3 levels of stratey

7/29/2019 3 Levels of Stratey

http://slidepdf.com/reader/full/3-levels-of-stratey 1/41

3 STRATEGY LEVEL

1

THREE STRATEGY LEVELS

1.INTRODUCTIONTo understand the process of strategic management the concept should be

understood and controlled. The term strategy is derived from the Greek word

“STRATEGOS” Generalship. The actual direction of military force, as distinct from

governing its deployment. The word strategy means “ THE ART OF GENERAL ”.

Based on the studies and views by various experts and management gurus Strategy in

business has taken various connotations.

Definition:

William Glueck, a Management Professor defined it as “A unified,

comprehensive and integrated plan designed to assure that the basic objectives of the

enterprise are achieved”.

Alfred Chandler defined Strategy as:- “The determination of the basic long term

goals and objectives of an enterprise and the adoption of the courses of action and the

allocation of resources necessary for carrying out these goals”.

Thus strategy is: - a. A plan / course of action leading to a direction. b. It is related

to company‟s activities. c. It deals with uncertain future. d. It depends on vision / mission

of the company to reach its current position.



3 STRATEGY LEVEL

3

8. Strategy rests on unique activities –“ The essence of strategy is in the activities –

choosing to perform things differently and to perform different activities than rivals”.

9. Strategy is long term. If company focus is only on operational effectiveness. It can

become good and not better. Overemphasis on growth leads to the dilutions of

strategy. Growth is achieved by deepening strategy.

10. Strategy is the future plan of action, which relates to the companies activities and its

mission/vision i.e. when it would like to reach from its current position.

11. It is concerned with the resource available today and those that will be required for

the future plan of action. It is about the trade off between its different activities and

creating a fit among these activities.

2.2 LEVELS OF STRATEGY:

1. When a company performs different business/ has portfolio of products, the company

will organize itself in the form of strategic business units (SBU‟s).

2. In order to segregate different units each performing a common set of activities, many

companies are organized on the basis of operating divisions/decisions. These are

known as strategic business units.

CORPORATE LEVEL

FUNCTIONAL LEVEL STRTEGIES [CORPORATE]

SBU1 SBU2 SBU3 (SBU LEVEL)

FUNCTIONAL LEVEL STRATEGIES

3. Strategies are looked at Corporate level SBU level

4. There exists a difference at functional levels like marketing, finance, productions etc.

Functional level strategies exist at both corporate and SBU level. It has to be aligned

and integrated.

5. CORPORATE LEVEL STRATEGY: It‟s a broad level strategy and all i ts plan of

actions is at corporate level i.e. what the company as a whole. It covers the various

strategies performed by different SBU‟s. Strategies needs should be in align with the

company objective.



3 STRATEGY LEVEL

4

6. Resources should be allocated to each SBU and broad level functional strategies. To

ensure things there would need to have co-ordination of different business of the

SBU‟s.

7. For most companies strategies plans are made at 3 levels.

a) FUNCTIONAL STRATEGY

b) SOCIETAL STRATEGY

c) OPERATIONAL STRATEGY

FUNCTIONAL STRATEGY: As the SBU level deals with a relatively. Smaller area

that provides objectives for a specific function in that SBU environment are

marketing, finance, production, operation etc. SOCIETAL STRATEGY: Larger Companies like conglomerates with multiple

business in different countries needs larger level strategy.

1) A relatively smaller company may require a strategy at a level higher than

corporate level.

2) It‟s how the company perceives itself in its role towards the society/ even countries

in terms of vision/ mission statement/ a set of needs that strives to fulfill corporate

level strategies are then derived from the societal strategy.

OPERATIONAL LEVEL STRATEGY: In the dynamic environment & due to the

complexities of business strategies are needed to be set at lower levels i.e. one step

down the functional level, operational level strategies. There are more specific & has

a defined scope. E.g. Marketing Strategy could be subdivided into sales Strategies for

different segments & markets, pricing, distribution etc. Some of them may be

common & some unique to the target markets. It should contribute to the functional

objectives of marketing function. These are interlinked with other strategies at

functional level like those of finance, production etc

MISSION/VISION LEVEL, CORPORATE LEVEL, FUNCTIONAL LEVEL,

STRTEGIES [CORPORATE], SBU1 SBU2 SBU3 (SBU LEVEL), FUNCTIONAL,

LEVEL STRATEGIES, OPERATIONAL LEVEL.



3 STRATEGY LEVEL

5

2.3 What makes a good strategy?

Ask a collection of management gurusand you‟ll get a variety of answers. Some say

that you need a vision. Others emphasize

focus on your core competencies. Still others

would insist that you innovate your business

model and on it goes.

There is also a divide on who should

formulate strategy. While some hold that it isa management function, others believe that it

should emerge from the bottom-up. Often it is

developed by high priced consultants who

specialize in strategy (many of whom have

never actually run a business themselves. The veritable Noah‟s Ark of voices and theories

can be downright stupefying. I would submit that one reason for the confusion and

cacophony is that, far from being monolithic, there are three levels of strategy and each

requires a very different approach. Here‟s an overview:



3 STRATEGY LEVEL

6

3. Mission and Strategic Intent

On the top level, in the domain of the founder or current CEO, a mission must be

articulated. Hamel and Pralahad call this strategic intent

Articulating a vision in this way serves as a battle cry for the organization and

forms a basis for making decisions. Google strives to “organize the world‟s

information.” Southwest Airlines focused on being “THE low cost airline.” Jack Welch,

when he was at GE, insisted on being number one or two in each and every business

where they compete.

Forming and pursuing a specific strategic intent is important, even crucial,

because it defines success and infuses an organization with meaning. However, it is

somewhat limited because it doesn‟t provide much guidance about how to actually

achieve goals. Moreover, strategic intent is somewhat static. Some companies maintain a

specific strategic intent for their entire life. So strategic intent should be considered a

good basis for long-term strategy, ranging from five years to the life for the company.

However, it is incomplete. Necessary, but not sufficient.

3.1 Strategic Moves

On the next level down we have strategic moves. This involves where a company

puts its resources and therefore, like an organization‟s mission, is under the purview of

top management and should be considered medium-term strategy (six months to a few

years).

Strategic moves should be pur sued with a specif ic strategic i ntent i n mind. Google‟s

move into mobile phones, oil companies‟ decisions about whether to invest in alternative

energy and the Gates Foundation‟s determination of sub-Saharan Africa as a center of

activity are all examples of strategic moves. Analytical management gurus of the

“positioning school” can be very helpful in guiding strategic moves. Michael Porter and

his 5 Forces framework, which takes into account not only competitors, but suppliers,

customers, market entrants and substitute goods in formulating strategy is an excellent

approach. Also, as I alluded to in an earlier post, Game Theory can be a helpful guide

http://en.wikipedia.org/wiki/Michael_Porter

http://en.wikipedia.org/wiki/Porter_5_forces_analysis

http://www.digitaltonto.com/2010/a-marketers-guide-to-game-theory/

http://www.digitaltonto.com/2010/a-marketers-guide-to-game-theory/

http://en.wikipedia.org/wiki/Porter_5_forces_analysis

http://en.wikipedia.org/wiki/Michael_Porter



3 STRATEGY LEVEL

7

when considering strategic moves. While much of the literature surrounding game theory

is highly technical, Dixit and Nalebuff have written a highly readable book that will

guide you through the basic concepts.

