 Concept of Strategy:- Strategy is one of the most significant concepts

to have emerged in the subject of management studies in the recent

past.

 Its applicability, relevance, potential and viability have been put to

several test and all the time it has emerged as a critical input to
organizational success and has come in handy as a tool to deal with
the uncertainties that organizations face.

 It has helped to reduce ambiguity and provided a solid foundation as

a theory to conduct business: a convenient way to structure the many
variables that operate in the organizational context, and to understand
their interrelationship.

 The term Strategy is derived from a Greek word Strategos, which means
Generalship – the actual direction of military force, as distinct from the
policy governing its deployment.

 Hence the word Strategy means ‘The Art of the General.’

 In business parlance, there is no definite meaning assigned to

strategy. It is often used loosely to mean a number of things.
 A Strategy could be:-

i. A plan or course of action or a set of decision rules, making a

pattern or creating a common thread;
ii. The pattern or common thread related to the organization's
activities, which are derived from the policies, objectives and
goals;
iii. Related to pursing those activities which move an organization
from its current position to a desired future state;
iv. Concerned with the resources necessary for implementing a plan
or following a course of action;
v. Connected to the strategic positioning of a firm, making trade-
offs between its different activities and creating a fit among
these activities;
vi. The planned or actual coordination of the firm’s major goals and
actions, in time & space that continuously co-align the firm with
its environment.
 In Simplified terms, a strategy is the means to achieve the objectives.

 In Complex terms, it may possess all the characteristics mentioned

in the previous slide.

 Levels at which Strategy Operates:- For many companies, a single

strategy is not only inadequate but also inappropriate.

 The need is there for multiple strategies at different levels.

 In order to segregate different units or segments, each performing a

common set of activities, many companies organize on the basis of
operating divisions or simply divisions.

 These divisions may also be known as profit centers or Strategic

Business Units (SBUs).

 An SBU, is defined as “Any part of a business organization which is

treated separately for Strategic Management purpose.”
 Generally, SBUs are involved in a single line of business.

 A complementary concept to SBU, valid for the external

environment of a company, is a Strategic Business Area (SBA).

 It is defined as ‘A distinctive segment of the environment in

which the firm does (or may want to do) its business.’

 A number of SBUs, relevant for different SBAs, form a cluster of

units under a corporate umbrella.

 Each of the SBUs has its own functional departments or a few

major functional departments while common functions are
grouped under the Corporate Level.

 The different levels of Strategy could be at the Corporate Level, the

SBU Level and at the Functional Level.
Levels of Management Levels of Strategy

Corporate
Corporate Office Corporate - Level

SBU SBU SBU SBU Business - Level

A B C

Functional Functional – Level

Finance Marketing Operations HRM Information

Fig:- Different Levels of Strategy

 Corporate Level Strategy is an over–arching plan of action
covering the various functions that are performed by different
SBUs.
The plan deals with the Objectives of the Company, Allocation
of Resources, and coordination of the SBUs for optimal
performance.

 SBU level (or business) strategy is a Comprehensive Plan

providing Objectives for SBUs, Allocation of Resources among
Functional Areas and Coordination between them for making
optimal contribution to the achievement of the corporate level
objectives.

 Functional Strategies deals with a Relatively Restricted Plan,

providing Objectives for a Specific Function, Allocation of
Resources among different operations within that functional
area and Coordination between them for optimal contribution to
the achievement of the SBU and corporate–level objectives.
 Ex:- Panacea Biotec is a health management company in India,
involved in research, manufacturing and marketing of
pharmaceuticals, biopharmaceuticals, new chemical entities, natural
products and vaccines. It is organized into five SBUs: Critical Care,
Diacar, PRO, GROW and Best on Health(BOH), which enables it to
respond to changes in the industry and marketplace with speed and
sensitivity.

 Apart from the three levels at which strategic plans are made,
occasionally, companies plan at some other levels too.
Firms often set strategies at a level higher than the
corporate–level. These are called the societal strategies.
Based on a mission statement, a societal strategy is a
generalized view of how the corporation relates itself to the
society in terms of a particular need or a set of needs that it
strives to fulfill.
Corporate–Level Strategies could then be based on the
societal strategy.
 Ex:- Suppose a corporation decides to provide alternative sources
of energy for the society at an optimum price and based on the latest
available technology.
On the basis of its societal strategy, the corporation has a
number of alternatives with regard to the businesses it can take up.
It can either be a manufacturer of nuclear power reactors, a
maker of equipments used for tapping solar energy or a builder of
windmills among other alternatives.
The choice is wide and being in any one of such diverse fields
would still keep the corporation within the limits set by its societal
strategy.

 Corporate and Business level strategies derive their rationale

from the societal strategy.

 Some strategies are also required to be set at lower levels.

One step down the functional level, a company could set its
operational level strategies.
 Each Functional Area could have a number of Operational
Strategies. These would deal with a Highly Specific and Narrowly
Defined area.
Ex:- A functional strategy at the marketing level could be
subdivided into sales, distribution, pricing, product and advertising
strategies.

 Activities in each of the Operational Areas of Marketing,

whether Sales or Advertising, could be performed in such a way
that they contribute to the Functional Objectives of the
Marketing Department.

 The Functional Strategy of Marketing is interlinked with those

of the Finance, Production and Personnel Departments.

 All these Functional Strategies operate under the SBU–level.

Different SBU–Level strategies are put into action under the
Corporate–Level Strategy which, in turn, is derived from the
Societal–Level Strategy of the Corporation.
 Ideally, a perfect match is envisaged among all strategies at
different levels so that a Corporation, its Constituent Companies,
their different SBUs, functions in each SBU and various
Operational Areas in every Functional Area are synchronized.

 When perceived in this manner, the organization moves ahead,

towards its Objectives and Mission, like a well–oiled machine.

 Such an ideal, though extremely difficult – if not impossible to

attain – is the intent of strategic management.

 Strategic Marketing Management is focusing on the alignment

of marketing management within an organization with its
business and corporate to gain Strategic Advantage.

 Strategic Development Framework (Competitive Marketing

Strategies):- There is need to develop strategies that are more
than customer based. The strategy should also focus on attacking
and defending against competitors.
 A company can follow any of the following strategies of Build, Hold,
Harvest or Divest depending on the Competitive Conditions
prevailing in the market and its Own Objectives.

