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1a) Describe the three generic business-level strategies to gain competitive advantage over other firms operating in the same industry. Provide examples of any industry of your choice.
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Business-level strategy can be defined as the strategy that is chosen by a company to hold a competitive advantage within the market that it is involved with. Such a strategy has to be chosen by firms because of the intense competition that exists within a certain industry and thus managers, see the need to formulate business-level strategies that are geared towards creating and maintaining a competitive advantage over the rival firms in the same industry. This is a choice that a firm has to make when it chooses to compete in a single product market where every firm’s products share the some similarities. There are three generic strategies that were developed by Michael Porter, who is a distinguished Harvard professor and author of numerous books and articles that deal with the competitive advantages of companies and nations, that are considered to the cornerstone of strategies that you formulate to give you an edge in competing with your rivals and making above average economic profits for your firm. These strategies are cost-leadership, differentiation and focus. The strategy that you choose depends on numerous factors, both internal and external. These factors could include type of industry, cost of raw materials, type of labour skills required, technology, governmental factors, consumers and many more such factors. We will now look at the three generic business-level strategies in greater detail and find out how these strategies work. The textbook, Management – A Pacific Rim focus, defines cost-leadership, the first of the three strategies we will be looking at, as a, “strategy … emphasising organizational efficiency so overall cost of providing products and services are lower than that of the competitors.” This strategy called cost-leadership, involves the very delicate process of being able to produce or be able to deliver goods or services that are of standards acceptable to customers at a cost that is considered to be the lowest among all the competitors in the given market. This does not however, imply that the good that the cost-leader sells or that the service you provide is in any way an inferior good when it is compared to a competitors product but, a product or service that is of the same or of comparable quality that is cheaper than the rest of the rival’s products. If a good is deemed to be of inferior quality when compared to a competitor’s then, the customer will decide to go with the good or service that is of a higher quality because he perceives this good to be of better value than the cheap good or service that the cost-leader is producing. The implementation of this strategy by a firm will also imply that this firm has to be an industry leader in terms of volume sold because, for the firm to be able to make an above average profits, it has to sell very high quantities because the profits that the cost-leader makes on a single unit is negligible because of the strategy that the firm has decided to implement. There are various ways for a firm to go about implementing a strategy such as cost-leadership. The firm has to analyse its situation, its resources and then decide on which course to take in order for it to become a cost-leader in its market. The first and most important way that a firm can become a cost leader is through the process known as economies of scale. Economies of scale is defined as the process whereby, the mass production of the good in large quantities reduces the per unit price of producing the good. Thus, by being able to produce the good at a low price, the firm is able to sell its product in the market at the cheapest price thus, establishing itself in the market as a cost-leader. The second way to achieve cost-leadership is through the cutting down or the trimming of unnecessary costs such as overhead, administrative as well as other costs that have the potential to increase the per unit cost of the product. Such a move has to also include cutting of costs in major areas such as promotions and advertising. This is done because, cost that are involved with promotions and advertising are always passed to the customer and since, the firm wants to be a price-leader in its market, it has to streamline its costs and not add on unnecessary costs that have the potential to increase the per unit cost of the good and thus, risk the firm losing its cost-leader status in the industry. The learning curve effect also plays a very important role in the reduction of the per unit cost of the product. The learning curve effect is defined as the “percentage decrease in additional labour cost each time output doubles.” It is a proven fact that every time the output doubles, the labour costs that arise from the production of additional units usually declines by 80%. A figure is attached in appendix section labelled Appendix 1 which shows a learning curve that adheres to this 80 percent rule. Technology plays a very pivotal role in the reduction of the per unit costs of the product. Better technology will ensure that the products are produced at a cheaper price than compared to before then new technology was adopted. Better technology will also ensure that there is a decrease in the number of defects that is produced and thus, the unit cost of the good will be lower than compared to before the adoption of new technology. The reduction of defects will also help to keep the unit cost of the product down. Finally, the cost-leader needs to have a very good logistics network to supplement its production capabilities. The logistics network should encompass both the input as well as the output parts of the operations. A good logistics network ensures that the company saves warehousing costs for both its raw materials as well as its finished goods. The other plus factor about having a good transportation network is that, you can transport your goods where you want and when you want without any hassles. This will ensure that the consumer always has access to your products and does not have to settle for a substitute. A firm that aims to be the cost-leader in its market displays a few characteristics that are similar to all cost-leaders regardless of what market it is in or what good it produces. One such characteristic is the fact that this firm has to follow a policy that makes it very capital intensive when it comes to the manufacturing or the production of the good.
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