SM CHAP -5

May / Nov 22
Business Level
Strategies
C
CHHA
ALLI
ISSA
A

www.cakishankumar.com
Summarize without
Compromise
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BY KISHAN KUMAR
RANKHOLDER
THINK TAX, THINK KISHAN

CA KISHAN KUMAR
ALL INDIA RANKHOLER

9540365625
www.cakishankumar.com
 Business Level Strategies
Business Level Strategies

C HAPTER 5

B USINESS L EVEL S TRATEGIES

1. I N T R O D U C T I O N

▪ Business level strategy refers to

➢ course of action adopted by an Organization for each of its business separately
➢ to serve identified customer group and
➢ provide value to customers by satisfying their needs.
▪ Customers are foundation of Company’s business level strategy.
▪ Business managers must decide
a) Who are customers i.e. target market? Knowing the customers is very important for achieving and
sustaining competitive advantage.
b) What needs have to be met? Predicting and satisfying future needs is also important.
c) How to satisfy customer needs? How to use Co’s resources and core competency to satisfy customer
needs and add value to them.
▪ Thus, BL strategy focuses on using core competencies to satisfy customer needs & gain competitive
advantage.

2. P O R T E R ’ S F I V E F O R C E S M O D E L O F C O M P E T I T I V E A N A L Y S I S

▪ Every business operates in a competitive environment. Various competitive forces in an industry determine
➢ attractiveness and profitability of Industry; and
➢ how an Organization develops its business level strategies.
▪ A powerful and widely used tool for systematic analysis of significant competitive pressures and assessing
its importance is Porter’s 5 forces model.
▪ This model reflects that state of competition in an Industry is influenced by 5 competitive pressures:
a) Competitive pressure associated with Threat of New Entrants
b) Competitive pressure associated with bargaining power of Buyers
c) Competitive pressure associated with bargaining power of Suppliers

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d) Competitive pressure associated with Nature of Rivalry

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e) Competitive pressure associated with Substitute products.
▪ Inter-relation among these five forces gives each Industry its own particular competitive environment.

2.1. T H R E A T O F N E W E N T R A N T S

New entrants are powerful source of competition. They reduce industry profitability as they
➢ add new production capacity leading to increase in supply at lower price.
This erodes market share of existing players/ incumbents.
Bigger the new entrant, greater is the threat.
To discourage new entrants, existing players try to raise entry barriers.
a) Capital Requirement If entry in an Industry requires huge capital, Organizations having less funds
are effectively barred from entry.
b) Economies of scale It refers to reduction of cost per unit. As volume increases, large Firms enjoy
economies of scale which discourages new entrants.
c) Product It refers to uniqueness of a product in eyes of customer. Since cost of creating
differentiation unique product is high, it also acts as an entry barrier.
d) Brand identity Brand building is long process involving substantial resources. It is important in
case of products which have high prices and are infrequently purchased.
e) Possibility of This may also act as an entry barrier for new entrants.
aggressive retaliation
by incumbent
f) Switching cost New entrant needs to convince existing customers of other company to switch
to its product.

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Business Level Strategies

Buyer often incurs financial & psychological cost in switching existing player.
When switching cost is high, buyer is reluctant to switch.
g) Access to Unavailability of distribution channel is another barrier for new entrants.
distribution channel

2.2. B A R G A I N I N G P O W E R O F B U Y E R

It means buyers exert some pressure on Organization to reduce its cost and improve its product/services.
This force is significant when buyers form group or cartel. Mostly seen in industrial goods.
Buyer’s bargaining power is evident when
a) Buyer has full knowledge of sources of raw material and their substitutes.
b) They are big buyers and spend a lot of money.
c) Buyers are more concentrated than suppliers.
d) Product is not considered critical for buyer who can easily switch to substitutes.

2.3. B A R G A I N I N G P O W E R O F S U P P L I E R

It means suppliers exert pressure on Organization by increasing price of its supplies (Raw material).
Bargaining power of supplier determines cost of raw material & inputs, thus affecting profitability of
industry.
Supplier can have bargaining power when
a) Their product is critical to buyer and substitutes are not available.
b) No. of suppliers is less and they are more concentrated than their buyers.
c) There is higher switching cost.