1. Build Objective:- Build objective involves increasing the company’s

market share.

• Such a strategy makes sense when the market is growing and the
company has a competitive advantage that it can capitalize on.

• When to Build:- A build objective is suitable in markets which are

growing. All companies can increase their market share
simultaneously because there are large number of customers who have
not yet bought the product.

• But if a market is mature, and hence it is not growing, increase in

market share of one company can happen only at the expense of
market share of another company.

• A company can build in a mature market when there are competitive

weakness that it can exploit, or a company can build if it has corporate
strengths that it can exploit.
• The Concept of Experience Curve says that every time a
company’s cumulative production is doubled, its cost of
production goes down by a certain percentage, depending upon
the industry the company is in.
By building sales faster than competition, a company can
achieve the position of cost leader.
Thus a company can be in a position to reduce price and
hence be able to sell in large volumes by attracting customers
of its competitors.

• Strategic focus:- A Company can Build by Market Expansion,

Winning Market Share from Competitors, by Mergers or
Acquisitions and by Forming Strategic Alliances.

o Market Expansion:- A Company expands the market for its product

by creating new users, or new uses, or by increasing frequency of
purchase. It can find new users by moving to foreign markets, or
targeting larger segments. It can promote new uses for its
product.
o Winning Market Share:- This indicates gaining market share at
the expense of competition.
Principles of offensive warfare apply in this case. These are to
consider the strengths of the leader’s position, to find a weakness in
the leader’s strength, and attack at that point.

i. Frontal Attack:- This involves the aggressor taking on the

incumbent head on.

 The aggressor attacks the main market of the incumbent by

launching a product with a similar or superior marketing mix.

 The incumbent gets most of its revenue and profits from this
market segment. If the incumbent is a market leader, the aggressor
should have clear and sustainable competitive advantage.

 If its competitive advantage is low cost, and it uses low price to gain
market share of the market leader, the latter will match its low price
because it has deep pockets.
 Low price can be a sustainable competitive advantage only if
the aggressor has developed some proprietary technologies by
which it has been able to reduce its costs of manufacturing and
distribution.

 A distinct differential advantage provides basis for superior customer

value by which incumbent’s customers can be enticed, but the
aggressor should be able to match the incumbent in other activities.

 An aggressor is more likely to be successful if there is some

restriction on the incumbent’s ability to retaliate.

 Finally, the challenger needs adequate resources to withstand

the battle that will take place should the leader retaliate.
Sustainability is necessary to stretch the leader’s capability to
respond.
ii. Flanking Attack:- In flanking attack, an aggressor attacks
unguarded or weakly guarded markets.

 The aggressor attacks geographical areas or market segments

where the incumbent’s presence is weak or the incumbent does
not consider the segment lucrative and allows the initial
incursion.
Ex:- The Japanese car companies launched flanking attack in the US car
market. They attacked the small car segment, from which they
expanded into other segments. The American car companies did not
retaliate vigorously because sedans and luxury cars, and not small cars,
were their major markets.

iii. Encirclement Attack:- The aggressor launches products in all

segments and at all price points. It has a product for every
conceivable need of customers.

 The aggressor needs to have deep pockets to launch & sustain

such an attack, and it should have prepared for a long time,
before launching the attack.
 Normally such an aggressor is a large corporate which enters a
new category, and has ambitions to become the lead player in
it.

 The incumbent has to regroup and redirect its resources to

meet the aggressor in every segment that the aggressor has
encroached.

 An incumbent may also decide to ration its resources, and

protect its most lucrative segments, letting the less lucrative
ones fall prey to the aggressor’s attacks.
Ex:- Samsung launched mobile handsets offering both CDMA
and GSM technologies at all price points, with a goal of becoming
the largest player in the Indian market. It attacked the market leader
Nokia directly and aggressively in all its existing segments.
iv. Bypass Attack:- This attack involves circumventing the incumbent’s
position. The aggressor changes the rules of the game, usually
through technological leap-frogging.

 The aggressor can revert to making a simpler product with very

low price or it can incorporate a new technology in its product
which enhances the value of the product by a big margin.

 Diversification is also a type of bypass attack – the aggressor can

bypass an incumbent by venturing in new markets with new
products.

v. Guerilla Attack:- The aggressor pin–pricks the incumbent instead

of serving it body blows. The aggressor is a small player and
makes life uncomfortable for the stronger incumbents by
unpredictable price discounts, sales promotions or heavy
advertising in a few segments and regions.
vi. Mergers or Acquisitions:- An aggressor merges with or acquires
competitors.

 By doing so, it is able to avoid expensive marketing wars, and

also able to gain synergies in functions such as purchasing,
production, financial, marketing and R&D.

 Mergers and acquisitions result in immediate increase in market

share when the players operate in the same market.

 Mergers involve high level of risk because people with different

culture, language and business practices have to work together
which is never easy.
vii. Forming Strategic Alliance:- A company can build through
strategic alliances. The players entering the alliance want to
create sustainable competitive advantage for themselves –
often on a global scale.

 Companies can form strategic alliances through joint

ventures, licensing agreements, purchasing & supply
agreements, or joint product & process development
programmes.

 The companies in alliance are able to enter new markets, get

access to new distribution channels, develop new products and
fill gaps in their product portfolio.

 By strategic alliances, partners can share the product

development costs and risks.

 Strategic alliances are flexible, and it is easier for a player to

walk out of a strategic alliance than in the case with mergers and
acquisitions.
 A strategic alliance can work only if the players are willing and
able to contribute to a common cause, and if their
contributions complement each other.

 Strategic alliance involves risk in the sense that partners develop

intimate understanding of each others’ competences, strengths
and weaknesses – an unscrupulous player can use such
information to damage its erstwhile partner once the strategic
alliance is dissolved.

2. Hold Objective:- The company defends its current position

against imminent competition.

 It applies principles of defensive warfare – it blocks strong

competitive moves.

 When To Hold:- Hold objective makes strategic sense for a market

leader in a mature or declining market – it is in cash cow
position.
• The market leader generates positive cash flows by holding on
to market leadership, which can be used to build other
products.

• It is in a position to hold onto market leadership, because it is

in a strong bargaining position with distribution channel
members and has strong brand image.

• It enjoys experience curve effects that reduce costs, so it can sell

at lower price. In a declining market, if a company is able to
maintain market leadership, it becomes a virtual monopolist as
weaker competitors withdraw.

