Corporate Strategy

MODULE – 4
COMPETITIVE POSITIONING
Introduction

Each business should have its own business strategy. A business strategy is basically a competitive
strategy and is concerned more with how a business competes successfully in the chosen market.
The strategic decisions at business-level revolve around choice of products and markets, meeting
the needs of customers, protecting market share, gaining advantage over competitors, exploiting or
creating new opportunities and earning profit at the business unit level.

In short, a business strategy outlines the competitive posture of its operations in the industry.
Business strategy is guided by the direction set by the corporate strategy. It takes the cue from the
priorities set by the corporate strategy. It translates the direction and intent generated at the
corporate level into objectives and strategies for individual business units.

Industry Structure

An industry is a collection of firms offering goods or services that are close substitutes of each
other. Alternatively, an industry consists of firms that directly compete with each other. For the
purpose of industry analysis, an industry can be defined rather broadly (the beverage industry) or
more precisely (the carbonated soft drink industry). How one defines and circumscribes an industry
depends on the kinds of analysis to be performed.

In “industry analysis”, it is generally better to define an industry as precisely as possible. Example:

In discussing companies like Coca-Cola and Pepsi, one would want to define the boundaries of the
“carbonated soft drink industry” rather than that of the “beverage industry”.

The term “industry structure” refers to the number and size distribution of firms in an industry. The
number of firms in an industry may run into hundreds or thousands. The existence of a large number
of firms in an industry reduces opportunities for coordination among firms in the industry. Hence,
generally speaking, the level of competition in an industry rises with the number of firms in the
industry. The size distribution of firms in an industry is important fromthe perspective of both
business policy and public policy.

Industry structure consists of four elements:

Table 4:1: Industry structure

(a) Concentration
(b) Economies of scale
(c) Product differentiation
(d) Barriers to entry.

(a) Concentration: It means the extent to which industry sales are dominated by only a few
firms. In a highly concentrated industry, i.e. an industry whose sales are dominated by a
handful of firms, the intensity of competition declines over time. High concentration serves
as a barrier to entry into an industry, because it enables the firms to hold large market shares
to achieve significant economies of scale.
(b) Economies of Scale: This is an important determinant of competition in an industry. Firms
that enjoy economies of scale can charge lower prices than their competitors, because of
their savings in per unit cost of production. They also can create barriers to entry by
reducing their prices temporarily or permanently to deter new firms from entering the
industry.
(c) Product differentiation: Real perceived differentiation often intensifies competition among
existing firms.
(d) Barriers to entry: Barriers to entry are the obstacles that a firm must overcome to enter an
industry, and the competition from new entrants depends mostly on entry barriers. These
features determine the strength of the competitive forces operating in the industry.

Trends affecting industry structure are important considerations in strategy formulation.

Positioning of the Firm

When starting a new firm or launching new product, a prime strategic decision is to identify the
target audience. But even though a useful segment has been identified, this does not in itself resolve
the organisation’s strategy. The competitive position within the segment then needs to be explored,
because only this will show how the organisation will compete within the segment. Competitive
positioning is thus the choice of differential advantage that the product or services will possess
against its competitors. Competitive positioning allows an organisation to compete and survive in a
market place or in a segment of a market place. To develop positioning, it is useful to follow a two-
stage process- first identify the segment gaps, second identify positioning within segments.

Identification of Segment Gaps and their Competitive Positioning Implications

From a strategy viewpoint, the most useful strategy analysis often emerges by exploring where there
are gaps in the segments of an industry. The starting point for such work is to map out the current
segmentation position and then place companies and their products into the segments; it should then
become clear where segments exist that are not served or are poorly served by current products.

Identifying the Positioning within the Segment

From a strategy perspective, some gaps may be more attractive than others.

For example, they may have limited competition or poorly supported products. In addition, some
gaps may possess a clear advantage in terms of competitive positioning. Others may not.

The process of developing positioning runs as follows:

1. Perceptual mapping: In-depth qualitative research on actual and prospective customers on

the way they make their decisions in the market place, e.g. strong versus weak, cheap
versus expensive, modern versus traditional.
2. Positioning: Brands or products are then placed on the map using the research dimensions.
3. Options development: Take existing and new products and use their existing strengths and
weaknesses to devise possible new positions on the map.

