Business Level Strategy is concerned more with how a business competes successfully in a particular market. It relates to strategic decisions about the choice of products, identifying and fulfilling the needs of customers, building competitive advantages over competitors, exploiting or creating new opportunities etc.
Business level strategies are essentially positioning strategies whereby businesses tend to secure for themselves an identity and position in the market. The aim here is to increase the business value for the corporate and stakeholders by increasing the brand awareness and value perceived by the customers. They can either focus on pricing or product differentiation to increase the perceived customer value.
Customers are the foundation of successful business-level strategy –
- Who will be served by the strategy?
- What needs shall the strategy satisfy?
- How will the strategy satisfy those needs?
The low cost strategy emphasizes having the lowest costs, not necessarily the lowest price, in a market. A firm attempting to realize a low cost strategy should stress resources that facilitate efficiency. A firm that has successfully achieved a low cost position will have the lowest costs relative to competitors. A firm can use such a position to either lower its prices and gain market share and sales from rivals or keep its prices at the present market level and make relatively more profit per unit sold. The key idea is that cost and price are independent choices, and this strategy is focused on cost.
The differentiation strategy focuses on developing a unique product or (equally useful) a perception of a unique product that customers are willing to pay a premium for. If a firm is not receiving a premium price for its goods or services it is NOT a differentiator. A firm seeking to follow a differentiation strategy should attempt to develop and enhance its resources that promote customer responsiveness, quality, and/or innovation. Note that costs are still important to a differentiator because it is possible that the costs of making the product unique will be greater than the premium consumers are willing to pay for it.
The firm can choose to compete in the mass market with a broad scope, or in a defined, focused market segment with a narrow scope. In either case, the basis of competition will still be either cost leadership or differentiation. In adopting a narrow focus, the company ideally focuses on a few target markets (segmentation strategy or niche strategy). The choice of offering low prices or differentiated products/services should depend on the needs of the selected segment and the resources and capabilities of the firm. It is hoped that by focusing your marketing efforts on one or two narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the needs of that target market. The firm typically looks to gain a competitive advantage through product innovation and/or brand marketing rather than efficiency.
Case 1: Walmart – Cost Leadership Strategy
Founded by Sam Walton, the first Wal-Mart store opened in Rogers, Arkansas, in 1962. Seventeen years later, annual sales topped $1 billion. By the end of January 2002, Wal-Mart Stores, Inc. (Wal-Mart), was the world’s largest retailer, with $218 billion in sales.
Wal-Mart’s winning strategy in the U.S. was based on selling branded products at low cost. Each week, about 100 million customers visited a Wal-Mart store somewhere in the world. The company employed more than 1.3 million associates (Wal-Mart’s term for employees) worldwide through more than 3,200 stores in the United States and more than 1,100 units in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom.
In 2001, Fortune magazine named Wal-Mart the third most admired company in America, and the Financial Times and PricewaterhouseCoopers ranked it as the eighth most admired company in the world. The following year, Wal-Mart was named number one on the Fortune 500 list and was presented with the Ron Brown Award for Corporate Leadership, a presidential award that recognized companies for outstanding achievement in employee and community relations.
Wal-Mart enjoyed a 50 percent market share position in the discount retail industry. Procter & Gamble, Clorox, and Johnson & Johnson were among its nearly 3,000 suppliers. Though Wal-Mart may have been the top customer for consumer product manufacturers, it deliberately ensured it did not become too dependent on any one supplier; no single vendor constituted more than 4 percent of its overall purchase volume.
About 85 percent of all the merchandise sold by Wal-Mart was shipped through its distribution system to its stores. (Competitors supplied to their retail outlets on average less than 50 percent of the merchandise through their own distribution centers.) The company owned a fleet of more than 3,000 trucks and 12,000 trailers. (Most competitors outsourced trucking.) Wal-Mart had implemented a satellite network system that allowed information to be shared between the company’s wide network of stores, distribution centers, and suppliers. The system consolidated orders for goods, enabling the company to buy full truckload quantities without incurring the inventory costs.
