Everything you need to know about the types of business level strategies. A strategy is a pattern or a plan which integrates an organisation’s major policies, goals and actions, sequences in a coherent linear of decision.
It is not a simple one, strategy have a number of implications. It can be described as – i. A plan, or a similar idea that is direction, guide, course of action, ii. A perspective on an organisation’s fundamental way of doing things, iii. A pattern that provides for consistent behaviour over time and iv. A play or a specific “maneuver” intended to defeat a competitor.
Strategy is a “military” term. It was Peter Drucker who pointed out the importance of strategic decision in 1955 in his book, “The Practice of Management”. Here he defined strategic decision as “all decision on business objectives and on the means to reach them.”
Business strategy aims on improving the competitive position of a firm’s or business unit’s products or services within the particular industry or market segment that the firm, or business unit serves.
In this article we will discuss about the different types of business level strategies. They are:- 1. Cost Leadership 2. Porter’s Generic Strategies 3. Differentiation Strategy 4. Focus and Niche Strategies 5. Tactical Strategies.
Types of Business Level Strategies: Cost Leadership, Porter’s Generic, Differentiation, Focus, Niche and Tactical Strategies
Types of Business Level Strategies – Top 3 Types: Cost Leadership, Differentiation, Focus and Niche Strategies
A strategy is a pattern or a plan which integrates an organisation’s major policies, goals and actions, sequences in a coherent linear of decision. It is not a simple one, strategy have a number of implications.
It can be described as:
i. A plan, or a similar idea that is direction, guide, course of action.
ii. A perspective on an organisation’s fundamental way of doing things.
iii. A pattern that provides for consistent behaviour over time.
iv. A play or a specific “maneuver” intended to defeat a competitor.
Strategy is a “military” term. It was Peter Drucker who pointed out the importance of strategic decision in 1955 in his book, “The Practice of Management”. Here he defined strategic decision as “all decision on business objectives and on the means to reach them.”
However the importance of the concept was fully realised when pioneers like Alfred Chandler and Michael Porter have developed the work strategic, which is regarded as the Classical Approach. It involved the use of formal and systematic design techniques. It concentrated on long-term plans and not concerned with implementation.
More or less it ignores the human element. It is also based on quantitative aspect and focused externally. On the other hand, later writers emphasised on human and qualitative aspect of strategy. They saw “strategy” as evolutionary. It showed that “organisational behaviour” as part of organisational processes.
Type # 1. Cost Leadership:
Cost Leadership is a situation in which market leader sets the price of a product or service, and competitors feel compelled to match that price.
Cost Leadership is perhaps the clearest of the three generic strategies. In it, a firm set out to become the low-cost producer in its industry. The firm has a broad scope and serves many industry segments, and may even operate in related industries, the firm’s breadth is often important to its cost advantage.
The sources of cost advantages are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials, and other factors. A low-cost product must find and exploit all sources of cost advantage. Low-cost producers typically sell a ‘standard’ or ‘no frills’ product and place considerable emphasis on reaping scale or absolute cost advantages from all sources.
If a firm can achieve and sustain cost leadership, then it will be an above average performer in its industry provided it can command prices at or near the industry average. At equivalent or lower prices than its rivals, a cost leader’s low-cost position translates into higher returns.
A cost leader, however, cannot ignore the bases of differentiation. If its product is not perceived as comparable or acceptable by buyers, a cost leader will be forced to discount prices well below competitors, to gain sales. This may nullify the benefits of its favourable cost position.
A cost leader must achieve parity or proximity in the bases of differentiation relative to its competitors to be an above-average performer, even though it relies on cost leadership for its competitive advantage. Parity in the bases of differentiation allows a cost leader to translate its cost advantage directly into higher profits than competitors. Proximity in differentiation means that the price discount necessary to achieve an acceptable market share does not offset a cost leader’s cost advantage and hence the cost leader earns above-average returns.
The strategic logic of cost leadership usually requires that a firm be the cost leader, not one of several firms vying for this position. Many firms have made serious strategic errors by failing to recognize this. When there is more than one aspiring cost leader, rivalry among them is usually fierce because every point of market share is viewed as crucial.
Unless one firm can gain a cost lead and “persuade” others to abandon their strategies, the consequences for profitability (and long-run industry structure) can be disastrous, as has been the case in a number of petrochemical industries. Thus, cost leadership is a strategy particularly dependent on preemption, unless major technological change allows a firm to radically change its cost position.
