strategic Management / Dr, M. Ae Mannan State the reasons for the failure of differentiation strategy Define focus market and focus strategy favorable for focus strategy i: rkel situations atepraaeeers for the failure of focus strategy Slate the reasons Sire nord a fo bel cs i 5 1 situations favor: st strate Discuss the mae lure of best cost strategy oY State the reasons for the fai a Chapter Outline 9.0 Strategy 9.1 Generic Strategies 9.2 Cost Leadership Strategy 9.3 Differentiation Strategy 9.4 Fogus Strategy : 9.5 Best-Cost Provider Strategy 9.6 Concluding Remarks oo h the strategy-formnulation in a single- business firm. The strategies followed by the single-business firms are called business-level strategies. These are applicable to not only single-business companies but also to SBUs in the diversified companies.’ This chapter mainly concentrates on the discussions of business-level strategies that are specifically used for achieving competitive advantages. A separate chapter will be devoted to corporate-level strategy used by diversified companies (group of companies) having several lines of businesses under a common umbrella — the corporate headquarters, Since this section tocisos, on strategy formulation, let's first have a conceptual clarification of the terms strategy, corporate strategy, business strategy, functional strategy and operating strategy- = This chapter is concemed will , WW evitaay De word ‘strategy’ is adopted from military administration. In military, most often strategy refers to ‘deployment’ of troops — thal NE, maneuvering of troops into position before the enemy Is ieee. erapaed. In plisiness: we can substitute ‘resources’ for pa Business people deploy resources of various types to ‘or an explanation of the concept of SBU (strategic business unit), sce Chapter 1CHAPTER 9 usin A strategy is considered as a long-term plan that relates the strategic advantages of an organization to the challenges af the environment. It involves determination of long-term objectives of the organization and adoption of courses of action. It also involves allocation of resources necessary to achive the objectives. When defined this way, objectives aro considered as part of strategy Strategy is the formulation. According to the definition provided by Thompson and means used lo Strickland, sirateay | means used to achiove the ends, Here _,0chievo the ends “means! ends’ toler ses OB ieee Strategy expresses the intention of management about the way to achieve objectives of the organization. According to Michael Porter, the undisputed guru of compatitive strategy, “strategy is_about compatith sition, about differentiating yourself In the eyes of the customer, about-adding value Through a mix of activities diferent from_ thoss Ta his Ce competitive strategy as “a combination of the ends for which the firm is striving and the means by which it Is seeking to get there."? In their book of 1980, Thompson and Strickland defined strategy as “the pattern of organizational moves and managorial approaches used to achieve organizational objectives, and to pursue the organization's mission.”* & We should distinguish among four forms of strategy: (1).Corporate strategy, (2) Business strategy, (3) Functional strategy and (4) Operating strategy. ‘Strategy and Camorate strategy defines the markels. and businescesinwhicha —_faclics together gammpany wil operste. Corporate strategy is formulated at the top re the gap level by the afagement of a diversified company (in our — Delwuerrends and country, a diversified company is popularly known as ‘group of companies’, such as Bashundhara Group, Partex Group, Beximco Group, Square Group and 5M Group). Such strategy describes the company’s overall direction in terms of its various businesses and product lines.’ Corporate strategy defines the long-term objectives and generally affects all the business-units under its umbrella. A corporate strategy, for example, of Bashundhara may be acquiring the major tissue paper companies in Bangladesh in ‘order to become the unquestionable market leader. CA -leadch Aeon Business strategy defines the basis on which a firm will compete. It ig business-unit level strategy, formulated by the set of the unit. This strategy emphasizes on the strengthening of company’s competitive position of products or services. Business siralegies | are composed of competitive and _cooperalve strategies: ore 3 Bees wv arvard Business School Press, 1986), Crewn'e_ Tasks of ? Michel Porter, Competi “A. Thompson and A. isiness Publications, 1980). Wheelon, Esseatials of Srategic Management (New Jersey: “3.1. Munger and Prentice Hall, 2001, pp. 112-113), SJ. 1D, Munger amd T. L- Wheclen, Easeninds of Stroegic Mawongennent (New Jerscy: Prentice {all 2001, pp E2113.goment/ Dr. M.A. Mannan II the actions and approaches 5, iness slralegy encompasses a ce eonpating. against the competitors and the ways Managem, i en usinass siratogy ee he . As Hill and Jones hi a sis of pans addresses various strategic eo eee ot plans of ante, ave of action dope! remarked, business strategy con: earpany's Wabcinne “4 nun @ strategic managers adopt to use a comp: aa i i ies to gain a competilive advantage ove, its fa in oath Business slralegy is usually formulated