caterpillars heavyduty earthmoving equipment. Here the aim is to achieve class leadership by creating something, which is perceived as unique. Creating highly differentiated products and marketing programmes-like design or brand image, customer service or dealer network, or any other feasible dimension can achieve it. Companies pursuing this strategy have major strengths in R&D design, quality control and marketing. A differentiated strategy is an integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them. Price for product can exceed what the firms target customers are willing to pay. These are Non-standardized products and Customers value differentiated features more than they value low cost. Incorporate differentiating features that cause buyers to prefer firms product or service over brands of rivals. Find ways to differentiate that create value for buyers and are not easily matched or copied by rivals. Not spending more to achieve differentiation than the price premium that can be charged Factors That Drive Differentiation Unique product features Unique product performance Exceptional services New technologies Quality of inputs Exceptional skill or experience Extensive personal relationships with buyers and suppliers Differentiation Strategy and the Five Forces of Competition Rivalry Among Competing Firms - Can defend against competition because: brand loyalty to differentiated product offsets price competition Bargaining Power of Buyers - Can mitigate buyer power because: well differentiated products reduce customer sensitivity to price increases Bargaining Power of Suppliers - Can mitigate suppliers power by: absorbing price increases due to higher margins, passing along higher supplier prices because buyers are loyal to differentiated brand

Threat of New Entrants - Can defend against new entrants because: new products must surpass proven products or new products must be at least equal to performance of proven products, but offered at lower prices When Does a Differentiation Strategy Work Best? There are many ways to differentiate a product that have value and please customers Buyer needs and uses are diverse Few rivals are following a similar differentiation approach Technological change and product innovation are fast-paced

Major Risks of Differentiation Strategy Customers may decide that the price differential between the differentiated product and the cost leaders product is too large Means of differentiation may cease to provide value for which customers are willing to pay Appealing product features are easily copied by rivals Buyers see little value in unique attributes of product Overspending on efforts to differentiate the product offering, thus eroding profitability Over-differentiating such that product features exceed buyers needs Charging a price premium buyers perceive is too high Not striving to open up meaningful gaps in quality, service, or performance features vis-vis rivals products Examples of companies following differentiation strategy Hero Honda - Innovative features, performance, A flood of successive improved models Gati Freight Services - Technology driven, Risk insurance in shipments, Full - Refund on failure to deliver on-time, Online tracking Orient Fans - Energy Efficiency, cost of fan recovered in 2 yrs, Air reach and air delivery (wide blades), Wide blades, heavy duty motor, high velocity Frooti - Innovative Packaging at price parity, Innovative format of packaged beverage nonaerated Barista - The Experience & Ambience, Service, Beverage quality & choice ICICI Home Loans - Ease of operations, Counseling, Legal and technical assistance

Differentiation involves creating and marketing unique products for the mass market. Approaches to differentiation include developing unique brand images (Levis jeans), unique technology (MacIntosh stereo components), unique featues (Jenn Air electric ranges), unique channels (Tupperware), unique customer service (IBM), or the like. In other words, the key to differentiation is obtaining a differential advantage that is readily perceived by the consumer. Differentiation is a viable strategy for earning above average returns in an industry, because it creates a defensible position for coping with the five competitive forces.

Focus The underlying assumption in Focus is that a firm should be able to serve a narrow strategic target effectively and efficiently. As a result the firm achieves either differentiation from meeting the need of a particular target, on both. A focus strategy must exploit a narrow targets differences from the balance of the industry by: isolating a particular buyer group isolating a unique segment of a product line concentrating on a particular geographic market finding their niche Factors That May Drive Focused Strategies Large firms may overlook small niches Firm may lack resources to compete in the broader market May be able to serve a narrow market segment more effectively than can larger industrywide competitors Focus may allow the firm to direct resources to certain value chain activities to build competitive advantage Major Risks of Focused Strategies Firm may be outfocused by competitors Large competitor may set its sights on your niche market Preferences of niche market may change to match those of broad market Competitors find effective ways to matcha focusers capabilities in serving niche Niche buyers preferences shift towards product attributes desired by majority of buyers niche becomes part of overall market

Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered

Approach to defining a market niche Geographic uniqueness Specialized requirements in using product/service Special product attributes appealing only to niche buyers What Makes a Niche Attractive for Focusing? Big enough to be profitable and offers good growth potential Not crucial to success of industry leaders Costly or difficult for multi-segment competitors to meet specialized needs of niche members Focuser has resources and capabilities to effectively serve an attractive niche Few other rivals are specializing in same niche Focuser can defend against challengers via superior ability to serve niche members

Focus is essentially a strategy of segmenting markets and appealing to only one or a few groups of consumers or industrial buyers. The logic of this approach is that a firm that limits its attention to one or a few market segments can serve those segments better than firms that seekto influence the entire market. For example, products such as Rolls Royce automobiles, Cross pens, and Hartmann luggage are designed to appeal to the upscale market and serve it well rather than trying to compete in the mass market.

Requirements for generic competitive strategies Generic strategy Commonly required skills and resources Overall Cost Leadership Sustained capital investment & access to capital Process engineering skills Intense supervision of labour Products designed for ease of manufacture Low-cost distribution system Strong marketing abilities Product engineering Creative flair Strong capability in basic research Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels o Combination of the above policies directed at the particular strategic target

Common organizational requirements Tight cost control Frequent, detailed control reports Structured organization and responsibilities Incentives based on meeting strict quantitative tares Strong coordination among functions in R & D, product development, and marketing Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labour, scientists or creative people. Combination of the above policies directed at the particular strategic target

Differentiation

Focus

strategy Overall Cost Sustained capital investment and Leadership access to capital Process engineering skills Intense supervision of labor Products designed for ease in manufacture Low-cost distribution system

Tight cost control Frequent, detailed control reports Structured organization and responsibilities Incentives based on meeting strict quantitative targets

Differentiation

Strong marketing abilities Product engineering Creative flair Strong capability in basic research Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels

Strong coordination among functions in R&D, product development, and marketing Subjective measurement and incentive instead of quantitative measures Amenities to attract highly skilled labor, scientists, or creative people

Focus

Risks of leadership Cost leadership is not sustained Competitors imitate Technology changes

Combination of the above policies Combination of the above directed at the particular strategic policies directed at the target particular strategic target Risks of focus cost Risks of differentiation Differentiation is not sustained Competitors imitate bases for differentiation The focus strategy is imitated The target segment becomes structurally unattractive structure erodes demand disappears

other bases for cost become less important to leadership erode buyers Proximity in Cost proximity is lost Broadly targeted competitors differentiation is lost overwhelm the segment the segments differences from other segments narrow the advantages of a broad line increase

Cost focusers achieve Differentiation focusers New focusers even lower cost in achieve even greater industry segments differentiation in segments

sub-segment

the

Size Market

of

Generic Strategies Cost Leadership Type 1 Low cost Type 2 Best Value Differentiation Focus

Large

Type 3 - Differentiation

Small

Type 3 - Differentiation

Type 4 Low Cost Type 5 Best Value

Best-Cost Provider Strategy Combine a strategic emphasis on low-cost with a strategic emphasis on differentiation Make an upscale product at a lower cost Give customers more value for the money Deliver superior value by meeting or exceeding buyer expectations on product attributes and beating their price expectations Be the low-cost provider of a product with good-to-excellent product attributes, then use cost advantage to underprice comparable brands A best-cost providers competitive advantage is based on its capability to include upscale attributes at a lower cost than rivals comparable products To achieve competitive advantage, a company must be able to: Incorporate attractive features at a lower cost than rivals, Manufacture a good-to-excellent quality product at a lower cost than rivals, Develop a product that delivers good-to-excellent performance at a lower cost than rivals, Provide attractive customer service at a lower cost than rivals When Does a Best-Cost Provider Strategy Work Best? Where buyer diversity makes product differentiation the norm Where many buyers are also sensitive to price and value A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: adapt quickly to environmental changes learn new skills and technologies more quickly effectively leverage its core competencies while competing against its rivals Successful firms using this strategy have above-average returns. Firm offers two types of values to customers - some differentiated features (but less than a true differentiated firm), relatively low cost (but now as low as the cost leaders price)

Risk of a Best-Cost Provider Strategy - A best-cost provider may get squeezed between strategies of firms using low-cost and differentiation strategies Low-cost leaders may be able to siphon customers away with a lower price High-end differentiators may be able to steal customers away with better product attributes An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm) The firm may become stuck in the middle lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

You might also like