Levels of strategic management and their uses

There are three levels of Strategic Management. There is the Corporate Level, the Business level and the Functional Level. These levels are depicted as under:

For each level a certain set of questions arises or rather there is a function for each level while framing strategies for the entire business.

Corporate Level: What business(es) should the company be in?

Business Level : How should the organization compete in the environment?

Functional Level: How should the organization’s resources be best employed to support its strategy?

This article is dedicated to the business level strategies that are being adopted by managers of different firms so that their business has a competitive advantage over their competitors in the highly volatile market.

Business Level Strategy

The first step for divisional managers is to develop a model that’ll allow a company to gain a competitive advantage over its competitors in the market . They must take into consideration the following:

STRATEGIC CHOICES

Customer needs & Product Differentiation

Customers’ needs are changing and the firm must be able to innovate and differentiate their products and services from their competitors.

Customer group & Market Segmentation

A company needs to group customers based on the importance of difference in their need and preference. As such a company has three alternatives:

The company may not recognize that different groups have different needs and moves ahead in serving the average customer.

The company may choose to market segment into different states and develop a product that suits the needs of each segment.

The company can recognize market segments and choose to cater its products and services only to one market segment.

Deciding on Distinctive Competencies

A company must decide the distinctive competencies it must pursue to satisfy customer’s needs and groups. In making a business strategy choice, a company must decide how to organize and combine its distinctive competencies to gain a competitive advantage.

CHOOSING A GENERIC COMPETITIVE STRATEGY AT THE BUSINESS LEVEL

Choosing a generic competitive strategy at the business level implies choosing any of the following approaches:

Cost Leadership/ Low cost

Differentiation

Focus

All businesses can pursue regardless of whether they are from the manufacturing sector, service sector, or nonprofit organizations. They can be pursued in different types of industrial environments. Each of the generic strategies results from a company’s persistent and consistent choices on its product, the market, and distinctive competencies

Overall Cost Leadership

Establishing a cost structure that allows a firm to provide goods and services at a lower unit cost than its competitors

Strategic Choices

The cost leader does not even try to be the innovator

The cost leader positions his products to appeal to the minds of the “average” customer

The ultimate goal of a cost leader is to increase his efficiency and lower his costs.

Advantages

If competitors charge similar prices, the cost leader achieves a much superior profitability

The cost leader is able to charge a price lower than his competitors.

If there are powerful suppliers , the cost leader is less affected by increase in prices of inputs

If there are powerful buyers, the cost leader is less affected by a fall in price of inputs

Purchases are done in huge quantities to increase bargaining power over suppliers

The ability of reducing price to compete with other substitute products

Low prices are a barrier to entry of potential competitors.

Disadvantages

The competitors may lower their cost.

The competitors may copy the cost leader’s methods.

The overall cost leadership strategy carries a risk that the cost leader, the single minded desire to reduce costs, may lose right to changes in customer tastes.

Differentiation

Differentiation strategy refers to the differentiated company’s ability to satisfy a customer’s needs.

A company must create a product that customers perceive as distinct in an important way

If customers pay the higher price charged for a product( higher than the price charged by cost leader), it means that customers believe the product-differentiated qualities to be worth the difference.

Strategic Choices

Focus on Quality, innovativeness and responsiveness to customer needs

Strives to differentiate itself from competitors.

Segments the market into many different niches

Concentration on the organizational functions that provide the source of differentiation and competitive advantage

Advantages

Customers become loyal and develop brand loyalty

Price increases can be passed on to customers

Powerful buyers will be easy to find because the product is distinct and therefore there is increase in revenues.

Differentiated products and brand loyalty are barriers to entry of potential competitors.

The threat of substitute products is minimized and depends on competitors’ ability to meet the needs of the customer.

Disadvantages

It is difficult to maintain a long-term distinctness in the customers’ eyes. Competitors can quickly imitate the company’s products.

Application of Patents and first-mover advantage are limited

It is difficult to maintain a continuous premium price

Overall Cost Leadership & Differentiation Strategy

There are some businesses that pursue models of the overall cost leader and differentiator simultaneously

Strategic Choices

Limiting the customer options can reduce the cost of production and marketing costs

A company can reduce costs by adopting the JIT inventory model. This inturn improves quality and reliability

The internet has proved to be of immense help to marketers as they can engage in e-commerce to advertise and sell their product.

These products are often in huge production in countries with low labor costs.

Focus Strategy

The focus strategy is basically serving the customer’s needs of specific market segments.

The location of specific customers eg: The people from the North-East love to eat pork.

Whether the customer is a spend-thrift or is a type of customer who saves. Another differentiation would be in terms of quality seekers.

After identifying and choosing a specific market segment, a focused company positions itself using either a

Low-cost or differentiation strategy.

When a company focuses on one group of customers, it is said that the company is adopting either a focused cost strategy or a focused differentiated strategy.