Investing in cost leadership by rapidly down the experience curve is a common way to establish a firm’s competitive advantage. Its success depends, in part, on the factors that underlie the experience curve. In cost leadership, the distinction between cost declines that occur at any point in time and cost declines that may occur over time can be known.
This leads us to consider a revised experience concept in which the dynamic interrelationship between a firm’s production rate, cumulative production and unit cost is explicitly considered. It provides a detailed analysis of various scale- learning relationships and their strategic implications for establishing competitive advantage through an investment in cost leadership. It also proves analytically that such investment should take place only in the presence of learning.
A firm pursuing a cost leadership strategy attempts to gain a competitive advantage primarily by reducing its economic costs below its competitors. This policy once achieved provides high margins and a superior’s return on investments.
The skills and resources required to be successful in this strategy are sustained capital investment and access to capital; superior process engineering skills; good supervision and motivation of its labour force; product designed for ease in manufacturing; low-cost distribution system.
This strategy requires tight cost control. This is often done by using a full costing method or activity based costing with frequent and detailed control reports the structure of the organization should be clear-cut and responsibilities clearly lay out. Organizations often provide incentives based on meeting strict quantitative targets, etc.
In order to remain a cost leader, the firm attempts to avoid those factors that can cause the economies of scale to be affected. It has to work within the physical limits to efficient size, workers motivation, and focus on markets and suppliers, sometimes, in restricted geographical areas.
The low-cost producer strategy works best when buyers are large and have significant bargaining power; price competition among rival sellers is a dominant competitive force; the industry’s product is a standard item readily available from a variety of sellers; there are not many ways to achieve product differentiation that have value to the buyer; buyers incur low switching costs in changing from one seller to another and are prone to shop for the best price.
A low-cost leader is in the strongest position to set the floor on market price and this strategy provides attractive defenses against competitive forces. Its cost position gives it a defense from competitors because its lower costs mean that it can still earn returns after its competitors have competed away their profits through rivalry. It is protected from powerful buyers because buyers can exert power only to lower prices, and this will be possible only with next most efficient competitor.
Lower cost provides protection against suppliers because there is more flexibility in the organization to cope with input cost increases. Any new entrant will find it difficult to overcome entry barriers because of required economies of scale, and also because the activities taken to achieve low costs are both rare and costly to imitate.
Finally, it places the organization in a favourable position when pitted against substitutes compared to competitors in the industry.
There are a number of risks in using this strategy. These risks relate to the fast changing business environment. The most serious risk to cost leadership is technological change that nullifies past investment or learning of the organization. Sometimes the inability of the management to see or anticipate the changes required in the product or market change, is a grave handicap. The organization’s advantage can also be neutralized if there is low cost learning by industry newcomers or inflation in costs of supplies or processes that provide the organization a competitive advantage.
Type # 2. Differentiation:
The second generic strategy is Differentiation. In a Differentiation Strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. It is rewarded for its uniqueness with a premium price.
The means for Differentiation are peculiar to reach industry. Differentiation can be based on the product itself, the delivery system by which it is sold, the marketing approach, and a broad range of other factors. In construction equipment, for example, Caterpillar Tractor’s Differentiation is based on product durability, service, spare parts availability, and an excellent dealer network. In cosmetics, Differentiation tends to be based more on product image and the positioning of counters in the stores.
A firm that can achieve and sustain Differentiation will be an above-average performer in its industry if its price premium exceeds the extra costs incurred in being unique. A Differentiator, therefore, must always seek ways of differentiating that lead to price premium greater than the cost of differentiating.
A differentiator cannot ignore its cost position, because its premium prices will be nullified by a markedly inferior cost position. A differentiator, thus, aims at cost parity or proximity relative to its competitors, by reducing cost in all areas that do not affect differentiation.
The logic of the Differentiation Strategy requires that a firm choose attributes in which to differentiate itself that are different from its rivals. A firm must truly be unique at something or be perceived as unique if it is to expect a premium price. In contrast to cost leadership, however, there can be more than one successful differentiation strategy in an industry if there are a number of attributes that are widely valued by buyers.