in lin 2 i tegy. The main focus of business strategy ;, competencies with the corporate strategy. : f integration (vee gaincompetlive on product development, innovation, _ inte 7 oa), atvanioges il" zontal), market development, diversification and thee, monet Compaive strategy aims at gaining Rn copa agen be marketplace against the competitors. e a ies that lead to some uniqueness in the manson Winks competitive strategies are rounded in sustainable compelitive advantage. Examples a competiive Strategy include differentiation strategy, low-cost strategyant focus or market-niche strategy. it i i that_managers Business _ strate is concerned with actions lertake_to improve market position of the com) Dan through satisfying the customer: ving market position implies = undertaking actions against cree (oS me industry. Thus, the Competitive . crcepl OT” compeliive strateay (a8 opposed to_cooperalive gone me Stateoyy hes oe itororientation-The objective of competitive Strategy is To win tho customers” heart throughs he monet needs,_and_finally-to~ outcompete thé competitors (or _rival merkelplace companies) and attain competitive advantages. The success of ae, competitive strategy depends on thé company's capabilities, Strengths and weaknesses in ‘elation ta its competitors’ capabilities, strengths and weaknesses, In doing business, companies confront a lot of Strategic issues. Management has to address all these issues effectively to survive in the marketplace. Business strategy deals with these issues, in addition to ‘how to compete.’ -~ Funetic Strategy is _in_reality the dey rtmental/divisional (nt sf cl i i is, there may be Production Strategy, marketing strategy, ») advertisement Strategy, sales strategy, human resource strategy, & inventory strategy, financial Strategy, training strategy etc, hat emphasizes on a ion.® tt is formulated to by maximizing resource al strategy is called departmental ion i: usually vested with a Production department of a ‘production Strategy’ as the 4 business organization Me production, marketing, inventory. administration, human rexouregs ee nt eting, inventory Fesources, research and development,dee fy at) departmental strategy. or the training department. formulates At the fevel of ‘training strategy’ for providing training to the employees. ‘operating divisions i lune! departments, Functional strategy is concemed with developing distinctive functional competence to provide a business unil with a compelilive — strategies focus on advantage.’ Each business unit or company has its own sel of ousiness departments, and every department has its own functional strategy. 7Ocesses and : SOY. value chain. Functional strategies are adopted to support the competitive strategy. For example, a company following a low-cost competitive strategy needs a production strategy that emphasizes on reducing cost of operations-and also a human resource strategy that emphasizes on retaining lowest possible number of employees who are highly qualified to work for the organization. Other functional strategies such as marketing strategy, advertising strategy and — Functional financial strategy are also to be formulated appropriately to support strategies ara the business-level competitive strategy. ‘adopted to support . the competitive Operating strategy is formulated al the operating units of an. strategy. organization. A-company-may-devatop-oparaling strategy, as-an instance, Tor its factory, sales territory or small sections within a department. Usually the operating managers/field-level managers develop operating strategy to achieve immediate objectives. In large organizations, the operating managers normally take assistance from the mid-level managers while developing the operating strategy. In some companies, managers develop operating strategy for each set of annual objectives in. the departments or divisions. Leveis of Strategy-Making * Ina business-unil, Strategy-making is involved with the identification af the ways that strategies are an organization can undertake to achieve the performance targets, formulated ot treo weaken the competitors, achieve competitive advantage and diversified ensure long-term survival of the organization. In a diversified company, four- company (a company having different lines of business under one _level strategy- umbrella), strategies are initiated at four levels. The strategies at aula ihe each level of the organization are known by the name of the level : (see figure 1.2): Kour-Level Strategies in a Diversified Company # Levels of Organization | _ Names of Strategy 1___ | Corporate level Corporate strategy 2 Business level Business strategy 3 Functional level Functional strateqy | 4 Operating level ‘Operating strategy. ‘At the business-unit level, there are three levels of organization, and obviously, three types of strategies are formulated. aes OEE 7 arnite con 1D Munver and ‘T. L. Wheelen, Essentials of Strategic Management492 Abchaol Porter identified inroe fpes of compctitive stategies -what te called |. A. Mannan gle Management /,D¢. a ef Strategies in a Single-Business Company 0-Leve Thre Operating Level 5 [berets ot Oranizatton Levels of Strateay Figure 9.1: Hierarchy of organizational levels and strategies ’ Srewmita 9.1 