9781292145150_pp07.ppt

Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Exploring Strategy
11th edition
Text and Cases
Part 2
Strategic choices
Chapter 7
Business strategy and
models

The focus of part II:
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.

Strategic choices

Learning outcomes
• Assess business strategy in terms of the generic
strategies of cost leadership, differentiation,
focus and hybrid strategy.
• Identify business strategies suited to
hypercompetitive conditions.
• Assess the benefits of cooperation in business
strategy.
• Apply principles of game theory to business
strategy.
• Identify and apply business model components:
value creation, configuration and capture.

Business Strategy

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);
– Capabilities-based criteria (similar strategic
capabilities).

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 the success or failure of its
own strategy.

Generic competitive strategies
Michael 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
company, business unit or organisation achieves
competitive advantage in its domain of activity.
• Competitive advantage is about how a company,
business unit or organisation creates value for its
users, both greater than the costs of supplying
them and superior to that of rivals.

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 reserved.

Cost-leadership strategy
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 design.

Economies of scale and the
experience curve

Costs, prices and profits for
generic strategies
Average

Cost-leadership strategy
Low cost should not be pursued in total disregard
for quality. Businesses have two options here:
• Parity – equivalent quality in terms of product or
service features. The cost leader can then charge
the same price as rivals and make higher profits.
• Proximity – only slightly lower quality allows the
cost leader to offer a slightly lower price and still
make higher profits.

Differentiation strategy (1 of 2)
Differentiation involves uniqueness along some
dimension that is sufficiently valued by customers
to allow a price premium.
• Within each market businesses may
differentiate along different dimensions.
Two key issues to consider:
• The strategic customer on whose needs the
differentiation is based.
• Key competitors – who are the rivals and who
may become a rival.

Differentiation strategy (2 of 2)
The key drivers of differentiation are:
• Product and service attributes – providing better
or unique features (e.g. Apple or Dyson).
• Customer relationships – customer service and
responsiveness (e.g. Zalando); customisation (e.g.
SAP) or marketing and reputation (e.g. Coca Cola).
• Complements – building on linkages with other
products/services (Apple and iTunes).

Focus strategy (1 of 3)
A focus strategy targets a narrow segment or domain
of 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 for
ecological cleaning products).

• Cost focusers identify areas where broader cost
based strategies fail because of the added cost of
trying to satisfy a wide range of needs (e.g.
Iceland Foods).
• Differentiation focusers look for specific needs
that broad differentiators do not satisfy so well
(e.g. ARM Holdings in the market for mobile
phone chips).

Successful focus strategies depend on at least one
of three key factors:
• Distinct segment needs.
• Distinct segment value chains.
• Viable segment economics.

‘Stuck in the middle’?
Porter 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’ – doing no strategy well.
• The argument for pure generic strategies is
controversial. Porter acknowledges that the
strategies can be combined (e.g. if being
unique costs nothing).

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 work.
• Hybrid strategies.

Hybrid strategy
A hybrid strategy combines different generic
strategies.
For example Southwest Airlines (USA)
famously pioneered low cost air fares but also
seeks to differentiate on convenience,
frequent departures and friendly service.

The Strategy Clock (1 of 2)
The strategy clock provides an alternative
approach to generic strategy which gives more
scope for hybrid strategies.
It has two distinct features:
• It is focused on the prices to customers rather
than the costs to organisations.
• The circular design allows for incremental
adjustments in strategy rather than stark
choices.

The Strategy Clock (2 of 2)
Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.

Strategy clock – differentiation
• Strategies in this zone seeks to provide products
that offer perceived benefits that differ from
those offered by competitors.
• There is a range of alternative strategies:
– 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.

Strategy clock – Low-price
Low price combined with low perceived value.
• A standard low-price strategy (9 o’clock)
Low prices combined with similar quality to
competitors aimed at increasing market share.
Needs a cost advantage (such as economies of
scale) to be sustainable, e.g. Asda/Walmart in
grocery retailing.
• A ‘no-frills’ strategy (7 o’clock)
Focusing on price sensitive market segments –
typified by low-cost airlines like Ryanair.

Strategy clock – hybrid strategy
Seeks to simultaneously achieve higher benefits
and lower prices relative to those of 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.
A classic example is IKEA.