In a differentiation strategy, a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions it to meet those needs. Differentiation will cause buyers to prefer the company’s product/service over the brands of rivals. An organization pursuing such a strategy can expect higher revenues/margins and enhanced economic performance.
The challenge in finding ways to differentiate that creates value for buyers and that are not easily copied or matched by rivals. Anything a company can do to create value for buyers represents a potential basis for differentiation.
Successful differentiation creates lines of defence against the five competitive forces. It provides insulation against competitive rivalry because of brand loyalty of customers and hence lower sensitivity to price. The customer loyalty also provides a disincentive for new entrants who will have to overcome the uniqueness of the product or service.
Competitors are not likely follow a similar approach if buyers value the differentiated products and services. If they do, this will lead to a loose-loose situation for them. The higher returns of the strategy provides a higher margin to deal with supplier power. Buyer power is mitigated as there are no comparable alternatives. Finally, a company that has differentiated itself to achieve customer loyalty should be better placed to compete with substitutes than its competitors.
Competitive advantage through differentiation is sustainable if the activities taken to achieve differentiation are rare and costly to imitate. The most appealing types of differentiation strategies are those least subject to quick or inexpensive imitation. Differentiation is most likely to produce an attractive, long-lasting competitive edge when it is based on technical superiority, quality, giving customers more support services, and on the core competencies of the organization.
Differentiation strategy works best when there are many ways to differentiate the product/service and these differences are perceived by buyers to have value or when buyer needs and uses of the item are diverse. The strategy is more effective when not many rivals are following a similar type of differentiation approach. There are risks in this strategy when the cost of differentiation becomes too great or when buyers become more sophisticated and need for differentiation falls.
Type # 3. Focus and Niche Strategies:
The third generic strategy is focus. This strategy is quite different from the others because it rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment of group of segments in the industry and tailors its strategy to serving them to the exclusion of others. By optimizing this strategy for the target segments, the focuser seeks to achieve a competitive advantage in its target segments even though it does not possess a competitive advantage overall.
The focus strategy has two variants, in cost focus, a firm seeks a cost advantage in its target segment, while in differentiation focus, and a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segments and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments.
Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segment. Such differences imply that the segments are poorly served by broadly targeted competitors who serve them at the same time as they serve others.
The focuser can thus achieve competitive advantage by dedicating itself to the segments exclusively. Breadth of target is clearly a matter of degree, but the essence of focus is the exploitation of a narrow target’s differences from the balance of the industry. Narrow focus in and/or itself is not sufficient for above-average performance.
A focuser takes advantage of sub-optimization in either direction by broadly-targeted competitors. Competitors may be underperforming in meeting the needs of a particular segment, which opens the possibility for differentiation focus. Broadly-targeted competitors may also be over performing in meeting the needs of a segment, which means that they are bearing higher than necessary cost in serving it. An opportunity for cost focus may be present in just meeting the needs of such a segment and no more.
A generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry, or buys groups or a geographical market and tailors its strategy to serving them to the exclusion of others. The attention of the organization concentrated on a narrow section of the total market with an objective to do a better job serving buyers in the target market niche than the rivals. Each functional policy of the organization is built with this mind.
There are two aspects to this strategy, the cost focus and the differentiation focus. In the cost focus, a firm seeks a cost advantage in its target market. The objective is to achieve lower costs than competitors in serving the market; this is how cost producer strategy focused on the target market only. This requires the organization to identify buyer segments with needs/preferences that are less costly to satisfy as compared to the rest of the market. Differentiation focus offers niche buyers something different from other competitors. The firm seeks product differentiation it its target market.
Both variants of the focus strategy rest on differences between a focuser’s target market and other markets in the industry. The target markets must either have buyers with unusual needs or else the production and delivery system that best serves the target market must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some markets. While differentiation focus explants its special needs of buyers in certain markets. A focuser may do both to earn a sustainable competitive advantage though this is difficult.
Focus strategy is successful if the organization can choose a market niche where buyers have distinctive preferences, special requirements, or unique needs and they developing a unique ability to serve the needs of the target buyer segments. Even though the focus strategy does not achieve low cost or differentiation from the perspective of the market as a whole, it does achieve this in its narrow target.
However, the market segment has to be big enough to be profitable and it has growth potential. The organization has to identify a buyer group or segment of a product line that demands unique product attributes. Alternatively, it has to identify a geographical region where it can make such offerings.
