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After analyzing environmental opportunities and threats, and organizational strengths and weaknesses, an organization will be in a position to examine how it can compete effectively in a particular industry. Here we look at the strategic options available at business level that could help an organization compete successfully in a given industry.
Business-level strategy is concerned with an organization's position within an industry, in relation to its competitors. Business-level strategies detail the actions to be taken by a business unit in order to achieve competitive advantage [1] and provide value to its customers, by maximizing its core competencies in individual product or service markets. But before we go on, it is important to clarify what business-level strategy involves.
What is ‘Business-Level’ Strategy?
While corporate strategy relates to decisions about the direction of the entire organization, strategic decisions at business-level need to be connected to a strategic business unit. A strategic business unit (or SBU) is a unit within an organization for which there is an external market for goods or services that are different from the goods or services from another SBU within the same organization.
Examples of strategic business units in a large energy supply organization could include the Customer Services unit (which would focus on a specific customer market, such as residential customers) and the Business Services unit (which would focus on large organizations requiring comprehensive personalized attention). At business-level, the customer lies at the heart of all key strategic decisions, i.e. who is the customer; what are their needs; how will their needs be satisfied.
Choosing a Competitive Strategy at Business-Level
The objective of business-level strategy is to give the organization a sustainable competitive advantage that will enable it to outshine its competitors and increase profits. There are some generic strategies an organization can use to establish their competitive advantage:
- Cost leadership
- Differentiation
- Focus
- Combination (hybrid) strategy.
1. Cost Leadership
Cost leadership organizations compete for a wide customer market on the basis of price, obtaining competitive advantage by getting their costs of production or distribution lower than those of rivals in its market. This can be done by minimizing operating expenses, tightly controlling labor costs and distributing as widely as possible.
The advantages of a cost leadership strategy include the opportunity for higher profits (when all competitors charge the same price for products and services, the cost leader will make higher profits because its production costs are lower). In addition, if competition increases and price wars break out, the organizations that operate at a higher cost will be driven out of the industry before the cost leader. However, risks to a cost leadership strategy include the potential for imitation by competitors, and the possible impact of competitors producing at a lower cost due to developments in technology.
Cost leaders can also suffer from ‘tunnel vision’, where they lose sight of changes in customer tastes and attitudes due to their single-minded attempts to cut costs. Examples of cost leaders include ‘no frills’ organizations, such as Ryanair and EasyJet, and supermarkets such as Aldi, Lidl, KwikSave and Wal-Mart.
2. Differentiation Strategy
An organization that pursues a differentiation strategy tries to gain competitive advantage by creating a product or service that has unique features or characteristics. The differentiated organization can charge a premium price for its products and services because of their exclusivity.
Most differentiated organizations aim for a very high level of differentiation and frequently produce a range of products. Product differentiation can be achieved in many ways, e.g. through producing high quality products (Sony), through providing good customer service (IBM and Federal Express), or through prestige products (BMW, Rolex, Ralph Lauren).
The advantages of a differentiation strategy include the development of a strong brand image and increased customer loyalty (which in turn means competitors are not a threat), and above average profits (due to the premium price charges). However, risks to a differentiation strategy include the possibility of imitation (depending on the organization’s ability to maintain its individuality); the fact that its uniqueness may be superseded by changing customer tastes and attitudes; and the difficulty of maintaining premium price in a changing marketplace.
3. Focus Strategy
A focus strategy is aimed at a particular customer group. The organization concentrates on serving a particular market niche, which may be characterized in terms of geographic location, type of customer (rich, young, male, female etc.) and/or by segment of the product line such as only very expensive cars or designer clothes.
A focus strategy can be pursued using either a cost leadership or a differentiation approach. When an organization adopts a focused cost leadership approach it competes on price against the market leader only in those segments where it has no cost disadvantage. When an organization adopts a focused differentiation approach it competes using its individuality, targeting its products and services at a small segment of the market.
Organizations using a focused strategy may be more effective in serving a smaller segment than competitors who have a broad base of customers. Because they are closer to the customer, they can use their knowledge of their small customer segment to their advantage.
Another advantage is protection from competition (because the organization provides products or services at a price/quality its competitors cannot offer). However, as with the other strategies, there are risks, including powerful suppliers posing a threat to the organization (because it buys in such small quantities that its bargaining power is diminished). In addition, the small segment the focused organization serves may eventually become of interest to broad market organizations, and the smaller focused organization can be swallowed up.
4. Combination/Hybrid Strategy
Growing evidence shows that successful strategy can actually be based upon a combination (hybrid) of differentiation, price and cost control.
The scale of differentiation, price and cost control in this strategy will depend upon the nature of the market the organization is targeting. In markets where customers favor quality, the strategic emphasis will be less on price. In contrast, in markets where demand is price sensitive (e.g. the ‘no-frills’ airline market) the priority will be very much on keeping prices and costs as low as possible. Organizations may also attempt to modify market conditions through their marketing efforts, thus manipulating customer attitudes.
There are risks attached to using a combination of strategies. It can lead to the organization becoming ‘stuck in the middle’ with no distinct competitive advantage, although some organizations have succeeded using combination strategies. For example, Southwest Airlines combined cost leadership with differentiation. It reduced costs by not assigning seating and by doing away with meals on its flights. It has used this to its advantage, advertising that passengers do not get tasteless airline food on its flights. It also significantly reduced its fares, which have been low enough to attract a sizeable number of passengers, thus allowing the airline to succeed.
Many factors must be considered if an organization is to develop a business-level strategy that allows it to compete effectively. Each of the business-level strategies discussed here requires that the organization make consistent product/market choices to achieve a proper fit. Many have made the wrong choice and been unable to obtain a competitive advantage and maintain or increase their profits. All organizations, from one-person operations to the strategic business units of large corporations, must develop a business strategy if they are to compete effectively and maximize their long-term profitability.
Key Points
- Business-level strategy refers to the plan of action for maximizing an organization's resources and distinctive competencies in order to gain a competitive advantage over industry or market rivals.
- Customer needs and expectations lie at the heart of business-level strategic choices.
- The generic competitive strategies (or bases of competition) are: cost leadership, differentiation, focus and hybrid/combination strategy. Each has advantages and disadvantages.
- An organization must constantly manage and adapt its strategy; otherwise, it risks being stuck in the middle, with no competitive advantage in any area.
References[1] Competitive advantage: A competitive advantage is an advantage gained over competitors through offering better value products or services to customers (either by means of lower prices or by providing greater benefits and service that justify premium prices), resulting in higher profits for the organization.
