Republic of the Philippines

Province of Bukidnon
Municipality of Pangantucan
Ordinance No. 1 series of 2016
CHED En Banc Resolution No. 421-2016
TIN: 000-631-170-000
PANGANTUCAN BUKIDNON COMMUNITY COLLEGE
BS ENTREP DEPARTMENT

Instructor: RYNHART SIBAYAN Course Code: MGT3

Yr. & Section:_____________ Course Title: STRATEGIC MANAGEMENT
Contact Number (Optional): ___________________ Module No. : 8
I. Main Topic: Material:
 Business Level Strategy  Module 8

Reference:
II. Main Objectives  https://ebooks,Ipude.in/
 Distinguish the two primary types of competitive advantage and commerce/mcom/term_4/
formulate strategies to create a cost and or a differentiation advantage DCOM506_DMGT502_STRATE
GIC_MANAGEMENT.pdf
 https://pracownik.kul.pl/files/
12439/pubilc/3David.pdf

Textbook:
 Dess, G., Lumpkin, G.,
Eisner, A., McNamara, G., &
Kim, B,. ( 2012). Strategic
Management Text & Cases.
Mc Graw Hill Education

III. Lesson Preview/ Review

Introduction
Each business should have its own business strategy. A business strategy is basically a competitive
strategy and is concerned more with how a business competes successfully in the chosen market.
The strategic decisions at business-level revolve around choice of products and markets, meeting
the needs of customers, protecting market share, gaining advantage over competitors, exploiting or
creating new opportunities and earning profit at the business unit level. In short, a business strategy
outlines the competitive posture of its operations in the industry. Business strategy is guided by the
direction set by the corporate strategy. It takes the cue from the priorities set by the corporate
strategy. It translates the direction and intent generated at the corporate level into objectives and
strategies for individual business units

IV. Discussion/ Activity & Assessment

1
 Industry Structure
An industry is a collection of firms offering goods or services that are close substitutes of each other.
Alternatively, an industry consists of firms that directly compete with each other. For the purpose of
industry analysis, an industry can be defined rather broadly (the beverage industry) or more precisely
(the carbonated soft drink industry). How one defines and circumscribes an industry depends on the
kinds of analysis to be performed. In “industry analysis”, it is generally better to define an industry as
precisely as possible.

Example: In discussing companies like Coca-Cola and Pepsi, one would want to define the
boundaries of the “carbonated soft drink industry” rather than that of the “beverage industry”.

The term “industry structure” refers to the number and size distribution of firms in an industry. The
number of firms in an industry may run into hundreds or thousands. The existence of a large number
of firms in an industry reduces opportunities for coordination among firms in the industry. Hence,
generally speaking, the level of competition in an industry rises with the number of firms in the
industry. The size distribution of firms in an industry is important from the perspective of both business
policy and public policy.
Industry structure consists of four elements:

1. Concentration
2. Economies of scale
3. Product differentiation
4. Barriers to entry.
A. Concentration: It means the extent to which industry sales are dominated by only a few
firms. In a highly concentrated industry, i.e. an industry whose sales are dominated by a
handful of firms, the intensity of competition declines over time. High concentration serves
as a barrier to entry into an industry, because it enables the firms to hold large market
shares to achieve significant economies of scale.
B. Economies of Scale: This is an important determinant of competition in an industry. Firms
that enjoy economies of scale can charge lower prices than their competitors, because of
their savings in per unit cost of production. They also can create barriers to entry by
reducing their prices temporarily or permanently to deter new firms from entering the
industry.
C. Product differentiation: Real perceived differentiation often intensifies competition among
existing firms.
D. Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to enter an
industry, and the competition from new entrants depends mostly on entry barriers

These features determine the strength of the competitive forces operating in the industry. Trends affecting
industry structure are important considerations in strategy formulation.

Positioning of the Firm

When starting a new firm or launching new product, a prime strategic decision is to identify the target audience.
But even though a useful segment has been identified, this does not in itself resolve the organization’s
strategy. The competitive position within the segment then needs to be explored, because only this will show
how the organization will compete within the segment. Competitive positioning is thus the choice of differential
advantage that the product or services will posses against its competitors. Competitive positioning allows an
organization to compete and survive in a market place or in a segment of a market place. To develop
positioning, it is useful to follow a two-stage process-first identify the segment gaps, second identify positioning
within segments.

