Competitive Strategy Analysis: A Close Look at Business Unit Strategies

TABLE OF CONTENTS

1.0 Introduction. 3

2.0 Generic Strategies Based on Porters Typology. 4

2.1 Market Targeting. 4

2.2 Low-Cost Strategy: 5

2.3 Focus Low-Cost Strategy: 6

2.4 Differentiation Strategy: 7

2.5 Focus Differentiation Strategy: 9

2.6 Low-Cost Differentiation Strategy: 10

2.7 Focus Low-Cost Differentiation Strategy: 11

2.8 Multiple Strategies: 12

2.9 Analysis. 13

3.0 Conclusion and Recommendations. 14

References. 16

1.0 Introduction

The competitiveness of an organization is greatly dependent upon its choice of a business unit strategy. A business unit is an entity of a certain firm characterized by having its own industry, set of competitors, and even its own unique mission and goals (Cockbun et al 2000, p. 1129: Lorsch & Clark 2008). As such, the top managers of a firm need to decide on how its business units should compete in the industry; in line with the company’s corporate-level strategy. These decisions comprise the firm’s business unit strategy that is used to attain as well as sustain the company’s competitive advantage.

According to He and Wong (2004, p. 490), business unit strategies are used by the top managers in deciding on whether the business should exploit current opportunities, explore new opportunities, or strike a balance between the two. In this way, the firm is able to know how core competencies can be achieved, how to position the business, the needs to be satisfied as well as who the company should serve.

As highlighted in the work of Cockburn et al (2000, p.1131) and Porter (2011), there are several competing approaches that can be applied, and the choice depends on the resources available in the business unit. Generic strategy frameworks have been developed in an attempt to study and identify different strategic groups in the industry. This report analyses business unit strategies based on Porter’s Generic Strategies Framework and how they can be applied to achieve a competitive advantage, one that can never be duplicated by a competitor in the industry.

2.0 Generic Strategies Based on Porters Typology

Porter’s generic strategies are a good starting point for top managers who are developing business unit strategies for their firm. Using this typology, companies can decide to use low-cost strategies or high-cost strategies in their operations in the market (Porter 2008a, Porter 2008b). This typology also helps managers to decide whether to focus on a specific subset within the market or the entire mass market (see table below).

Emphasis On Entire Market Or Niche Emphasis On Low Costs Emphasis On Differentiation Emphasis On Low Cost And Differentiation
Entire Market Low cost strategy Differentiation strategy Low cost differentiation strategy
Niche Focus Low cost strategy Focus differentiation strategy Focus low cost differentiation strategy

Table: Porter’s Generic Strategies Typology (Porter 1980)

2.1 Market Targeting

As stated earlier in this report, Porter’s generic strategies are very useful in deciding which market to go for. The typology suggests that managers need to determine whether their business unit will focus on a specific identifiable subset within the market or just the entire market. The choice between the two depends on the size of the business. Typically, focusing on market subsets is more successful with smaller businesses than larger businesses (Cockbun et al 2000). This is why specialty products are targeted for smaller market niches while many businesses that provide basic needs target mass markets.

For instance, supermarket chains target their grocery stores to the mass market and this strategy has proved to be successful for many organizations (Porter 2008b). Many supermarket chains that have successfully employed this business strategy develop products that are appealing to the public in general and not just a specific group. On the other hand, specialty clothing shops (particularly in shopping malls) are more successfully operated by focusing on a small niche market (Lorsch and Clark 2008). However, the success of any of these two approaches depends on the combination of either low-cost or high-cost strategies stated earlier.

2.2 Low-Cost Strategy:

This strategy is employed by businesses that produce undifferentiated products for the mass market that is generally prices sensitive. As a result, the businesses tend to be large and well established in order to meet the quantity demands from the large markets (Porter 2008a). As posited by He and Wong (2004, p. 489), businesses that use the low-cost strategy should strive to be efficient in order to reduce production costs. Walmart has achieved this for the last two decades, and this is why it has become the world’s meg- retailer (Walmart 2012). Efficiency is essential for the company to offer low prices to its customers.

