0
Strategic Management BUSM 3200                   These Lecture Slides summarize the key points covered in the respective c...
The importance of Business Strategy topic:        Is very important part of the group         assignment as Business Stra...
Classifying Strategies        Strategies can be depicted in many ways and         hence use different models        How ...
The focus of part 2:                                                  strategic choices        How organisations relate t...
Strategic choices                                                     This is the subject matter for Part 2 of the text   ...
The Strategy-Making Hierarchy       Corporate                     Multibusiness Strategy—how to gain synergies from managi...
Before we go into the topic of Business Strategy….        It is important to see how strategy fits into the         total...
Linking Strategy…..                                                               Implications for Strategy Formulation   ...
Business strategic options: from current tofuture strategy Gaps identified in analysis influence  future strategy choices...
The Ansoff Matrix: Directions/Options for Strategic Growth                                                                ...
Product and market options (Ansoff) Growth in existing product-markets      Increase market share by increasing penetrat...
Product and market options (Ansoff) Existing products into related market      Finding new markets for existing products...
Slide 6.13             Strategic Choices                  6: Business Strategy
Learning outcomes for Chapter 6        Identify strategic business units (SBUs) in         organisations.        Assess ...
Business strategy     Figure 6.1     Business strategyBUSM 3200- Strategic Management (Jan 2013) GDS                      ...
Strategic business units (SBUs)          A strategic business unit (SBU) supplies          goods or services for a distinc...
The purpose of SBUs        To decentralise initiative to smaller units within         the corporation so SBUs can pursue ...
Generic strategies        Porter introduced the term ‘Generic Strategy’ to         mean basic types of competitive strate...
Three generic strategies     Figure 6.2      Three generic strategies     Source: Adapted with the permission of The Free ...
THE FIVE GENERIC COMPETITIVE           STRATEGIES         Some authors suggest                                            ...
There is also the view that it is possible to combine                              different strategies                   ...
Cost-leadership        Cost-leadership strategy involves becoming the        lowest-cost organisation in a domain of activ...
LOW-COST PROVIDER STRATEGIES   ♦ Effective Low-Cost Approaches:           ● Pursue cost-savings that are difficult imitate...
Major Avenues for Achieving a Cost Advantage   ♦ Low-Cost Advantage            ●    A firm‘s cumulative costs for its over...
Economies of scale and the experience curve     Figure 6.3     Economies of scale and the experience curveBUSM 3200- Strat...
Cost-Efficient Management of Value Chain Activities   ♦ Cost Driver            ●    Is a factor with a strong influence on...
Costs, prices and profits for generic strategies     Figure 6.4     Costs, prices and profits for generic strategiesBUSM 3...
Cost-Leadership StrategyAdvantages:              Disadvantages:  Charge lower price       Easy to lose sight   than co...
When a Low-Cost Provider Strategy Works Best   ♦ Price competition among rival sellers is vigorous.   ♦ Products are readi...
Pitfalls of a Low-Cost Provider Strategy   ♦ Lowering selling prices results in gains that     are smaller than the increa...
Differentiation strategies        Differentiation involves uniqueness along some        dimension that is sufficiently val...
BROAD DIFFERENTIATION STRATEGIES   ♦ Effective Differentiation Approaches:           ● Carefully study buyer needs and beh...
Uniqueness Drivers: The Keys to Creating                              a Differentiation Advantage                         ...
Differentiation in the US airline industry     Figure 6.5       Mapping differentiation in the US airline industry     Sou...
Differentiation StrategyAdvantages:             Disadvantages:  Customers develop       Difficult to   brand loyalty f...
When a Differentiation Strategy Works Best                                                     Market Circumstances       ...
Pitfalls of a Differentiation Strategy   ♦ Relying on product attributes easily copied by rivals.   ♦ Introducing product ...
Focus strategies (1)         A focus strategy targets a narrow segment of         domain of an activity and tailors its pr...
Focus strategy may be based on either of the          two advantagesFigure 6.2      Three generic strategiesSource: Adapte...
Focus strategies (2)         Successful focus strategies depend on at         least one of three key factors:            ...
Focus StrategyAdvantages:            Disadvantages:  Customer loyalty       Suppliers have   lessens the threat       ...
When a Focused Low-Cost or Focused            Differentiation Strategy Is Attractive   ♦ The target market niche is big en...
The Risks of a Focused Low-Cost or                  Focused Differentiation Strategy   ♦ Competitors will find ways to mat...
‘Stuck in the middle’?        Porter’s argues:        It is best to choose which generic strategy to          adopt and t...
Combining generic strategies          A company can create separate strategic business           units each pursuing diff...
BEST-COST PROVIDER STRATEGIES               Differentiation:                                               Low Cost Provid...
Market Characteristics Favoring                          a Best-Cost Provider Strategy   ♦ Product differentiation is the ...
The Big Risk of a Best-Cost Provider Strategy—             Getting Squeezed on Both Sides                                 ...
Linking Business Strategy to other Porter                                 Frameworks on Strategy        The Generic Busin...
Linking Differentiation Strategy and Value Chain DifferentiationStrategy impact on the specificactivities withinthe Value ...
Translating Company Performance of Value Chain Activities                            into Competitive Advantage – Differen...
Examples of Value-Creating Activities Associated                                                 with the Differentiation ...
So we know there are 3 generic strategies: howthen do you FIT this to the 5 Forces Model?                                 ...
How would Differentiation Strategy impact          on the Five Forces?                                          DIFF      ...