2.4. N A T U R E O F R I V A L R Y I N T H E I N D U S T R Y

Intensity of rivalry is significant determinant of profitability and attractiveness of Industry.

It influences strategies being adopted by Organisation & also cost, price being charged, advertisement etc.
More intensive the rivalry, less is the profitability, hence, less attractive is the industry.
It is cut-throat when
a) Industry has no Strong leaders discourage price wars by disciplining initiator of price war.
clear leader
b) Competitors are If no. of competitors is high, ability of industry leader to control them decreases.
numerous
c) Competitors have Hence, they try to utilize the capacity. This increases supply and profitability
higher fixed cost/ decreases.
production capacity
d) Competitors face If exit barrier is low, competitors can exit market if they are not profitable.
high exit barriers But, if asset of an Organization is specialized and of little value to others,
Organization can’t sell the asset.

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e) Competitors have If there is opportunity for differentiation, increased price may be charged thus

Business Level Strategies

little opportunity to increasing profitability.
differentiate
f) Industry faces slow If industry’s growth is slow, rivals try hard to hold or grow by reducing price
down further, thus reducing profitability.

2.5. T H R E A T O F S U B S T I T U T E S

It is the latent/hidden source of competition.

If they offer price advantage or performance advantage, it may constitute major source of competition.
For example, coir suffered at the hands of synthetic fibre.
Threat of substitute product increases
➢ when there is significant investment in research & development
➢ in highly technological industry.

2.6. P R O C E S S O F A N A L Y S I N G C O M P E T I T I O N I N A N I N D U S T R Y ( 3 S T E PS )

a) Identify the competitive pressure associated with each of 5 forces.

b) Determine strength of each pressure [fierce, strong, moderate, normal, weak]
c) Determine whether collective strength of 5 competitive forces is conducive for industry’s profitability.

3. BUSINESS LEVEL STRATEGIES

Business-level strategy is concerned with a firm’s position in the industry, in relation to its competitors and
to the five forces of competition discussed above.
Primarily, it deals with 3 issues:
i) Meeting the needs of the customer
ii) Achieving advantage over competition
iii) Avoiding competitive disadvantage
According to Michael Porter, 3 generic strategies can be followed by a Firm to gain competitive advantage.
These strategies have been termed generic, because they can be pursued by any type or size of business firm
and even by not-for-profit organizations.

3.1. C O S T L E A D E R S H I P

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It involves producing
➢ standard products
➢ at very low cost per unit
➢ for price sensitive market (Broad mass market)
It involves efforts to reduce cost in area of Procurement; Production; Storage and Distribution of goods.
Also, economies of scale and reduction in overhead is done due to large volume of sale.
Because of lower cost, cost leader is able to charge lower price than its competitors and still make
satisfactory profit
But cost leadership strategy must be pursued along with differentiation.
Vertical and Horizontal integration strategy is pursued to gain cost leadership benefits.

When is cost leadership strategy effective? How to achieve cost leadership?

a) Market has many price sensitive customers. a) Forecast the demand of product/ service
b) Buyers do not care much about differentiation b) Optimum utilization of resources
or brand. c) Achieving economies of scale to reduce cost per unit
c) There is few scope of differentiation. d) Standardization of product for mass production
d) There are large no. of buyers with bargaining
e) Invest in cost saving techniques for smart working
power.
f) Resistance to differentiation till it becomes essential
g) Low overhead and No tolerance of wastage

3.2. A D V A N T A G E S O F C O S T L E A D E R S H I P S T R A T E G Y

Cost leadership strategy enables a Firm to be profitable even with 5 forces of Porter’s Five Forces Model:
Rivalry
Competitors try to
avoid price wars,
since low-cost
Firm will continue
to earn profit even
if they reduce
their price.
Buyer Supplier New Entrants Substitute
Powerful buyers Since cost leader Cost leader creates Cost leader is able
will not be able has lowest cost in entry barriers for to lower cost to
to exploit cost Industry, it is able new entrants due ensure that buyer
leader as its cost to absorb greater to low cost. continues with their
is already lowest. price increase by its product.
Hence, buyer will suppliers before it is They can also
continue to buy compelled to invest to develop
from it. increase the price. substitutes.