In an attempt to reduce costs, companies that use the low-cost strategy outsource or offshore some or most of the production functions. In this strategy, He and Wong (2004) believe that companies tend to outsource services like distribution provided that costs are reduced. This is clearly indicated by a move by some American firms to transfer their production activities to China, Bangladesh, and other Asian countries in the 1990s to 2000s. Ann Taylors Stores is one company that transferred its activities to China due to the low labor costs in China.

A study by Lorsch and Clark (2008) revealed that firms that use the low-cost strategy capitalize on their unique capabilities that are not available to other firms such as scarcity of raw materials, large market share among others. By doing so, the firm is able to build a large market share that earns it profits through economies of scale. This is further enhanced by insisting on low initial investment costs as well as low operating costs.

However, managers using this strategy face several challenges in dealing with this strategy are many. Porter (2011) suggests that cutting costs is the major challenge for firms that use the low-cost strategy while avoiding the problems that accompany it. Cost-cutting is likely to reduce the quality of the product and this might greatly reduce sales. Other challenges include easy imitation by competitors, vulnerability to technological obsolescence, and the fact that success with this strategy can be short-lived (Cockbun et al 2000).

2.3 Focus Low-Cost Strategy:

This strategy is used by business units that aim to reduce costs while focusing on a smaller niche market. According to Porter (2008b), the focus low-cost strategy helps firms to avoid direct competition from a mass-market cost leader. However, this strategy is very difficult to understand in practice since almost every business unit focuses on its business activities.  Using this strategy, firms tend to provide goods and services to customers particularly those that are not targeted by large business units. As revealed by Kickul and Gundry (2002), Aldi is one of the firms that have successfully used the focus low-cost strategy to survive in the retail market. The company offers an assortment of grocery items in the US market at very low prices in an attempt to compete with the large Walmart retail stores. The strategy enables Aldi to produce grocery items at minimal costs in order to offer lower market prices that target low to moderate-income earners (Kickul & Gundry 2002). To achieve this strategy, business units that use this strategy negotiate cheaper supplier prices, reducing the number of employees, minimizing transaction and packaging costs among others. Furthermore, research and development are focused on ways of reducing production costs by improving machine efficiency rather than innovating new products that might be costly.

However, the focus low-cost strategy does not lack disadvantages to the business units that employ it. Business units that adopt this strategy are vulnerable to stiff price competition from large businesses (Porter 2008a). Lorsch and Clark (2008) also argue that businesses that adopt this strategy are vulnerable to technological obsolescence since they do not respond to new market opportunities.

2.4 Differentiation Strategy:

Many times, businesses that are large and well established may employ a differentiation strategy whereby they produce and market products or services that are easily distinguished from those of the competitors (Porter 2011). These easily distinguished products and services are targeted to the entire market. Based on Porter’s generic strategies model, top managers in such business units tend to focus on innovations and creating new market opportunities for their products. To achieve this, Lorsch and Clark (2008) suggest that businesses must easily access new and innovative scientific breakthroughs to keep pace with the dynamic market demands. Automobiles provide the best option in using this strategy. For instance, the Toyota Company has greatly differentiated its car models to provide its customers in the mass market with different product features and attributes that meet the diverse needs of the customers (He and Wong 2004). Similarly, PepsiCo, Inc. has successfully differentiated its products using its several business units to provide variety to its customers in the over 200 countries the firm operates (PepsiCo Corporate Website 2006).