Linking Differentiation Strategy and the Five Forces                       ModelDifferentiationStrategy impact  on the Fiv...
Differentiation Strategy: Competitors     Rivalry with                    Defends against     Competitors                ...
Differentiation Strategy: Buyers  Bargaining Power                   Can mitigate buyers’     of Buyers                  ...
Differentiation Strategy: Suppliers Bargaining Power                                     Can mitigate suppliers’   of Sup...
Differentiation Strategy: New Entrants    The Threat of                     Can defend against new  Potential Entrants   ...
Differentiation Strategy: Substitutes      Product                        Well positioned     Substitutes                ...
5 - 61  Summary (differentiation strategy): Improving   Competitive Position vis-à-vis the Five Forces• Differentiation   ...
Linking Cost Leadership Strategy and Value ChainCost LeadershipStrategy impact on the specificactivities withinthe Value C...
Translating Company Performance of Value Chain Activities                            into Competitive Advantage – Cost Lea...
Examples of Value-Creating Activities Associated                                                 with the Cost Leadership ...
How would Cost Leadership Strategy impact           on the Five Forces?                                           CL      ...
Linking Cost Leadership Strategy and the Five                        Forces ModelCost LeadershipStrategy impact  on the Fi...
Cost Leadership Strategy: Competitors               Rivalry with                                   Due to cost leader’s  ...
Cost Leadership Strategy: Buyers                Bargaining Power                              Can mitigate buyers’       ...
Cost Leadership Strategy: Suppliers                Bargaining Power                              Can mitigate suppliers’ ...
Cost Leadership Strategy: Substitutes      Product                                     Cost leader is well     Substitute...
Cost Leadership Strategy: New Entrants   The Threat of                     Can frighten off new Potential Entrants       ...
5 - 72  Summary (cost leadership strategy): Improving   Competitive Position vis-à-vis the Five Forces• An overall low-cos...
The Strategy Clock        Provides another way of approaching the generic         strategies        The Strategy Clock h...
Strategy clock     Figure 6.6      The Strategy Clock     Source: Adapted from D. Faulkner and C. Bowman, The Essence of C...
Strategy clock - differentiation        Strategies in this zone seeks to provide         products that offer benefits tha...
Strategy clock – low price         Low price combined with:           low perceived product benefits focusing on         ...
Strategy clock - hybrid         Seeks to simultaneously achieve          differentiation and low price relative to       ...
Strategy clock – non-competitive         Increased prices without increasing          service/product benefits.         ...
Strategic lock-in        Strategic lock-in is where users become         dependent on a supplier and are unable to use   ...
Establishing strategic lock-in               Size or market      First-mover                 dominance         dominance  ...
INTERACTIVE STRATEGIES        Generic strategies are chosen and         implemented        But what happens when a strat...
Interactive price and quality relationships        See Figure 6.7 and read page 211        Shows how different organizat...
Hypercompetition         Hypercompetition describes markets with          continuous disequilibrium and change e.g.      ...
Hypercompetition framework     D‘Aveni argues that ‘…frequency, boldness and      aggressiveness of dynamic movement by p...
Interactive price and quality strategies     Figure 6.7      Interactive price and quality strategies     Source: Adapted ...
Figure 6.8- Responding to low cost rivalsBUSM 3200- Strategic Management (Jan 2013) GDS                        5-86
Interactive strategies in hyper-competition         Four key principles:           Cannibalise bases of success.        ...
Cooperative Strategy        Competition may be zero-sum or negative returns        Better to collaborate between organiz...
Cooperative StrategyBUSM 3200- Strategic Management (Jan 2013) GDS                      89
Game theory         Game theory encourages an organisation to          consider competitors’ likely moves and the        ...
Prisoner’s dilemma     Figure 6.10      Prisoner‘s dilemma game in aircraft manufactureBUSM 3200- Strategic Management (Ja...
Lessons from game theory          Game theory encourages managers to           consider how a ‘game’ can be transformed  ...
Summary (1)          Business strategy is concerned with seeking           competitive advantage in markets at the busine...
Summary (2)          In hypercompetitive conditions sustainable           competitive advantage is difficult to achieve. ...
PRACTICE ESSAY QUESTIONS                IMPORTANT NOTE: →              These questions are provided for your reference on...
Sample essay questions        1. Discuss, with examples, how the two main           business level strategies differ in fa...
Sample essay questions        3. Examine the advantages and disadvantages for a           firm to reply on the value chain...
Sample essay question        4. Briefly discuss each of Porter’s three generic           strategies. In your opinion, how ...
Sample essay question        5. Strategy of an enterprise is defined by answers           to two questions                ...
Sample essay question        6. Singapore Airline has implemented its differentiation           strategy since its establi...
