Business Level Strategies: Notes | Financial Management & Strategic Management for CA Intermediate PDF Download

 Page 1


LEARNING OUTCOMES 
 
 
 
BUSINESS LEVEL  
STRATEGIES  
After studying this chapter, you will be able to: 
? Identify the Business Level Strategies 
? Explain Porter’s Five Forces Model 
? Understand the features and suitability of Cost Leadership 
Strategy 
? Understand the features and suitability of Differentiation  
Strategy 
? Understand the features and suitability of Focus Strategy
“If all you’re trying to do is essentially the same thing as your rivals,
then it is unlikely that you’ll be very successful.”
- Michael Porter
“Strategy is a pattern in a stream of decisions.”
Henry Mintzberg 
CHAPTER 5 
Page 2


LEARNING OUTCOMES 
 
 
 
BUSINESS LEVEL  
STRATEGIES  
After studying this chapter, you will be able to: 
? Identify the Business Level Strategies 
? Explain Porter’s Five Forces Model 
? Understand the features and suitability of Cost Leadership 
Strategy 
? Understand the features and suitability of Differentiation  
Strategy 
? Understand the features and suitability of Focus Strategy
“If all you’re trying to do is essentially the same thing as your rivals,
then it is unlikely that you’ll be very successful.”
- Michael Porter
“Strategy is a pattern in a stream of decisions.”
Henry Mintzberg 
CHAPTER 5 
 
 
STRATEGIC MANAGEMENT 
5.2 
 5.1 INTRODUCTION 
An organization’s core competencies should be focused on satisfying customer 
needs or wants in order to achieve organisational objectives. This is achieved 
through businesses level strategies. Business level strategies are the course of action 
adopted by an organisation, for each of its businesses separately, to serve identified 
customer groups and provide value to those customers by satisfying their needs. In 
the process, the organisation uses its competencies to gain, sustain and enhance its 
strategic and competitive advantage. 
Competitive  Analysis (Porter's 
Five Forces)
Business Level 
Strategies
Michael Porter's 
Cost Leadership 
Strategy
Differentiation 
Strategy
Focus Strategy
Best Cost 
Provider 
Strategy
CHAPTER OVERVIEW 
Page 3


LEARNING OUTCOMES 
 
 
 
BUSINESS LEVEL  
STRATEGIES  
After studying this chapter, you will be able to: 
? Identify the Business Level Strategies 
? Explain Porter’s Five Forces Model 
? Understand the features and suitability of Cost Leadership 
Strategy 
? Understand the features and suitability of Differentiation  
Strategy 
? Understand the features and suitability of Focus Strategy
“If all you’re trying to do is essentially the same thing as your rivals,
then it is unlikely that you’ll be very successful.”
- Michael Porter
“Strategy is a pattern in a stream of decisions.”
Henry Mintzberg 
CHAPTER 5 
 