• Hold objective also makes strategic sense when the costs of

increasing sales and market share outweigh the benefits – there
are aggressive competitors who retaliate strongly if attacked.

• In such situations, it makes sense that the companies be content

with their market share, and do not take actions that may
invite strong retaliatory actions from competitors.
 Strategic Focus:- A company holds on to its market share by
monitoring competition or by confronting the competition.

 Monitoring the Competition:- When an industry is in competitive

stability, all players are being good competitors. All players are
content with their market share and they are not willing to
destabilize the industry structure. A company needs to monitor its
competitors to check that there are no significant changes in
competitor behaviour, but beyond that they do not need to do
anything extravagant.

 Confronting the Competition:- Rivalry is more pronounced

among existing players since the product is in the maturity or
the decline stage.

• Strategic action may be required to defend sales and market

share from aggressive challenges:-
i. Position Defense:- Position defense involves building fortification
around one’s existing territory, which translates into building
fortification around existing products.

• The company has a good product which is priced competitively and

promoted effectively. This will work if products have a differential
advantage that can not be easily copied, for instance, through patent
protection.

• Brand and Reputation may provide strong defense. But this

strategy can be dangerous, as customers’ need or the underlying
technologies of the product may have changed but the company
may refuse to change track fearing that it will damage its current
positioning and reputation.

ii. Flanking defense:- The company takes actions to defend a hitherto

unprotected market segment, because it believes that the
aggressor will consolidate itself in the flanking segment, and after
getting adequate experience of how to operate in the market, it
will try to enter the more lucrative segments of the market.
 Therefore, an incumbent should not leave segments
unattended, even if they are not very lucrative.

 Competitive incursions are less when a incumbent has

presence in all segments. But if this effort is half hearted, it will
not help.

 Failure to defend an emerging market segment may be

dangerous later, as competitors will entrench themselves in the
unprotected segment.

iii. Pre-emptive Defense:- Pre–emptive defense involves taking

proactive steps to protect oneself from the imminent attack of
a competitor.

a. Attack First:- This involves continuous innovation and new

product development. The defender proactively defends its turf by
adopting such measures. This may dissuade a would-be attacker.
b. Counter Offensive Defense:- In head on counterattacks, an
incumbent matches or exceeds what the aggressor has done –
cuts price more sharply or advertises more intensely.

• The incumbent is willing to incur the high costs of such

counterattacks because they are the only means left to thwart a
persistent aggressor.

• The incumbent may also attack the aggressor’s cash cow, and
hence choke the aggressor’s resource supply line. A
counterattack may also be based on innovation – make a product
that makes the aggressor’s product obsolete.

c. Encircle the Attacker:- The defender launches brands to

compete directly against attacker’s brands.
d. Mobile Defense:- When a company’s major market is under
threat, a mobile defense makes strategic sense.

• The two options in a mobile defense are Diversification and

Market Broadening.

• Diversification involves attempts to serve a different market with a

different product.

• Here the Company will have to check if it has the competences

to serve the new market effectively.

• Market broadening involves broadening the business

definition.
Ex:- When film companies faced declining cinema audiences,
they redefined their business As entertainment providers rather than
film makers, and moved into TV, Magazines, Theme Parks etc.
e. Strategic Withdrawal:- The incumbent takes stock of strengths
and weaknesses of its businesses. It decides to hold on to its
strong businesses, and divests its weak businesses – which
means, it concentrates on its core business.

• Therefore, strategic withdrawal allows a company to focus on

its core competences. Strategic withdrawal makes sense when a
company’s diversification strategies have resulted in too wide a
spread of business, away from what it does exceptionally well.

3. Niche objective:- The company seeks to serve a small segment or

even a segment within a segment.

• By being content with a small market share, it is able to avoid

competition with companies which are serving the major
segments. But if the niche is successful, large competitors may seek
to serve it too.
 When to Niche:- A company can only niche if it has a small
budget, and if strong competitors are dominating the major
segments.

 The company finds small segments, whose customers are not

well served by incumbents, and it builds special competences to
serve them.

 It creates competitive advantage and runs profitable operations

for these segments.

 It often happens that an industry’s major players are focused on

serving customer of large segments, and hence their strategies
and operations are aligned to meet their needs.

 Needs of smaller segments are ignored by major players, and

hence niching becomes a smart strategic objective in such
markets.
 Strategic Focus:- A strategic tool for Nichers is market
segmentation.

 They should search for under-served segments that may provide

profitable opportunities.

 The choice of the segment will depend upon the attractiveness

of the niche and the capability of the company to serve it.
Focused R&D expenditure gives a small company a chance to make
effective use of limited resource.

 The customers of a niche have peculiar needs - their needs are

substantially different from those of the majority of customers in
the market, and hence a Nicher should develop a sophisticated
understanding of their needs.

 It then designs a unique operation and delivery mechanism to

serve those needs.
 Since a Nicher is serving only a small segment, it may be tempted to
serve a larger segment. A Nicher should not fall prey to such
temptations because they will have to dilute their offerings to
be attractive to a larger segment, which will automatically
make it unattractive for its niche.

 A Nicher is small in its operations by design, and not by chance,

and it is there because it values the high profits that a niche
generates. A Nicher should decide to remain small – always.

4. Harvest Objective:- A company with harvest objective tries to

maximize its profit, and it is not overly worried if its actions
result in loss of market share.

 It is more focused on reducing cost than gaining market share.

It wants to generate funds for its growing business, and hence is
focused on generating large cash flows.
 When to Harvest:- Moderately successful products in Matured
or declining markets are the prime targets for harvest
strategies, since they lose money or earn very little, and take up
valuable management time and resources.

 Harvesting strategies can make such products highly profitable

in the short term.

 Harvesting also makes sense if a company has a substantial

number of loyal customers whom it continues to serve.

 In growing markets, a company has to make huge investments in

operations and marketing to build, and a company may decide that
payoffs of such investments are not adequate. In such markets, a
company can harvest businesses which are consuming lot of
resources but are not gaining market share rapidly – it decides
that these businesses do not have the potential to become market
leaders.
 A company has to continuously identify its future breadwinners.
It needs to invest in them, for which it harvests some of its existing
products which are not doing well.