3.1.1 Operational Strategies

The final level is both the most difficult and the most exciting, because it involves

the way things actually get done. Operational strategies can be short-term to medium-

term, ranging from a few months to several years to execute. There can be dozens or

even hundreds going on at once.

For instance, Apple incorporated iTunes into their iPad and mobile devices in

whatClayton Christensen would call a business model innovation. They also priced the

iPod to sell briskly, started selling iPhones through Verizon and are constantly launching

new products with features that represent a plethora of smaller strategic ideas. As Henry

Mintzberg points out, operational strategies are mostly out of the control of the CEO

(although sometimes subject to final approval). However, in the best companies,

operati onal strategies eventuall y f il ter up in to strategic moves , as when Intel‟s decided

to move out of memory chips. Mintzberg calls this emergent strategy.

3.1.2 Putting it altogether

Once you realize that different approaches are needed for different levels of

strategy, a lot of confusion can be avoided. For instance, management consultants can be

helpful in formulating strategic intent and strategic moves, but are usually a disaster at

operational strategies (very few have ever had real jobs). Another salient point is that the

bulk of strategic activity occurs much fur ther down than most managers realize . If the

rank and file doesn‟t buy into the organization‟s strategic intent and strategic moves, they

will seek to undermine them and operational strategies won‟t be in line. After all, it‟s the

lunatics that run the asylum. Most of all good strategy is a dynamic, reflexive process,

constantly seeking to resolve inevitable tensions between the three levels. Leadership

after all, is as much about watching and listening as it is about setting direction.

http://www.amazon.com/Art-Strategy-Theorists-Success-Business/dp/0393337170/ref=sr_1_2?ie=UTF8&s=books&qid=1275122754&sr=8-2

http://www.claytonchristensen.com/

http://hbr.org/2008/12/reinventing-your-business-model/ar/1

http://en.wikipedia.org/wiki/Mintzberg


http://planningskills.com/glossary/154.php

http://www.digitaltonto.com/2011/why-the-lunatics-really-do-run-the-asylum/





http://planningskills.com/glossary/154.php



http://hbr.org/2008/12/reinventing-your-business-model/ar/1

http://www.claytonchristensen.com/

http://www.amazon.com/Art-Strategy-Theorists-Success-Business/dp/0393337170/ref=sr_1_2?ie=UTF8&s=books&qid=1275122754&sr=8-2



3 STRATEGY LEVEL

8

4. CORPORATE-LEVEL STRATEGY

Although alignment of strategic initiatives is a corporate-wide effort, considering

strategy in terms of levels is a convenient way to distinguish among the various

responsibilities involved in strategy formulation and implementation. A convenient way

to classify levels of strategy is to view corporate-level strategy as responsible for market

definition, business-level strategy as responsible for market navigation, and functional-

level strategy as the foundation that supports both of these.

Level of

Strategy Definition Example

Corporate

strategy Market definition

Diversification into new product or

geographic markets

Business

strategy Market navigation

Attempts to secure competitive advantage

in existing product or geographic markets

Functional

strategy

Support of

corporate strategy

and business

strategy

Information systems, human resource

practices, and production processes that

facilitate achievement of corporate and

business strategy



3 STRATEGY LEVEL

9

Corporate-level strategies address the entire strategic scope of the enterprise. This

is the "big picture" view of the organization and includes deciding in which product or

service markets to compete and in which geographic regions to operate. For multi-

business firms, the resource allocation processow cash, staffing, equipment and other

resources are distributeds typically established at the corporate level. In addition, because

market definition is the domain of corporate-level strategists, the responsibility for

diversification, or the addition of new products or services to the existing product/service

line-up, also falls within the realm of corporate-level strategy. Similarly, whether to

compete directly with other firms or to selectively establish cooperative relationship

strategic alliances all within the purview corporate-level strategy, while requiring

ongoing input from business-level managers. Critical questions answered by corporate-

level strategists thus include:

1. What should be the scope of operations; i.e.; what businesses should the firm be in?

2. How should the firm allocate its resources among existing businesses?

3. What level of diversification should the firm pursue; i.e., which businesses represent

the company's future? Are there additional businesses the firm should enter or are

there businesses that should be targeted for termination or divestment?

4. How diversified should the corporation's business be? Should we pursue related

diversification; i.e., similar products and service markets, or is unrelated

diversification; i.e., dissimilar product and service markets, a more suitable approach

given current and projected industry conditions? If we pursue related diversification,

how will the firm leverage potential cross-business synergies? In other words, how

will adding new product or service businesses benefit the existing product/service

line-up?5. How should the firm be structured? Where should the boundaries of the firm be

drawn and how will these boundaries affect relationships across businesses, with

suppliers, customers and other constituents? Do the organizational components such

as research and development, finance, marketing, customer service, etc. fit together?



3 STRATEGY LEVEL

10

Are the responsibilities or each business unit clearly identified and is accountability

established?

6. Should the firm enter into strategic alliance so operative, mutually-beneficial

relationships with other firms? If so, for what reasons? If not, what impact might this

have on future profitability?

As the previous questions illustrate, corporate strategies represent the long-term direction

for the organization. Issues addressed as part of corporate strategy include those

concerning diversification, acquisition, divestment, strategic alliances, and formulation of

new business ventures. Corporate strategies deal with plans for the entire organization

and change as industry and specific market conditions warrant.

Top management has primary decision making responsibility in developing corporate

strategies and these managers are directly responsible to shareholders. The role of the

board of directors is to ensure that top managers actually represent these shareholder

interests. With information from the corporation's multiple businesses and a view of the

entire scope of operations and markets, corporate-level strategists have the most

advantageous perspective for assessing organization-wide competitive strengths and

weaknesses, although as a subsequent section notes, corporate strategists are paralyzed

without accurate and up-to-date information from managers at the business-level.



3 STRATEGY LEVEL

11

5. CORPORATE PORTFOLIO ANALYSIS

One way to think of corporate-level strategy is to compare it to an individual

managing a portfolio of investments. Just as the individual investor must evaluate each

individual investment in the portfolio to determine whether or not the investment is

currently performing to expectations and what the future prospects are for the investment,

managers must make similar decisions about the current and future performances of

various businesses constituting the firm's portfolio. The Boston Consulting Group (BCG)

matrix is a relatively simple technique for assessing the performance of various segments

of the business.

The BCG matrix classifies business-unit performance on the basis of the unit's

relative market share and the rate of market growth as shown in Figure 1.

5.1 BCG Model of Portfolio Analysis

Products and their respective strategies fall into one of four quadrants. The typical

starting point for a new business is as a question mark. If the product is new, it has no

market share, but the predicted growth rate is good. What typically happens in an

organization is that management is faced with a number of these types of products but

with too few resources to develop all of them. Thus, the strategic decision-maker must

determine which of the products to attempt to develop into commercially viable products

and which ones to drop from consideration. Question marks are cash users in the

organization. Early in their life, they contribute no revenues and require expenditures for

market research, test marketing, and advertising to build consumer awareness.