 
STRATEGIC MANAGEMENT 
5.2 
 5.1 INTRODUCTION 
An organization’s core competencies should be focused on satisfying customer 
needs or wants in order to achieve organisational objectives. This is achieved 
through businesses level strategies. Business level strategies are the course of action 
adopted by an organisation, for each of its businesses separately, to serve identified 
customer groups and provide value to those customers by satisfying their needs. In 
the process, the organisation uses its competencies to gain, sustain and enhance its 
strategic and competitive advantage. 
Competitive  Analysis (Porter's 
Five Forces)
Business Level 
Strategies
Michael Porter's 
Cost Leadership 
Strategy
Differentiation 
Strategy
Focus Strategy
Best Cost 
Provider 
Strategy
CHAPTER OVERVIEW 
5.3 
BUSINESS LEVEL STRATEGIES 
 5.2 PORTER’S FIVE FORCES MODEL- 
COMPETITIVE ANALYSIS 
Every business operates in a competitive environment. The competitive state of an 
industry has a strong influence on how firms develop their strategies.  Michael Porter 
believed that the basic unit for analysis, is a group of competitors producing goods 
or services, that compete directly with each other. Competitive advantage is industry 
specific. An organisation attempts to adopt an approach to win over competitors in 
the same industry. 
The character, mix, and intricacies of competitive forces differ from one industry to 
another. A powerful and widely used tool for systematically diagnosing the signifi-
cant competitive pressures in a market, and assessing the strength and importance 
of each of those pressures, is the Porter’s five-forces model of competition. (see 
figure) This model holds that, the state of competition in an industry is a composite 
of competitive pressures operating in five major areas of the market: 
? Competitive pressures associated with  market manoeuvring and jockeying for 
buyer patronage that goes on among rival sellers in the industry. 
? Competitive pressures associated with threat of new entrants in the market.  
? Competitive pressures coming from attempts of companies in other industries 
to win buyers,  by offering substitute products. 
? Competitive pressures stemming from supplier bargaining power a nd supplier-
seller collaborations. 
? Competitive pressures stemming from buyer bargaining power and seller-buyer 
collaborations. 
Strategists can use the five-forces model to determine the competitive landscape  
of a given industry, by undertaking the following three steps: 
Step 1: Identify the specific competitive pressures associated with each of the five 
forces. 
Step 2:  Evaluate the strength of pressure comprising each of the five forces (it 
could be fierce, strong, moderate to normal, or weak). 
Step 3:  Determine whether the collective strength of the five competitive forces is 
conducive to earning attractive profits. 
Page 4


LEARNING OUTCOMES 
 
 
 
BUSINESS LEVEL  
STRATEGIES  
After studying this chapter, you will be able to: 
? Identify the Business Level Strategies 
? Explain Porter’s Five Forces Model 
? Understand the features and suitability of Cost Leadership 
Strategy 
? Understand the features and suitability of Differentiation  
Strategy 
? Understand the features and suitability of Focus Strategy
“If all you’re trying to do is essentially the same thing as your rivals,
then it is unlikely that you’ll be very successful.”
- Michael Porter
“Strategy is a pattern in a stream of decisions.”
Henry Mintzberg 
CHAPTER 5 
 
 
STRATEGIC MANAGEMENT 
5.2 
 5.1 INTRODUCTION 
An organization’s core competencies should be focused on satisfying customer 
needs or wants in order to achieve organisational objectives. This is achieved 
through businesses level strategies. Business level strategies are the course of action 
adopted by an organisation, for each of its businesses separately, to serve identified 
customer groups and provide value to those customers by satisfying their needs. In 
the process, the organisation uses its competencies to gain, sustain and enhance its 
strategic and competitive advantage. 
Competitive  Analysis (Porter's 
Five Forces)
Business Level 
Strategies
Michael Porter's 
Cost Leadership 
Strategy
Differentiation 
Strategy
Focus Strategy
Best Cost 
Provider 
Strategy
CHAPTER OVERVIEW 
5.3 
BUSINESS LEVEL STRATEGIES 
 5.2 PORTER’S FIVE FORCES MODEL- 
COMPETITIVE ANALYSIS 
Every business operates in a competitive environment. The competitive state of an 
industry has a strong influence on how firms develop their strategies.  Michael Porter 
believed that the basic unit for analysis, is a group of competitors producing goods 
or services, that compete directly with each other. Competitive advantage is industry 
specific. An organisation attempts to adopt an approach to win over competitors in 
the same industry. 
The character, mix, and intricacies of competitive forces differ from one industry to 
another. A powerful and widely used tool for systematically diagnosing the signifi-
cant competitive pressures in a market, and assessing the strength and importance 
of each of those pressures, is the Porter’s five-forces model of competition. (see 
figure) This model holds that, the state of competition in an industry is a composite 
of competitive pressures operating in five major areas of the market: 
? Competitive pressures associated with  market manoeuvring and jockeying for 
buyer patronage that goes on among rival sellers in the industry. 
? Competitive pressures associated with threat of new entrants in the market.  
? Competitive pressures coming from attempts of companies in other industries 
to win buyers,  by offering substitute products. 
? Competitive pressures stemming from supplier bargaining power a nd supplier-
seller collaborations. 
? Competitive pressures stemming from buyer bargaining power and seller-buyer 
collaborations. 
Strategists can use the five-forces model to determine the competitive landscape  
of a given industry, by undertaking the following three steps: 
Step 1: Identify the specific competitive pressures associated with each of the five 
forces. 
Step 2:  Evaluate the strength of pressure comprising each of the five forces (it 
could be fierce, strong, moderate to normal, or weak). 
Step 3:  Determine whether the collective strength of the five competitive forces is 
conducive to earning attractive profits. 
 