Successful implementation of the differentiation strategy requires that the top managers be abreast with the changing customer requirements in order to manipulate different product features (product mix). According to Lorsch and Clark (2008), the product mix consists of various subjective and objective differences in the features of the product or service. As such, these may include the speed of service whereby customers may demand quicker services. Starbucks Corporation successfully used the speed of service to differentiate its products from those of its competitors. This speed of service earned Starbucks a competitive advantage for some time but it became a great concern when other items were added to the services, slowing down the delivery of the services. (Kickul &Gundry 2002) suggests that timing can also be integrated into the differentiation strategy of a business unit to target customers who are relatively priced insensitive.

The main challenges that come with the use of a differentiation strategy are the difficulty in highlighting the distinctiveness of a product line’s vulnerability to low-cost firms. This is especially prominent where the firms misinterpret the needs of the customers. According to Lorsch and Clark (2008), the sales of Proctor & Gamble declined drastically while they attempted to differentiate their toothpaste from that of the competitors. This was due to the fact that the firm had introduced over 300 brands leading to buyer confusion. Consequently, customers sought alternative easier to purchase toothpaste.

2.5 Focus Differentiation Strategy:

Due to the challenge posed by differentiation strategy in the mass market, managers have resorted to the use of this differentiation strategy but with a focus on a specified target market. As revealed by Porter (2008a) and Porter (2011), the focus differentiation strategy is very useful to firms that compete with large and well-established competitors in the market. Differentiation with a focus can be achieved by developing new products and product features that target a smaller neglected market niche. Lorsch and Clark (2008) reported that Viking Range Corporation in the USA produces home appliances in order for customers who are quality-oriented. This makes it compete favorably with large and well-established Home appliance manufacturers in the USA.

Focus differentiation can be achieved by managers through activities like online shopping for customers who dislike shopping or have no time for shopping. Using this strategy enables the firms to sell their products and services at higher prices to customers who need prestige, product performance, security, or safety.

This strategy however poses a challenge in that the market size is too small to be profitable. Kaplan and Norton (2001) suggest that this challenge is aggravated in a down economy where customers may prefer mainstream offers that are less expensive. As such, a firm that uses this strategy risks the dilution of its product image thus decreasing company revenues.

2.6 Low-Cost Differentiation Strategy:

Some managers opt to pursue low-cost and differentiation strategies simultaneously in an attempt to achieve a competitive advantage. As posited by Porter, it is not advisable for a company to implement a low-cost differentiation strategy since this may lead to conflicting company operations (Porter 2008a: Lorsch & Clark, 2008). This implies that some company actions that are designed to favor one strategy can limit the other strategy. For instance, differentiating a product is very costly and this works against the ideology behind a low-cost strategy. Similarly, cost trimming measures may work against quality and product attributes that try to differentiate a company’s products.

Nevertheless, some companies have successfully implemented the two strategies simultaneously. The McDonald’s Corporation for instance was initially popular for its consistency from store to store, cleanliness, and friendly service (Lorsch & Clark 2008). The firm’s managers used these differentiation bases to attain a large market share which enabled it to negotiate lower prices from the suppliers for the raw materials. This strategy has enabled McDonald’s to achieve an enviable position in the fast-food industry that has larger and well-established competitors like Starbucks Corporation.

Declines in sales revenues may also force a business unit to cut costs in its differentiated businesses in the market in order to remain competitive. Porter (2008a) argues that firms may cut costs in their differentiated products by demanding low supplier prices, limiting some of the differentiated product features, or minimizing promotional and advertising costs. Even though Porter’s typology believes that this strategy is impractical, it can be achieved in practice provided that the managers take necessary precautions. Successful implementation of this strategy should begin with managers focusing on organizational commitment to quality (Kaplan & Norton 2001). Customers may be attracted to quality and this will increase the market share hence providing a base for negotiating lower production costs. According to Lorsch and Clark (2008), a business can achieve low cost and differentiation strategies simultaneously through a commitment to quality, differentiation on low price, product innovations, process innovations, and value innovations.