Upcoming SlideShare
Loading in...5
×

SM Lecture Five : Business Strategy

10,637

Published on

0 Comments
6 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
10,637
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
771
Comments
0
Likes
6
Embeds 0
No embeds

No notes for slide

Transcript of "SM Lecture Five : Business Strategy"

  1. 1. Strategic Management BUSM 3200 These Lecture Slides summarize the key points covered in the respective chapters in your recommended text; these slides do NOT substitute, at all, the required reading of the assigned chapter from the text. These slides also may contain additional supplementary material extracted from other texts and sources outside your text book.BUSM 3200- Strategic Management (Jan 2013) GDS 5-1
  2. 2. The importance of Business Strategy topic: Is very important part of the group assignment as Business Strategy is a key aspect of the discussion in the report Section 5 of the report asks you to discuss the type of generic business strategy the firm (or SBU) implements by examining its strategy statement and/or its value chain activities.BUSM 3200- Strategic Management (Jan 2013) GDS 5-2
  3. 3. Classifying Strategies Strategies can be depicted in many ways and hence use different models How do we compete? Generic Strategies Where are we going? Strategic Directions (Ansoff Matrix) Under what contexts or conditions do we develop strategy?  Level of the business: corporate or SBU  Stage of Industry Maturity (Growth or Maturity)  Scope of operation (local or international?)  Scale of operation (SME- entrepreneurial strategy) So there are many ways of describing ‘strategy’BUSM 3200- Strategic Management (Jan 2013) GDS 5-3
  4. 4. The focus of part 2: strategic choices How organisations relate to competitors in terms of their competitive business strategies. How broad and diverse organisations should be in terms of their corporate portfolios. How far organisations should extend themselves internationally. How organisations are creative and innovative. How organisations pursue strategies through organic development, acquisitions or strategic alliances.BUSM 3200- Strategic Management (Jan 2013) GDS 5-4
  5. 5. Strategic choices This is the subject matter for Part 2 of the text Figure II.i Strategic choicesBUSM 3200- Strategic Management (Jan 2013) GDS 5-5
  6. 6. The Strategy-Making Hierarchy Corporate Multibusiness Strategy—how to gain synergies from managing a Strategy portfolio of businesses together rather than as separate businesses Two-Way Influence • How to strengthen market position and gain competitive advantage Business • Actions to build competitive capabilities of single businesses Strategy • Monitoring and aligning lower-level strategies Two-Way Influence • Add relevant detail to the how‘s of the business strategy Functional Area • Provide a game plan for managing a particular activity in ways that Strategies support the business strategy Two-Way Influence • Add detail and completeness to business and functional strategies Operating • Provide a game plan for managing specific operating activities with Strategies strategic significance 5-6Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 2–6 4-6
  7. 7. Before we go into the topic of Business Strategy…. It is important to see how strategy fits into the total process of planning and strategic management We have just completed the sections on External Analysis, Internal Analysis and Strategic Purpose How does strategy link with those elements? Remember that strategy is a “outcome” of external and internal analysis Therefore any strategy that is proposed or analyzed must be mapped against the implications of internal and external analysisBUSM 3200- Strategic Management (Jan 2013) GDS 5-7
  8. 8. Linking Strategy….. Implications for Strategy Formulation External analysis – Strategies developed PESTEL must be aligned to Industry analysis taking advantage of opportunities or Strategy overcoming threats. Internal Resources Strategies developed but Capabilities leverage on the internal Competencies strengths of the firm. Strategies developed Strategic Purpose must be consistent with Vision, Mission, the scope defined by the Objectives mission; strategies will be benchmarked by specific objectivesBUSM 3200- Strategic Management (Jan 2013) GDS 5-8
  9. 9. Business strategic options: from current tofuture strategy Gaps identified in analysis influence future strategy choices  Large gaps may require a new business strategy  Small gaps suggest retaining current business strategy and focus on implementation issues (functional strategies) A change of business strategy will produce new gaps that must be addressed 5-9 Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & Beamish/Strategic Management/4th edition
  10. 10. The Ansoff Matrix: Directions/Options for Strategic Growth We will cover this in Chapter7 Diversification 5-10 Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & Beamish/Strategic Management/4th edition
  11. 11. Product and market options (Ansoff) Growth in existing product-markets  Increase market share by increasing penetration eg:  Obtaining new customers  Increasing frequency of use  Increasing quantity used  New applications for current customers Related products for existing market  Marketing new products related to current products eg:  Add features or refinements  Expand product line  New generation products  New products 5-11 Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & Beamish/Strategic Management/4th edition
  12. 12. Product and market options (Ansoff) Existing products into related market  Finding new markets for existing products eg  Target new customer segments  Expand geographically Other less common growth strategies include:  Related products into related markets  Existing and related products into unrelated markets  Unrelated products into existing and related markets  Unrelated diversification 5-12 Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & Beamish/Strategic Management/4th edition
  13. 13. Slide 6.13 Strategic Choices 6: Business Strategy
  14. 14. Learning outcomes for Chapter 6 Identify strategic business units (SBUs) in organisations. Assess business strategy in terms of the generic strategies of cost leadership, differentiation and focus. Identify business strategies suited to hypercompetitive conditions. Assess the benefits of cooperation in business strategy. Apply principles of game theory to business strategy.BUSM 3200- Strategic Management (Jan 2013) GDS 5-14