Identification of Segment Gaps and their Competitive Positioning Implications

From a strategy viewpoint, the most useful strategy analysis often emerges by exploring where there are gaps
in the segments of an industry. The starting point for such work is to map out the current segmentation position
and then place companies and their products into the segments; it should then become clear where segments
exist that are not served or are poorly served by current products.

Identifying the Positioning within the Segment

2
 From a strategy perspective, some gaps may be more attractive than others. For example, they may have
limited competition or poorly supported products. In addition, some gaps may possess a clear advantage in
terms of competitive positioning. Others may not

The process of developing positioning runs as follows:

1. Perceptual mapping: In-depth qualitative research on actual and prospective customers on the way
they make their decisions in the market place, e.g. strong versus weak, cheap versus expensive,
modern versus traditional.
2. Positioning: Brands or products are then placed on the map using the research dimensions.
3. Options development: Take existing and new products and use their existing strengths and
weaknesses to devise possible new positions on the map.
4. Testing: First with simple statements with customers, then at a later stage in the marketplace.

It will be evident that this is essentially a process, involving experimentation with actual and potential
customers.

Generic Strategies
Generic strategies were first outlined in two books from Michael Porter of Harvard Business School. These
were “Competitive Strategy” in 1980 and “Competitive Advantage’’ in 1985. The second book contained a
small modification of the concept. The original version is explored here.

Michael Porter made the bold claim that there are only three fundamental strategies that any business can
undertake. During the 1980s, they were regarded as being at the forefront of strategic thinking. Arguably, they
still have a contribution to make in the new century in the development of strategic options.

Professor Porter argued that the three basic strategies open to any business are:
1. Cost leadership
2. Differentiation
3. Focus.

Each of these generic strategies has the potential to overcome the five forces of competition and allow the firm
to outperform rivals within the same industry. These are called ‘generic’ because they can be used in a variety
of situations, across diverse industries at various stages of development.

Cost Leadership
Cost leadership is a strategy whereby a firm aims to deliver its product or service at a price lower than that of
its competitors. Overall cost leadership is achieved by the firm by maintaining the lowest costs of production
and distribution within an industry and offering “no-frills” products. This strategy requires economies of scale in
production and close attention to efficiency and operating costs. The firm places a lot of emphasis on
minimizing direct input and overhead costs, by offering no-frills products.

A cost leadership strategy is likely to work better where the product is standardized, competition is based
mainly on price and consumers can switch easily between different suppliers. However, a low cost base will
not in itself bring competitive advantage. The product must be perceived as comparable or acceptable by
3
consumers. Firms pursuing this strategy must be effective in engineering, purchasing, manufacturing, and
physical distribution. Marketing can be considered as less important, as the consumer is familiar with the
product attributes. Having a low cost position also gives a company a defence against rivals. Its lower costs
allow it to continue to earn profits during times of heavy competition. Its high market share means that it will
have high bargaining power relative to its suppliers. Its low price also serves as a barrier to entry because few
new entrants will be able to match the leader’s cost advantage. As a result, cost leaders are likely to earn
above average profits on investment.

Companies that want to be successful by following a cost leadership strategy must maintain constant efforts
aimed at lowering their costs (relative to competitor’s costs) and creating value for customers.

Cost leadership requires:

1. Aggressive construction of efficient scale facilities
2. Vigorous pursuit of cost reductions from experience
3. Tight cost and overhead control
4. Avoidance of marginal customer accounts 5. Cost minimization in all activities in the firm’s value chain,
such as R&D, services, sales force, advertising etc.

Implementing and maintaining a cost leadership strategy means that a company must consider its value chain
of primary and secondary activities and effectively link those activities with critical focus on efficiency and cost
reduction. For example, McDonald’s Restaurants achieved low costs through standardized products,
centralized buying of supplies for a whole country and so on.

Potentials Pitfalls of Overall Cost Leadership Strategies

1. Too much focus on one or a few value-chain activities.

2. All rivals share a common input or raw materials.
3. The strategy is imitated too easily.
4. A lack of parity on differentiation.
5. Erosion of cost advantages when the pricing information available to customers increases.

Differentiation Strategy
Differentiation consists of offering a product or service that is perceived as unique or distinctive by the
customer. This allows firms to command a premium price or to retain buyer loyalty because customers will pay
more for what they regard as a better product. A differentiation strategy can be more profitable than a cost
leadership strategy because of the premium price.

Products can be differentiated in a number of ways so that they stand apart from standardized
products:
1. Superior quality
2. Special or unique features
3. More responsive customer service
4. New technologies
5. Dealer network.

