Business-Level Strategy is the integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets. The basis of all business-level strategy choices is a process of deciding what products to offer, what market segments to serve, and what distinctive competencies to pursue (i.e. the what, who, how questions). The fundamental question of business-level strategy is: how do companies compete within a given industry. (Parnell, 2013)
The firm’s business-level strategy is a deliberate choice about how it will perform the value chain’s primary and support activities in ways that create unique value. Sound strategic choices reduce uncertainty, facilitate success, and depend upon continuously updated competitive advantages to achieve long-term success. (Parnell, 2013)
- B Select our company business level strategy
The five types of business-level strategies that firms choose among to establish and defend their desired strategic position against rivals are:
- Cost leadership
- Focused cost leadership
- Focused differentiation
- Integrated cost leadership/differentiation
The effectiveness of each strategy is contingent upon the opportunities and threats in a firm’s external environment and the possibilities provided by the firm’s unique resources, capabilities, and core competencies. (Hitt, Ireland, & Hoskisson, 2013)
The selected strategy for the company is the Integrated Cost Leadership/Differentiation Strategy.
Integrated Cost Leadership/Differentiation Strategy is the integrated set of actions designed by a firm to produce or deliver goods or services at an acceptable cost that customers perceive as being different in ways that are important to them. Cost leadership and differentiation strategies emphasize different primary and support activities. Achieving a successful balance when selecting the activities to perform is a difficult challenge and requires a flexible organizational structure. (Manoj, 2008) A flexible structure for a firm is required using an integrated strategy with:
- A commitment to strategic flexibility is necessary to effectively use the integrated strategy.
- Decision-making patterns need to be flexible, partly centralized, and partly decentralized.
- Jobs are less specialized than in a traditionally functional structure so that workers are more sensitive to the need for balance between low cost and differentiation.
The advantages an integrated strategy provides to the company are:
- Improved speed of adapting to environmental changes.
- Improved speed for learning new skills and technologies.
- The improved leverage of core competencies while competing against rivals.
- Evidence suggests a relationship between the use of an integrated strategy and achieving above-average returns.
- Businesses that combine multiple forms of competitive advantage in low-profit-potential industries are shown to outperform businesses that compete with a single form.
Advantages that this strategy will provide us in dealing with each of the five competitive forces are:
A. Threat of new entrants
Ever-improving levels of efficiency and cost reduction can be difficult to replicate and serve as a significant entry barrier to potential competitors unless they are willing to accept below-average returns. Customer loyalty and a high level of product uniqueness serve as significant entry barriers to potential competitors unless they are willing to make significant investments while seeking customers’ loyalty.
B. Threat of substitute products or services
Cost leaders hold an attractive position in terms of product substitutes, with the flexibility to lower prices to retain customers. However, when the features and characteristics become attractive to the customers, lower prices may not be an incentive to stay with the lower-priced product Again, firms with customers loyal to their products are positioned effectively against product substitutes.
C. Bargaining power of customers (buyers
Powerful customers can demand reduced prices, but only to the point of driving competitors out of the market, at which point they would lose their power. The uniqueness of differentiated products also reduces customer sensitivity to raised prices when a product continues to satisfy the customer’s perceived unique needs.
D. Bargaining power of suppliers
Costs leaders are in a position to absorb supplier price increases and relationship demands. Alternatively, due to volumes, cost leaders can often force suppliers to hold down their prices. High margins that can be charged for differentiated products provide insulation from the influence of suppliers. Higher supplier costs can be either absorbed into the margin or passed along to willing customers.
E. Intensity of competitive rivalry
A low-cost position is a valuable defense against rivals. Customer loyalty (which reduces customer sensitivity to price) provides the most valuable defense against rivals.
2.1 Mention the competitive risks associated with the selected business strategy
The risks faced by firms that select an Integrated Cost Leadership/differentiation strategy are:
- Failure to establish a leadership position can result in a firm being “stuck in the middle” and unable to create value, and unable to earn above-average returns.
- Processes can become obsolete.
- Focus on cost reductions can be at the expense of understanding customer perceptions and needs.
- The strategy could be imitated, requiring the firm to increase the value offered to retain customers.
- The price differential for the differentiated product may be perceived to be too large.
- A firm’s means of differentiation may cease to provide value for which customers are willing to pay, particularly if rivals have successfully imitated the firm’s strategy.
- Experience can narrow the customers’ perceptions of the value of a product’s differentiated features.
- Counterfeit goods might appear in the marketplace.
3.1 What is Corporate Level Strategy and what it’s the purpose?
Corporate-Level Strategy specifies actions a firm takes to gain a competitive advantage by selecting and managing a portfolio of businesses that compete in different product markets or industries. Corporate level strategy is concerned with the strategic decisions a business makes that affect the entire organization. Financial performance, mergers, and acquisitions, human resource management, and the allocation of resources are considered part of the corporate level strategy. (Hill & Jones, 2008)
3.2 What is diversification?
Diversification occurs when a business develops a new product or expands into a new market. Often, businesses diversify to manage risk by minimizing potential harm to the business during economic downturns. The basic idea is to expand into a business activity that doesn’t negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable. A business may also use diversification as a growth strategy. (Hitt, Ireland, & Hoskisson, 2013)
Rather than investing in one single investment, you spread your assets out among many; this can help balance the valleys and peaks of investing. If one of your investments begins to yield lower returns than expected or begins to lose money, your other investments are there to potentially support your portfolio and can enable you to still come out ahead.