  15. 15. Business strategy Figure 6.1 Business strategyBUSM 3200- Strategic Management (Jan 2013) GDS 5-15
  16. 16. Strategic business units (SBUs) A strategic business unit (SBU) supplies goods or services for a distinct domain of activity. A small business has just one SBU. A large diversified corporation is made up of multiple businesses (SBUs). SBUs can be called ‘divisions’ or ‘profit centres’ SBUs can be identified by:  Market based criteria (similar customers, channels and competitors).  Capability based criteria (similar strategic capabilities).BUSM 3200- Strategic Management (Jan 2013) GDS 5-16
  17. 17. The purpose of SBUs To decentralise initiative to smaller units within the corporation so SBUs can pursue their own distinct strategy. To allow large corporations to vary their business strategies according to the different needs of external markets. To encourage accountability – each SBU can be held responsible for its own costs, revenues and profits.BUSM 3200- Strategic Management (Jan 2013) GDS 5-17
  18. 18. Generic strategies Porter introduced the term ‘Generic Strategy’ to mean basic types of competitive strategy that hold across many kinds of business situations. Competitive strategy is concerned with how a strategic business unit achieves competitive advantage in its domain of activity. Competitive advantage is about how an SBU creates value for its users both greater than the costs of supplying them and superior to that of rival SBUs.BUSM 3200- Strategic Management (Jan 2013) GDS 5-18
  19. 19. Three generic strategies Figure 6.2 Three generic strategies Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 5-19
  20. 20. THE FIVE GENERIC COMPETITIVE STRATEGIES Some authors suggest there is a fifth strategy Low-Cost Striving to achieve lower overall costs than rivals on Provider products that attract a broad spectrum of buyers. Broad Differentiating the firm‘s product offering from rivals‘ with Differentiation attributes that appeal to a broad spectrum of buyers. Focused Concentrating on a narrow price-sensitive buyer Low-Cost segment and on costs to offer a lower-priced product. Focused Concentrating on a narrow buyer segment by meeting Differentiation specific tastes and requirements of niche members Best-Cost Giving customers more value for the money by offering Provider upscale product attributes at a lower cost than rivals 5-20Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–20
  21. 21. There is also the view that it is possible to combine different strategies 5-21Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–21
  22. 22. Cost-leadership Cost-leadership strategy involves becoming the lowest-cost organisation in a domain of activity. Four key cost drivers that can help deliver cost leadership:  Lower input costs.  Economies of scale.  Experience.  Product process and design.BUSM 3200- Strategic Management (Jan 2013) GDS 5-22
  23. 23. LOW-COST PROVIDER STRATEGIES ♦ Effective Low-Cost Approaches: ● Pursue cost-savings that are difficult imitate. ● Avoid reducing product quality to unacceptable levels. ♦ Competitive Advantages and Risks: ● Greater total profits and increased market share gained from underpricing competitors. ● Larger profit margins when selling products at prices comparable to and competitive with rivals. ● Low pricing does not attract enough new buyers. ● Rival‘s retaliatory price cutting set off a price war. 5-23Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–23
  24. 24. Major Avenues for Achieving a Cost Advantage ♦ Low-Cost Advantage ● A firm‘s cumulative costs for its overall value chain must be lower than its rival‘s cumulative costs. ♦ How to Gain a Low-cost Advantage: ● Do a better job than rivals of performing value chain activities more cost-effectively. ● Revamp the firm‘s overall value chain to eliminate or bypass cost-producing activities. 5-24Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–24
  25. 25. Economies of scale and the experience curve Figure 6.3 Economies of scale and the experience curveBUSM 3200- Strategic Management (Jan 2013) GDS 5-25
  26. 26. Cost-Efficient Management of Value Chain Activities ♦ Cost Driver ● Is a factor with a strong influence on a firm‘s costs. ● Can be asset- or activity-based. ♦ Ways to Secure a Cost Advantage: ● Use lower-cost inputs and hold minimal assets ● Offer only ―essential‖ product features or services ● Offer only limited product lines ● Use low-cost distribution channels ● Use the most economical delivery methods 5-26Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–26
  27. 27. Costs, prices and profits for generic strategies Figure 6.4 Costs, prices and profits for generic strategiesBUSM 3200- Strategic Management (Jan 2013) GDS 5-27
  28. 28. Cost-Leadership StrategyAdvantages: Disadvantages:  Charge lower price  Easy to lose sight than competitors but of changes in make the same level customers’ taste of profit  Competitors will  Withstand try to beat the cost competition based on leader at its own price game 5-28
  29. 29. When a Low-Cost Provider Strategy Works Best ♦ Price competition among rival sellers is vigorous. ♦ Products are readily available from many sellers. ♦ Industry products are not easily differentiated. ♦ Most buyers use the product in the same ways. ♦ Buyers incur low costs in switching among sellers. ♦ Large buyers have the power to bargain down prices. ♦ New entrants can use introductory low prices to attract buyers and build a customer base. 5-29Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–29
  30. 30. Pitfalls of a Low-Cost Provider Strategy ♦ Lowering selling prices results in gains that are smaller than the increases in total costs, reducing profits rather than raising them. ♦ Relying on a cost advantage that is not sustainable because rivals can copy or otherwise overcome it. ♦ Becoming too fixated on cost reduction such that the firm‘s offering is too features-poor to generate sufficient buyer appeal. 5-30Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–30
  31. 31. Differentiation strategies Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Two key issues:  The strategic customer on whose needs the differentiation is based.  Key competitors – who are the rivals and who may become a rival. See Illustration 6.2 – Volvo in IndiaBUSM 3200- Strategic Management (Jan 2013) GDS 5-31