 
STRATEGIC MANAGEMENT 
5.4 
Figure: Michael Porter’s Five Forces Model of Competition
Porter’s five forces model is one of the most effective and enduring conceptual 
frameworks used to assess the nature of competitive environment and to under-
stand an industry’s structure. The interrelationship amongst these five forces, gives 
each industry, its own particular competitive environment. By applying Porter’s five 
forces model of industry attractiveness to their own industry,  management can 
gauge their firm’s strengths, weaknesses, probable threats and future opportunities. 
5.2.1 Threat of New Entrants 
New entrants can reduce an industry’s profitability, because they add new produc-
tion capacity, leading to increase in supply of the product, sometimes even at a 
lower price and can substantially erode existing firm’s market share position. How-
ever, New entrants are always a powerful source of competition. The new capacity and 
product range they bring in throws up a new competitive pressure.  The bigger the 
new entrant, the more severe the competitive effect. New entrants also place a limit 
on prices and affect the profitability of existing players, which is known as Price War. 
For Example, Reliance Jio offered cheap services when it entered the telecom industry 
in 2016, thus limiting the prices for existing players like Airtel, Vodafone, Idea, etcA 
Page 5


LEARNING OUTCOMES 
 
 
 
BUSINESS LEVEL  
STRATEGIES  
After studying this chapter, you will be able to: 
? Identify the Business Level Strategies 
? Explain Porter’s Five Forces Model 
? Understand the features and suitability of Cost Leadership 
Strategy 
? Understand the features and suitability of Differentiation  
Strategy 
? Understand the features and suitability of Focus Strategy
“If all you’re trying to do is essentially the same thing as your rivals,
then it is unlikely that you’ll be very successful.”
- Michael Porter
“Strategy is a pattern in a stream of decisions.”
Henry Mintzberg 
CHAPTER 5 
 
 
STRATEGIC MANAGEMENT 
5.2 
 5.1 INTRODUCTION 
An organization’s core competencies should be focused on satisfying customer 
needs or wants in order to achieve organisational objectives. This is achieved 
through businesses level strategies. Business level strategies are the course of action 
adopted by an organisation, for each of its businesses separately, to serve identified 
customer groups and provide value to those customers by satisfying their needs. In 
the process, the organisation uses its competencies to gain, sustain and enhance its 
strategic and competitive advantage. 
Competitive  Analysis (Porter's 
Five Forces)
Business Level 
Strategies
Michael Porter's 
Cost Leadership 
Strategy
Differentiation 
Strategy
Focus Strategy
Best Cost 
Provider 
Strategy
CHAPTER OVERVIEW 
5.3 
BUSINESS LEVEL STRATEGIES 
 5.2 PORTER’S FIVE FORCES MODEL- 
COMPETITIVE ANALYSIS 
Every business operates in a competitive environment. The competitive state of an 
industry has a strong influence on how firms develop their strategies.  Michael Porter 
believed that the basic unit for analysis, is a group of competitors producing goods 
or services, that compete directly with each other. Competitive advantage is industry 
specific. An organisation attempts to adopt an approach to win over competitors in 
the same industry. 
The character, mix, and intricacies of competitive forces differ from one industry to 
another. A powerful and widely used tool for systematically diagnosing the signifi-
cant competitive pressures in a market, and assessing the strength and importance 
of each of those pressures, is the Porter’s five-forces model of competition. (see 
figure) This model holds that, the state of competition in an industry is a composite 
of competitive pressures operating in five major areas of the market: 
? Competitive pressures associated with  market manoeuvring and jockeying for 
buyer patronage that goes on among rival sellers in the industry. 
? Competitive pressures associated with threat of new entrants in the market.  
? Competitive pressures coming from attempts of companies in other industries 
to win buyers,  by offering substitute products. 
? Competitive pressures stemming from supplier bargaining power a nd supplier-
seller collaborations. 
? Competitive pressures stemming from buyer bargaining power and seller-buyer 
collaborations. 
Strategists can use the five-forces model to determine the competitive landscape  
of a given industry, by undertaking the following three steps: 
Step 1: Identify the specific competitive pressures associated with each of the five 
forces. 
Step 2:  Evaluate the strength of pressure comprising each of the five forces (it 
could be fierce, strong, moderate to normal, or weak). 
Step 3:  Determine whether the collective strength of the five competitive forces is 
conducive to earning attractive profits. 
 