The reasons that firms use diversification strategies
- To increase the firm’s value by improving its overall performance (value-creating diversification).
- To gain market power relative to competitors, often through multimarket competition or vertical integration.
- To allocate capital more efficiently to those businesses with the greatest potential for high performance or as a part of a business restructuring plan.
- In response to government-induced stimuli (such as antitrust regulation and tax laws) e. In response to concerns about a firm’s low performance, the uncertainty of future cash flows, or other types of risk.
- To take advantage of tangible or intangible resources the firm possesses that would facilitate diversification.
- To match and thereby neutralize a competitor’s market power (such as to neutralize another firm’s advantage by acquiring a distribution outlet similar to its rival).
- To expand a firm’s portfolio of businesses and reduce managerial employment risk (if one of the businesses in a diversified firm fails, the top executive of the firm has an opportunity to remain employed). (Ireland, Hoskisson, & Hitt, 2009)
There are two ways diversification strategies can create value:
- Operational relatedness – sharing activities
- Corporate relatedness – transferring knowledge Corporate Relatedness A firm’s intangible resources, such as its know-how, can become its core competencies, resources, and capabilities that link businesses through managerial and technological knowledge, experience, and expertise.
Operational and corporate relatedness determine how resources are used to create economies of scope.
Economies of Scope are cost savings that the firm creates by successfully transferring some of its capabilities and competencies that were developed in one of its businesses to another of its businesses. While Synergy conditions exist when the value created by business units working together exceeds the value those same.
3.3 Choose a new business into which your company will diversify its operations and explain your choice.
Currently, the company is operating in the Pets hospital industry in Kuwait where the company is offering medical services as well as pets’ related products. so the business where the company now planned to diversify is having a retail store selling pet animals-related products like food, accessories, medicinal equipment, and even medicines. The company will be offering products of different brands. This will allow the company to buy products from the manufacturer at a retailer’s prices which will assist in letting the hospital and the retail store earn higher profits. Another benefit for the company would be having a separate source of income. The doctors of the hospital will refer the people to buy products for their animal from the company’s store nearby and on the other hand, the customers could have all the animal-related products from the store any time of the day even if the hospital is closed. (Armstrong & Kotler, 2008)
Hence, the diversification strategy for the company is related linked diversification strategy.
4.1 Analyze and identify the level of diversification of the company
The level of diversification for the company will be moderate to a high level of diversification. The diversification strategy selected for this is the related linked diversification strategy.
Related Linked Diversification Strategy
Related diversification strategy is characterized by linked firms that share fewer resources and assets among their businesses, concentrating on the transfer of knowledge and competencies among the businesses. A firm generating more than 30% of its sales revenue outside a dominant business and whose businesses are related to each other in some manner uses a related diversification corporate-level strategy. (Armstrong & Kotler, 2008) In the case of our company, the limited resources and competencies that will be shared with the new business are:
- The brand name of the hospital so that the consumers should have a background image of the store.
- The knowledge of products and different brands related to animals.
- The competencies of sharing some trained employees so that they could implement the same values in the store as are in the hospital.
5.1 Discuss and identify the reasons for diversification by the company
The sharing of intangible assets is the foundation of core competencies across divisions to create value in multidivisional firms. Transferring competencies across businesses will create value as:
- The expense of developing competence is incurred in one unit will eliminate the need for the second unit to allocate resources to develop the competence. Intangible resources are difficult for competitors to understand and imitate; therefore, the unit receiving a transferred competence often gains an immediate competitive advantage over its rivals. (Manoj, 2008)
For our company, it will be Vertical Integration that exists when a company produces its own inputs or owns its own source of distribution of outputs; as the new store will be providing all products and equipment required in the hospital or by the customers. Vertical integration is used to:
- Gain market power over rivals.
- Reduce operational costs
- Reduce market costs
- Improve product quality
- Protect technology (from imitation)
However, some limitations to vertical integration are:
- Outside suppliers may produce inputs at a lower cost.
- Bureaucratic costs may occur.
- Substantial investments may be required.
- Changes in demand can create a capacity imbalance and coordination problems.
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Hill, C., & Jones, G. (2008). Strategic Management: An Integrated Approach. New York: Cengage Learning, Inc.
Hitt, M., Ireland, R. D., & Hoskisson, R. (2013). Strategic Management: Concepts: Competitiveness and Globalization. Mason, OH: Cengage Learning.
Ireland, R. D., Hoskisson, R. E., & Hitt, M. A. (2009). Understanding Business Strategy: Concepts and Cases. Mason, OH: South Western Cengage Learning, Inc…
Manoj. (2008, December 4). HENRI FAYOL’S 14 Principles of Management. MANAGEMENT INNOVATIONS. Retrieved from http://managementinnovations.wordpress.com/2008/12/04/henri-fayols-14-principles-of-management/
Parnell, J. A. (2013). Strategic Management: Theory and Practice. Sage Publications Inc.