If the correct decision is made and the product selected achieves a high market

share, it becomes a BCG matrix star. Stars have high market share in high-growth

markets. Stars generate large cash flows for the business, but also require large infusions

of money to sustain their growth. Stars are often the targets of large expenditures for

advertising and research and development to improve the product and to enable it to

establish a dominant position in the industry. Cash cows are business units that have high



3 STRATEGY LEVEL

12

market share in a low-growth market. These are often products in the maturity stage of

the product life cycle. They are usually well-established products with wide consumer

acceptance, so sales revenues are usually high. The strategy for such products is to invest

little money into maintaining the product and divert the large profits generated into

products with more long-term earnings potential, i.e., question marks and stars.

Dogs are businesses with low market share in low-growth markets. These are

often cash cows that have lost their market share or question marks the company has

elected not to develop. The recommended strategy for these businesses is to dispose of

them for whatever revenue they will generate and reinvest the money in more attractive

businesses (question marks or stars).

Despite its simplicity, the BCG matrix suffers from limited variables on which to

base resource allocation decisions among the business making up the corporate portfolio.

Notice that the only two variables composing the matrix are relative market share and the

rate of market growth. Now consider how many other factors contribute to business

success or failure. Management talent, employee commitment, industry forces such as

buyer and supplier power and the introduction of strategically-equivalent substitute

products or services, changes in consumer preferences, and a host of others determine

ultimate business viability. The BCG matrix is best used, then, as a beginning point, but

certainly not as the final determination for resource allocation decisions as it was

originally intended. Consider, for instance, Apple Computer. With a market share for its

Macintosh-based computers below ten percent in a market notoriously saturated with a

number of low-cost competitors and growth rates well-below that of other technology

pursuits such as biotechnology and medical device products, the BCG matrix would

suggest Apple divest its computer business and focus instead on the rapidly growing iPod

business (its music download business). Clearly, though, there are both technological andmarket synergies between Apple's Macintosh computers and its fast-growing iPod

business. Divesting the computer business would likely be tantamount to destroying the

iPod business.



3 STRATEGY LEVEL

13

A more stringent approach, but still one with weaknesses, is a competitive

assessment. A competitive assessment is a technique for ranking an organization relative

to its peers in the industry. The advantage of a competitive assessment over the BCG

matrix for corporate-level strategy is that the competitive assessment includes critical

success factors, or factors that are crucial for an organizational to prevail when all

organizational members are competing for the same customers. A six-step process that

allows corporate strategist to define appropriate variables, rather than being locked into

the market share and market growth variables of the BCG matrix, is used to develop a

table that shows a businesses ranking relative to the critical success factors that managers

identify as the key factors influencing failure or success. These steps include:

1. Identifying key success factors. This step allows managers to select the most

appropriate variables for its situation. There is no limit to the number of variables

managers may select; the idea, however, is to use those that are key in

determining competitive strength.

2. Weighing the importance of key success factors. Weighting can be on a scale of

1 to 5, 1 to 7, or 1 to 10, or whatever scale managers believe is appropriate. The

main thing is to maintain consistency across organizations. This step brings an

element of realism to the analysis by recognizing that not all critical successfactors are equally important. Depending on industry conditions, successful

advertising campaigns may, for example, be weighted more heavily than after-

sale product support.

3. Identifying main industry rivals. This step helps managers focus on one of the

most common external threats; competitors who want the organization's market

share.

4. Managers rating their organization against competitors.

5. Multiplying the weighted importance by the key success factor rating.

6. Adding the values. The sum of the values for a manager's organization versus

competitors gives a rough idea if the manager's firm is ahead or behind the

competition on weighted key success factors that are critical for market success.



3 STRATEGY LEVEL

14

A competitive strength assessment is superior to a BCG matrix because it adds

more variables to the mix. In addition, these variables are weighted in importance in

contrast to the BCG matrix's equal weighting of market share and market growth.

Regardless of these advantages, competitive strength assessments are still limited by the

type of data they provide. When the values are summed in step six, each organization has

a number assigned to it. This number is compared against other firms to determine which

is competitively the strongest. One weakness is that these data are ordinal: they can be

ranked, but the differences among them are not meaningful. A firm with a score of four is

not twice as good as one with a score of two, but it is better. The degree of "betterness,"

however, is not known.



3 STRATEGY LEVEL

15

6. CORPORATE GRAND STRATEGIES

As the previous discussion implies, corporate-level strategists have a tremendous

amount of both latitude and responsibility. The myriad decisions required of thesemanagers can be overwhelming considering the potential consequences of incorrect

decisions. One way to deal with this complexity is through categorization; one

categorization scheme is to classify corporate-level strategy decisions into three different

types, or grand strategies. These grand strategies involve efforts to expand business

operations (growth strategies), decrease the scope of business operations (retrenchment

strategies), or maintain the status quo (stability strategies).

6.1 GROWTH STRATEGIES

Growth strategies are designed to expand an organization's performance, usually as

measured by sales, profits, product mix, market coverage, market share, or other

accounting and market-based variables. Typical growth strategies involve one or more of

the following:

1. With a concentration strategy the firm attempts to achieve greater market penetration

by becoming highly efficient at servicing its market with a limited product line (e.g.,

McDonalds in fast foods).

2. By using a vertical integration strategy, the firm attempts to expand the scope of its

current operations by undertaking business activities formerly performed by one of

its suppliers (backward integration) or by undertaking business activities performed

by a business in its channel of distribution (forward integration).

3. A diversification strategy entails moving into different markets or adding different

products to its mix. If the products or markets are related to existing product or

service offerings, the strategy is called concentric diversification. If expansion is into

products or services unrelated to the firm's existing business, the diversification is

called conglomerate diversification.



3 STRATEGY LEVEL

16

6.2 STABILITY STRATEGIES

When firms are satisfied with their current rate of growth and profits, they may

decide to use a stability strategy. This strategy is essentially a continuation of existing

strategies. Such strategies are typically found in industries having relatively stable

environments. The firm is often making a comfortable income operating a business that

they know, and see no need to make the psychological and financial investment that

would be required to undertake a growth strategy.

6.3 RETRENCHMENT STRATEGIES

Retrenchment strategies involve a reduction in the scope of a corporation's activities,

which also generally necessitates a reduction in number of employees, sale of assetsassociated with discontinued product or service lines, possible restructuring of debt

through bankruptcy proceedings, and in the most extreme cases, liquidation of the firm.

Firms pursue a turnaround strategy by undertaking a temporary reduction in

operations in an effort to make the business stronger and more viable in the

future. These moves are popularly called downsizing or rightsizing. The hope is

that going through a temporary belt-tightening will allow the firm to pursue a

growth strategy at some future point. A divestment decision occurs when a firm elects to sell one or more of the

businesses in its corporate portfolio. Typically, a poorly performing unit is sold to

another company and the money is reinvested in another business within the

portfolio that has greater potential.

Bankruptcy involves legal protection against creditors or others allowing the firm

to restructure its debt obligations or other payments, typically in a way that

temporarily increases cash flow. Such restructuring allows the firm time to

attempt a turnaround strategy. For example, since the airline hijackings and the

subsequent tragic events of September 11, 2001, many of the airlines based in the

U.S. have filed for bankruptcy to avoid liquidation as a result of stymied demand

for air travel and rising fuel prices. At least one airline has asked the courts to



3 STRATEGY LEVEL

17

allow it to permanently suspend payments to its employee pension plan to free up

positive cash flow.