Generic Strategies Ccomrend<— 22) : Michael Porter originally identified three types of competitive strategies: Cost Leadership Sitalegy. Diferentation Strategy, an Focus Strategy. The generic Strategies can be applied in ary bosinass-organizalfon-inetpecine oT ae See pore Because of their susceptibility to COMMON a amu Strategies by some other researchers and authors, such as Thompson, Strickland, Gamble and Jain. In addition to the generic Strategies, there are also other competitive strategies that 2 company may employ for improving organization's competitiveness. These Strategies will be discussed in the Next chapter under the caption of “Complementary Strategies” because of their role in ling the generic strategies for achieving competitive and ensuring Sustainable development of organizations. The four generic strategies are as Shown in Figure 9.2 *Sce Thompson et te PD. 137-164=- Conty.cadersiip Steateny Figure 9.2: The ganeric strategies The generic strategies are labeled as the basic competitive strategy options for a business firm. Such competitive strategies always aim at se competitive advantages” over the competitors in the marketplace. Business firms endeavor to achieve _competitive advantages by giving customers superior value, which requires ‘performing value chain activities differently than rivals and building competencies and resource capabilities that are not readily matched." \ Pkeost Leadership Strategy Cost Leadership Strategy Defined Cost leadership strategy is also known as ‘low-cost provider strategy, or simply ‘low-cost strategy.’ We will use the term ‘low- cost strategy’ in this book. The company that follows this strategy intends to become the overall low-cost provider in the industry in which the company operates its business. A company’s strategy of selling its products at a price lower than its competitors is known as low-cost strategy. The emphasis is placed on production of standardized products at a low per unit cost for price-sensitive customers. Charging lower price becomes possible: when the company can ensure cost reduction by operating business in a highly cost-effective manner. The strategic target of this strategy is abroad section of the market where the company offers economical prices. The company emphasizes on cost reduction r deiaited idea on competitive advantages, see chapter |. id. p. 137. Fora clarification of value chain, see Chapter 5, See ee Best Cost Focus s Siratexy Strateny 413 ‘Superior value can mean a good product at a lowor price; @ superior product that is worth paying more for; or 2. best value offering that represents an attractive combination of price, features, qualily, service, and other appealing attributes.” = Thompson & Strickiond When a company adopts the stralegy of selling its products at a price lower than its compelitors, this strategy is known as low-cost strategy.ag y intends to gain market shay, e 344 i an’ without reducing quality. The oe through underpricing compet —— 1 compan vy low s idly ey and General Etec Company in en incluso Whillpoo! ty Docker 11 POST sre Pharmai as appliances, ea ball pen. and Sau' ceutical tissue paper. utic drugs) . ; medicine (therape' the low-cost strategy is to manage ¢o, hei pany’ business. The goal of jj rs through low-cost leadersh; The key to sus! mi down in every area OF Me otto cos ost leader, it is likely to eam, Whidpoo! and strategy is to outperfo! temeerisccre- When company becomes © bere in home 0 fits. rage profits. above-average P ing cost advantages are keys to attainj, company may achieve Cost Some widel Oech staini and Decker in Creating and then su powers "succes wecost strategy: a lissue paper mn success Fa) doing a better job than competion In perfonny Senbenpen ore intemal value chain activities efficiently. (b) taking initiatives to cy wok-anown fr Vown costs of value chain activities, ane (0) recognizing the Value sng low coal i i ‘some cost-producing activities. eeneateg, § omen to avoid (bypass) \ PEiLeadership Strategy: _ Benefits to Business Organizations x ‘A business organizalion may derive the following benefits from ~ pursuing a low-cost strategy: 4. Overcoming threats from competitors: Because of its cost advantage, a company can protect itself from the business. titors, If competitors enter into market with attacks of the compet low price, the company can even further cut down its prices, This is possible because the company has already developed ways to reduce cost and sustain the cost advantage. Its cost- leadership position helps it dominate the competitors. Effective dealing with powerful suppliers: When suppliers 2 Powerful big * are few innumber as well as powerful, the: i fe , they may try to increas ayers (such os \ paces ae materials/other inputs. The eit witha iw iwolesaten strategy can endure such price-i i tele or 7 overall ower costs prige-increase because of ils £007: Macon \ 3 faa Powerful buyers effectively: Powerful big buyers Mejmay dette as dealers and wholesalers or retail chains Ii peer Meena Bazaar or Wal-Mart) i p relne e A fe products. A company that ‘elon dictate prices of a company's products. less affected by such actions of Boyes, st leadership staleay F 4. Encounterin 9 threats i leader is able to cee from substitute products: A low-cost can reduce the pice wane threats from substitute products. |! entering into. the rails products if substijute products stat 5, GAMPaNY retain its marketshare, °* '@@dership helps: he ming th . 