 A company should always remember that if it harvests a

product for a long time, it is not likely to survive.

 Strategic Focus:- Harvesting involves eliminating R&D and

Marketing Expenditure. Only the very essential expenditures
are incurred.

 The company tries to reduce cost of manufacturing. It

rationalizes its product portfolio. It eliminates brands which
are not doing well, and focuses on few brands which are doing
well.

 It reduces its promotion expenses and also withdraws from less

profitable distribution channels, and increases price whenever
it can.
 Continued harvesting makes a business very weak and
eventually unviable. Therefore, a company has to decide as to
when it should stop harvesting and sell the business, because it is
never a good idea to persist harvesting for such a long time that no
buyer finds anything worthwhile left in the business.

5. Divest Objectives:- A company divests a SBU or a product, and

hence is able to prevent the flow of cash to poorly performing
SBUs and products.

 Divestment is a decision that is often considered to be the last

option by a company.

 The decision to divest must be made carefully, while not only

assessing the particular business, but also analyzing its impact
on other businesses of the company, and its portfolio.
 When to Divest:- A company divest unprofitable businesses – it
does not believe that it can turn them around and it wants to divert
its Financial and Managerial resources to more promising
businesses.

 It also divests businesses whose costs of turnaround are likely

to exceed benefits.

 It may divest its moderately successful products of growth

phase, sometimes after harvesting has run its full course,
because it is not willing to commit the type of resources that will
be required to make them market leaders.

 Before taking the decision to divest a product, a company should

deliberate if it will adversely affect the sale of a profitable
product, because it often happens that an industrial customer
buys two products in conjunction, and either he buys them
together or he does not buy either of them.
 Some industrial customers want to buy all the products that they
need to serve a specific requirement from a single supplier, and
hence, a company has to retain its unprofitable products if it
wants to continue to do business with such a buyer.

 Strategic Focus:- A loss making product is a drain on profits and

cash flows, and hence a company should divest it quickly to
minimize losses.

 It should try to find a buyer, but if it does not find one within a
reasonable frame of time, it should withdraw the product.

 A company may continue to harvest one of its businesses and

sap all vitality form it. Such a business will not be attractive to
buyers and will not fetch a good price.

 A company should act fast once it decides that it has to get rid of
a business and sell it when it is still in a viable shape.
 It should look for a buyer in whose portfolio the business will fit
well. Such a buyer will always be willing to pay more as it will try to
salvage and grow the business rather than use it to earn some money
by selling to some other party.

 A company should avoid the situation when its divestment is

seen as a desperate sale. It will fetch less money and lot of
disrepute.
 Competitive Advantage:- The key to superior performance is to
gain and hold competitive advantage. Firms can gain a
competitive advantage through Differentiation of their product
offerings which provides superior customer value, or by Managing
for lowest delivery cost. In most cases, an industry’s ‘return on
investment’ leader opts for one of the strategies, while the
second placed firm pursues the order.

Differentiation

Achieving
Cost
Competitive Differentiation
Leadership
Advantage Focus

Focus
Cost Focus

Fig:- Achieving Competitive Advantage

 Competitive Strategies:- The two means of competitive advantage of
low cost of delivery and differentiation, when combined with competitive
scope of activities of broad versus narrow, result in four generic
strategies:-
 Differentiation.
 Cost Leadership.
 Differentiation Focus.
 Cost Focus.

The Differentiation and Cost Leadership strategies seek competitive

advantage in a broad range of market, whereas, Differentiation
Focus and Cost Focus strategies are confined to a narrow segment.

• Differentiation:- A company that pursues differentiation strategy

selects only one or just a few of the total choice criteria that are used
by customers of the industry.

 It then uniquely positions itself to meet these choice criteria by

designing a product that gives a very high level of performance on
the chosen choice criteria, and only a mediocre level of performance
on other choice criteria.
 Ex:- A manufacturer of A.Cs may target customers whose choice criteria is
‘Rapid Cooling’. Therefore, it designs an AC which ‘Cools rapidly’, but is
not very ‘energy efficient’. Differentiation strategies raise the average cost
of the industry, because players of the industry are providing higher level
of performance based on one choice criteria or the other. But the players
can charge premium prices because customers are getting their desired
values. Such an industry will be segmented on choice criteria, and players
will target only one or just a few of the total segments. Therefore, another
manufacturer of AC may target customers whose choice criteria is ‘energy
efficient’. Companies that pursue differentiation strategy differentiate in
ways that lead to price premiums in excess of cost of differentiating.
Differentiation gives customers a reason to prefer one product over
another and is thus central to segmentation and positioning.

• Cost Leadership:- Cost leadership involves the achievement of lowest

cost position in an industry.

 Firms market standard products that are believed to be acceptable to

customers, at reasonable prices which give them above average profits.
Some cost leaders discount prices in order to achieve higher sales
levels.
• Differentiation Focus:- The company targets a small segment or niche,
which has special needs.
 The special needs of the segment offer an opportunity to the company
to differentiate its product from those of competitors who may be
targeting a broader group of customers.
 It designs a product to meet the unique needs of the customers of this
small segment.
 Therefore, when a company pursues differentiation focus strategy, its
underlying premise is that the needs of its target segment differ from
the broader market, and that existing competitors are
underperforming in its target segment.

• Cost Focus:- A firm seeks a cost advantage with one or a small number
of target market segments.

 Services / features may be provided to all segments but in some segments

those services / features may not be needed. For these segments, the
company is over performing. By providing a basic product, a company
is able to reduce costs more than the price discount it has to give to
sell it.
 Creating Differential Advantage:- A company’s resources and skills
are the sources of its competitive advantage, but they are
translated into a differential advantage only when the company’s
customers perceive that its product is providing value more than
what its competitors’ products are providing.

 Therefore, a company uses its resources and skills to create

differential advantage by providing higher level of performance
than its competitors on choice criteria that its target segments
value highly.

 But, the companies should understand that attributes on the

bases of which differentiation can be made are not always ones
that are considered most important by customers.
Ex:- If an Airline asked its customers to rank safety, punctuality and on-
board service in importance when flying, most customers would rank
safety on top.
But, when they choose an airline, safety ranks low, because they assume
that all airlines are safe, and they choose an airline on the basis of
punctuality and on–board service. Therefore, airlines differentiate their
services on bases which customers said were less important.
 A company can create differential advantage by enhancing
customer value proposition on one or more elements of its
marketing mix – lower price, intensive distribution, knowledgeable
salespeople, and slick advertisement.

