Business level strategies are popularly known as generic or competitive strategies. Michael Porter classified these strategies into overall cost leadership, differentiation and focus. The first two strategies are broader in concept as their competitive scope is wide enough whereas the third strategy i.e the focus strategy has a narrower competitive scope.
The experience curve : Cost has been correlated with the accumulated experience by the experience curve. Let us take the example of production;
The underlying principle behind the experience curve is that as total quantity of production of a standardized item is increased, its unit manufacturing cost decreases in a systematic manner. The concept of the experience curve was presented by BCG in 1966 and since then it has been accepted as an important phenomenon.
Causes of experience curve effect;
- Improved productivity of labour
- Increased specialization
- Innovation in production methods
- Value engineering and fine tuning
- Balancing production line
- Methods and system rationalization
The experience curve relationship provides a good framework for managerial considerations for predicting industrial scenario with respect to future costs, profit margins, and corresponding cash flows for the manager’s own as well as his/her competitor’s operations.
Competitive strategies like the below mentioned can be developed based on experience curve;
- Selling product at most competitive price
- Maximising profits by selling at the highest price the market can afford
- Selling at a higher price initially but crashing the prices later to keep the competition out.
1. Low cost provider strategy
The firms operating in this highly competitive environment are always on the move to become successful. To strive in this competitive environment the firms should have an edge over the competitors. To develop competitive advantage, the firms should produce good quality products at minimum costs, etc. This means that the firms should provide high quality at low cost so that the customer gets the best value for the product he/she is buying. One such competitive strategy is overal l cost leadership, which aims at producing and delivering the product or service at a low cost relative to its competitors at the same time maintaining the quality.
According to Porter, following are the prerequisites of cost leadership –
- Aggressive construction of efficient scale facilities
- Vigorous pursuit of cost reduction from experience
- Tight cost and overhead control
- Avoidance of marginal customer accounts
- Cost minimization
To sustain the cost leadership throughout, the firm must be clear about its accomplishment through different elements of the value chain.
Though low cost can be one of the most important competitive advantages enjoyed by firms all over the globe it does have its own drawback. Some are
- Initiation by the competitive firms
- Threat of competitive firms from other countries
- Firm losing cost leadership due to fast technological changes, which require high capital investment
- Threat by competitors to capture still lower cost segments
- Competition based on other than cost.
2. Differentiation Strategy
Every individual customer is unique in itself so is his/her preferences regarding tastes, preferences, attitudes, etc. These needs of the customers are fulfilled by the firms by producing differentiated products. In our day-to-day life we see many such examples of differentiated products. Most of the fast moving consumer goods like biscuits, soaps, toothpastes, oils, etc come under the category of differentiated products. To satisfy the diverse needs of the customers, it becomes essential for the firms to adopt a differentiation strategy. To make this strategy successful, it is necessary for the firms to do extensive research to study the different needs of the customers. A firm is able to differentiate from its competitors if it is able to position itself uniquely at something that is valuable to buyers. Differentiation can lead to differentiatial advantage in which the firm gets the premium in the market, which is more than the cost of providing differentiation. The extent to which the differentiation occurs depends on the overall strategy of the firm. Previously differentiation was viewed narrowly by the firms, but in the present scenario it has become one of the essential components of the firm’s strategy. Reliance Infocomm, offers varied products like different facilities to its customers in the CDMA telephones. This is differentiation.
There are a number of factors which result in differentiation. Some of them are;
- To compete against the rivals
- To create entry barriers for newcomers by building a unique product
- To reduce the threats arising from the substitutes
- To develop a differentiation advantage
Different areas of differentiation;
- Purchasing – quality of components and material acquired
- Design – aesthetic appeal
- Manufacturing – minimization of defects
- Delivery – speed in fulfilling customer orders, reliability in meeting promised delivery items
- HRM – improved training and motivation increases customer service capability
- Technology management – permits responsiveness to the needs of specific customers
- Financial management – improves stability of the firm
- Marketing – building of product and company reputation through advertising
- Customer service – providing pre-sales information to customers
Sources of differentiation – Its not only the low price at which different products are offered, which creates differentiation, instead the firm can differentiate from its competitors by providing something unique, which is valuable to the customers of that product. Differentiation occurs from the specific activities a firm performs and how they affect the buyer.