Focusing organizations develop the skills and resources to serve the market effectively. They defend themselves against challengers via the customer goodwill they have built up and their superior ability to serve buyers in the market.
The competitive power of a focus strategy is greatest when the industry has fast-growing segments that are big enough to be profitable but small enough to be of secondary interest to large competitors and no other rivals are concentrating on the segment. Their position is strengthened as the buyers in the segment require specialized expertise or customized product attributes.
A focuser’s specialized ability to serve the target market niche builds a defence against competitive forces. Its focus means that either organization has a low cost option as its strategic target, high differentiation, or both. The logic that has been laid out earlier for cost leadership and differentiation also is applicable here.
Types of Business Level Strategy – 3 Main Types: Cost Leadership, Differentiation and Focus Strategies
1. Cost Leadership Strategy:
A firm can achieve a cost leadership (low cost) position only when it is able to produce, provide goods or services at lower unit cost than their rivals. Here one should keep in mind that low cost does not mean that absolute lowest possible cost, it is just lower than rivals.
In the process of adopting this strategy, managers should not exclude the features and services that are essential from buyers point. Managers need to identify the sources of cost advantage, which vary from one industry structure to another industry structure. There are nine major ways to achieve a cost advantage in performing value chain activities.
i. Economies of Scale – This benefit arise when an organisation achieves larger volumes that spread out some costs like advertising, R&D over large volumes.
ii. Learning Curve Effects – The benefits of learning curve arises from experience of firm personnel in activities like plant layout, product design, mastering new technology and so on. It is better to remember a proverb “practice makes a man perfect”.
iii. Cost of Key Resource Inputs – The prime resource input for manufacturing product is raw material and the second one is labour. Managers pool right quality raw materials at reasonable prices, and try to use labour (particularly not unionized), to increase productivity and reduce per unit production cost.
iv. Link the cost with other Activities in the Company – Generally cost of one activity is affected by other activities performed; cost can be reduced with cooperation between and among activities. For example activities of supplier may be liked with a company’s inventory cost and reduce delivery time and inventory ordering and carrying cost.
v. Sharing Resources with other Business Units – Resources like order passing, customer billing, warehouse, distribution channel, marketing personnel and technical support may be shared thereby reduce per unit cost of used resources.
vi. Outsourcing – Outsourcing or hiring outside specialists to perform certain activities and functions helps reduce cost. Outsiders perform some selected activities with specialised skills and of cheaper than the company can perform those in the organisation.
vii. First Mover Advantage – Generally a firm that moves first would be able to sell huge quantity of goods, and build brand name, which leads to reduction in cost.
viii. Higher Capacity Utilisation – Fixed cost per unit comes down with high utilisation of fixed assets.
ix. Ascertainment of Managerial Decisions – A firm’s cost can be reduced by taking some strategic decisions like minimising customer services, restructuring and the like.
2. Differentiation Strategy:
In a differentiation strategy, firm seeks to create a product or service that is perceived industry wide as unique and value by customers. Differentiation can take many forms.
i. Multiple features (Microsoft windows vista)
ii. Superior service (FedEx)
iii. Spare parts availability (Caterpillar earth moving equipment)
iv. Engineering design and performance (Mercedes, BMW)
v. Product reliability (Johnson & Johnson baby products)
vi. One stop shopping (Amazon.com)
vii. Technological leadership (3M’s bonding and coating products)
viii. Radar network (Lexus Automobiles)
ix. Innovation (Nokia Cellular phones)
Which of these is a preferred choice to achieve differentiation? Answer is obvious. The course, which is less expensive and is difficult to be copied by rivals.
3. Focus Strategy:
Where an organisation can offer neither a cost leadership nor a differentiation strategy, a focus strategy could be more suitable. Focus strategy is also known as niche strategy. A firm that adapts this strategy selects a segment and tailors its strategy to serve them. A segment may be defined by geographic uniqueness, or by special product attributes. For example, Google (a specialist in Internet search engine software), eBay (online auctions). In this strategy, a firm focuses its effort and resources on a narrow, defined segment of market.
Therefore, competitive advantage can be achieved only in the company’s target. The essence of a focus strategy is the exploitation of a particular market segment that is different from the rest of the industry.