Wal-Mart’s value proposition can be summed up as “everyday low prices for a broad range of goods that are always in stock in convenient geographic locations.” It is those aspects of the customer experience that the company over-delivers relative to competitors. Under-performance on other dimensions, such as ambiance and sales help, is a strategic choice that generates cost savings, which fuel the company’s price advantage. If the local mom-and-pop hardware store has survived, it also has a value proposition: convenience, proprietors who have known you for years, free coffee and doughnuts on Saturday mornings, and so on.
Case 2: Apple – Differentiation Strategy
Apple Inc. is an American corporation that designs and manufactures computer hardware, software and other consumer electronics. The company headquarters is in Cupertino, California, CEO and co-founder is Steve Jobs and the company boasts of 284 retail locations spanning 10 different countries. Apple was established on April 1st, 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne to sell the Apple I personal computer kit. Since then, it has developed a unique reputation in the consumer electronics field. The Company’s products and services include Macintosh (“Mac”) computers, iPhone, iPad, iPod, Apple TV, Xserve, a portfolio of consumer and professional software applications, the Mac OS X and iOS operating systems, third-party digital content and applications through the iTunes Store, and a variety of accessory, service and support offerings. The Company sells its products worldwide through its retail stores, online stores, and direct sales force and third-party cellular network carriers, wholesalers, retailers, and value-added re-sellers.
Apple’s differentiation approach enhances the company’s competitive advantage in the market. It favors Apple to continue down a path that not only maintains premium positioning but also enhances it. It is clearly doing this at the research and development (R&D) level. The introduction of a new portable manufacturing process (the unibody MacBook and MacBook Pro) and a relatively fast-paced operating system release cycle are clearly a function of Apple’s ever-evolving differentiated positioning. The upcoming Mac OS X Snow Leopard (successor to Mac OS X Leopard) and iPhone OS 3.0 will continue to push the envelope and set the groundwork for continued innovation in the years to come. Apple has never shied away from starting over. It did this with the transition to Mac OS X, the transition to Intel processors, and the re-design of their portable Macs. Each enhancement widens the differentiation gap that competitors must narrow or copy in order to compete with Apple.
The Company participates in several highly competitive markets. While it is widely recognized as a leading innovator in the markets where it competes, these markets are highly competitive and subject to aggressive pricing. To remain competitive, Apple believes that increased investment in research and development and marketing and advertising is necessary to maintain or expand its position in the markets where it competes.
Digging deeper into the strategy, the trade-off protects Apple’s unique position. Competitors have two main ways to imitate an incumbent. A competitor can (1) reposition itself or (2) straddle, an approach that attempts to match the incumbent’s position while maintaining its existing position. By maintaining its price premium at the expense of unit volume, Apple has created an imitation barrier that competitors cannot easily cross. PC competitors cannot realistically enter Apple’s space by transforming themselves into a premium brand without alienating or pricing out existing customers. If a competitor decided to reposition or straddle it would have to compete with Apple’s decades long premium brand equity. Thus, PC vendors have two transformational issues working against them, time and cost. Apple’s competitors will not be able to transform their brand image overnight. Any such effort will take considerable amount of time on numerous dimensions ranging from product design to marketing. This leads to the second issue, cost. Any transformation undertaken by a competitor will cost tens or perhaps hundreds of millions of dollars in a sustained re-branding and advertising campaign. In today’s marketplace, a cost of this magnitude is not feasible. From a trade-off perspective, Apple has systematically analyzed what not to do; attempt to compete at lower price points.
Apple’s entry into retailing, for example, is designed to provide better point-of-sales service to customers wishing to purchase an Apple product than can be had from independent stores. By helping to raise the overall level of differentiation associated with Apple’s offering, the strategy is designed to strengthen Apple’s competitive position.
Case 3: Zara – Focused Differentiation Strategy
Zara is a phenomenon in the textile industry; it was a start-up in Spain and gradually has evolved to be today a very successful leader quoted company in its industry.