Testing: First with simple statements with customers, then at a later stage in the marketplace. It will
be evident that this is essentially a process, involving experimentation with actual and potential
customers.

Generic Strategies

Generic strategies were first outlined in two books from Michael Porter of Harvard Business
School. These were “Competitive Strategy” in 1980 and “Competitive Advantage’’ in 1985. The
second book contained a small modification of the concept. The original version is explored here.

Michael Porter made the bold claim that there are only three fundamental strategies that any
business can undertake. During the 1980s, they were regarded as being at the forefront of strategic
thinking. Arguably, they still have a contribution to make in the new century in the development of
strategic options.

Professor Porter argued that the three basic strategies open to any business are:

1. Cost leadership

2. Differentiation

3. Focus.

Each of these generic strategies has the potential to overcome the five forces of competition and
allow the firm to outperform rivals within the same industry.

Figure: 4.1- Generic Strategic Options

These are called ‘generic’ because they can be used in a variety of situations, across diverse
industries at various stages of development.

Cost Leadership

Cost leadership is a strategy whereby a firm aims to deliver its product or service at a price lower
than that of its competitors. Overall cost leadership is achieved by the firm by maintaining the
lowest costs of production and distribution within an industry and offering “no-frills” products. This
strategy requires economies of scale in production and close attention to efficiency and operating
costs. The firm places a lot of emphasis on minimizing direct input and overhead costs, by offering
no-frills products.

Example: Deccan Airways, Timex, Nirma.

A cost leadership strategy is likely to work better where the product is standardized, competition is
based mainly on price and consumers can switch easily between different suppliers.

However, a low-cost base will not in itself bring competitive advantage. The product must be
perceived as comparable or acceptable by consumers.

Firms pursuing this strategy must be effective in engineering, purchasing, manufacturing, and
physical distribution. Marketing can be considered as less important, as the consumer is familiar
with the product attributes.

Companies that want to be successful by following a cost leadership strategy must maintain
constant efforts aimed at lowering their costs (relative to competitor’s costs) and creating value for
customers.

Cost leadership requires:

1. Aggressive construction of efficient scale facilities

2. Vigorous pursuit of cost reductions from experience

3. Tight cost and overhead control

4. Avoidance of marginal customer accounts

5. Cost minimization in all activities in the firm’s value chain, such as R&D, services, sales
force, advertising etc.

Implementing and maintaining a cost leadership strategy means that a company must consider its
value chain of primary and secondary activities and effectively link those activities with critical
focus on efficiency and cost reduction.

For example, McDonald’s Restaurants achieved low costs through standardised products,
centralised buying of supplies for a whole country and so on.

Differentiation Strategy

Differentiation consists of offering a product or service that is perceived as unique or distinctive by

the customer.
This allows firms to command a premium price or to retain buyer loyalty because customers will
pay more for what they regard as a better product. A differentiation strategy can be more profitable
than a cost leadership strategy because of the premium price.

Products can be differentiated in a number of ways so that they stand apart from standardized
products:

1. Superior quality

2. Special or unique features

3. More responsive customer service

4. New technologies

5. Dealer network.

Example: Hero Honda, Nike athletic shoes, Sony, Asian Paints, Mercedes-Benz, BMW etc.

Nokia achieves differentiation through the individual design of its product, while Sony achieves it
by offering superior reliability, service and technology.

Mercedes-Benz differentiates by stressing a distinctive product service image, while Coca Cola
differentiates by building a widely recognized brand. This strategy is often supported by high
spending on advertising and promotion to sustain the brand identity.

Focus Strategy

A focus strategy occurs when a firm focuses on a specific niche in the market place and develops its
competitive advantage by offering products especially developed for that niche. It targets a specific
consumer group (e.g. teenagers, babies, old people etc.) or a specific geographic market (urban
areas, rural areas etc.). Hence, the focus strategy selects a segment or group of segments in the
industry and tailors its strategy to serve them to the exclusion of others. By optimizing its strategy,
for the targets, the focuser seeks to achieve competitive advantage in its target segments, even
though it does not possess a competitive advantage overall.

The focus strategy has two variants:

Cost focus: A firm seeks to achieve low cost position in its target segment only. 2. Differentiation
focus: A firm seeks to differentiate its products in its target segment only.