Liquidation is the most extreme form of retrenchment. Liquidation involves the

selling or closing of the entire operation. There is no future for the firm;

employees are released, buildings and equipment are sold, and customers no

longer have access to the product or service. This is a strategy of last resort and

one that most managers work hard to avoid.



3 STRATEGY LEVEL

18

7. BUSINESS-LEVEL STRATEGIES

Business-level strategies are similar to corporate-strategies in that they focus on

overall performance. In contrast to corporate-level strategy, however, they focus on only

one rather than a portfolio of businesses. Business units represent individual entities

oriented toward a particular industry, product, or market. In large multi-product or multi-

industry organizations, individual business units may be combined to form strategic

business units (SBUs). An SBU represents a group of related business divisions, each

responsible to corporate head-quarters for its own profits and losses. Each strategic

business unit will likely have its' own competitors and its own unique strategy. A

common focus of business-level strategies are sometimes on a particular product or

service line and business-level strategies commonly involve decisions regarding

individual products within this product or service line. There are also strategies regarding

relationships between products. One product may contribute to corporate-level strategy

by generating a large positive cash flow for new product development, while another

product uses the cash to increase sales and expand market share of existing businesses.

Given this potential for business-level strategies to impact other business-level strategies,

business-level managers must provide ongoing, intensive information to corporate-levelmanagers. Without such crucial information, corporate-level managers are prevented

from best managing overall organizational direction. Business-level strategies are thus

primarily concerned with:

1. Coordinating and integrating unit activities so they conform to organizational

strategies (achieving synergy).

2. Developing distinctive competencies and competitive advantage in each unit.

3.

Identifying product or service-market niches and developing strategies for competing in each.

4. Monitoring product or service markets so that strategies conform to the needs of the

markets at the current stage of evolution.



3 STRATEGY LEVEL

19

In a single-product company, corporate-level and business-level strategies are the

same. For example, a furniture manufacturer producing only one line of furniture has its

corporate strategy chosen by its market definition, wholesale furniture, but its business is

still the same, wholesale furniture. Thus, in single-business organizations, corporate and

business-level strategies overlap to the point that they should be treated as one united

strategy. The product made by a unit of a diversified company would face many of the

same challenges and opportunities faced by a one-product company. However, for most

organizations, business-unit strategies are designed to support corporate strategies.

Business-level strategies look at the product's life cycle, competitive environment, and

competitive advantage much like corporate-level strategies, except the focus for business-

level strategies is on the product or service, not on the corporate portfolio.

Business-level strategies thus support corporate-level strategies. Corporate-level

strategies attempt to maximize the wealth of shareholders through profitability of the

overall corporate portfolio, but business-level strategies are concerned with (1) matching

their activities with the overall goals of corporate-level strategy while simultaneously (2)

navigating the markets in which they compete in such a way that they have a financial or

market edge-a competitive advantage-relative to the other businesses in their industry.



3 STRATEGY LEVEL

20

8. ANALYSIS OF BUSINESS-LEVEL STRATEGIES

PORTER'S GENERIC STRATEGIES.

Harvard Business School's Michael Porter developed a framework of generic

strategies that can be applied to strategies for various products and services, or the

individual business-level strategies within a corporate portfolio. The strategies are (1)

overall cost leadership, (2) differentiation, and (3) focus on a particular market niche. The

generic strategies provide direction for business units in designing incentive systems,

control procedures, operations, and interactions with suppliers and buyers, and with

making other product decisions.

Cost-leadership strategies require firms to develop policies aimed at becoming

and remaining the lowest cost producer and/or distributor in the industry. Note here that

the focus is on cost leadership, not price leadership. This may at first appear to be only a

semantic difference, but consider how this fine-grained definition places emphases on

controlling costs while giving firms alternatives when it comes to pricing (thus ultimately

influencing total revenues). A firm with a cost advantage may price at or near

competitors prices, but with a lower cost of production and sales, more of the price

contributes to the firm's gross profit margin. A second alternative is to price lower thancompetitors and accept slimmer gross profit margins, with the goal of gaining market

share and thus increasing sales volume to offset the decrease in gross margin. Such

strategies concentrate on construction of efficient-scale facilities, tight cost and overhead

control, avoidance of marginal customer accounts that cost more to maintain than they

offer in profits, minimization of operating expenses, reduction of input costs, tight control

of labor costs, and lower distribution costs. The low-cost leader gains competitive

advantage by getting its costs of production or distribution lower than the costs of the

other firms in its relevant market. This strategy is especially important for firms selling

unbranded products viewed as commodities, such as beef or steel.

Cost leadership provides firms above-average returns even with strong

competitive pressures. Lower costs allow the firm to earn profits after competitors have



3 STRATEGY LEVEL

21

reduced their profit margin to zero. Low-cost production further limits pressures from

customers to lower price, as the customers are unable to purchase cheaper from a

competitor. Cost leadership may be attained via a number of techniques. Products can be

designed to simplify manufacturing. A large market share combined with concentrating

selling efforts on large customers may contribute to reduced costs. Extensive investment

in state-of-the-art facilities may also lead to long run cost reductions. Companies that

successfully use this strategy tend to be highly centralized in their structure. They place

heavy emphasis on quantitative standards and measuring performance toward goal

accomplishment.

Efficiencies that allow a firm to be the cost leader also allow it to compete

effectively with both existing competitors and potential new entrants. Finally, low costs

reduce the likely impact of substitutes. Substitutes are more likely to replace products of

the more expensive producers first, before significantly harming sales of the cost leader

unless producers of substitutes can simultaneously develop a substitute product or service

at a lower cost than competitors. In many instances, the necessity to climb up the

experience curve inhibits a new entrants ability to pursue this tactic.

Differentiation strategies require a firm to create something about its product that

is perceived as unique within its market. Whether the features are real, or just in the mind

of the customer, customers must perceive the product as having desirable features not

commonly found in competing products. The customers also must be relatively price-

insensitive. Adding product features means that the production or distribution costs of a

differentiated product will be somewhat higher than the price of a generic, non-

differentiated product. Customers must be willing to pay more than the marginal cost of

adding the differentiating feature if a differentiation strategy is to succeed.

Differentiation may be attained through many features that make the product or

service appear unique. Possible strategies for achieving differentiation may include

warranty (Sears tools have lifetime guarantee against breakage), brand image (Coach

handbags, Tommy Hilfiger sportswear), technology (Hewlett-Packard laser printers),

features (Jenn-Air ranges, Whirlpool appliances), service (Makita hand tools), and dealer



3 STRATEGY LEVEL

22

network (Caterpillar construction equipment), among other dimensions. Differentiation

does not allow a firm to ignore costs; it makes a firm's products less susceptible to cost

pressures from competitors because customers see the product as unique and are willing

to pay extra to have the product with the desirable features.

Differentiation often forces a firm to accept higher costs in order to make a

product or service appear unique. The uniqueness can be achieved through real product

features or advertising that causes the customer to perceive that the product is unique.

Whether the difference is achieved through adding more vegetables to the soup or

effective advertising, costs for the differentiated product will be higher than for non-

differentiated products. Thus, firms must remain sensitive to cost differences. They must

carefully monitor the incremental costs of differentiating their product and make certain

the difference is reflected in the price.