Zara, the most profitable brand of Inditex SA, the Spanish clothing retail group, opened its first store in 1975 in La Coruña, Spain, they have expanded operations into 45 countries with 531 stores located in the most important shopping districts of more than 400 cities in Europe, the Americas, Asia and Africa. Throughout this expansion Zara has remained focused on its core fashion philosophy that creativity and quality design together with a rapid response to market demands will yield profitable results. In order to realized these results Zara developed a business model that incorporated the following three goals for operations: develop a system the requires short lead times, decrease quantities produced to decrease inventory risk, and increase the number of available styles and/or choice. These goals helped to formulate a unique value proposition: to combine moderate prices with the ability to offer new clothing styles faster than its competitors. These three goals helped to shape Zara’s current business model.
Capabilities of Zara, or the required resources needed to exploit the opportunities and execute this conceptual strategy, are numerous for Zara. Zara maintains tight control over their production processes keeping design and manufacturing in-house or with some strategic partnerships located nearby Headquarters. Value drivers for Zara are both tangible and intangible in the benefits that are returned to all stakeholders. Tangibly, Inditex, the parent company of Zara, has 11.02% net margin on operations and their market capitalization (Equity – market value) is â €š ¬13, 981 (in thousands) in 2002. Their net working capital (current assets – current liabilities) is â €š ¬133 (in thousands) . Additionally, the success of Zara can be demonstrated through their outstanding financial performance. From 1996 to 2000, Inditex SA tripled their corporate profits and in 2001, a year of overall economic downturn in the retail industry, Inditex SA saw a 31% increase in profits. Intangibly, customer loyalty and brand recognition have provided significant value to Zara. The number of consumers they attract continues to rise and their brand is synonymous with the cutting edge of fashion at affordable prices. The successful implementation of Zara’s business model provides great value to stakeholders and differentiates their business from their peers.
- Vertical integration: A distinctive feature of Zara’s business model, has allowed the company to successfully develop a strong merchandising strategy. This strategy has led Zara to create a climate of scarcity and opportunity as well as a fast-fashion system. Zara manufactures 60% of its own products. By owning its in-house production, Zara is able to be flexible in the variety, amount, and frequency of the new styles they produce. Also, 85% of this production is done through the season, which allows the chain to constantly provide its costumer with very updated products. Traditional retailers lack this flexibility. Traditional retailers are obligated to place production orders to manufacturers overseas at least 6 months in advance of the season. Zara purchases its fabric in advance , much of it in grienge form this gives flexibility to color & print, to desired effect.
- Low current inventory: Regular customers know that new products are introduced every two weeks and most likely would not be available tomorrow. Therefore, Zara’s scarcity climate allows the company to sell more items at full price. This strategy minimizes Zara’s total cost because it reduces 15-20% of markdown merchandise compare to a traditional retailer. Zara’s centralized distribution facility gives the chain a competitive advantage by minimizing the lead-time of their goods, distribution center is a place where merchandise is moved rather than stored. The current ratio shows that for every euro in short-term debt, Inditex has 1.02 million euros in current assets. H&M however, has 3.40 million euros in current assets for every euro in short-term debt. The company designs and cuts its fabric in-house and it acquires fabrics in only four colors to keep costs low. Zara postpones dyeing and printing designs until close to manufacture, thereby reducing waste and minimizing the need to clear unsold inventories.
- Technology: Whether measured by IT workers as a percentage of total employees or total spending as a percentage of sales, Zaras IT expenditure is less than one-fourth the fashion industry average. Zara excels by targeting technology investment at the points in its value chain where it will have the most significant impact, making sure that every dollar spend on tech has a payoff. It still uses the DOS system without much networking capability, whereas its competitors like Prada use RFID technology, Benneton uses SAP.
- Marketing & Advertising: Zara also has an advantage over its competitors due to its low advertising costs. Zara’s advertising investment is 0-.3% as compared to traditional retailers who expends 3 – 4%. Zara relies mainly on its stores to project their image. For that reason, Zara has a department, which exclusively works in acquiring global prime real estate locations. In addition, this department is responsible for the frequent refurbishing of store layouts, as well as the creation of a common window display for Zara’s global stores.