 The key to deciding whether improving an element of marketing mix

is worthwhile, is to know if the potential benefit provides value that
the customers desire.

 Product:- A product should give higher performance on

parameters that target customers consider important and
mediocre performance on other parameters.

 Durability, reliability, styling, capacity to upgrade, provision of

guarantee, giving technical assistance, helping in installation
etc., can help in differentiating a product from that of the
competitor.
 Distribution:- Wide distribution coverage and careful selection
of distributor locations can provide convenient purchasing
points for customers.

 Quick and reliable delivery helps in differentiating a company’s

offerings from those of competitors.

 Building exclusive channel partnerships and entering into long

term contracts with these partners can also prove to be
beneficial to the company in getting better customer feedback.

 Promotion:- A differential advantage can be achieved by the

creative use of advertising.

 Advertising can aid differentiation by creating a stronger brand

personality than competitive brands.

 Using more creative sales promotional methods or simply

spending more on sales incentives can give direct added value
to customers.
 By engaging in co-operative promotion with distributors,
producers can lower their costs and raise their goodwill.

 When products are similar, a well–trained sales force can

provide superior problem solving skills for their customers.

 Dual selling whereby a producer provides sales force assistance

to distributors can lower latter’s cost and increase sales.

 Fast, accurate quotes can lower customers’ costs by making

transactions more efficient.

 Free demonstrations and free trial arrangements can reduce

the risk of purchase for customers.

 Superior complaint handling procedures can lower customer

costs by speeding up the process and reduce inconvenience that
can accompany it.
 Price:- Using low price to gain differential advantage can fail
unless the firm enjoys cost advantage and has resources to fight
a price war.

 Credit facilities and low interest loans are indirectly low prices
and a high price can be used to do premium positioning.

 Where a brand has distinct product, promotional and

distribution advantage, a premium price provides consistency
with the marketing mix.

 Attaining Cost Leadership:- Some of the major cost drivers that

determine the behaviour of costs in the value chain are:-

• Economies of Scale:- Economies of scale can arise from the use of

more efficient methods of production at higher volumes.

 It also arise form the less than proportional increase in

overhead cost as production volume increases.
 Another scale economy results from the capacity to spread the
cost of R&D and promotion over a greater sales volume.

 But scale economies do not proceed indefinitely. At some point,

diseconomies of scales are likely to arise as size gives rise to
complexity and personnel difficulties.

 Learning:- Costs can fall through effects of learning.

 People learn how to assemble more quickly and pack more

efficiently. The combined effect of economies of scale and
learning, as cumulative output increases, has been termed the
‘Experience Curve’.

 This suggests that firms with greater market share will have a
cost advantage through the experience curve effect, assuming all
companies are operating on the same curve.
 But a move towards a new technology can lower the experience
curve effect for companies that adopt such new technologies,
allowing them to leap–frog more traditional forms and thereby gain a
cost advantage even though their cumulative output may be lower.

 Capacity Utilization:- Since fixed costs must be paid whether a

plant is manufacturing at full or zero capacity, underutilization
incurs costs.

 The effect of underutilized capacity is to push up the cost per unit for
production. Therefore, greater capacity utilization ensures lower
per unit cost of production.

 Linkage:- Linkages describe how costs of some activities are

reduced, by the way other activities are performed.
 Ex:- Improving quality assurance activities can reduce after sales service
costs.

 Activities of suppliers and distributors are also linked to the

activities of a firm and affect costs of a firm.
 Ex:- Introduction of JIT delivery system by a supplier reduces
inventory costs of the firm. Distributors can influence a firm’s physical
distribution costs through warehouse location decision. To exploit
such linkages, the firm may need considerable bargaining power.

 Inter–Relationships:- Sharing costs with other business units is a

potential cost driver.

 Sharing the costs of R&D, transportation, marketing and purchasing

lower costs.

 Integration:- Both integration and de–integration can affect

costs.

 Owning the means of physical distribution rather than using

outside contracts could lower costs. Ownership may allow a
producer to avoid suppliers or customers with sizeable bargaining
power. Ownership also increases control, which may allow
greater efficiency of distribution.
 De–integration can also lower costs and raise flexibility. By
using many small suppliers, a company can be in a powerful
position to keep costs low and also maintain a high degree of
production flexibility.

 Timing:- Both first movers and late entrants have opportunities

for lowering costs.

 For first movers, it is usually cheaper to establish a brand name

in the minds of customers if there is no competition. They also
have prime access to cheap or high quality raw materials and
locations.

 Late entrants to a market have the opportunity to buy the

latest technology and avoid high market development costs.
They can also avoid costly mistakes made by the pioneer in
building a market for the product.
 Policy Decisions:- Firms have a wide range of discretionary policy
decisions that affect costs.

 Product width, levels of service, extent of diversification,

channel decisions etc., have direct impact on costs.

 Care must be taken not to reduce costs on activities that have a major
bearing on customer value.

 Locations:- The location of plants and warehouses affect costs

through different wage, physical distribution and energy costs.

 Location near customers lowers outbound distributional costs, and

location near suppliers reduces inbound distributional costs.

 Institutional Factors:- These include government regulations,

tariffs and local content rules.

 These are uncontrollable factors for a business, but changes can

affect costs.
 A firm can anticipate such changes by conducting regular
checks and follow–ups of various activities in their
environment.

 The firm cannot avoid these events, though they can be better
prepared. A well equipped firm is likely to be affected less
adversely in an industry, as compared to competitors.
 Competitive Strategy Selection:- A company that selects a
generic strategy and faithfully & diligently follows it, is
successful.

 Companies that do not pursue a generic strategy are stuck in the

middle position, pursuing irreconcilable strategies like
‘differentiation at low cost’. They do not develop any competitive
advantage, and hence perform poorly.

 A successful company understands the generic basis of its

success. It understands its competitive advantage and avoids
actions that will dilute it.

 A cost leader that makes ‘no frills’ products should be paranoid

about controlling costs and never move to make differentiated
products just because they fetch more prices and margins.

 The move will raise the cost of its ‘no frills’ product, but its
differentiated product will not be ‘differentiated’ enough to lure
the more sophisticated customers of the market.
 A company that follows the focus strategy should know that it
can only have limited sales volume, and that it cannot target a
large segment because it does not have the competitive
advantage to serve it.