Nokia achieves differentiation through the individual design of its product, while Sony achieves it by offering
superior reliability, service and technology. Mercedes-Benz differentiates by stressing a distinctive product
service image, while Coca Cola differentiates by building a widely recognized brand. This strategy is often
supported by high spending on advertising and promotion to sustain the brand identity.

McDonald’s is differentiated by its brand name and its ‘Big Mac’ and ‘Ronald McDonald’ products and imagery.
In order to differentiate a product, Porter argued that it is necessary for the producer to incur extra costs, for
example, to advertise a brand and thus differentiate it. The form of differentiation varies from industry to
industry. In construction industry, equipment durability, spare parts availability and service will feature, while in
cosmetics, differentiation is based on sophistication and exclusivity. Differentiation is aimed at the broad mass
market. It is a viable strategy for earning above average profits because the resulting brand loyalty lowers
customers’ sensitivity to price. Buyer loyalty also serves as an entry barrier because new entrants must
develop their own distinctive competence to differentiate their products in some way to achieve buyer loyalty.

It is essential for the success of this strategy that the premium price for the differentiated product must exceed

4
the cost of differentiation.

For successfully carrying out the differentiation strategy, the following are required:
1. Creative flair
2. Engineering skills
3. R&D capabilities
4. Innovative marketing capabilities
5. Motivation for innovation
6. Corporate reputation for quality or technological capabilities.

However, there are two problems associated with differentiation strategies:

1. It is difficult to estimate whether the extra costs incurred in differentiation can be recovered from the
customer by charging a higher price.
2. The successful differentiation may attract competitors to copy the differentiated product and enter the
market segment.

Neither of the above problems is insurmountable but they do weaken the attractiveness of this option.

Potentials Pitfalls of Differentiation Strategies

1. Uniqueness that is not valuable

2. Too much differentiation
3. Too high a price premium
4. Differentiation that is easily imitated
5. Dilution of brand identification through product-line extension
6. Perception of differentiation may vary between buyers and sellers

Focus Strategy
A focus strategy occurs when a firm focuses on a specific niche in the market place and develops its
competitive advantage by offering products especially developed for that niche. It targets a specific consumer
group (e.g. teenagers, babies, old people etc.) or a specific geographic market (urban areas, rural areas etc.).
Hence, the focus strategy selects a segment or group of segments in the industry and tailors its strategy to
serve them to the exclusion of others. By optimizing its strategy, for the targets, the focuser seeks to achieve
competitive advantage in its target segments, even though it does not possess a competitive advantage
overall.

As Porter observes, while the low cost and differentiation strategies are aimed at achieving their objectives
industry-wide, the entire focus strategy is built around serving a particular target very well. Sometimes,
according to Porter, neither a low-cost leadership strategy nor a differentiation strategy is possible for an
organization across the broad range of the market.

Equally, the costs of differentiation, while serving the mass market of customers, may be too high. If the
differentiation involves quality, it may not be credible to offer high quality and cheap products under the same
brand name. So a new brand name has to be developed and supported. For these and related reasons, it may
be better to adopt a focus strategy.

The focus strategy has two variants:

1. Cost focus: A firm seeks to achieve low cost position in its target segment only.
2. Differentiation focus: A firm seeks to differentiate its products in its target segment only.

The essence of focus strategy is the exploitation of a narrow target’s differences from the balance of the
industry. Focus builds competitive advantage through high specialization and concentration of resources in a
given niche.

A focus strategy can serve the needs of a niche segment

1. by identifying gaps not covered by existing players, and
2. by developing superior skills or efficiency while serving such narrow segments.

By targeting a small, specialized group of buyers it should be possible to earn higher than average profits,
either by charging a premium price for exceptional quality or by a cheap and cheerful low priced product. In the
global car market, Rolls Royce and Ferrari are clearly niche players. They have only a minute percentage of
the market world-wide. Their niche is premium product and premium price

5
The focus strategy rests on the premise that the firm is able to serve its narrow strategic target more effectively
and efficiently than competitors who are competing more broadly. As a result, the firm achieves either
differentiation from better meeting the needs of the particular target, or lower costs in serving this target, or
both. Even though the focus strategy does not achieve low cost or differentiation industry-wide, it does so in its
narrow market target. The focus strategy requires for its success the same common factors, as are required for
the success of cost leadership and differentiation, except that they are directed at the particular target market.
In the Indian context, examples of focus strategy are Ayur Herbal Brand, Anjali Kitchenware, Anchor
toothpaste, T-series Cassettes etc.