Focus, the third generic strategy, involves concentrating on a particular customer,

product line, geographical area, channel of distribution, stage in the production process,

or market niche. The underlying premise of the focus strategy is that the firm is better

able to serve its limited segment than competitors serving a broader range of customers.

Firms using a focus strategy simply apply a cost-leader or differentiation strategy to a

segment of the larger market. Firms may thus be able to differentiate themselves based on

meeting customer needs through differentiation or through low costs and competitive

pricing for specialty goods.

A focus strategy is often appropriate for small, aggressive businesses that do not

have the ability or resources to engage in a nation-wide marketing effort. Such a strategy

may also be appropriate if the target market is too small to support a large-scale

operation. Many firms start small and expand into a national organization. Wal-Mart

started in small towns in the South and Midwest. As the firm gained in market

knowledge and acceptance, it was able to expand throughout the South, then nationally,

and now internationally. The company started with a focused cost-leader strategy in its

limited market and was able to expand beyond its initial market segment.



3 STRATEGY LEVEL

23

Firms utilizing a focus strategy may also be better able to tailor advertising and

promotional efforts to a particular market niche. Many automobile dealers advertise that

they are the largest-volume dealer for a specific geographic area. Other dealers advertise

that they have the highest customer-satisfaction scores or the most awards for their

service department of any dealer within their defined market. Similarly, firms may be

able to design products specifically for a customer. Customization may range from

individually designing a product for a customer to allowing the customer input into the

finished product. Tailor-made clothing and custom-built houses include the customer in

all aspects of production from product design to final acceptance. Key decisions are made

with customer input. Providing such individualized attention to customers may not be

feasible for firms with an industry-wide orientation

9. FUNCTIONAL-LEVEL STRATEGIES.

Functional-level strategies are concerned with coordinating the functional areas of

the organization (marketing, finance, human resources, production, research and

development, etc.) so that each functional area upholds and contributes to individual

business-level strategies and the overall corporate-level strategy. This involves

coordinating the various functions and operations needed to design, manufacturer,

deliver, and support the product or service of each business within the corporate

portfolio. Functional strategies are primarily concerned with:

Efficiently utilizing specialists within the functional area.

Integrating activities within the functional area (e.g., coordinating advertising,

promotion, and marketing research in marketing; or purchasing, inventory control,

and shipping in production/operations).

Assuring that functional strategies mesh with business-level strategies and the

overall corporate-level strategy.

Functional strategies are frequently concerned with appropriate timing. For

example, advertising for a new product could be expected to begin sixty days prior to



3 STRATEGY LEVEL

24

shipment of the first product. Production could then start thirty days before shipping

begins. Raw materials, for instance, may require that orders are placed at least two weeks

before production is to start. Thus, functional strategies have a shorter time orientation

than either business-level or corporate-level strategies. Accountability is also easiest to

establish with functional strategies because results of actions occur sooner and are more

easily attributed to the function than is possible at other levels of strategy. Lower-level

managers are most directly involved with the implementation of functional strategies.

Strategies for an organization may be categorized by the level of the organization

addressed by the strategy. Corporate-level strategies involve top management and address

issues of concern to the entire organization. Business-level strategies deal with major

business units or divisions of the corporate portfolio. Business-level strategies are

generally developed by upper and middle-level managers and are intended to help the

organization achieve its corporate strategies. Functional strategies address problems

commonly faced by lower-level managers and deal with strategies for the major

organizational functions (e.g., marketing, finance, production) considered relevant for

achieving the business strategies and supporting the corporate-level strategy. Market

definition is thus the domain of corporate-level strategy, market navigation the domain of

business-level strategy, and support of business and corporate-level strategy byindividual, but integrated, functional level strategies.



3 STRATEGY LEVEL

25

9.1 Three Levels of Strategy: Similar Components But Different Issues

We have argued that marketing managers have primary responsibility for the

marketing strategies associated with individual product or service offerings, and that their

perspectives and inputs often have a major influence on the decisions that shape

corporate and business-level strategies. But we haven‟t said much about what those

strategic decisions are. Consequently, it‟s time to define what strategies are and how they

vary across different levels of an organisation.

Strategy: A Definition

Although strategy first became a popular business buzzword during the 1960s, it

continues to be the subject of widely differing definitions and interpretations. The

following definition, however, captures the essence of the term:

A strategy is a fundamental pattern of present and planned objectives, resource

deployments, and interactions of an organisation with markets, competitors, and

other environmental factors.



3 STRATEGY LEVEL

26

The Components of Strategy

A well-developed strategy contains five components, or sets of issues:

Scope. The scope of an organisation refers to the breadth of its strategic domain –

the number and types of industries, product lines, and market segments it

competes in or plans to enter. [1]

Decisions about an organisation‟s strategic scope

should reflect management‟s view of the firm‟s purpose or mission. This common

thread among its various activities and product-markets defines the essential

nature of what its business is and what it should be.

Goals and objectives. Strategies should also detail desired levels of

accomplishment on one or more dimensions of performance – such as volume

growth, profit contribution, or return on investment – over specified time periods

for each of those businesses and product-markets and for the organisation as a

whole.[2]

Resource deployments. Every organisation has limited financial and human

resources. Formulating a strategy also involves deciding how those resources are

to be obtained and allocated, across businesses, product-markets, functional

departments, and activities within each business or product-market.[3]

Identification of a sustainable competitive advantage. One important part of any

strategy is a specification of how the organisation will compete in each business

and product-market within its domain. How can it position itself to develop and

sustain a differential advantage over current and potential competitors? To answer

such questions, managers must examine the market opportunities in each business

and product-market and the company‟s distinctive competencies or strengths

relative to its competitors. Synergy. Synergy exists when the firm‟s businesses, product-markets, resource

deployments, and competencies complement and reinforce one another. Synergy

enables the total performance of the related businesses to be greater than it would

otherwise be: The whole becomes greater than the sum of its parts.

http://marketingblog.wikispaces.com/2.2+Three+Levels+of+Strategy+Similar+Components+but+different+issues#cite_note-1














3 STRATEGY LEVEL

27

9.2 The Hierarchy of Strategies

Explicitly or implicitly, these five basic dimensions are part of all strategies.

However, rather than a single comprehensive strategy, most organisations have a

hierarchy of interrelated strategies, each formulated at a different level of the firm. The

three major levels of strategy in most large, multiproduct organisations are (1) corporate

strategy, (2) business-level strategy, and (3) functional strategies focused on a particular

product-market entry. [5]

In small, single-product-line companies or entrepreneurial start-

ups, however, corporate and business-level strategic issues merge.