  32. 32. BROAD DIFFERENTIATION STRATEGIES ♦ Effective Differentiation Approaches: ● Carefully study buyer needs and behaviors, values and willingness to pay a unique product or service. ● Incorporate features that both appeal to buyers and create a sustainably distinctive product offering. ● Use higher prices to recoup differentiation costs. ♦ Advantages of Differentiation: ● Premium prices for products ● Increased unit sales ● Brand loyalty 5-32Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–32
  33. 33. Uniqueness Drivers: The Keys to Creating a Differentiation Advantage 5-33Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–33
  34. 34. Differentiation in the US airline industry Figure 6.5 Mapping differentiation in the US airline industry Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), ‗The US airlines relative positioning‘, Tourism Management, 26, 5, 57–67: p. 62BUSM 3200- Strategic Management (Jan 2013) GDS 5-34
  35. 35. Differentiation StrategyAdvantages: Disadvantages:  Customers develop  Difficult to brand loyalty for a maintain product uniqueness in the  Differentiation customer’s eye creates barriers to  Threat of entry for other substitute companies products 5-35
  36. 36. When a Differentiation Strategy Works Best Market Circumstances Favoring Differentiation Diversity of Many ways that Few rival firms Rapid change buyer needs differentiation follow a similar in technology and uses for can have value differentiation and product the product to buyers approach features 5-36Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–36
  37. 37. Pitfalls of a Differentiation Strategy ♦ Relying on product attributes easily copied by rivals. ♦ Introducing product attributes that do not evoke an enthusiastic buyer response. ♦ Eroding profitability by overspending on efforts to differentiate the firm‘s product offering. ♦ Not opening up meaningful gaps in quality, service, or performance features vis-à-vis the products of rivals. ♦ Adding frills and features such that the product exceeds the needs and uses of most buyers. ♦ Charging too high a price premium. 5-37Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–37
  38. 38. Focus strategies (1) A focus strategy targets a narrow segment of domain of an activity and tailors its products or services to the needs of that specific segment to the exclusion of others. Two types of focus strategy:  cost-focus strategy (e.g. Ryanair).  differentiation focus strategy (e.g. Ecover).BUSM 3200- Strategic Management (Jan 2013) GDS 5-38
  39. 39. Focus strategy may be based on either of the two advantagesFigure 6.2 Three generic strategiesSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performanceby Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved 5-39 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–39
  40. 40. Focus strategies (2) Successful focus strategies depend on at least one of three key factors:  Distinct segment needs.  Distinct segment value chains.  Viable segment economics.BUSM 3200- Strategic Management (Jan 2013) GDS 5-40
  41. 41. Focus StrategyAdvantages: Disadvantages:  Customer loyalty  Suppliers have lessens the threat power over of substitutes focused firms,  Power over buyers making the firms because they vulnerable to cannot get the changes same product  Vulnerable to elsewhere attack, therefore must define its niche constantly 5-41
  42. 42. When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive ♦ The target market niche is big enough to be profitable and offers good growth potential. ♦ Industry leaders do not see that having a presence in the niche is crucial to their own success. ♦ It is costly or difficult for multisegment competitors to meet the needs of target market niche buyers. ♦ The industry has many different niches and segments. ♦ Rivals have little or no interest in the target segment. ♦ The focuser has a reservoir of buyer goodwill and long-term loyalty. 5-42Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–42
  43. 43. The Risks of a Focused Low-Cost or Focused Differentiation Strategy ♦ Competitors will find ways to match the focused firm‘s capabilities in serving the target niche. ♦ The specialized preferences and needs of niche members to shift over time toward the product attributes desired by the majority of buyers. ♦ As attractiveness of the segment increases, it draws in more competitors, intensifying rivalry and splintering segment profits. 5-43Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–43
  44. 44. ‘Stuck in the middle’? Porter’s argues: It is best to choose which generic strategy to adopt and then stick rigorously to it. Failure to do this leads to a danger of being ‘stuck in the middle’ i.e. doing no strategy well. The argument for pure generic strategies is controversial. Even Porter acknowledges that the strategies can be combined (e.g. if being unique costs nothing).BUSM 3200- Strategic Management (Jan 2013) GDS 5-44
  45. 45. Combining generic strategies A company can create separate strategic business units each pursuing different generic strategies and with different cost structures. Technological or managerial innovations where both cost efficiency and quality are improved. Competitive failures – if rivals are similarly ‘stuck in the middle’ or if there is no significant competition then ‘middle’ strategies may be OK.BUSM 3200- Strategic Management (Jan 2013) GDS 5-45
  46. 46. BEST-COST PROVIDER STRATEGIES Differentiation: Low Cost Provider: Providing desired quality/ Charging a lower price features/performance/ than rivals with similar service attributes caliber product offerings Best-Cost Provider Hybrid Approach Value-Conscious Buyer 5-46Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–46
  47. 47. Market Characteristics Favoring a Best-Cost Provider Strategy ♦ Product differentiation is the market norm. ♦ There are a large number of value-conscious buyers who prefer midrange products. ♦ There is competitive space near the middle of the market for a competitor with either a medium-quality product at a below-average price or a high-quality product at an average or slightly higher price. ♦ Economic conditions have caused more buyers to become value-conscious. 5-47Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–47