Type of Business Level Strategy – Top 5 Types: Porter’s Generic, Cost-Leadership, Differentiation, Focus and Tactical Strategies
Porter’s generic strategies framework constitutes a major contribution to the development of the strategic management literature. Generic strategies were first presented in two books by Professor Michael Porter of the Harvard Business School in 1980 and 1985.
Porter suggested that some of the most basic choices faced by companies are essentially the scope of the markets that the company would serve and how the company would compete in the selected markets. Competitive strategies focus on ways in which a company can achieve the most advantageous position that it possibly can in its industry.
The profit of a company is essentially the difference between its revenues and costs. Therefore, high profitability can be achieved through achieving the lowest costs or the highest prices vis-a-vis the competition. Porter used the terms ‘cost leadership’ and ‘differentiation’, wherein the latter is the way in which companies can earn a price premium.
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. These three generic strategies are defined along two dimensions-strategic scope and strategic strength.
Strategic scope is a demand-side dimension and looks at the size and composition of the market you intend to target. Strategic strength is a supply-side dimension and looks at the strength or core competency of the firm. In particular he identified two aspects that he felt were most important- product differentiation and product cost efficiency or product cost leadership.
This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what customers receive). To succeed at offering the lowest price while still achieving profitability and a high return on investment, the firm must be able to operate at a lower cost than its rivals. There are three main ways to achieve this.
The first approach is achieving a high asset turnover. In service industries, this may mean, for example, a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. In manufacturing, it will involve production of high volumes of output. 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.
These approaches mean that fixed costs are spread over a larger number of units of the product or service, resulting in a lower unit cost, i.e., the firm hopes to take advantage of economies of scale and experience curve effects. For industrial firms, mass production becomes both a strategy and an end in itself.
Higher levels of output both require and result in high market share, and create an entry barrier to potential competitors, who may be unable to achieve the scale necessary to match the firm’s low costs and prices. Companies that successfully use this strategy tend to be highly centralized in their structures. They place heavy emphasis on quantitative standards and measuring performance towards goal accomplishment.
The second dimension is achieving low direct and indirect operating costs. This is achieved by offering high volumes of standardized products, offering basic no-frills products and limiting customization and personalization of service. Production costs are kept low by using fewer components, using standard components, and limiting the number of models produced to ensure larger production runs.
Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of the business.
This will include outsourcing, controlling production costs, increasing asset capacity utilization, and minimizing other costs including distribution, R&D and advertising. The associated distribution strategy is to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue out of low cost product features.
The third dimension is control over the supply/procurement chain to ensure low costs. This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contracts, working with vendors to keep inventories low, using methods such as Just-in-Time purchasing or Vendor- Managed Inventory.
Wal-Mart is famous for squeezing its suppliers to ensure low prices for its goods. Dell Computer initially achieved market share by keeping inventories low and only building computers on order. Other procurement advantages could come from preferential access to raw materials, or backward integration.
Some writers posit that cost leadership strategies are only viable for large firms with the opportunity to enjoy economies of scale and large production volumes. However, this takes a limited industrial view of strategy. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs.
For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited menu, rapid table turnover and employs staff on minimum wages. Innovation of products or processes may also enable a start-up or small company to offer a cheaper product or service where incumbents’ costs and prices have become too high.
An example is the success of low- cost budget airlines who despite having fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills services at prices much cheaper than those of the larger incumbents.
The companies that attempt to become the lowest-cost producers in an industry are generally referred as those following a cost leadership strategy. The company with the lowest costs would earn the highest profits in the event when the competing products are essentially undifferentiated, and selling at a standard market price.
Companies following this strategy place emphasis on cost reduction in every activity in the value chain. It is important to note that a company might be a cost leader but that does not necessarily imply that the company’s products would have a low price.
In certain instances, the company can for instance charge an average price while following the low cost leadership strategy and reinvest the extra profits into the business. Examples of companies following a cost leadership strategy include Ryan Air, and EasyJet, in airlines, and Tesco, in superstores.
This strategy requires 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 than competitors 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 labour 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 steel.
Cost leadership provides firms above-average returns even with strong competitive pressures. Lower costs allow the firm to earn profits even after competitors have 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 product from a competitor.
The risk of following the cost leadership strategy is that the company’s focus on reducing costs, even sometimes at the expense of other vital factors, may become so dominant that the company loses vision of why it embarked on one such strategy in the first place. A cost leadership strategy may have the disadvantage of lower customer loyalty, as price-sensitive customers will switch once a lower-priced substitute is available.