There are, however, some problems with the focus strategy:

1. By definition, the niche is small and may not be large enough to justify attention.

2. Cost focus may be difficult if economies of scale are important in an industry such as the car
industry.

3. The niche is clearly specialist in nature and may disappear over time. None of these
problems is insurmountable. Many small and medium-sized companies have found that this
is the most useful strategy to explore.

Risks in Competitive Strategies

No one competitive strategy is guaranteed for success. Some companies that have successfully
implemented one of Porters’ competitive strategies have found that they could not sustain the
strategy. Each of these generic strategies has its own risks.

1. Risks of cost leadership:

a) Cost leadership may not be sustained

i. If competitors imitate
ii. If technology changes
iii. If other bases for cost leadership erode.
b) Proximity in differentiation is lost.
c) Cost focusers achieve even lower costs in segments.

Proximity in differentiation means that companies that choose cost leadership strategy must offer
relatively standardized products with features or characteristics that are acceptable to customers. In
other words, the company must offer a minimum level of differentiation–at the lowest competitive
price. If this minimum level of differentiation is lost, then the strategy of cost leadership will fail.

2. Risks of differentiation:

a) Differentiation may not be sustained

i. If competitors imitate.
 ii. If features of differentiation become less important to buyers.
b) Cost proximity is lost.
c) Firms that follow focus strategy may achieve even greater differentiation in segments.
d) Dilution of brand identification through product-line.
A company following a differentiation strategy must ensure that the higher price it charges
for its higher quality is not priced too far above the competition, otherwise customers will
not see the extra quality as worth the extra cost.

In other words, if the price differential between the standardized and differentiated product is too
high, the risk is that the company provides a greater level of uniqueness than the customers are
willing to pay for.

3. Risks of Focus:

The competitive risks of focus strategy are similar to those previously noted for cost leadership and
differentiation strategies, with the following additions:

a) Focus strategy is not sustained if competitors imitate it.

b) The target segment may become structurally unattractive.
 if structure erodes.
 if demand disappears.
a) Competitors may successfully focus on an even smaller segment of the market, out focusing
the focuser, or focus only on the most profitable slice of the focuser’s chosen segment.
b) An industry-wide competitor may recognize the attractiveness of the segment served by the
focuser and mobilize its superior resources to better serve the segment’s need.
c) Preferences and needs of the narrow segment may become more similar to the broad market,
reducing or eliminating the advantage of focusing.

Comment on Porter’s Generic Strategies

Hendry ll and others have set out the problems of the logic and the empirical evidence associated
with generic strategies that limit its absolute value.
Low-cost Leadership

1. If the option is to seek low-cost leadership, then how can more than one company be the
low-cost leader? It may be a contradiction in terms to have an option of low-cost
leadership.
2. Competitors also have the option to reduce their costs in the long-term, so how can one
company hope to maintain its competitive advantage without risk?
3. Low-cost leadership should be associated with cutting costs per unit of production.
However, there are limitations to the usefulness of this concept.
4. Low-cost leadership assumes that technology is relatively predictable, if changing.
Radical change can so alter the cost positions of actual and potential competitors.
5. Cost reductions only lead to competitive advantage when customers are able to make
comparisons.
This means that the low-cost leader must also lead price reductions or competitors will be able to
catch up, even if this takes some years and is at lower profit margins. But permanent price
reductions by the cost leader may have a damaging impact on the market positioning of its product
or service that will limit its usefulness.
Differentiation
1. Differentiated products are assumed to be higher priced. This is probably too simplistic.
The form of differentiation may not lend itself to higher prices.
2. The company may have the objective of increasing its market share, in which case it
may use differentiation for this purpose and match the lower prices of competitors.
3. Porter discusses differentiation as if the form this will take in any market will be
immediately obvious. The real problem for strategy options is not to identify the need for
differentiation but to work out what form this should take that will be attractive to the
customer.
4. Generic strategy options throw no light on this issue whatsoever. They simply make the
dubious assumption that once differentiation has been decided on, it is obvious how the
product should be differentiated.
Focus
1. The distinction between broad and narrow targets is sometimes unclear.
Are they distinguished by size of market?
 Or by customer type?
If the distinction between them is unclear then what benefit is served by focus?
2. For many companies, it is certainly useful to recognise that it would be more productive
to pursue a niche strategy, away from the broad markets of the market leaders. That is
the easy part of the logic. The difficult part is to identify which niche is likely to prove
worthwhile. Generic strategies provide no useful guidance on this at all.
3. As markets fragment and product life cycles become shorter, the concept of broad targets
may become increasingly redundant.
Business Tactics
Tactics should work with a firm’s strategy and they are the set of requirements need for the plan to
take place. A tactic is a device used by the firm for meeting your goals set by your strategy. Strategy
and tactics should always be relative to one another because the tactics are the set of actions needed
to fulfil your strategy.
1. Tactics are the tools used to achieve goals.
2. Tactics include things like advertising and marketing.
3. Tactics are the steps taken to achieve goals.
Brand Management
One tactic that almost every firm employ is strategic brand management. Firms must find a way to
communicate their products and corporate philosophy to potential customers. Over time, a business
can establish a reputation that gives its brand name an advantage over the lesser known competitors.
Brand management includes good advertising and public relations to present an image of that is
consistent with the mission and vision of the company. A company may also conduct research or
poll the general public to learn about how it is perceived and what changes are necessary.