  48. 48. The Big Risk of a Best-Cost Provider Strategy— Getting Squeezed on Both Sides Best-Cost Low-Cost High-End Provider Providers Differentiators Strategy 5-48Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 5–48
  49. 49. Linking Business Strategy to other Porter Frameworks on Strategy The Generic Business Strategies discussed by Professor Michael Porter is LINKED to the two frameworks we learnt in earlier lectures- the Five Forces Industry Model and the Value Chain We need to ask two questions: 1. If a company pursues a given generic strategy, how would it impact its configuration of its “value chain”? 2. If a company pursues a given generic strategy, how does it help to mitigate or reduce the impact of threats as identified in the five forces model?BUSM 3200- Strategic Management (Jan 2013) GDS 5-49
  50. 50. Linking Differentiation Strategy and Value Chain DifferentiationStrategy impact on the specificactivities withinthe Value Chain BUSM 3200- Strategic Management (Jan 2013) GDS 5- 50
  51. 51. Translating Company Performance of Value Chain Activities into Competitive Advantage – Differentiation Strategy We covered VC in Lecture 3. Now see how this is linked to the strategy of Differentiation (Porter) 5-51Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 4–51 3-51
  52. 52. Examples of Value-Creating Activities Associated with the Differentiation StrategySOURCE: Adapted with the permissionof The Free Press, an imprint of Simon &Schuster Adult Publishing Group, fromCompetitive Advantage: Creating andSustaining Superior Performance, byMichael E. Porter, 47. Copyright © 1985,1998 by Michael E. Porter. BUSM 3200- Strategic Management 5-52 (Jan 2013) GDS
  53. 53. So we know there are 3 generic strategies: howthen do you FIT this to the 5 Forces Model? Cost Leadership Linkage? Strategy Focus Differentiation Strategy Strategy 4–53
  54. 54. How would Differentiation Strategy impact on the Five Forces? DIFF Strategy Focus CL Strategy Strategy 4–54
  55. 55. Linking Differentiation Strategy and the Five Forces ModelDifferentiationStrategy impact on the Five The strategies Forces used following the differentiation approach should help to mitigate or reduce the impact of the threats created by the respective force BUSM 3200- Strategic Management (Jan 5- 55 2013) GDS
  56. 56. Differentiation Strategy: Competitors Rivalry with Defends against Competitors competitors because Threat of brand loyalty to new entrants differentiated Rivalry amongcompeting Bargaining power of product offsets price suppliers firms competition. Threat of Bargaining substitute power of products buyers 4–56
  57. 57. Differentiation Strategy: Buyers Bargaining Power Can mitigate buyers’ of Buyers power because well Threat of differentiated new Rivalry entrants products reduce amongcompeting Bargaining power of customer sensitivity suppliers firms to price increases. Threat of Bargaining substitute power of products buyers 5-57 5-57
  58. 58. Differentiation Strategy: Suppliers Bargaining Power Can mitigate suppliers’ of Suppliers power by:  Absorbing price Threat of new increases due to entrants Rivalry Bargaining higher margins. amongcompeting power of firms suppliers  Passing along higher Threat of Bargaining supplier prices substitute products power of buyers because buyers are loyal to differentiated brand. 5-58 5-58
  59. 59. Differentiation Strategy: New Entrants The Threat of Can defend against new Potential Entrants entrants because: Threat of  New products must new entrants surpass proven Rivalry among Bargaining power of products. competing firms suppliers  New products must be Threat of substitute Bargaining power of at least equal to products buyers performance of proven products, but offered at lower prices. 5-59 5-59
  60. 60. Differentiation Strategy: Substitutes Product Well positioned Substitutes relative to substitutes because: Threat of  Brand loyalty to a new entrants Rivalry among Bargaining differentiated power ofcompeting firms suppliers product tends to reduce customers’ Threat of Bargaining substitute power of testing of new products buyers products or switching brands. 5-60 5-60
  61. 61. 5 - 61 Summary (differentiation strategy): Improving Competitive Position vis-à-vis the Five Forces• Differentiation - Creates higher entry barriers due to customer loyalty - Provides higher margins that enable the firm to deal with supplier power - Reduces buyer power because buyers lack suitable alternative - Reduces supplier power due to prestige associated with supplying to highly differentiated products - Establishes customer loyalty and hence less threat from substitutes
  62. 62. Linking Cost Leadership Strategy and Value ChainCost LeadershipStrategy impact on the specificactivities withinthe Value Chain BUSM 3200- Strategic 62 5-62
  63. 63. Translating Company Performance of Value Chain Activities into Competitive Advantage – Cost Leadership Strategy We covered the Value Chain in Lecture 3. Now see how this is linked to the strategy of Cost Leadership (Porter) 5-63Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 4–63 3-63
  64. 64. Examples of Value-Creating Activities Associated with the Cost Leadership StrategySOURCE: Adapted with the permissionof The Free Press, an imprint of Simon &Schuster Adult Publishing Group, fromCompetitive Advantage: Creating andSustaining Superior Performance, byMichael E. Porter, 47. Copyright © 1985,1998 by Michael E. Porter. 5-64 BUSM 3200- Strategic 4–64
  65. 65. How would Cost Leadership Strategy impact on the Five Forces? CL Strategy Focus DIFF Strategy Strategy 4–65
  66. 66. Linking Cost Leadership Strategy and the Five Forces ModelCost LeadershipStrategy impact on the Five The strategies Forces used following the cost leadership approach should help to mitigate or reduce the impact of the threats created by the respective force BUSM 3200- Strategic 5- 66
  67. 67. Cost Leadership Strategy: Competitors Rivalry with Due to cost leader’s Existing Competitors advantageous position: Threat of new entrants  Rivals hesitate to Rivalry among Bargaining compete on basis of power of competing firms suppliers price. Threat of substitute Bargaining power of  Lack of price products buyers competition leads to greater profits.BUSM 3200- Strategic Management (Jan 2013) GDS 5-67 5-67
  68. 68. Cost Leadership Strategy: Buyers Bargaining Power Can mitigate buyers’ of Buyers power by: Threat of  Driving prices far new Rivalry entrants below competitors, Bargaining among competing power of suppliers causing them to firms exit, thus shifting Threat of substitute Bargaining power of power with buyers products buyers back to the firm.BUSM 3200- Strategic Management (Jan 2013) GDS 5-68 5-68