 If it targets a larger segment, it would have diluted its product

enough to make it unattractive for its original small segment.

 In most situations strategies of differentiation and cost

leadership are incompatible because resources have to be
expended for differentiating a company’s offerings.

 But there are circumstances when both can be achieved

simultaneously. A differentiation strategy may lead to market
share domination, which lowers cost through economies of
scale and learning effects.

 Or a highly differentiated firm can pioneer a major process

innovation that significantly reduces manufacturing costs
leading to a cost leadership position.
 When differentiation and cost leadership coincide, performance
is exceptional, since a premium price can be charged for a low cost
product.

 Sources of Competitive Advantage:- A company has several sources

of competitive advantages such as R&D, scale of operations,
technological superiority, more qualified personnel etc.

 Companies in the same industry usually have different sources of

competitive advantage, which must provide superior customer value
than the competition.

• Superior Skills:- Are distinctive capabilities of key personnel

that set them apart from personnel of competing firms.
Ex:- Superior selling skills may result in closer relationships with
customers than what competing firms can achieve.
Superior quality assurance skills can result in higher and more
consistent product quality.
• Superior Resources:- Are tangible requirements that enable a
firm to exercise its skills, Superior resources may be number of
sales people, expenditure on advertising and sales promotion,
number of retailers who stock the product (distribution
coverage), expenditure on R&D, scale and type of production
facilities and financial resources, brand equity etc.

• Core competences:- The distinctive nature of these skills and

resources sum up a company’s core competences.

Superior
Superior Skills –
Resources –
Distinctive
Capabilities of key
personnel
+ Tangible
Requirements to
Exercise Skills
Core
Competencies

Fig:- Core Competencies of a Company

• Value Chain:- Value chain is a useful method for locating superior
skills and resources.

 A company’s value chain comprises of all the activities that the

company undertakes to be able to serve its customers.

 These activities can be categorized into Primary and Support

activities.

 All companies design, manufacture, market, distribute and service its

products. When a company delineates its value chain, it can better
locate and understand its sources of costs and differentiation.

 A company’s primary activities include in-bound logistics,

warehousing, manufacturing, marketing, out-bound logistics,
selling order processing, installation, and repair.

 Support activities are found within all these primary functions

and include purchasing, technology, human resource
management and the company’s infrastructure.
 They are not defined within a given primary activity because
they can be found in all of them.

 By examining each value creating activity, a company can look for

skills and resources that may form the basis for low cost or
differentiated strategy.

 The company also looks for linkage between value creating

activities.
Ex:- Greater co-ordination between manufacturing and in-
bound logistics may reduce costs through lower inventory levels.
Value chain analysis can extend to the value chains of suppliers
and customers. A company can reduce its costs or enhance its
differential positions by creating effective linkages between its value
chain and those of its suppliers and customers – a company can
reduce its inventory holding costs by enabling it supplier to supply in
smaller lot sizes, or its engineers can collaborate with suppliers’
engineers to produce better quality products.
 Value chain analysis provides an understanding of the nature &
location of skills & resources that provide the basis for competitive
advantage.

 Operating costs and assets are assigned to the activities of the value
chain and improvements can be made and cost advantage defended.
Ex:- If a company’s cost advantage is based on its superior manufacturing
facility, it should always be willing to upgrade it, to maintain its position
against competitors.
But, if a company’s differential position is based upon skills in product
design, it should always be keen to hire the best designers and procure the
latest design tools.

 The identification of specific sources of advantage can lead to their

exploitation in new markets where customers place a similar high value
on these resultant outcomes.

 For a differential advantage to be realized, a company not only

needs to provide customer value, but the value should also be
superior to that provided by competitors.
 Besides creating an effective marketing mix, a company also needs to
react fast to changes in the market.
Ex:- Using advanced telecommunications, companies receive sales
information from around the world 24 hours a day, every day of the year
and react promptly to them.

 Building corporate Advantage Across Business:- Most multi-

business companies are just sum of their individual businesses.

 Companies have been able to build competitive advantage at the

level of individual businesses. But they have not been able to build
corporate advantage across their multiple businesses.

 Corporate advantage has to be built through the configuration and

co-ordination of the various businesses that the corporate is
managing.

 Corporate advantage is built by judiciously using resources like

assets, skills and competencies – a company uses these resources in a
unique way, and it is almost impossible for a competitor to copy it.
 Companies like Toyota and Southwest Airlines have been
successful by using their resources in unique ways, and though
they have been very willing to let others study their systems,
not many companies have been able to copy their systems
effectively.

 A Corporate can move into a business area only if its resources

will help build a corporate advantage in the new business area.

 A corporate should enter a new business based on the similarity

between the technology required for the new business and those
possessed by the corporate, instead of similarity of products.

 Similarly, the structure and size of the corporate office should be

dependent on the strategy being perused, rather than following
prevalent practices.

 Today most corporations favour a lean, minimalist corporate office.

The arrangement may suit some companies but can be disastrous for
others.
 Resources and Business:- There should be a strict relationship
between company’s corporate capabilities and its choice of
businesses – its corporate capabilities must help its different
businesses in creating their individual competitive advantages.
Ex:- If a company has extremely efficient manufacturing plants, and
very strong relationships with discount retailers, it should venture into
businesses that can use these capabilities to create competitive
advantages – it should not enter businesses that will require it to have
flexible manufacturing plants or which will sell from high–end stores.
Ex:- Sharp’s most important resource is its liquid crystal display
technology, which is a critical component in nearly all Sharp’s products.
Sharp keeps its set of businesses restricted. It enters a business only
when it can create competitive advantage by using one of its
technologies.
Its competitors like Sony and Mastsushita have diversified into the
movie business, but Sharp has resisted from making such a move
because it understands that it does not have the corporate capability to
succeed in the movie business.
 Organization:- Organizational mechanisms have to be put in place
to enable the corporate to add value to each of the businesses.

