BUSINESS STRATEGY

FORMULATION
Nidhi Kaicker
Strategic Business Units

• Any given organization may comprise a number of different businesses, each

operating in distinct markets and serving different customers

• Business strategy is a means of separating out and formulating a competitive

strategy at the level of the individual business unit (known as a strategic
business unit - SBU)

• Role of the business unit is to devise a strategy that allows it to compete

successfully in the marketplace and to contribute to the overall corporate
strategy set up by the parent company

• Corporate strategy answers the question ‘What business should we be in’ or

‘Which markets do we want to serve?’; Business strategy answers the
question ‘How are we going to compete in our chosen market?’
What is the difference in the Strategy of the following?

Company targets a
broad market but offers
a product or service at
a very low price.
Showcase product or
service offerings as
unique as possible vis-
a-vis competitors

Target a niche market

and offer products or
services at the lowest
price
Focuses on a niche
market but offer a
product or service that
is unique
Porters Generic Strategies

• Michael Porter presented three generic strategies that a firm can use to
overcome the five forces and achieve competitive advantage

• Overall cost leadership, is based on creating a low-cost position. A firm must

manage the relationships throughout the value chain and lower costs
throughout the entire chain

• Differentiation requires a firm to create products and/or services that are

unique and valued. The primary emphasis is on “nonprice” attributes for
which customers will gladly pay a premium

• A focus strategy directs attention (or “focus”) toward narrow product lines,
buyer segments, or targeted geographic markets, and they must attain
advantages through either differentiation or cost leadership
Porters Generic Strategies
 How firms can attain an overall cost leadership strategy in their
primary and support activities

Technical Input / Output

Non Unionized Labour
Relationships,
Indivisibilities,
Specialisation

Increased individual
skills and improved
organisational
routines
Bargaining
power with
respect to Ratio of fixed to
purchase price variable costs
and discounts Fast and Flexible
Capacity
adjustment