Strategies at all three levels contain the five components mentioned earlier, but

because each strategy serves a different purpose within the organisation, each emphasises

a different set of issues. Exhibit 2.5 summarises the specific focus and issues dealt with at

each level of strategy; we discuss them in the next sections.




http://coursewebsites.ebsglobal.net/CourseContent/h17mk/textpages/MA0202.html#MAE0205

http://coursewebsites.ebsglobal.net/CourseContent/h17mk/textpages/MA0202.html#MAE0205




3 STRATEGY LEVEL

28

Exhibit 2.5 Key components of corporate, business and marketing strategies

Strategy

components

Corporate strategy Business strategy Marketing strategy

ScopeCorporate domain: „Which

business should we be in?‟

Corporate development

strategy:

– Conglomerate

diversification (expansion

into unrelated businesses)

– Vertical integration

– Acquisition and

divestiture policies

Business domain:

„Which product markets

should we be in within

this business or

industry?‟

Business development

strategy:

– Concentric

diversification (new

products for existing

customers or new

customers for existing

products)

Target market definition

Product-line depth and

breadth

Branding policies

Product-market development

plan

Line extension and product

elimination plans

Goals and

objectives

Overall corporate objectives

aggregated across

businesses:

– Revenue growth

– Profitability

– ROI (return on

investment)

– Earnings per share

– Contributions to other

stakeholders

Constrained by

corporate goals

Objectives aggregated

across product-market

entries in the business

unit:

– Sales growth

– New product or

market growth

– Profitability

– ROI

– Cash flow

Constrained by corporate

and business goals

Objectives for a specific

product-market entry:

– Sales

– Market share

– Contribution margin

– Customer satisfaction



3 STRATEGY LEVEL

29

– Strengthening bases of

competitive advantage

Allocation of resources

Allocation among businesses in the corporate

portfolio

Allocation across functions

shared by multiple

businesses (corporate R&D,

MIS)

Allocation among product-market entries

in the business unit

Allocation across

functional departments

within the business unit

Allocation acrosscomponents of the marketing

plan (elements of the

marketing mix) for a specific

product-market entry

Sources of

competitive

advantage

Primarily through superior

corporate financial or

human resource; more

corporate R&D; better

organisational processes or

synergies relative to

competitors across all

industries

Primarily through

competitive strategy;

business unit‟s

competencies relative to

competitors in its

industry

Primarily through effective

product positioning;

superiority on one or more

components of the marketing

mix relative to competitors

within a specific product

market

Sources of

synergy

Shared resources,

technologies or functional

competencies across

businesses within the firm

Shared marketing resources,

competencies or activities across

product-market entries

9.3 Corporate Strategy

At the corporate level, managers must coordinate the activities of multiple business units

and, in the case of conglomerates, even separate legal business entities. Decisions about

the organisation‟s scope and resource deployments across its divisions or businesses are

the primary focus of corporate strategy. The essential questions at this level include,

What business(es) are we in? What business(es) should we be in? and What portion of our



3 STRATEGY LEVEL

30

total resources should we devote to each of these businesses to achieve the organisation‟s

overall goals and objectives? Thus, new CEO Gerstner and other top-level managers at

IBM decided to pursue future growth primarily through the development of Web-based

services and software rather than computer hardware. They shifted substantial corporate

resources – including R&D expenditures, marketing and advertising budgets, and vast

numbers of salespeople – into the corporation‟s service and software businesses to

support the new strategic direction.

Attempts to develop and maintain distinctive competencies at the corporate level focus on

generating superior human, financial, and technological resources; designing effective

organisation structures and processes; and seeking synergy among the firm‟s various

businesses. Synergy can provide a major competitive advantage for firms where related businesses share R&D investments, product or production technologies, distribution

channels, a common salesforce and/or promotional themes – as in the case of IBM.[12]

9.4 Business-Level Strategy

How a business unit competes within its industry is the critical focus of business-level

strategy. A major issue in a business strategy is that of sustainable competitive advantage.

What distinctive competencies can give the business unit a competitive advantage? And

which of those competencies best match the needs and wants of the customers in the

business‟s target segment(s)? For example, a business with low-cost sources of supply

and efficient, modern plants might adopt a low-cost competitive strategy. One with a

strong marketing department and a competent salesforce may compete by offering

superior customer service.[13]

Another important issue a business-level strategy must address is appropriate scope: how

many and which market segments to compete in, and the overall breadth of product

offerings and marketing programs to appeal to these segments. Finally, synergy should be

sought across product-markets and across functional departments within the business.

9.5 Marketing Strategy

http://coursewebsites.ebsglobal.net/CourseContent/h17mk/textpages/ginmk670.html#MAC0212






3 STRATEGY LEVEL

31

The primary focus of marketing strategy is to effectively allocate and coordinate

marketing resources and activities to accomplish the firm‟s objectives within a specific

product-market. Therefore, the critical issue concerning the scope of a marketing strategy

is specifying the target market(s) for a particular product or product line. Next, firms seek

competitive advantage and synergy through a well-integrated programme of marketing

mix elements (the 4 Ps of product, price, place, promotion) tailored to the needs and

wants of potential customers in that target market.

10. 3 Generic Business-level Strategies

Business-level strategy can be defined as the strategy that is chosen by a

company to hold a competitive advantage within the market that it is involved with. Such

a strategy has to be chosen by firms because of the intense competition that exists within

a certain industry and thus managers, see the need to formulate business-level strategies

that are geared towards creating and maintaining a competitive advantage over the rival

firms in the same industry. This is a choice that a firm has to make when it chooses to

compete in a single product market where every firm‟s products share the some

similarities.

There are three generic strategies that were developed by Michael Porter, who is adistinguished Harvard professor and author of numerous books and articles that deal with

the competitive advantages of companies and nations, that are considered to the

cornerstone of strategies that you formulate to give you an edge in competing with your

rivals and making above average economic profits for your firm. These strategies are

cost-leadership, differentiation and focus. The strategy that you choose depends on

numerous factors, both internal and external. These factors could include type of

industry, cost of raw materials, type of labour skills required, technology, governmental

factors, consumers and many more such factors.

We will now look at the three generic business-level strategies in greater detail

and find out how these strategies work. The textbook, Management – A Pacific Rim

focus, defines cost-leadership, the first of the three strategies we will be looking at, as a,



3 STRATEGY LEVEL

32

“strategy … emphasising organizational efficiency so overall cost of providing products

and services are lower than that of the competitors.”

This strategy called cost-leadership, involves the very delicate process of being

able to produce or be able to deliver goods or services that are of standards acceptable to

customers at a cost that is considered to be the lowest among all the competitors in the

given market. This does not however, imply that the good that the cost-leader sells or that

the service you provide is in any way an inferior good when it is compared to a

competitors product but, a product or service that is of the same or of comparable quality

that is cheaper than the rest of the rival‟s products. If a good is deemed to be of inferior

quality when compared to a competitor‟s then, the customer will decide to go with the

good or service that is of a higher quality because he perceives this good to be of better

value than the cheap good or service that the cost-leader is producing.

The implementation of this strategy by a firm will also imply that this firm has to

be an industry leader in terms of volume sold because, for the firm to be able to make an

above average profits, it has to sell very high quantities because the profits that the cost-

leader makes on a single unit is negligible because of the strategy that the firm has

decided to implement. There are various ways for a firm to go about implementing a

strategy such as cost-leadership. The firm has to analyse its situation, its resources and

then decide on which course to take in order for it to become a cost-leader in its market.

The first and most important way that a firm can become a cost leader is through

the process known as economies of scale. Economies of scale is defined as the process

whereby, the mass production of the good in large quantities reduces the per unit price of

producing the good. Thus, by being able to produce the good at a low price, the firm is

able to sell its product in the market at the cheapest price thus, establishing itself in the

market as a cost-leader.

The second way to achieve cost-leadership is through the cutting down or the

trimming of unnecessary costs such as overhead, administrative as well as other costs that

have the potential to increase the per unit cost of the product. Such a move has to also



3 STRATEGY LEVEL

33

include cutting of costs in major areas such as promotions and advertising. This is done

because, cost that are involved with promotions and advertising are always passed to the

customer and since, the firm wants to be a price-leader in its market, it has to streamline

its costs and not add on unnecessary costs that have the potential to increase the per unit

cost of the good and thus, risk the firm losing its cost-leader status in the industry.