3.2.1. D I S A D V A N T A G E S O F C O S T L E A D E R S H I P S TR A T EG Y

a) Cost advantage may not be for long period as competitors may follow cost reduction techniques as well.
b) This strategy can be successful only if Firm can achieve higher sales volume.
c) In this strategy, expenses on advertisement, marketing, research & development etc. is minimal which
may be counter-productive in long run.
d) Technological changes are great threat to cost leader.

3.3. D I F F E R E N T I A T I O N S T R A T E G Y

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It aims at producing

Business Level Strategies

➢ unique products and service
➢ directed at customers who are relatively price insensitive. [Broad mass market]
Because of differentiation, businesses can charge premium for its products and also gain customer loyalty
as customer gets strongly attached to differentiating features.
Differentiation/ uniqueness can be in
➢ Product design; Brand; Features; Quality; Customer service etc.
Note: All Firms essentially follow differentiation strategy because only one Firm can be cost leader.
Basis/ Form/ Types of Differentiation
Product Differentiation Price Differentiation Organizational Differentiation
It means innovative products which It means company can It involves maximizing power of a brand
give Org. an edge over competitors either offer lowest price or or using specific advantage of
New product involves higher cost can charge highest price Organization to differentiate its
due to R&D, marketing but return in the Industry. products.
may be higher if it is valued by Eg: Brand image, customer loyalty,
customers. locational advantage, R&D capability.

3.3.1.Achieving Differentiation Strategy

a) Offer utility to customers and match the product with their taste and preference.
b) Improve/Elevate performance of product and its quality for buyer satisfaction.
c) Rapid product innovation by investing in R&D.
d) Take steps for enhancing the brand image and brand value.
e) Fixing product prices based on the unique features of product & buying capacity of customer.
Differentiate → Charge premium → customer loyalty

3.3.2. A D V A N T A G E S O F D I F F E R E N T I A T I O N S T R A TE G Y

Differentiation strategy enables a Firm to be profitable even with 5 forces of Porter’s Five Forces Model:
Rivalry Buyer Supplier Entrants Substitute
Brand loyalty gives They do not Since Since, innovative Substitutes can’t
an Organization negotiate for differentiation products are replace
competitive price as they get allows Org. to expensive to make differentiated
advantage over special features & charge higher price, & offer, it acts as product due to
rivals as customers they have fewer they can absorb a barrier for new high brand value &
will be less sensitive options in the increase in price of entrants. customer loyalty.
to changes in price. market. raw material.

3.3.3. D I S A D V A N T A G E S O F D I F F E R E N T I A T I O N S TR A T EG Y

a) It does not guarantee competitive advantage if standard product sufficiently meets customer needs.
b) If differentiation is not valued by customer, this strategy fails. In such cases, C.L. strategy is preferred.
c) In long run, uniqueness is difficult to sustain as competitors may copy differentiating uniqueness.
d) Charging too high price for differentiated product may cause customers to switch to different product.

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3.4. F O C U S S T R A T E G Y

It means an organization concentrates on

➢ particular group of customers, geographic market or product line
➢ in order to serve well defined but narrow market
➢ better than competitors who serve broader market.
Focus strategy is successful when
a) Industry segment is of sufficient size,
b) Has good growth potential, and
c) Not crucial to success of other major competitors.
Strategies such as market penetration and market development offer substantial focusing advantages.
Focus strategy can be pursued along with cost leadership strategy or differentiation strategy.

Focused C.L. strategy Focused Differentiation strategy

In this, Firm competes with its competitors on price to
charge in target narrow market.
It does not mean that the Firm charges lowest price
in industry.
Rather, it charges low price as compared to its
competitors in target market.
It requires offering unique products that fulfill
demand of a narrow market.
Some Firms using F.D. strategy concentrate their
efforts on
➢ Particular sale channel likes selling over
Internet, or
➢ A particular demographic group.