Process Innovation
Reengineering of business processes Location advantages
Standardisation of design and Ownership of low cost
components inputs
Using the Value Chain to Analyze Costs
Using the value chain to identify differentiation potential
HOW DO LOW COST CARRIERS DRIVE
LOWER UNIT COSTS IN COMPARISON TO
FULL SERVICE CARRIERS?
Analyze the factors that drive relative unit
costs in each of the firm’s activities in a
systematic and comprehensive manner
How do low cost carriers drive lower unit costs in comparison to
full service carriers?
Aircraft • Ownership Structure • Anti-cyclical purchasing
Ownership • Fleet Structure • Optimize owner / leased mix
Costs • Aircraft Utilisation • Fleet harmonization
• Optimize mix of older and newer aircraft
• Reduce turnaround times
• Reduce maintenance downtime
Fuel Costs • Route Efficiency • Shorter en-route and approachtimes
• PurchasingCosts • Reduce delays, use smaller airports
• Weight Reduction • Reduction in service fees
• Use of fuel hedging strategy
• Calculation of ‘no show’ passengers
• Product innovation
Maintenance • Fleet • Fleet harmonization
Costs • Service Costs • Reduce average fleet age
• Optimize maintenanceactivities
• Joint purchase of some work
Catering Costs • Reduce Units Costs • Simplification of meal choice
• Reduce Volumes • Reduce logistics costs for delivery
• Monitor passengers vs availablemeals
• Improve waste management
How do low cost carriers drive lower unit costs in comparison to
full service carriers?
Crew • Productivity • Improved
- planning of crew logistics
Costs • Wage Related Costs • Lower block hour restrictions
• Crew Costs • Fewer and / or less senior cabin crew
• Reduction of extra wage allowances
• Reduce need for overnight stays
• Reduce allowances for overnight stays
Handling • Service Level • Standardization
- of service level agreements
Costs • Insourcing • Revise SLA components
• Reduce Handling • Pre Cleaning activities by cabin crew
Fees • Loading/unloading support from crew
• Global contracts with key suppliers
• Off peak pricing
Distribution • Ticketing • Development of e-ticketing
• Sales Channels • Self service check-ins
• Sales Commissions • Divert customers to online channels
• Target driven contracts with agents
How Low Cost Leadership improves competitive position vis-à-
vis the Five Forces
Benefits Risks
Threats of Lower costs allow a firm to earn The focus of competition may shift to
Existing returns even if its competitors eroded non-price attributes, and lowering of
Rivalry their profits through intense rivalry costs to below acceptable thresholds
Bargaining Buyers can exert power to drive down May lead to erosion of margins
Power of prices only to the level of the next
Buyers most efficient producer
Bargaining Low cost position provides more May lead to erosion of margins
Power of flexibility to cope with demands from
Suppliers powerful suppliers for input cost
increases
Threat of Low-cost position also provide a May lead to erosion of margins, and
New substantial entry barriers position due replacement of product / services with
Entrants to economies of scale that of competitors
Threat of Protection against substitute products May lead to replacement, especially
Substitutes through further lowering of prices when faced with innovation
How Reliance Jio Became India’s Wireless Wonder (Fortune, 25
August 2019)
There’s a new king of telecom in India: Reliance Jio Infocomm, the wireless carrier created by
multibillionaire Mukesh Ambani, which ranked No. 1 on last year’s Change the World list. The
network had 331 million subscribers at the end of June, exceeding Vodafone Idea (320 million
customers) for the first time. Owned by Ambani’s energy and retailing giant, Reliance Industries
Ltd. (RIL), the telecom company could become the foundation of an online and e-commerce
platform in India that rivals Alibaba in China and Amazon in the U.S., analysts at UBS predict.
It’s an amazing feat for the carrier, which started offering mobile service for free just three years
ago before converting subscribers to still-cheap data plans in 2017. Currently, one Jio plan
charges just three rupees per gigabyte of data used, equal to 5¢, and is ranked as the
cheapest rate in the world.
To create the low-cost carrier, Ambani spent billions to build a thoroughly modern wireless
network that supports only 4G standards, bypassing older 2G and 3G technology, and relies on
the kind of routers and equipment used to build the Internet instead of on more specialized—
and expensive—telecommunications switching gear.
Ambani’s wireless price war is eating his competitors. While Jio said net profit in the quarter
ending June 30 jumped 46%, to $130 million, Vodafone Idea lost $690 million and third-ranked
Airtel lost $410 million. Both had been profitable a year earlier.
Reliance has been expanding its offerings into e-commerce and cloud services, leading UBS
analysts to make the comparison to top Internet companies. “Can RIL evolve into India’s
Amazon/Alibaba/Walmart? Yes,” the analysts concluded. With Ambani’s deep pockets and
willingness to cost-cut his way to industry domination, it’s certainly plausible.
Potential Pitfalls of Overall Low Cost Leadership Strategy

• Too much focus on one or a few value chain activities may undercut the overall cost
leadership strategy
• Managers should explore all value-chain activities, including relationships among them,
as candidates for cost reductions

• Increase in the cost of inputs on which the advantage is based makes firms vulnerable, such
as rising labor costs in China

• If the cost leadership is based on an activity which is easily imitable, the firm may be able to
attain only competitive parity
• The basis for cost leadership may also become obsolete over time

• Firms striving to attain cost leadership advantages must obtain a level of parity on
differentiation

• Building up a low-cost advantage often requires significant investments in plant and

equipment, distribution systems, and large, economically scaled operations. As a result, firms
often find that these investments limit their flexibility, leading to great difficulty responding to
changes in the environment.
Competitive Parity a must with Cost Leadership

• Business “learns” to lower costs as it gains experience with production

processes – experience or the learning curve contributes to overall cost
leadership strategy

• A firm following an overall cost leadership position must attain competitive

parity on the basis of differentiation relative to competition

• Price is just one component of value. No matter how good the price, the most
cost-sensitive consumer won’t buy a bad product.