The learning curve effect also plays a very important role in the reduction of the

per unit cost of the product. The learning curve effect is defined as the “percentage

decrease in additional labour cost each time output doubles.” It is a proven fact that every

time the output doubles, the labour costs that arise from the production of additional units

usually declines by 80%. A figure is attached in appendix section labelled Appendix 1

which shows a learning curve that adheres to this 80 percent rule.

Technology plays a very pivotal role in the reduction of the per unit costs of the

product. Better technology will ensure that the products are produced at a cheaper price

than compared to before then new technology was adopted. Better technology will also

ensure that there is a decrease in the number of defects that is produced and thus, the unit

cost of the good will be lower than compared to before the adoption of new technology.

The reduction of defects will also help to keep the unit cost of the product down.

Finally, the cost-leader needs to have a very good logistics network to supplement

its production capabilities. The logistics network should encompass both the input as well

as the output parts of the operations. A good logistics network ensures that the company

saves warehousing costs for both its raw materials as well as its finished goods. The other

plus factor about having a good transportation network is that, you can transport your

goods where you want and when you want without any hassles. This will ensure that the

consumer always has access to your products and does not have to settle for a substitute.

A firm that aims to be the cost-leader in its market displays a few characteristics

that are similar to all cost-leaders regardless of what market it is in or what good it

produces. One such characteristic is the fact that this firm has to follow a policy that

makes it very capital intensive when it comes to the manufacturing or the production of



3 STRATEGY LEVEL

34

the good. This is because to cut costs related to labour, the firm has to invest heavily in

new technology as well as new machines that will reduce its reliance on the labour force

and thus in the long run cut costs that have the potential to be passed on to the consumers.

The second strategy, that was formulated by Porter, which we have to look at, is

called differentiation. The textbook defines this business-strategy as the, “strategy …

involving attempting to develop products or services viewed as being unique to the

industry.” This is the process whereby firms, that follow this strategy, produce or deliver

services that the consumer feels is of use to him and there is no other product in the

market meets his or her criteria‟s for buying the good or service. Th ese products are

unique when compared to the goods or services produced by the competitors because,

they have features or special aspects that cause this particular product to differ from the

other existing products. And, it is because of this very difference in features that the

consumer perceives that the differentiated product as important enough to buy. Customer

perception is very important when you employ a business strategy such as differentiation.

Only if a customer is able to perceive that the good that the firm is selling is of a higher

quality will he buy the good or service.

The other reason why some firms opt to choose a strategy such as differentiation

is because, that with the differentiation of products, the firm will have the option to serve

a much bigger segment of the market if it chooses to. They can do this by gearing

different products i.e. the same product with varying features to serve different segments

whose needs and requirements will be different. How many segments a firm should opt to

target depends completely upon the company and its capabilities. Should it have the

resources and the capital, it will be a very good move to target every segment is the

market so as to capture a chunk of business from every segment thus, becoming a major

market player.

There are various methods that a firm can employ so as to differentiate it products

from the rest of the products that are in the market. How you differentiate is not very

important. But, when the differentiation is done, the features or designs employed must



3 STRATEGY LEVEL

35

be visible enough for the consumer who is about to buy the product to perceive it as

important enough to buy. As I have mentioned before, the perception that the consumer

has, is an important determinant is to how well the product sells in the market segment.

The simplest way that a firm can go about differentiating a product is by changing

its features. The firm should be able to provide features and designs that consumers see

the need for. To succeed in doing this, you need to be aware of the changing needs of the

consumer. This is usually done through conducting market surveys and using other

channels and means through which a firm is able to get inputs from the consumer as to

what features or designs they prefer. This way, the firm will have the ability anticipate

what the consumer demands and also stay ahead of the competition by giving what the

consumer demands.

Another method that firms use to pursue their differentiation strategy is through

the use of a very large product mix. This, simply explained, implies that the firm does not

have to product one product with all the features and designs loaded into it but, they can

create a spectrum of products with varying features and designs. This will also ensure

that the firm produces goods, for the same market, that are unique. This is also a very

useful method that firms employ to cater to more than one segment of the market.

The use of a product mix also ensures that the products or services that you

produce or deliver are made from similar raw materials as only their features and designs

differ. This also helps the firm save some costs involved with the stocking and sourcing

of different raw materials. By having the same materials for the different products and

services, the firm ensures that the processes for the manufacture of the good is relatively

the same and thus, this ensures that money is saved as no retooling has to be done to

produce different goods. This cost saving can in turn be passed on to the consumer thus,

giving the consumer an added incentive to buy the product over the firms competitors.

A firm enjoys a differentiation strategy when it is the first firm in a new industry.

This is a process known as the first mover advantage. This simply implies that since the

firm is the first one in the market, the product or service that the firm puts out to the



3 STRATEGY LEVEL

36

consumer is the only one in the market and thus, it enjoys the benefits of the

differentiation strategy because it is a new product that no consumer has seen before and

thus, it is different in all aspects. But, as new entrants begin to trickle into the industry,

the first mover needs to begin the process of true differentiation by implementing one of

the many methods that are available to it. This will ensure that the firm does not lose

ground to the new rivals and stays on top. This has to be done if the new mover wants to

still be able to enjoy above average economic profits that it enjoyed as a new firm in a

new market.

Brands and firms that are well known in a particular industry also use the differentiation

strategy. They like to differentiate themselves from the rest of the products or services inthe market by banking on the fact that people will recognize their brand and know that it

stands for good quality, design or features. This type of brand differentiation always

depends on the perception of the consumers. If the consumers perceive that a known

brand to be of a higher quality, then they will buy the product or service. This is where

tools like promotion and advertising come in where the firm tries to inform the

consumers of the difference between its products and the other products that exist in the

market.

Firms that decide to adopt this strategy need to keep improving and updating their

products to prevent the competition from reaching the standards that the firm has set. To

do this, the firm needs to invest heavily in research and development to ensure that they

have access to the latest breakthroughs first. To be profitable using this strategy, the firm

has to be able to hire, train and retain high skilled workers, unlike the cost-leadership

strategy which makes use of low-skilled labour, to produce their high end products. Since

the product is of high quality, unique and now mass produced, it requires the skills of

highly qualified workers to produce and deliver them. Last but not least, there as to be a

high level of coordination between the various departments of the firm such as marketing,

management, research and development. This is done to ensure that the operation of the

firm is a smooth one and also to make sure that the customers needs are received,



3 STRATEGY LEVEL

37

manufactured and put out into the market before the competition has a chance to deliver

the product. This will ensure that a company following this strategy will make profits that

are above average.

The last of Porter‟s generic business strategies that we look at is called focus. The

textbook defines focus strategy as the, “strategy outlined by Porter entailing specialising

a position of overall cost leadership, differentiating or both, but only within a particular

portion or segment, of am entire market.” The use of such a strategy ensures that you try

to integrate a set of actions, from both the differentiation as well as the cost-leadership

strategies to produce goods that only cater to one small segment of the market as a whole.

The segment that you choose to concentrate on depends on where you feel that you can

make the highest profits.