2.7 Focus Low-Cost Differentiation Strategy:

Based on Porter’s generic strategies, a business can also achieve differentiation and low-cost strategies while focusing on a smaller market niche. However, Kaplan and Norton (2001) revealed that this strategy is very difficult to implement niche orientation works against any prospects for economies of scale that reduces production costs. The focus low-cost differentiation strategy is popularly used by many small and independent restaurants especially those that specialize in local and international cuisine (Porter 2008b). The restaurants constantly seek to strike a balance between cutting costs and the uniqueness that targets a specific group of buyers in the market. For instance, Lorsch and Clark (2008) reported that SafeAuto adopted the focus low-cost differentiation strategy in the auto insurance industry to target low-income drivers. This is well explained in the company’s slogan that says “we keep you legal for less. That’s all we do” (Lorsch & Clark 2008, p.3).

2.8 Multiple Strategies:

Some business units may adopt multiple strategies that involve the implementation of more than one or all of the six strategies listed above. According to Porter (2008a), multiple strategies involve the implementation of two or more generic business unit strategies that are tailored to clearly distinct markets or classes of customers. Based on this, the approach of multiple strategies is more applicable to large businesses which have a vast amount of resources. A typical example of the successful execution of this approach is in the hotels that provide accommodation services.  As revealed by Kaplan and Norton (2001), hotels more often than not provide basic rooms to most of the guests while reserving expensive suites for a few other guests who can afford the services in the suites.

However, Porter (2011) argues that a multiple strategy approach can be very difficult to implement due to the confusion it creates on customers. The managers face the same challenges as those faced when implementing low-cost differentiation strategies. In principle, some actions geared towards executing one generic strategy may serve to limit the other strategies.

2.9 Analysis

In principle, a competitive strategy should be formulated in such a way that the organization is able to attract new customers in existing markets as well as maintain profits. It does not really mean that competitors in the market have to die off. In a balanced non-monopolistic environment, it is possible that all companies could have a competitive advantage. This is probably through product differentiation. However, when all businesses in one market area sell the same type of goods to the same customers, one enterprise will benefit over the other depending on the strategies and policies they put in place. Therefore, it is important that all organizations set an exemplary market strategy so that they can survive in all business environments.

Irrespective of the strategy adopted say low-cost production or differentiation, a business entity that gains more profitability cannot overlook environmental factors with the common acronym as PEST or PESTEL. That is, the competitive strategy of a company according to Peng and Nunes (2007, p.233) will consider the political structure of the country in which they are operating, the economic situation there, people’s social and buying behavior, technological advancements in the industry and sometimes the environmental impacts the company is associated with no exception of the legal framework within which to operate in the market environment.

3.0 Conclusion and Recommendations

Top managers in firms across the world employ a variety of generic strategies as explained in Porter’s generic strategies typology in their attempts to achieve a competitive advantage and strategically position their products and services in the market. The successful implementation of these strategies requires that the managers first decide whether they will target the mass market or just a niche market with specified needs and preferences. In line with this, there are seven possible approaches derived from Porter’s generic strategies typology that business units can choose from in order to guide their principles. These strategies are identified as low-cost strategy, focus low-cost strategy, differentiation strategy (without focus), focus differentiation strategy, low-cost differentiation strategy, and focus low-cost differentiation strategy. The seventh approach is a result of the combination of two or more of these strategies and is known as multiple strategies. Each of these approaches comes with its own advantages and challenges that need to be addressed by the top management.

In principle, if a company’s choice of strategy is not working in one way or another, then it’s the responsibility of the managers to adjust their approach in order to sustain a competitive advantage. Strategies geared towards trimming a firm’s costs work well with companies that are large and well established with a large market share. With these advantages, the respective firm can produce products or services that generally appeal to the entire market. Differentiation strategies however use high costs in trying to distinguish a firm’s products or services from those of the competitors. A firm can decide to execute both of these broad strategies with a bias on either of them. The choice of which way to go between low cost and differentiation strategies depends on the availability of resources, an organization’s commitment to quality, nature of competition in the market as well as the preferences and needs of the customers.

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