2S i fa ot frotetal commies in ra i Vvestors to come to.the ne tomurage aed Is cost’ advanc APTER 9 Busine Level Strategy automatically creates barriers to entry. 01 , i ~ OF a find it difficult fo match their costs with that ol ta leader. ; s may low-cost 7 Market Situations Favorable for Cost Leadership Strategy ‘A low-cost provider strategy works best under the following situations: 1. . When the market i When the brand differences from company to company ar minor, and at the same time, the.products are standardized and readily available. is composed of a large number of price- sensitive buyers who want to buy products at the lowest possible price, |. When there are few ways to achieve product differentiation. It means that it is difficult to differentiate the company's products from those of competitors due to the nature of the product. Buyers become sensitive to price differences when product-lo- product differences are negligible. In such a situation, they will go for the lowest price. |. When switching costs from the company’s brand to competitors’ brands are low or even zero. If buyers purchase another brand and this switching from the previous brand does not involve any additional cost (such as transportation or repair) they are likely to opt for the lower-priced brand. . When there are a large number of buyers with significant bargaining power, ie., they have significant power to negotiate price-related terms and conditions. . When price-competition among the sellers/suppliers is very tough. Low-cost strategy helps producers to compete effectively based on the price. ” When the company is in a position to use the lower-cost edge to attract price-sensitive buyers in great enough numbers to influence total profits. Reasons for Failure of Cost Leadership Strategy Low-cost strategy has some shortcomings or pitfalls. Managers need to. take care of these pitfalls so that they can undertake appropriate measures to be successful with this strategy. The shortcémings are as follows, which are responsible for the failure of the low-cost strategy: = It may invite aggressive price-cutting by competitors. It may lead to price-war that may lead to lower profitability. = Cost advantages may not sustain if competitors can ‘easily imitate the strategy. When the competitors are able to copy the cost advantages, low-cost strategy will fail. So, the ways to achieve cost advantage need to be difficult for others to copy. When switching costs from the company's brand to competitors’ brands are low or even zero, low- cost strategy works well IFlow-cost product does not contain enough attributes to be attractive fo prospective buyers, the strategy may fall. Re,— nt / Drei. Ae M@MM@M / Dr M. A. Mannan Strategic Manager a —_ tain enough attributes tg b ct does not con! tributes + I low-cost Pre eciWe buyers, the sratgy maya ot altractive {o A appealing to buyers. trsellvon mn price is not al eel is fealures-poor or quality fc ent, be lost if the p1 tralegy may become ineflecive when hag ae (eonnotogtcal breakthroughs by the the are ; industry. ; A 7 Cost Provider ategic Choice of Low the k ' order to’ be successful with the law. cast strategy, the low cdg, In : ic choices: i to various strateg 5 cae providers wesone idol differentiation. | aii ot o They: Uy. i to changes in the markel, they ailrentiaton i Gilt product aliferentiavon to Keep : willfully choo: ta low level. They wait and see When Low-cost providers production coms 2 ant to have differentiated features in the develop skils in customers seriously Wé foxdle manufacturing/ea roduct. : ji in the market. Average ag beste, do not focus on elite customers ii y Soe wee are their main targets. They do not operate in maeoerert diferent market segments with different types of products. This is because it is highly expensive to develop*product lines for different market segments. * Their attention is more on reducing costs in each | area of business activilics. They want to increase efficiency in production and service aclivities to reduce wastage of resources. They develop distinctive competencies in manufacturing and materials management to reduce manufacturing costs and thereby increasing efficiency. They. develop skills in flexible manufacturingflean manufacturing, just-in-time (JIT) production and total quality management. They also adopt efficient materials management techniques, . * They emphasize on strict Production control and rigorously use budgets to contro! the Production gy \9.3 Differentiation Strategy Differentiation Strategy Defined Oifferentiati is i ale lion strategy is Concerned with Produ : ict differentiation. It ‘0 Makin, if Products of the 22 company's product different from the similar Products mpetitors. Although there i ‘ation ir no + com can be di in ae {00, in this book we would Use the word ‘ane fs ,° Mean differentiation of tangible Products, enue fe atksting terminology, ¢ ati . diferent mang ® me Searentiation Means making a product Phitip Koller, diferentiation ie a ‘he competitors. According to