There are, however, some problems with the focus strategy:

1. By definition, the niche is small and may not be large enough to justify attention.
2. Cost focus may be difficult if economies of scale are important in an industry such as the car industry.
3. The niche is clearly specialist in nature and may disappear over time.

None of these problems is insurmountable. Many small and medium-sized companies have found that this is
the most useful strategy to explore.

Potential Pitfalls of Focus Strategies

1. Erosion of cost advantages within the narrow segment
2. Even product and service offerings that are highly focused are subject to competition from new entrants
and from imitation
3. Focuses can become too focused to satisfy buyer needs

Risks in Competitive Strategies

No one competitive strategy is guaranteed for success. Some companies that have successfully implemented
one of Porters’ competitive strategies have found that they could not sustain the strategy. Each of these
generic strategies has its own risks.

1. Risks of cost leadership:

A. Cost leadership may not be sustained
a. If competitors imitate
b. If technology changes
c. If other bases for cost leadership erode.
B. Proximity in differentiation is lost.
C. Cost focusers achieve even lower costs in segments.

Proximity in differentiation means that companies that choose cost leadership strategy must offer
relatively standardized products with features or characteristics that are acceptable to customers. In
other words, the company must offer a minimum level of differentiation–at the lowest competitive
price. If this minimum level of differentiation is lost, then the strategy of cost leadership will fail.
2. Risks of differentiation:
A. Differentiation may not be sustained
a. If competitors imitate.
b. If features of differentiation become less important to buyers.
B. Cost proximity is lost.
C. Firms that follow focus strategy may achieve even greater differentiation in segments.
D. Dilution of brand identification through product-line.

A company following a differentiation strategy must ensure that the higher price it charges for its
higher quality is not priced too far above the competition, otherwise customers will not see the extra
quality as worth the extra cost. In other words, if the price differential between the standardized and
differentiated product is too high, the risk is that the company provides a greater level of uniqueness
than the customers are willing to pay for.
3. Risks of Focus:
The competitive risks of focus strategy are similar to those previously noted for cost leadership and
differentiation strategies, with the following additions:
A. Focus strategy is not sustained if competitors imitate it.
B. The target segment may become structurally unattractive.
a. if structure erodes.
b. if demand disappears.
C. Competitors may successfully focus on an even smaller segment of the market, out focusing the
6
 focuser, or focus only on the most profitable slice of the focuser’s chosen segment.
D. An industry-wide competitor may recognize the attractiveness of the segment served by the focuser
and mobilize its superior resources to better serve the segment’s need.
E. Preferences and needs of the narrow segment may become more similar to the broad market,
reducing or eliminating the advantage of focusing

Stuck-in-the Middle
Professor Porter concluded his analysis of what he termed the main generic strategies by suggesting that there
are real dangers for the firm that engages in severed generic strategies but fails to achieve any of them. He
therefore emphasized the importance of clear positioning i.e., either follow cost leadership or differentiation. He
called firms that do not have clear strategic positioning and which make choices that include a few elements of
different strategies (i.e. some elements of differentiation and some elements of cost leadership) as firm’s
stuck–in-the-middle. He suggested that such firms do not develop successful competitive advantage. But this
concept of stuck-in-the–middle has been an issue of debate.

Several commentators, such as Kay, Stopford and Baden-Fuller and Miller now reject this aspect of the
analysis. They point to several empirical examples of successful firms that have adopted more than one
generic strategy.

As was pointed out above, there is now useful empirical evidence that some companies do pursue
differentiation and low-cost strategies at the same time. They use their low costs to provide greater
differentiation and then reinvest the profits to lower their costs even further.

Hybrid Strategies
Hybrid strategies include a combination of generic strategies, for example, simultaneous pursuing of both low
cost leadership and differentiation strategy. Research has found that such hybrid strategies have contributed to
competitive advantage in some situations. For example, successful implementation of differentiation strategy
may result in increased sales volume and as sales volume increases costs drop due to economies of scale.
Thus successful differentiators can also be the lowest cost producers in an industry.

Porter (1994) later offered some clarification: “A company cannot completely ignore quality and differentiation
in the presence of cost advantages, and vice-versa. Progress can be made against both types of advantage
simultaneously.” However, he notes that these are trade–offs between the two and that companies should
“maintain a clear commitment to superiority in one of them”.