Achieving Focus Strategy Advantage Disadvantage

a) Selecting specific niches not
covered by CL or differentiator.
b) Creating superior skills for
catering to such niche market.
c) Generating higher efficiency for
catering to such niche market.
d) Developing Innovative ways for
catering to such niche market.
a) Premium price can be a) Due to limited demand of
charged for such product/ product, sales may be limited
service. & cost may not be recovered.
b) Rivals & new entrants find b) Niche could disappear or be
it difficult to compete due taken over by competitors by
to enhanced expertise in acquiring same competencies.
target market. c) Firms lacking distinctive
competencies may not pursue
this strategy.

4. BEST COST PROVIDER STRATEGY

It is further development of 3 generic strategies.

It aims to provide more value to customer by emphasizing on both, lower cost & better-quality differentiated
products.
It can be done in following two ways: [Sub strategies]
a) By offering products at a lower price than what is being offered by rivals for same / similar quality; or
b) Charging similar price as rivals for better quality product as compared to rivals.

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5. D I S T I N C T I V E F E A T U R E S O F G E N E R I C C O M P E TI T I V E S T R A T E G I ES

Business Level Strategies

Broad Best-Cost Focused Low-Cost and
Features Low-Cost Provider
Differentiation Provider Focused Differentiation
Strategic A broad cross- A broad cross Value-conscious A narrow market niche where
target section of the section of the buyers buyer needs and preferences
market market are different from the rest of
the market
Basis of Lower cost than An ability to offer More value for Lower cost in serving the
competitive competitors buyers something the money niche (focused low cost) or
advantage different from special attributes that appeal
competitors to the tastes or requirements
of niche members (focused
differentiation)
Market Try to make a Build in whatever Either underprice Communicate how the
emphasis virtue out of features buyers rival brands with focuser’s product attributes
product features are willing to pay comparable and capabilities aim at
that lead to low for. features or catering to niche member
cost Charge a premium match the price tastes and/or specialised
price to cover the of rivals and requirements
extra cost of provide better
differentiating features, thus
features delivering the
best value

Sustaining Offer economical Communicate the Develop unique Remain totally dedicated to
the strategy prices/good value. points of expertise in serving the niche better than
Key is to manage difference in simultaneously other competitors; don’t
costs down, year credible ways. managing costs blunt the firm’s image and
after year, in Stress constant down and efforts by entering other
every area of the improvement & upscaling segments or adding other
business use innovation to features product categories to widen
stay ahead of attributes market appeal.
initiative
competitors

Product line A good basic Many product Good-to- Features and attributes that
product with few variations, wide excellent appeal to the tastes and/or
frills (acceptable selection, strong attributes, special needs of the target
quality & limited emphasis on several-to-many segment
selection) Differentiating upscale features
features
Product A continuous Creation of value Incorporation of Tailor-made for the tastes
emphasis search for cost for buyer; strive upscale features and requirements of niche
reduction without for product and attributes at members
sacrificing superiority low cost
acceptable quality
and essential
features

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THINK TAX, THINK KISHAN

CA KISHAN KUMAR
ALL INDIA RANKHOLER

9540365625
www.cakishankumar.com
 About CA Kishan Kumar

THE ONLY
    

Kishan Kumar is an Associate member of The Institute of Chartered Accountants of India.

 

  He is a throughout Rankholder in CA examinations.

 

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     He himself scored Exemption in Taxation [76] in his CA Inter Exam..
 

     He has been awarded by Nitish Kumar, Hon’ble Chief Minister of Bihar for his
excellence in the field of education.
 

     Internationally renowned University of South Wales has also felicitated him for his

IS THE ONE THAT

aptitude and achievements during his academic life.
 

  Kishan has worked with Ernst & Young and PwC (Big 4 Firms) and uses his practical
corporate experience to make the subject more interesting and engaging.
 

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     His students have secured marks as high as 85 and hundreds have scored exemptions.
 

  He is committed to make meaningful contribution to the life of promising CA aspirants.

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