Controlling notorious bottlenecks along the supply chain is key to speed. For example dyeing and fit are critical processes within the supply chain. Zara is a large investor in a dye and finishing plant-a notorious bottleneck. Its control allows them to oversee the dyeing process. A further trouble spot is sewing. Even though Zara uses sub-contractors some subcontractors, it carries out the bulk of all cutting itself-a crucial process that determines fit. 60% of the manufacturing processes are outsourced in countries close to the Zara headquarters in Spain to help achieve a quick turnaround. Zara maintains a strong relationship with their contractors and suppliers-viewing them as part of the company. To successfully react to consumers demands, design decisions are delayed as long as possible. Typically, Zara pre-commits to 50%-60% of its production in advance of the season, whereas other clothing retailers commit to 80%-90%. Thus Zara reserves mill capacities to ensure production facilities are available when needed.
Case 4: Ikea – Focused Cost Leadership
Ikea is one of the known global home furniture and household goods retailer which is a privately owned company. It was established by Ingvar Kamarad Sweden and in year 2008 the company owned 244 Ikea stores in 24 nations and the management is still planning to open 23 new stores. The company has also 32 stores on 16 nations and these stores were still managed and owned by franchisees outside the Ikea Group which extends the global reach of Ikea to 35 territories overseas. The Ikea Group has also been able to diversify their products beyond furnishings and furniture into food products and prefabricated housing. The company has been able to ensure that they have franchise agreements among most of the overseas operations to ensure capitalization of local marketing expertise and practices of the franchisees. The concept and trademark of Ike is owned by Ikea Systems BV and the operations of the company are basically controlled by Ingka Holding.
Primarily, the company is based on providing broad range of well-designed, functional home furnishing goods at an affordable cost to attract more customers. This concept of the Ikea is the foundation of their business operations which includes product designing, manufacturing, transportation, retailing, and assembling. The company sees to it that they work hard in attaining their business goals and providing quality products and services among their target market.
IKEA follows the focused cost leadership strategy. Young buyers in search of stylish and fashionable furniture and household accessories at a low cost are IKEA’s targeted market segment. For these customers, the firm offers home furnishings that combine good design, functionality and acceptable quality at low prices. According to the firm, low cost is always a priority. This applies to every phase of their activities.
IKEA emphasises several activities to keep its costs low. For example, instead of relying primarily on third party manufacturers, the firm’s engineers design low-cost, modular furniture ready for assembly by customers. IKEA also positions its products in domestic settings. Typically, competitors’ furniture stores display multiple varieties of a single item in separate rooms, meaning that their customers examine living room sofas in one room, tables in another room, chairs in yet another location, and accessories somewhere else entirely. In contrast, IKEA’s customers can view different furniture combinations (complete with sofas, chairs, tables, and so forth) in a single setting, which eliminates the need for sales associates or decorators to help the customer imagine how a furniture arrangement would look when placed in the customer’s home. This approach requires fewer sales personnel, allowing IKEA to keep its costs low. A third practice that helps keep IKEA’s costs low is expecting customers to transport their own purchases rather than providing a delivery service.
Although a cost leader, IKEA also offers some differentiated features that appeal to its target customers, including in-store playrooms for children, wheelchairs for customer use and extended hours. Stores outside those in the home country have “Sweden Shops” that sell Swedish specialties, such as herring, crisp bread, Swedish caviar and gingerbread biscuits. IKEA believes that these services and products are uniquely aligned with the needs of its customers, who are young, not wealthy, likely to have children, and because they work for a living, need to shop outside of regular hours. Thus, IKEA’s focused cost leadership strategy finds the firm offering some differentiated features with its low-cost products.
IKEA customers are actively involved in the shopping experience. The IKEA Concept relies on customers to choose, collect, transport and assemble IKEA products themselves. Customer involvement contributes to IKEA low prices. That is the idea behind: “You do your part. We do our part. Together we save money.”
IKEA had been successful in almost all countries, because of public awareness of the IKEA brand. IKEA is far more than a furniture merchant. It sells a lifestyle that customers around the world embrace as a signal that they have arrived, that they have good taste and recognize value.