• Example Tata Nano – How the People’s Car became the Cheapest Car!
WHY DID THE TATA NANO FAIL?
Branded as Cheapest Car; Singur
Controversy; Engineering and Design; Safety
Issues; but most importantly, Stuck in the
Middle!
How firms Differentiate - creating something that is perceived
industry wide as unique and valued by customers

Brand Image Quality Innovation

Customer Service Product Attributes Dealer Network

How firms can attain a differentiation strategy in their primary and
support activities
Using the value chain to identify differentiation potential
Using the value chain to identify differentiation potential
How Differentiation improves competitive position vis-à-vis the
Five Forces
Benefits Risks

Threats of Existing Rivalry Brand loyalty lowers customer sensitivity to Focus of competition may shift to
price and raises customer switching costs price. Increased differentiation
may result in higher costs above
thresholds
Bargaining Power of Reduces buyer power, because buyers May lead to erosion of margins
Buyers lack comparable alternatives and are
therefore less price-sensitive. Well
differentiated products or services are not
perfect imitations
Bargaining Power of Provides higher margins that enable a firm May lead to erosion of margins
Suppliers to deal with supplier power. Supplier power
is also decreased because there is a
certain amount of prestige associated with
being the supplier to a producer of highly
differentiated products and services
Threat of New Entrants Higher entry barriers result because of May lead to erosion of margins, or
customer loyalty and the firm’s ability to even replacement
provide uniqueness in its products or
services. Reputation for innovation, quality
or customer service provide protection
Threat of Substitutes Differentiation enhances customer loyalty, May lead to replacement
thus reducing the threat from substitutes
Potential Pitfalls of Differentiation Strategy

• It’s not enough just to be “different.” The offering should be valuable too

• Firms may strive for quality or service that is higher than customers desire. Thus, they
become vulnerable to competitors that provide an appropriate level of quality at a lower
price

• Customers may desire the product, but they are repelled by the price premium

• Differentiation that is easily imitated - “With any good business idea, you’re faced with
people who see you’ve cracked the code and who try to cash in on it”

• Firms may erode their quality brand image by adding products or services with lower
prices and less quality

• “Beauty is in the eye of the beholder.” Companies must realize that although they may
perceive their products and services as differentiated, their customers may view them
as commodities.
A differentiator cannot ignore costs

• Its premium prices would be eroded by a markedly inferior cost position.

Therefore, it must attain a level of cost parity relative to competitors

• Differentiators can do this by reducing costs in all areas that do not affect
differentiation
Focus

• Focus strategy is based on the choice of a narrow competitive scope within

an industry

• In a cost focus, a firm strives to create a cost advantage in its target segment

• In a differentiation focus, a firm seeks to differentiate in its target market

• Both variants of the focus strategy rely on providing better service than broad-
based competitors that are trying to serve the focuser’s target segment

• Cost focus exploits differences in cost behavior in some segments, while

differentiation focus exploits the special needs of buyers in other segment

• Potential pitfalls of focus strategies include: cost advantages may erode

within the narrow segment, facing competition from new entrants and from
imitation, and becoming too focused to satisfy buyer needs.
Can firms effectively combine the generic strategies of overall
cost leadership and differentiation?
• Combining (or integrating) overall cost leadership and generic differentiation
strategies can enable a firm to enjoy superior performance and improve its
competitive position

• Such positions are typically difficult for rivals to imitate

• However, sustaining a combined strategy is challenging, and managers must be

aware of the potential downside risks associated with such an initiative
• Failing to attain both strategies and possibly ending up with neither, leaving the
firm “stuck in the middle.”
• An organization stuck in the middle lacks the market share and capital
investment to be a low cost producer.
• It does not possess the industrywide differentiation which would preclude the
need to be a low cost producer.
• Nor does it have the focus capabilities to create differentiation or a low cost
position in a few segments
Hybrid Strategy

• Organizations are increasingly finding that a route to competitive advantage is

being able to combine being a low cost producer with some form of
differentiation; this is referred to as a hybrid strategy

IKEA which provides low Toyota has an enviable Marks & Spencer found
cost manufacture with a record on cost reductions that its clothes were no
differentiated product while at the same time its longer perceived by
cars are differentiated from consumers to be
other major players such differentiated on the basis
as Ford and General of outstanding value for
Motors money – Stuck in the
Middle
DUALITIES ARE OPPOSITES
THAT MAKE UP THE WHOLE!
The Yin and Yang in Taoist Philosophy
Blue Ocean Strategy