A reputation as a cost leader may also result in a reputation for low quality, which may make it difficult for a firm to rebrand itself or its products if it chooses to shift to a differentiation strategy in future.
The greatest risk of pursuing a cost strategy is that it is fairly easy for direct competitors to follow suit as the ways outlined above to achieve cost reduction are not unique and are readily available given the same level of investment in driving down costs. One way to stay ahead of the competition in a relatively levelled playing field is to introduce continuous optimization of the production and value chain by introducing lean manufacturing techniques like Six-Sigma or Kaizen.
When a company differentiates its products, it is often able to charge a premium price for its products or services in the market. Some general examples of differentiation include better service levels to customers, better product performance, etc., in comparison with the existing competitors.
Porter has argued that for a company employing a differentiation strategy, there would be extra costs that the company would have to incur. Such extra costs may include high advertising spending to promote a differentiated brand image for the product, which in fact can be considered a cost and an investment. McDonalds, for example, is differentiated by its very brand name and brand images of Big Mac and Ronald McDonald.
Differentiation has many advantages for the firm which makes use of the strategy. Some problematic areas include the difficulty on part of the firm to estimate if the extra costs entailed in differentiation can actually be recovered from the customer through premium pricing. Moreover, successful differentiation strategy of a firm may attract competitors to enter the company’s market segment and copy the differentiated product.
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 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.
Porter initially presented focus as one of the three generic strategies, but later identified focus as a moderator of the two strategies. Companies employ this strategy by focusing on the areas in a market where there is the least amount of competition. Organisations can make use of the focus strategy by focusing on a specific niche in the market and offering specialised products for that niche.
This is why the focus strategy is also sometimes referred to as the niche strategy. Therefore, competitive advantage can be achieved only in the company’s target segments by employing the focus strategy. The company can make use of the cost leadership or differentiation approach with regard to the focus strategy. In that, a company using the cost focus approach would aim for a cost advantage in its target segment only. If a company is using the differentiation focus approach, it would aim for differentiation in its target segment only, and not the overall market.
This strategy provides the company the possibility to charge a premium price for superior quality (differentiation focus) or by offering a low price product to a small and specialised group of buyers (cost focus). Ferrari and Rolls-Royce are classic examples of niche players in the automobile industry.
Both these companies have a niche of premium products available at a premium price. Moreover, they have a small percentage of the worldwide market, which is a trait characteristic of niche players. The downside of the focus strategy, however, is that the niche characteristically is small and may not be significant or large enough to justify a company’s attention.
The focus on costs can be difficult in industries where economies of scale play an important role. There is the evident danger that the niche may disappear over time, as the business environment and customer preferences change over time.
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 nationwide 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 organisations.
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.
Firms utilizing the 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.
Business tactics are specific moves, manoeuvres and actions taken in isolation or in a series by the managers in order to move from one milepost to another in the pursuit of operationalizing strategy. Tactics are short-term, linear, and single, with localized focus and having fairly limited impact on business performance. Tactics are by nature short- term affairs that function in consonance with all-inclusive strategic policy, but tweak it each time a business faces an issue or snag.
Tactics are ploys, patterns or manoeuvres the companies develop and implement to drive and support the strategy, and to get you closer to your objective. In business, tactics are manoeuvres and techniques that help the company to reach target market and acquire customers. It can also be stop customers from going to competitors. In business, getting a customer can be likened to scoring points against the opposition in a sporting contest. The more points you score, the better it is for you. The way in which you score points is through your tactics.
Specifically, business tactics include product, marketing, promotional, branding, channel/ distribution and pricing initiatives and campaigns you create and then execute in the market place. These initiatives are the specific plays or moves you develop and execute to help you build brand awareness, and convert that brand awareness into customers.
In business there is one function that drives the maximum numbers of tactics and that function is marketing. Put another way, your marketing function – and everyone involved in it – is the business equivalent of a championship-winning sports team or a Navy Seals unit.
The marketing function drives success in the business. And the purpose of every other function in business – administration, operations, accounting etc. – is to support the marketing function. Peter Drucker put it more definitively when he stated that- “Because it is its purpose to create a customer, any business enterprise has two – and only these two – basic functions: marketing and innovation. They are the entrepreneurial functions.”