Advantages

The focuser is protected from its competitors to the extent that it can cater its products or services that they can’t.

The buyers cannot get the same thing from others therefore the focuser has power over them.

Once brand loyalty has developed in the minds of customers, the new entrants’ threats is limited

Substitutes will pose minimal problem once the customer develops loyalty towards the product.

The changing needs of customers are better tracked by the focuser.

Disadvantages

With regards to powerful suppliers the focuser experiences a disadvantage because it procures in small volume at high costs and therefore cannot pass the cost along to its loyal customers

A focuser may have to incur more costs since it is procuring at low volumes

It is tough for a focuser to maintain its niche because of changing customer’s desires and speedy technological changes.

Competitors especially the differentiators will try in their best way to compete for the focuser’s niche that has been developed.

Now, let us focus on companies that adopt different business level strategies to gain a competive advantage over their competitors.

Coca-Cola

The Coca-Cola Company (Coca-Cola) is a manufacturer, distributor and marketer of non-alcoholic beverages and syrups, including fountain syrups. It manufactures and sells non-alcoholic beverages, carbonated soft drinks and various varieties of non-carbonated beverages. It is operating in every continent namely North America, Africa, South Asia and the Pacific, Europe, South America and Asia, Eurasia and Middle East. Products bearing the Coca-Cola trademark are being marketed in over 200 countries all over the world.

This company follows a business level strategy-namely the differentiation strategy. It spends huge amounts of money in promotions and advertisements in order to differentiate their offerings and create a unique image for its cola products. The Coca-Cola company has been successful in differentiating its products from its customers and thereby gains a competitive advantage over them.

Amreteck Group

Amreteck Group (AG) is a pharma service company that is specializing in arranging investment funds/investors, financing and is supporting different mergers for the pharmaceutical companies in the United States and several countries in South East Asia. Amreteck Group helps companies to export their products in Least Developed Countries (LDC) and also assists in locating local distributors and the products registration process in full completion.

Amreteck Group is involved with several local Bangladeshi pharmaceutical companies to capitalize on the country’s low cost environment. AG is adopting the overall low cost strategy to find new ways in production cost reduction, new product development that can be manufactured at low cost and marketing managers to search for ways of cost reduction in-order to be able to attract customers.

Toyota

Toyota Motor Corporation is associated with the automotive industry. Its automotive operations include the design, manufacture, assembly and sale of passenger cars, recreational and sport utility vehicles, minivans and trucks and parts and accessories for these creations. Toyota is pursuing a combined cost leadership and differentiation business level strategy. Toyota’s production system is actually the most efficient in the world as reported. This superior efficiency of Toyota gives the company a low cost strategy in the global car industry. Simultaneously Toyota is able to differentiate its products from its competitors. This superiority gives the company a leeway to charge premium prices to its elite models.

Nestle

Nestlé, today’s world’s biggest food and beverage company has factories in almost every country in the world. Nestlé’s existing products grow through continuous innovation and dedicated renovation while maintaining a balance in geographic activities and product lines.

Nestle’s priority is to bring out the best products to people, wherever they are depending on their needs throughout their lives. Nestlé believes in creating and maintaining a long-term commitment to the health and well being of people in every country in the scope of its operations. Nestle follow the business level strategy-namely the differentiation strategy to reduce the risk of complexity of supply chain and lower attractiveness for discounters.

PepsiCo,Inc

PepsiCo, Inc. is one of the largest food and beverage companies in the world. The company’s principal businesses include Frito-Lay snacks, Pepsi-Cola beverages, sports drinks, Tropicana juices and Quaker Foods.

Pepsi Co strictly follows the differentiation strategy. Their ability to continuously and sincerely innovate is their competitive advantage. Pepsi looks for opportunities to capitalize on the value of their prestigious brand of products by developing new and innovative products. Pepsi is able to fill consumption gaps, clearly identify the consumer’s changing needs and contribute to create both healthier and indulgent choices, thus bringing more enjoyment to their lives.

Wal-Mart Stores

Wal-Mart stores (founded in 1945) are a US retailer and are reportedly the largest retailer in the world as of 2009. This store which was originally started by Sam Walton is grouped into Division One (Discount Stores, Supercenters and Neighborhoods Markets) and SAM’s Club. This retailer is pursuing the overall cost strategy to find new ways in reducing the costs of the products that are being displayed in their shelves. Wal-Mart Stores critically negotiates with its suppliers for low priced items to bring forth their “Everyday Low Price” philosophy. Being a huge market player, Wal-Mart is able to dictate the pricing of products so much so that it led to the bankruptcy of its competitor ‘K-Mart’. Its other nearest competitor ‘Target’ is forced to offer products that were not offered in Wal-Mart because it could not compete with Wal-Mart’s prices. Wal-Mart Stores is pursuing and adopting its strategy successfully and is able to gain a competitive advantage over its competitors through continuous low pricing of its products.