  69. 69. Cost Leadership Strategy: Suppliers Bargaining Power Can mitigate suppliers’ of Suppliers power by: Threat of  Being able to absorb new entrants cost increases due to Rivalry among Bargaining low cost position. competing power of firms suppliers  Being able to make Threat of Bargaining very large purchases, substitute power of products buyers reducing chance of supplier using power.BUSM 3200- Strategic Management (Jan 2013) GDS 5-69 5-69
  70. 70. Cost Leadership Strategy: Substitutes Product Cost leader is well Substitutes positioned to:  Make investments to be Threat of new first to create entrants Rivalry Bargaining substitutes. amongcompeting power of firms suppliers  Buy patents developed Threat of Bargaining by potential substitutes. substitute power of products buyers  Lower prices in order to maintain value position. 5-70 5-70
  71. 71. Cost Leadership Strategy: New Entrants The Threat of Can frighten off new Potential Entrants entrants due to: Threat of  Their need to enter new Rivalry entrants on a large scale in Bargaining amongcompeting power of order to be cost suppliers firms competitive. Threat of Bargaining substitute products power of buyers  The time it takes to move down the learning curve. 5-71 5-71
  72. 72. 5 - 72 Summary (cost leadership strategy): Improving Competitive Position vis-à-vis the Five Forces• An overall low-cost position - Protects a firm against rivalry from competitors - Protects a firm against powerful buyers - Provides more flexibility to cope with demands from powerful suppliers for input cost increases - Provides substantial entry barriers from economies of scale and cost advantages - Puts the firm in a favorable position with respect to substitute products
  73. 73. The Strategy Clock Provides another way of approaching the generic strategies The Strategy Clock has two distinctive features: 1. More Market- focused: focuses on price to customers rather than costs to organization 2. The circular design of the clock allows for more continuous choices rather than the discrete options offered in the Porter model; there is a full range of incremental adjustments that can be madeBUSM 3200- Strategic Management (Jan 2013) GDS 5-73
  74. 74. Strategy clock Figure 6.6 The Strategy Clock Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995BUSM 3200- Strategic Management (Jan 2013) GDS 5-74
  75. 75. Strategy clock - differentiation Strategies in this zone seeks to provide products that offer benefits that differ from those offered by competitors. A range of alternative strategies from:  differentiation without price premium (12 o’clock) – used to increase market share.  differentiation with price premium (1 o’clock) – used to increase profit margins.  focused differentiation (2 o’clock) – used for customers that demand top quality and will pay a big premium.BUSM 3200- Strategic Management (Jan 2013) GDS 5-75
  76. 76. Strategy clock – low price Low price combined with:  low perceived product benefits focusing on price sensitive market segments – a ‘no frills’ strategy typified by low cost airlines like Ryanair.  lower price than competitors while offering similar product benefits – aimed at increasing market share typified by Asda /Walmart in grocery retailing.BUSM 3200- Strategic Management (Jan 2013) GDS 5-76
  77. 77. Strategy clock - hybrid Seeks to simultaneously achieve differentiation and low price relative to competitors. Hybrid strategies can be used:  to enter markets and build position quickly.  as an aggressive attempt to win market share.  to build volume sales and gain from mass production.BUSM 3200- Strategic Management (Jan 2013) GDS 5-77
  78. 78. Strategy clock – non-competitive Increased prices without increasing service/product benefits. In competitive markets such strategies will be doomed to failure. Only feasible where there is strategic ‘lock- in’ or a near monopoly position.BUSM 3200- Strategic Management (Jan 2013) GDS 5-78
  79. 79. Strategic lock-in Strategic lock-in is where users become dependent on a supplier and are unable to use another supplier without substantial switching costs. Lock-in can be achieved in two main ways:  Controlling complementary products or services. E.g. Cheap razors that only work with one type of blade.  Creating a proprietary industry standard. E.g. Microsoft with its Windows operating system.BUSM 3200- Strategic Management (Jan 2013) GDS 5-79
  80. 80. Establishing strategic lock-in Size or market First-mover dominance dominance Insistence on Self-reinforcing preservation commitment of positionBUSM 3200- Strategic 80 5-80
  81. 81. INTERACTIVE STRATEGIES Generic strategies are chosen and implemented But what happens when a strategy interacts with those of its competitors? Need to study ‘competitor moves’ – what if? Two areas to study:  Theory of Hyper-competition  Theory of GamingBUSM 3200- Strategic Management (Jan 2013) GDS 5-81 5-81
  82. 82. Interactive price and quality relationships See Figure 6.7 and read page 211 Shows how different organizations compete by emphasizing either low prices or high quality To plot the competitors moves and counter- moves Also study Figure 6.8 : Responding to low cost rivals And – read the case illustration 6.3: “McCafes challenges Starbucks” – page 213BUSM 3200- Strategic Management (Jan 2013) GDS 5-82
  83. 83. Hypercompetition Hypercompetition describes markets with continuous disequilibrium and change e.g. popular music or consumer electronics. Successful hypercompetition demands speed and initiative rather than defensiveness.BUSM 3200- Strategic Management (Jan 2013) GDS 5-83
  84. 84. Hypercompetition framework  D‘Aveni argues that ‘…frequency, boldness and aggressiveness of dynamic movement by players creates constant disequilibrium and rapid change, often involving unexpected new players and radical redefinitions of an industry.’  This situation is called ‗hypercompetition‘  In hypercompetition traditional strategic concepts and long-term sustainable advantage are perceived to be inappropriate  Not all industries experience hypercompetition  Different levels of competition can exist across industries 5-84 Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard & Beamish/Strategic Management/4th edition