 Executives fear that they will either violate the autonomy and
accountability of independent business units or will end up with
large, bureaucratic overhead structures. It is possible to add value
and avoid the two pitfalls.
Ex:- Newell understands that its know–how and experience are
embedded in its managers and it deliberately moves them across
business units and from the business units to the corporate level.
Unlike Newell, Sharp is divided into functional units, not product
divisions. Applied research and manufacturing of key components, such
as LCDs occur in a single specialized unit where economies of scale can
be exploited.
The company convenes a number of cross–unit and corporate
committees to ensure that the corporate R&D unit and sales are
optimally allocated among different product lines.
Sharp invests in such time–consuming co–ordination activities to
minimize the conflicts that arise when units share important activities
like R&D and manufacturing.
 Depending on its typical situation a corporation will devise its
strategy to add value to its business units.

 The company should always do one reality check: the company’s

business must not be worth more to another company.

 Sustaining Competitive Advantage:- A company should strive to

gain sustainable competitive advantage – it should differentiate in
ways that cannot be copied easily by its competitors.

 A company that competes primarily through low prices can be undone

by a competitor with deep pockets. Therefore, a competitive
advantage based on low prices is essentially short–lived, unless
the company has clear cost leadership.

 A company can gain sustainable competitive advantage by creating

patent–protected products, building strong brand personality,
building strong relationship with customers, providing exemplary
service and creating entry barriers like high R&D or promotional
budgets.
 Erosion of Competitive Advantage:- Three mechanisms are at
work which can erode a competitive advantage:-

 Technological and environmental changes that create

opportunities for competitors by eroding the protective
barriers.
 Competitors learns how to imitate sources of competitive
advantage.
 Complacency leads to lack of protection of the competitive
advantage.

 Core Strategy or Business Planning:- A company’s core strategy

enables it to achieve its business objectives. It comprises of three
elements:-

i. Target Markets:- A company’s target market is a group of

customers that it finds attractive to serve. It believes that it
has the capabilities to serve this group of customers profitably.
• To assess the attractiveness of segments of a market, it uses
information like their size, growth rate, level of competitor activity,
and customer requirements, which are key factors for success.

• The company surveys its competences, and then arrives at one

or more target markets that it can serve well.

• The needs of customers of its target market may change, and

accordingly a company should be always prompt in changing its
marketing mix so that it can serve the new needs effectively.

• A target market may become less attractive, in which case , it

targets a different segment and repositions its product
appropriately.

ii. Competitor Targets:- Weak competitors may be viewed as easy

prey and resources are organized to attack them. The company
has to establish a policy to determine the competitors that it
will take on and how.
iii. Competitive Advantage:- A successful company serves the needs
of customers of its target market better than its competitors.

 A company’s competitive advantage is how it is better than its

competitors in serving the needs of the customers of its target
markets.

 A successful company achieves a clean performance differential

over competitors on factors that are important to customers of
its target market.

 The most potent competitive advantages are built upon some

combination of following three superior performance:-
 Being Better:- A company sells high quality products or provides prompt service.

 Being Faster:- A company anticipates and responds to customer needs faster than
competition.
 Being Closer:- A company establishes close long term relationship with customers.
 A company can also achieve competitive advantage by becoming
the lowest cost producer of its industry.

 It translates its lowest cost into competitive advantage through

low prices.

 To some extent, achieving a highly differentiated product is not

incompatible with low cost position.

 High quality products suffer low rejection rates, lower repair

costs and therefore incur lower costs than low quality products.

 Tests of An Effective Core Strategy:- A company’s core strategy

must be based upon a clear definition of its target market and the
needs of its customers.

 A company should have a thorough understanding of its

competitors in terms of their strengths and competences, so that
its core strategy is based upon competitive advantage, i.e. what
the company can do better than or different from competitors.
 The strategy must incur acceptable risk – it is not prudent to
launch a frontal attack on a strong competitor with a clear
competitive advantage, rather it is better to launch a flanking
attack, so that it gets time to develop the required competences
to take the competitor head on at some later stage.

 A company may have a fanciful core strategy on paper, but it cannot

deliver value to customers if the company does not have
resources to implement it faithfully.

 A company’s core strategy should be derived from its strategic

objectives – heavy promotion and intensive distribution makes no
sense when the product’s strategic objective is to harvest.

 Moreover, a company’s core strategy should be internally

consistent, in terms of its elements blending to form a coherent
whole – a company cannot have affluent customers as its target
market, and have cost leadership as its competitive advantage.
 Identifying Competitors:- It seem to be a simple task for a
company to identify its competitors.
Ex:- PepsiCo knows that Coca Cola’s Kinley is the major bottled–
water competitor for its Aquafina brand.
ICICI Bank knows that Axis Bank is a major banking competitor.

 However, the range of a company’s actual and potential

competitors can be much broader than the obvious, and a
company is more likely to be hurt by emerging competitors or
new technologies than by current competitors.
 In recent years, for instance, a number of new ‘emerging giants’ have
arisen from developing countries, and these nimble competitors are
not only competing with multinationals on their home turf but also
becoming global forces in their own right.
 They have gained competitive advantage by exploiting their
knowledge about local factors of production – capital & talent –
and supply chain in order to build world–class businesses.
 Ex:- TCS, Infosys Technologies, Wipro and Satyam Computer
Services have succeeded in catering to the global demand for
software and service, even triumphing against multinational
software service providers such as Accenture and EDS.
These multinationals have a hard time sorting out talent in a
market where the level of people’s skills and the quality of
educational institutions vary dramatically.
Indian companies know their way around the human resources
market and are hiring educated, skilled engineers and technical
graduates at salaries much lower than those that similar employees
in developed markets earn.
Even as the talent in urban centers such as Bangalore and Delhi
gets scarce, the Indian companies will keep their competitive
advantage by knowing how to find qualified employees in India’s
second-tier cities.
 Taiwan based Inventec has become one of the world’s largest
manufacturers of notebook computers, PCs, and servers, also by
exploiting its knowledge of local factors of production. It makes
products in China and supplies them to giants such as Hewlett–
Packard and Toshiba and also makes cell phones and MP3 players for
other multinational customers.
Inventec’s customers get the low cost of manufacturing products
in China without investing in factories there, and they can also use
China’s talented software and hardware professionals.
It won’t be long, however, before Inventec begins competing
directly with its own customers; it has already started selling
computers in Taiwan and China under its own retail brand name.

 Competition can be examined from both an industry and a

market point of view.

 An industry is a group of firms that offer a product or class of

products that are close substitutes for one another.
 Marketers classify industries according to number of sellers;
degree of product differentiation; presence or absence of entry,
mobility, and exit barriers; cost structure; degree of vertical
integration; and degree of globalization.