 
STRATEGIC MANAGEMENT 
5.4 
Figure: Michael Porter’s Five Forces Model of Competition
Porter’s five forces model is one of the most effective and enduring conceptual 
frameworks used to assess the nature of competitive environment and to under-
stand an industry’s structure. The interrelationship amongst these five forces, gives 
each industry, its own particular competitive environment. By applying Porter’s five 
forces model of industry attractiveness to their own industry,  management can 
gauge their firm’s strengths, weaknesses, probable threats and future opportunities. 
5.2.1 Threat of New Entrants 
New entrants can reduce an industry’s profitability, because they add new produc-
tion capacity, leading to increase in supply of the product, sometimes even at a 
lower price and can substantially erode existing firm’s market share position. How-
ever, New entrants are always a powerful source of competition. The new capacity and 
product range they bring in throws up a new competitive pressure.  The bigger the 
new entrant, the more severe the competitive effect. New entrants also place a limit 
on prices and affect the profitability of existing players, which is known as Price War. 
For Example, Reliance Jio offered cheap services when it entered the telecom industry 
in 2016, thus limiting the prices for existing players like Airtel, Vodafone, Idea, etcA 
 
 
5.5 
BUSINESS LEVEL STRATEGIES  
firm’s profitability tends to be higher when new firms are blocked from entering the 
industry. To discourage new entrants, existing firms can try to raise barriers to entry. 
“Barriers to entry" represent economic forces (or ‘hurdles’) that slow down or im-
pede entry of new firms. Common barriers to entry include: 
(i)  Capital requirements 
(ii) Economies of scale 
(iii) Product differentiation 
(iv) Switching costs 
(v)  Brand identity 
(vi) Access to distribution channels 
(vii) Possibility of aggressive retaliation by existing players 
(i)  Capital Requirements: When a large amount of capital is required to enter 
an industry, firms lacking funds are effectively barred from that industry, thus, 
enhancing the profitability of existing firms. For example, huge investments 
are required to build production facilities and establish brand awareness 
amongst people for entry into the pharmaceutical industry. This makes entry 
of new companies into this sector very difficult. 
(ii)  Economies of Scale: Many industries are 
characterized by economic activities driven 
by economies of scale. Economies of scale 
refers to the decline in the per-unit cost of 
production (or other activity) as the vol-
ume grows. A large firm that enjoys econ-
omies of scale can produce high volumes 
of goods at successively lower cost. This 
tends to discourage new entrants who are in expansion stage and have higher 
costs. For example, in the semiconductor industry, large companies, such as 
IBM, Intel, Samsung and Texas Instruments, enjoy substantial economies of 
scale in the production of advanced microprocessors, communication chips and 
integrated circuits that power most consumer electronics, personal computers 
(PCs) and cellular phones. This acts as a barrier for new entrants.  
(iii)  Product Differentiation: Product differentiation refers to the physical or 
perceptual differences, or enhancements, that make a product special or 
unique in the eyes of customers. Firms in personal care and cosmetics indus-
try actively engage in product differentiation to enhance their products’