Diversification and Specialisation

Two different business strategies that deal with the scope of a company are diversification and
specialisation.

A business can diversify by simply expanding its products and services, such as adding a new
division, or through merging or acquiring another business.
Specialisation is the opposite of diversification.
It refers to narrowing a business’s products to focus on a more specific type of product. By focusing
limited resources on a smaller product line, a business may hope to improve the quality of its
remaining products, or simply divest itself of an unprofitable product.

Research and Development

Some firms use investments into research and development as a major tactic to get ahead of
competitors. This is particularly true in the manufacturing field, where new product technologies
can save money and produce products that will excite consumers. Smaller businesses may lack the
money or in-house talent to invest directly in research and development, but for larger companies
the ability to innovate can be the difference between success and failure.

Risk Management
Managing risk is a tactic that every firm employs in its own way. The simple act of founding a
business is itself a risk, since market trends and customer behaviour can be difficult to predict. For
an established business, managing risk means making good decisions about where to invest funds
and what types of products to focus on.

Value chain analysis

It is a way of looking at a business as a chain of activities that transform inputs to outputs that
customers value. It attempts to understand how a business creates customer value by examining the
contributions of different activities within the business to that value;
Customer value is derived from the following;
 Activities that differentiate the product(quality)
 Those that lower costs(affordability)
 Activities that meet customers need quickly (speedy delivery)
The analysis divides the activities of the firm into two groups;
1. Primary activities: are those involved in the physical creation of the product, marketing and
transfer of the product to the buyer and after sales service.
2. Support activities: such as human resource, R & D, management etc.
The value chain analysis process
A firm often performs a number of activities that may represent a strength or weakness.

These activities are such as;

 Installation
 Distribution
 Promotion

Any of these could be a source of competitive advantage.

Allocate costs
Each activity incurs costs and managers should assign costs to each of the activities and assess it on
the basis of the customer value that it creates.

Compare with competitors (competitor bench marking)

To evaluate a value activity as a strength or weakness, comparisons are made between it and key
competitor’s activities. Each element in the chain delivers a part of the total value to the customer
and contributes part of the total profits.

The purpose is to measure the value delivered and the profit contributed by each element to the
chain. Strategy would be to focus attention and resources onto the parts of the chain from which the
majority of the value comes.

Crafting Successful Business Strategies

The strategy must be developed so that it is a reflection of strengths of business as well as

competitors’ weaknesses. Businesses will respond with equal force and force if all competitors are
equally strong. When creating a successful business strategy, an organization must follow the
following steps:

1. Give priority to formulating and implementing strategies that improve the company’s
competitiveness over the long term and assist the firm in establishing itself as a market
leader in the marketplace.
2. Companies must know that a strategy designed to take advantage of limited business
opportunities will result in short-lasting benefits. In contrast, an obvious, consistent, and
competitive strategy is well thought out and implementing, which leads to creating a well-
known and respected business position.

3. Without a clear plan for the long term, an exclusive strategic position, and a slim chance of
advancing to the top of business, you must strive to avoid getting “stuck into the rut”. It is
one of the guidelines for crafting successful business strategies.

4. Companies should invest in developing a long-lasting competitive edge as it can lead to a

higher average profit in the most secure way.