Some examples of differentiation;
- Ability to serve customers needs anywhere
- Simplified maintenance for the customers
- Single point at which the buyer can purchase
- Superior compatibility among products
Factors/Drivers for differentiation;
- Policy choice – every firm decides its own policies regarding the activities to be performed and the activities to be ignored. The policy choices are basically related to the type of services to be provided to the customers, the credit policy, to what extent a particular activity be adopted, the content of activity, skill and experience required by the employees, etc
- Links – the uniqueness of a product depends to a large extent on the links within the value chain with suppliers and distribution channels, the firm deals with. If the firm has a good link with suppliers and has a sound distribution channel, then it becomes easy for the firm to produce and supply the product to the end users
- Timing – the firms can achieve uniqueness by encashing the opportunities at the right time. If the timing is perfect then a successful differentiation strategy can be adopted.
- Location – this is one of the important factors for the firms to have uniqueness. For example a bank may have its branch which is accessible to the customers, then the bank will gain an edge towards other banks.
- Interrelationships – a better service can be offered to the customers by sharing certain activities e.g sales force with the firm’s sister concerns.
- Learning – To peform better and better, continuous improvement is necessary and this comes through continous learning
- Integration – The firm can be termed as unique, if its level of integration is high. The integration level means the coordination level of value activities
- Scale – Larger the scale, more will be the uniqueness. If small volumes of products are produced , then the uniqueness of the product will be lost over a longer period of time. A very good example can be home-delivery services. The type of scale leading to differentiation varies depending on the individual firm’s activities
- Institutional factors – This factor sometimes play a role in making a firm unique, like relationship of management with employees
Differentiation is governed by value activities in a value chain and these activities in turn are governed by certain driving factors which make the form unique Cost of differentiation.
Differentiation generally involves costs. The differentiation adds costs as it involves added features to cater to the needs of the customers. Usually the cost is incurred in the following cases:
- Increased expenditure on training
- Increased advertising spend to promote the product
- Cost of hiring highly skilled salesforce
- Use of more expensive material to improve the quality of the product, etc
Advantages of differentiation;
- Premium price for the firm
- Increase in number of units sold
- Increase in brand loyalty by the customers
- Sustaining competitive advantage
Disadvantage of differentiation;
- Uniqueness of the product not valued by buyers
- Excess amount of differentiation
- Loss due to differentiation
3. Focus Strategy
The third business level strategy is focus. Focus is different from other business strategies as it is segment based and has narrow competitive scope. This strategy involves the selection of a market segment, or group of segments, in the industry and meeting the needs of that preferred segment (or niche) better than other market competitors. This is also known as niche strategy.
In focus strategy, the competitive advantage can be achieved by optimizing strategy for the target segments.
Focus strategy has two variants. They are;
a) Cost focus - Cost focus is where a firm seeks a cost advantage in the target segment. This is basically a niche-low cost strategy whereby a cost advantage is achieved in focuser’s target segment. According to Porter, cost focus exploits differences in behavior in some segments. In this the focuser concentrates on a narrow buyer segment and out-competes rivals on the basis of lower cost.
b) Differentiation focus – Differentiation focus is where a firm seeks differentiation in the target segment. In this, the firm offers niche buyers something different from rivals. Firm seeks differentiation in its target segment. Differentiation focus exploits the specific needs of buyers in specified segments. Eg. MayBach luxury car which is targeted to segment where customers can afford to pay a sum as large as Rs.5.4 crores.
Following are the situations where a focus strategy is efficient;
- Market segment large enough to be profitable
- Market segment has good growth potential
- Market segment is not significant to the success of major competitors
- Focuser has efficient resources
- Focuser is able to defend against challenges
- High costs are difficult to the competitors to meet the specialized need of the niche
- Focuser is able to choose from different segments
Advantages of focus strategy;
- Focuser can defend against Porters competitive forces
- Focuser can reduce competition from new firms by creating a niche of its own
- Threat from producers producing substitute products is reduced
- The bargaining power of the powerful customers is reduced
- Focus strategy, if combined with low-cost and differentiation strategy, would increase market share and profitability
Risks of focus strategy;
- Market segment may not be large enough to generate profits
- Segment’s need may become less distinct from the main market
- Competition may take over the target-segment