All industries in existence today –

the known market place. Industry
boundaries are defined and All industries not in existence
accepted, and the competitive today – unknown market space
rules of game are well untained by competition. Demand
understood. Companies try to is created rather than fought over.
outperform their rivals in order to Companies can give rise to
grab a greater share of existing entirely new industries, or a blue
demand. As the space gets more ocean can be created from within
and more crowded, prospects for a red ocean when the company
profit and growth are reduced. alters the boundaries of an
Products turn into commodities existing industry.
and increasing competition turns
the water bloody.
Blue Ocean Strategy

• Blue ocean strategy - business-level strategy that successfully combines differentiation

and cost-leadership activities using value innovation to reconcile the inherent trade-offs
in those two distinct strategic positions

• Blue oceans represent untapped market space, the creation of additional demand, and
the resulting opportunities for highly profitable growth

• In contrast, red oceans are the known market space of existing industries.
• In red oceans the rivalry among existing firms is cut-throat because the market
space is crowded and competition is a zero-sum game. Products become
commodities, and competition is focused mainly on price. Any market share gain
comes at the expense of other competitors in the same industry, turning the oceans
bloody red.

• Value innovation - aligning innovation with total perceived consumer benefits, price and
cost.
• Successful value innovation makes competition irrelevant by providing a leap in
value creation, thereby opening new and uncontested market spaces.
BLUE OCEAN STRATEGY AND
VALUE INNOVATION
Value Innovation
at IKEA
“Designing beautiful-but-expensive products is easy. Designing beautiful products that
are inexpensive and functional is a huge challenge. IKEA leverages its deep design
and engineering expertise to offer furniture that is stylish and functional and that can
be easily assembled by the consumer. In this way, IKEA can pursue a blue ocean
strategy based on value innovation to increase the perceived value of its products,
while simultaneously lowering its cost and offering competitive prices. It opened up a
new market serving a younger demographic than traditional furniture stores. When
young people the world over move into their own apartment or house, they frequently
furnish it from IKEA.
 Value Innovation Framework applied to IKEA

Eliminate factors Reduce factors Raise factors Create Factors

that Industry well below well above that Industry has
takes for granted Industry Industry never offered
Standard Standard

•Salespersons •Staff •Variety •New way of

•Expensive •Customization •Fully self shopping
small outlets in •Expensive manufacturing •New pricing
prime locations Materials •Customer approach
•Long wait after •Warranties Experience •On site child
ordering •Inventory Cost •Store size and care
furniture layouts •Restaurants
•Distribution within
Cost (self showrooms
delivery model) •Extended time
of operations
An Airline Company Stuck in the Middle

Rather than being consistent such as the differentiation or low-cost value

curves, the JetBlue value curve follows a zigzag pattern and is thus “all over the
place.” A value curve that zigzags across the strategy canvas indicates a lack of
effectiveness in its strategic profile.
Singapore Airlines’ Balancing Act
• SIA has earned a stellar reputation in the fiercely competitive commercial aviation business
by providing customers with high-quality service

• SIA is also one of the industry’s most cost-effective operators.

• SIA has combined the supposedly incompatible strategies of differentiation—which it pursues

through service excellence and continuous innovation—and cost leadership

• Michael Porter argues that it’s impossible to do so for a sustained period since dual
strategies entail contradictory investments and organizational processes

• Adopting a dual strategy is often the only choice.

• The demand for value-for-money products and services has shot up, so even producers
of premium offerings have to figure out how to grab opportunities in the middle and the
low end of the market
• MNCs face competition from rivals—many of them from emerging markets—that use new
technologies and business models to provide good-enough offerings at attractive prices.
• Incumbents can fight back by cutting prices or further differentiating products and
services, but it’s often a losing battle. Price wars typically hurt leaders more than they do
challengers, and relentless differentiation is tough to sustain
How does it execute the Dual Strategy?