  85. 85. Interactive price and quality strategies Figure 6.7 Interactive price and quality strategies Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetition: Managing the Dynamics of Strategic Manoeuvring by Richard D‘Aveni with Robert Gunther. Copyright © 1994 by Richard D‘Aveni. All rights reservedBUSM 3200- Strategic Management (Jan 2013) GDS 5-85
  86. 86. Figure 6.8- Responding to low cost rivalsBUSM 3200- Strategic Management (Jan 2013) GDS 5-86
  87. 87. Interactive strategies in hyper-competition Four key principles:  Cannibalise bases of success.  A series of small moves rather than big moves.  Be unpredictable.  Mislead the competition. See page 214BUSM 3200- Strategic Management (Jan 2013) GDS 5-87
  88. 88. Cooperative Strategy Competition may be zero-sum or negative returns Better to collaborate between organizations Leverage on their strengths and their competences Create win-win outcomes Grow the total market (‘pie’) instead of fighting for share of the pie Use M Porter Five Forces Model (key benefits of cooperation with each force)  See page 215  See Figure 6.9 In a later lecture we will cover ‘strategic alliances’BUSM 3200- Strategic Management (Jan 2013) GDS 5-88 5-88
  89. 89. Cooperative StrategyBUSM 3200- Strategic Management (Jan 2013) GDS 89
  90. 90. Game theory Game theory encourages an organisation to consider competitors’ likely moves and the implications of these moves for its own strategy. Interdependence exists where the choices made by one competitor is dependent on the choices made by other competitors Anticipate the ‘probabilities’ and expected outcomes of moves and counter-movesBUSM 3200- Strategic Management (Jan 2013) GDS 5-90
  91. 91. Prisoner’s dilemma Figure 6.10 Prisoner‘s dilemma game in aircraft manufactureBUSM 3200- Strategic Management (Jan 2013) GDS 5-91
  92. 92. Lessons from game theory Game theory encourages managers to consider how a ‘game’ can be transformed from ‘lose–lose’ competition to ‘win–win’ cooperation. Four principles:  Ensure repetition. Read page 221  Signalling.  Deterrence.  Commitment.BUSM 3200- Strategic Management (Jan 2013) GDS 5-92
  93. 93. Summary (1) Business strategy is concerned with seeking competitive advantage in markets at the business rather than corporate level. Business strategy needs to be considered and defined in terms of strategic business units (SBUs). Different generic strategies can be defined in terms of cost-leadership, differentiation and focus. Managers need to consider how business strategies can be sustained through strategic capabilities and/or the ability to achieve a ‘lock-in’ position with buyers.BUSM 3200- Strategic Management (Jan 2013) GDS 5-93
  94. 94. Summary (2) In hypercompetitive conditions sustainable competitive advantage is difficult to achieve. Competitors need to be able to cannibalise, make small moves, be unpredictable and mislead their rivals. Cooperative strategies may offer alternatives to competitive strategies or may run in parallel. Game theory encourages managers to get in the mind of competitors and think forwards and reason backwards.BUSM 3200- Strategic Management (Jan 2013) GDS 5-94
  95. 95. PRACTICE ESSAY QUESTIONS IMPORTANT NOTE: →  These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.  DO NOT use these questions to “spot”  The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise  The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive  To score a high grade it is important to LINK the theory to applications and examples. Where from?  You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.  You have selected a case company for your project; you may use examples from there.  You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.BUSM 3200- Strategic Management (Jan 2013) GDS 6-95
  96. 96. Sample essay questions 1. Discuss, with examples, how the two main business level strategies differ in fast cycle and slow cycle markets. 2. Explain how the Porters Five Forces model or the Value Chain model could be used in the formulation of business level strategy. Illustrate your answer with examples from the ___ cases that you have studied for.BUSM 3200- Strategic Management (Jan 2013) GDS 5-96
  97. 97. Sample essay questions 3. Examine the advantages and disadvantages for a firm to reply on the value chain to achieve sustainable competitive advantage with a cost leadership strategy. Use examples from the ___ case to illustrate your answer.BUSM 3200- Strategic Management (Jan 2013) GDS 5-97
  98. 98. Sample essay question 4. Briefly discuss each of Porter’s three generic strategies. In your opinion, how can cost-based advantages be sustained? Give examples to support your arguments. Note: the student should read this question and also consider that it is possible that in future any of the other TWO strategies could be tested. That is how would you answer this question if we substituted focus or differentiation strategy instead?BUSM 3200- Strategic Management (Jan 2013) GDS 5-98
  99. 99. Sample essay question 5. Strategy of an enterprise is defined by answers to two questions a) Where does the firm compete? (Domain selection) b) How does it compete (Domain navigation) Explain this statement from the perspective of corporate and business level strategy with examples. Note: this question covers a wide range of topics that also includes the next topic on Corporate Strategy. In this question you need to discuss Ansoff Matrix, Porter 3 Generic Strategies framework and the topic on Corporate Strategy that includes the concept of Diversification.BUSM 3200- Strategic Management (Jan 2013) GDS 5-99
  100. 100. Sample essay question 6. Singapore Airline has implemented its differentiation strategy since its establishment. In doing so, it has offered a high quality of customer services, maintained a very good safety record, and procured new aircrafts, including Airbus 380. At the same time, it attempts to reduce its overall costs through lowering its back-office costs and administrative overhead. Do you think these activities are contradictory or complementary in implementing Singapore Airline’s differentiation strategy? Why? (Hint: You can address these issues based on your understanding of the concept of value, value chain analysis, and business strategy).BUSM 3200- Strategic Management (Jan 2013) GDS 5-100
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×