Strategy clock – non-competitive
strategies
Increased prices with low perceived product or
service benefits.
• In competitive markets, such strategies will be
doomed to failure.
• Only feasible where there is strategic ‘lock-in’ or
a near monopoly position.

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.
An example is razors that only work with one type
of blade.
• Creating a proprietary industry standard.
Microsoft with its Windows operating system.

Interactive strategies
Business strategy choices depend on what
competitors do (they are interactive).
• Richard D’Aveni gives an example of how
competitors may interact in terms of
competitive moves in price and perceived
quality. (See Figure 7.6).
• Kumar gives an example of how firms might
respond to the entry of a low price rival. (See
Figure 7.7).

Interactive price and
quality strategies
Note: axes are not necessarily to linear scales.
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetition: Managing the Dynamics of Strategic Maneuvering by
Richard D’Aveni with Robert Gunther. Copyright © 1994 by Richard D’Aveni. All rights reserved.

Responding to low-cost rivals
Source: Reprinted by permission of Harvard Business Review. Exhibit from ‘A framework for responding to low-cost rivals’ by N. Kumar, December 2006. Copyright © 2006 by the Harvard Business
School Publishing Corporation. All rights reserved.

Hypercompetition
Hypercompetition describes markets with
continuous disequilibrium and change, e.g. popular
music or consumer electronics.
• It may be impossible to plan for long-term
sustainable competitive advantage.
• Planning may actually destroy competitive
advantage by slowing down responses.
• Successful hypercompetition demands speed and
initiative rather than defensiveness.

Interactive strategies in hypercompetition
Four key principles:
• Cannibalise bases of success.
• Series of small moves rather than big moves.
• Be unpredictable.
• Mislead the competition.

Cooperative strategy
• Sometimes too much competition can be
damaging and it is in the interests of
competitors to restrain competition.
• Collaboration with some competitors may
give competitive advantage over other
competitors (or potential entrants).
• Figure 7.8 illustrates various benefits from
cooperation using the five forces framework.

Cooperating with rivals
Source: Adapted from Competitive Strategy: Techniques for Analysing Industries and Competitors, The Free Press, by Michael E. Porter.
Copyright © 1980, 1998 by The Free Press. All rights reserved.

Game theory
Game theory encourages an organisation to
consider competitors’ likely moves and the
implications of these moves for its own strategy.
• Game theory is particularly important where
competitors are interdependent.
• In these circumstances it is important to:
– get in the mind of competitors;
– think forwards and reason backwards.

Prisoner’s dilemma

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.
• Signalling.
• Deterrence.
• Commitment.

Business models
A business model describes a value proposition
for customers and other participants, an
arrangement of activities that produces this
value and associated revenue and cost
structures.
New entrants with new business models can
radically change the dynamics and competition
in a market and establish superior positions
(e.g. Uber, Spotify).

Business models
There are three essential elements in a business
model:
• Value creation – a proposition that addresses
a customer segment’s needs.
• Value configuration – the way resources and
activities are organised to produce this value.
• Value capture – the way the cost structures
and revenue streams create added value for
stakeholders.

Business model components

Business models
Two points need emphasis:
• Business models once established are often taken
for granted. Models can become institutionalised
and form a ‘recipe’ for the industry.
• Even if competitors share a business model their
strategies may still differ. e.g. Airbnb have
differentiation advantages based on their size and
network effects even though others use the same
model.

Business model patterns
Three typical business model patterns are:
• Razor and blade – named after the classic Gillette
strategy of selling razors cheaply and profiting from sales
of high priced blades (mobile phones, ink-jet printers).
• Freemium – named by combining ‘free’ and ‘premium’.
Basic services are free to attract customers who then
upgrade to expensive premium services (Spotify).
• Multi-sided platforms – bringing together two or more
distinct but interdependent groups of customers (Uber,
video games, Google search).

Summary (1 of 2)
• Business strategy is concerned with seeking
competitive advantage in markets at the business
rather than corporate level.
• Porter’s framework and the Strategy Clock define
various generic strategies, including cost leadership,
differentiation, focus and hybrid strategies.
• In hypercompetitive conditions, sustainable
competitive advantage is difficult to achieve and
competitors need to carefully consider moves and
counter-moves.

Summary (2 of 2)
• 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.
• A business model describes the business logic
of an enterprise including the domains of
value creation, value configuration and value
capture.

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