Providing Service Excellence Cost Innovating in both a Centralised and

Effectively: Manages its planes and Decentralised Manner
people in a way that its service is
better than rivals, and costs are lower

Being a Technology Leader and a Achieving Standardisation and

Follower Personalisation in its Processes

Dualities Complement,
Not Contradict!
Singapore Airlines: Delivering Cost
Effective Service Excellence

Part 1 Part 2
How Singapore Airlines delivers cost effective service excellence

• Young Fleet  lower mechanical failures, hence, no delays in takeoffs, arrivals on time, no
cancellations!
• Less time in hangars means more time in the air!

• Young Fleet  more fuel efficiency and lower maintenance costs

• Extensive training of employees (twice as long as industry standards)  not only delights
customers, but also reduces costs by minimizing customer turnover
• SIA’s training program focuses as much on the necessity of keeping costs down as on the
delivery of great service.

• Cost considerations affect every decision made at SIA

• Aim is to reduce waste without compromising customer service
• Examples: lower dinner portions on late night flights, using opened bottles of alcoholic
drinks unless the customer specifies, serving jam trays only when requested

• SIA offers only average pay by Singaporean standards, which is low by global standards, but
an opportunity to earn bonuses of up to 50% of their salary depending on how profitable the
company is
How Singapore Airlines delivers cost effective service excellence

• Anything that touches the customer must be consistent with SIA’s premium positioning,
whereas everything behind the scenes is subject to control

• Company has outsourced ticketing and payroll processing to a low-cost Indian provider

• Company’s headquarters is atop an old hangar at Changi Airport—not in a swank downtown

skyscraper—and the number of headquarters staff is small - SIA offices are comfortable, but
not swanky with luxurious facilities

• For its training programs, SIA uses its own facilities

• Hard-bargaining local managers negotiate hotel rates for crew members at SIA’s destination

• SIA’s Other Costs (total costs less fuel, labor, depreciation, and aircraft rent-als) is, at 29.1%,
lower than the other large airlines’ average of 38.2%.

SIA’s training
• SIA combines standardization with personalization to delight customers -
programs such as Transforming Customer Service teach cabin crews how to anticipate
customer needs and enhance employees’ ability to delight customers
Summary - How Singapore Airlines delivers cost effective service
excellence
• SIA spends more than its rivals in key • …And it spends less, partly as a
areas: consequence, on
• Buying new aircraft: SIA replaces its • Price per aircraft: SIA is usually a
fleet more frequently than do showcase customer for aircraft makers,
competitors places large orders, and often pays in
• Depreciating aircraft: It depreciates cash
aircraft over 15 years compared with • Fuel, maintenance, and repair: SIA’s
the industry standard of 25 years operating costs are lower because its
• Training: The airline invests heavily in fleet is young and energy efficient
inducting and retraining employees • Salaries: SIA keeps salaries low by
• Labor costs on flights: SIA staffs each offering employees bonuses of up to
flight with more cabin crew members 50% depending on SIA’s profitability;
than do other airlines also, the airline’s reputation attracts
• Innovation It invests in both radical and
younger workers.
incremental innovations. • Sales and administration: Customer
loyalty, a lean headquarters, and
constant cost cutting keep the airline’s
SGA expenses low.
• Back-office technologies SIA chooses to
lag behind rivals in areas that don’t
affect the customer experience
How Singapore Airlines innovates
• SIA has earned the reputation of being a serial innovator
• On-demand entertainment systems in all classes; Dolby sound systems; a book-the-cook
service; the widest business-class seats; and so on

• SIA sustains innovation by using a structured, rigorous, and centralized process along with an
emergent, distributed, and local process

• SIA engages frontline employees, customers, competitors, and the media to create multiple
feedback channels; A small number of executives rotate in and out of the department every
three years

• The company fosters the idea that employees—especially those in customer-facing functions
such as in-flight services, ground services, and loyalty marketing—must innovate if SIA is to stay
ahead

• SIA is often the first to innovate in order to enhance the customer experience; Unlike many
market leaders that innovate in every aspect of their business, SIA engages in only small
improvements in functions that don’t touch the customer

• A technology leader where customers can experience the benefits is essential to differentiation;
being a follower in the back office contributes to cost leadership