Within the focus strategy itself, a firm can opt to choose one of two more specific

strategies that suit the firm best. Focused cost-leadership strategy, a strategy which offers

low priced products to customers in only one segment of the market, is one of these

strategies. The other one being focused differentiation strategy which offers unique or

varied products to customers in more than one segment of the market. The second option

is usually chosen if the firm wants to be able to compete in more than one segment thus,

increasing its overall profits.

The advantages of adopting a focus strategy are many. There are also some

disadvantages to being too focused. We will look at these advantages and disadvantages

in more detail.

One very important advantage of adopting a focus strategy is the ability of the

firms to be able to quickly change or adapt to an ever changing environment. This is

possible because of the smaller size of the companies when compared to a cost-leader or

a firm that practices differentiation. This is very advantageous because, an every

changing environment can help or hinder the firm from making profits. Thus, to counter

the effect of an ever changing environment, the firm needs to react quickly and change

with it or risk getting left behind.



3 STRATEGY LEVEL

38

Again, because of the size of the firm and the vast resources available to it, a firm

can use this to its advantage and be able to embrace new technologies and processes that

become available to the firm. This is also helped by the fact that a firm that follows this

strategy, has to employ a highly skilled workforce and such a workforce, will be able to

change faster. By moving quickly to adopt such new technologies and processes, the firm

can further cut costs and produce higher quality products that will appeal more to the

consumer. By cutting costs, they can also to aim to compete in the focused cost-

leadership strategy where they can maximise profits by selling cheaper than rivals.

The last advantage that I will list in this paper for the focus strategy is about the

advantage the a firm that practices the focus strategy has over its rivals because of the

knowledge and experience that this firm possesses in areas dealing with its core

competencies. It is always an acknowledged fact that, for a firm to compete against its

rivals, it had to use the experience is specific core areas that the firm is better at than the

rival firms. This is how focus strategy based companies compete. They focus on areas

they are experienced in and it is in these areas that rivals cannot compete with these firms

because of their prior experience and strong brand presence that has already been

established because of it reputation in that particular segment.

One major disadvantage for a focus strategy based company when the firm

becomes too focus in such a way that it serves consumers in one small sector of one

segment. If environmental changes were to cause a decline or a full termination of the

population in the niche segment that the firm is competing in, the firm will have no more

consumers on whom to bank so it has put itself in a corner. Thus, to prevent a situation

like this from taking place, the firm should recognise from the start that the focus

segment should not be one that is too narrow and it must give itself some room to move

and make changes as necessary when there is a change in the environment. It is because

of this, that companies in this segment need to constantly be performing an activity

known as environment scanning. This is to ensure that they can anticipate future trends,

changes and designs and make changes to be prepared for the environment change when

it occurs. This way, the firm does not lose out when there is a shift in trends or fashions.



3 STRATEGY LEVEL

39

One final disadvantage is that, if a particular firm who follows a strategy such as

cost-leadership or differentiation, decides to supply products that also appeal to your

niche market and, because of the strategy that they adhere to, their costs will be very

much cheaper when compared to a firm that follows the focus strategy. The problem

arises when consumers of this niche segment, that the focus strategy based firm is

targeting, choose products that are from these other firms. The focus strategy based firm

is unable to fight back because it is simply not geared to counter firms that can produce

numerous unique products or products that are very much cheaper. Thus, a firm that

wants to adopt a strategy such as focus, has to assess the risks of potential entrants to the

niche segment, that may arise before embarking on such a strategy and make

arrangements to counter such a move should the scenario come true.

I will now look at the automotive industry to illustrate with examples as to how

the different firms with the industry adopted and worked with the three generic strategies

that were described in great detail in the first part of this answer.

Everyone is familiar with the famous words by Henry Ford, “You can have any

colour as long as it is black.” This very clearly illustrated how convinced Henry Ford was

with the cost-leadership model. The Ford motor company was formed in 1903 by Henry

Ford whose aim was to provide the people with a cheap and affordable car that any

middle class employed person could own. Henry Ford‟s firm produced low cost

standardised products and, consumers had to substitute low cost for features. He achieved

this with his very famous car the Model T. He became the first person to use the cost-

leadership strategy with the implementation of a process that we today term as mass

production. He established assembly lines through which he maximised his outputs. To

become an even greater cost-leader, Ford motor company also practiced vertical

integration when the started to produce many of the production line machines in firms

that Ford owned. This was also done because at this early stage in the automotive market,

there were no machines that were available to this industry thus, Ford had to make their

own machines and with this, they effectively saved costs in the long run. With the

establishment of such a system, he was also able to employ low skilled workers who were



3 STRATEGY LEVEL

40

given specific jobs, like tire fitting, on the assembly lines. He took the cost-leadership

model a step further by standardising even the colour of the cars that his firm produced.

All these factors made his firm a highly effective cost-leader in the automotive field. But,

as we will see later, this very strategy was what caused his company to lose ground in the

market to other companies such as General Motor Company.

With the use of this strategy, Henry Ford emphasized innovation more in the field

of process improvement i.e. how to better improve the production so as to cut more costs.

By doing this, he effectively ignored the demand for innovation in the field of design and

improvement of the Model T. This was the one disadvantage in his cost-leader strategy

that cost the company dearly when new entrants saw the flaw in his strategy and

exploited thus, eroding his market share. Appendix 2 will show you how dramatic the

loss in market share was when new entrants came and filled the void that Ford had left by

now being an innovator.

General Motor Company did not always start out as a company that practised

differentiation for its business strategy. Before it became an industry leader using the

differentiation strategy, it had a very relaxed wait and see approach that would have

bankrupted the company had the management not realized this and changed its business

strategy to one of differentiation.

General Motors Company (GM) was founded in 1908 by William Durant, a carriage

merchant, as Buick Motor Company. From 1908 to 1911 he consolidated major car

companies such as Oldsmobile, Cadillac and Oakland (Pontiac) and called the

consolidated company GM. In 1915, he added the Chevrolet, the crown jewel to his

already full stable of car makes at GM. Though he acquired all these companies, Durant

had no idea how to truly consolidate these companies and how to standardize the flow of

information and what the management structure of the company was going to be like. He

also had no effective financial or cost controls over the whole organization. This was

because he was unable to decide on what the structure of the company was going to be

like and what kind of a business strategy he wanted to adopt.



3 STRATEGY LEVEL

In the early, 1920‟s a person by the name of Alfred Sloan took over the

management of GM and immediately set about restructuring the company. He adopted

the model that Dupont was using, the multidivisional strategy for the way the company

was to be structured. Along with this, he also imposed divisional, administrative, cost and

financial costs in order to standardise the flow of information to one format that all

divisions could decipher.

The most important thing he did after he took over was to restructure the product

lines by divisions so as to gear up for a very “aggressive” differentiation in which, every

division would have a part to play to kill the competition. His differentiation strategy

consisted of two parts. The first part would be to use his flagship division, Chevrolet, to

directly compete with Ford‟s Model T and work to steal business from Ford. This would

cut Ford‟s market share and thus, it would lose its position as a market leader. His second

part of the differentiation strategy was to use the rest of the car divisions he had at GM to

effectively cover all the different price ranges that existed within the market so as to

prevent any new entrants from venturing into the market and also to compete with the

small player that existed within these price divisions.

3 levels of stratey

Documents