 Using the market approach, we can define competitors as

companies that satisfy the same customer need.
Ex:- A customer who buys a word-processing package really
wants ‘writing ability’ – a need that can also be satisfied by pencils,
pens, or typewriters.
Marketers must overcome ‘marketing myopia’ and stop defining
competition in traditional category and industry terms.
Coca–Cola, focused on its soft-drink business, missed seeing the
market for coffee bars and fresh-fruit-juice bars that eventually
impinged on its soft-drink business.

 The market concept of competition reveals a broader set of actual

and potential competitors than competition defined in just product
category terms.
 Analyzing Competitors:- Once a company identifies its primary
competitors, it must ascertain their strategies, objectives, strengths
and weaknesses.

i. Strategies:- A group of firms following the same strategy in a

given target market is called a strategic group. Suppose a
company wants to enter the major appliance industry in India, what
is its strategic group?

 The company develops the chart shown in the next slide and
discovers four strategic groups based on product quality and level of
vertical integration. Group A has one; Group B has three; Group C
has four; and Group D has two. Important insights emerge from this
exercise. First, the height of the entry barriers differs for each group.
Second, if the company successfully enters a group, the members of
that group become its key competitors.
 Fig:- Strategic Groups in the Major – Appliance Industry
High
Group D
• Narrow Line
• Lower Mfg. Cost
• Very High Service
• High Price

Group C
• Moderate Line
• Medium Mfg. Cost
Quality

• Medium Service
• Medium Price

Group B
• Full Line
• Low Mfg. Cost
• Good Service
Low

• Medium Price

Group A
• Broad Line
• Medium Mfg. Costs
• Low service
• Low Price

High Low
Vertical Integration
ii. Objectives:- Once a company has identified its main competitors
and their strategies, it must ask:
 What is each competitor seeking in the marketplace?
 What drives each competitor’s behaviour?

 Many factors shape a competitor’s objectives, including size, history,

current management, and financial situation.

 If the competitor is a division of a larger company, it is

important to know whether the parent company is running it
for growth, profits, or milking it.
Ex:- Most U.S firms operate on a short-term profit-maximization
model largely because of the stock market pressures.
Japanese firms operate largely on a market– share– maximization
model.
Many Indian companies combine the objectives of sales growth
and profits.
 Finally, a company must monitor competitors’ expansion plans.
The below figure shows a product-market battlefield map for the
personal computer industry. Dell, which started out as a strong force
in selling personal computers to individual users, is now a major
force in the commercial and industrial market. Other incumbents
may try to set up mobility barriers to Dell’s future expansions.

Individual Commercial And

Users Industrial Educational
DELL
Personal
computers

Hardware
Accessories

Software

Fig:- A Competitor’s Expansion Plans

iii. Strengths and Weaknesses:- A company needs to gather information about each
competitor’s strengths and weaknesses.

Customer Product Product Technical Selling

Awareness Quality Availability Assistance Staff

Competitor A E E P P G

Competitor B G G E G E

Competitor C F P G F F

NOTE:- E= Excellent G= Good F= Fair P= Poor

Table:- Customers’ Ratings of competitors on Key Success Factors

 The above table shows the results of a company survey that asked customers to rate its three
competitors, A,B, and C, on five attributes. Competitor A turns out to be well known and
respected for producing high–quality products sold by a good sales force but is poor at
providing product availability and technical assistance. Competitor B is good across the
board and excellent in product availability and sales force. Competitor C rates poor to fair on
most attributes.

 This result suggests that the company could attack A on product availability and technical
assistance and C on almost anything, but should not attack B, which has no glaring
weakness.
 In general, a company should monitor three variables when
analyzing competitors:-

1. Share of Market:- The competitor’s share of the target market.

2. Share of Mind:- The percentage of customers who named the

competitor in responding to the statement, “Name the first
company that comes to mind in this industry.”

3. Share of Heart:- The percentage of customers who named the

competitor in responding to the statement, “Name the company
from which you would prefer to buy the product.”

 Companies that make steady gains in mind share and heart

share will inevitably make gains in market share and
profitability.

 To improve market share, many companies benchmark their most

successful competitors, as well as other world-class performers.
iv. Selecting Competitors:- After the company has conducted customer value
analysis and examined its competitors carefully, it can focus its attack on one of
the following classes of competitors:-
1. Strong Versus Weak:- Most companies aim their shots at weak competitors,
because this requires fewer resources per share point gained. Yet, the firm
should also compete with strong competitors to keep up with the best. Even
strong competitors have some weaknesses.

2. Close Versus Distant:- Most companies compete with the competitors that
resemble them the most.
Ex:- Chevrolet competes with Ford, not with Ferrari.
 Yet companies should also identify distant competitors.
Ex:- Coca-Cola recognizes that its number one competitor for Kinley brand is
Tap water, not Pepsi Co’s Aquafina. Museums now worry about theme parks and
malls.

3. Good Versus Bad:- Every industry contains good and bad competitors. Good
competitors play by the industry’s rules; they set prices in reasonable
relationship to costs; and they favor a healthy industry. Bad competitors try to
buy share rather than earn it; they take large risks; they invest in overcapacity;
and they upset industrial equilibrium. A company may find it necessary to
attack its bad competitors to reduce or end their dysfunctional practices.
v. Selecting Customers:- As part of competitive analysis, firms must evaluate
its customer base and think about which customers it’s willing to lose &
which it wants to retain. One way to divide up the customer base is in terms
of whether a customer is valuable and vulnerable, creating a grid of four
segments as a result as given below. Each segment suggests different
competitive activities.
Vulnerable Not Vulnerable

These customers are profitable These customers are loyal and

but not completely happy with profitable. Don’t take them for
Valuable the company. Find out and granted but maintain margins
address their sources of and reap the benefits of their
vulnerability to retain them. satisfaction.

These customers are likely to These unprofitable customers are

Not Valuable defect. Let them go or even happy. Try to make them
encourage their departure. valuable or vulnerable.

Ex:- BSNL, in one of its circles decided to protect its Valuable / Vulnerable
institutional customers by specifically analyzing their past usage pattern and
suggesting appropriate tariff plans to them. This resulted in substantial savings
for the customer despite the company incurring short-term loss in profits.