Week 3 strategic purpose choices

Outcomes covered in this session• Identify strategic business units SBUs in organisations • Explain bases of achieving competitive advantage in terms of Porter’s generic strategies & ‘

3BM020 Organisational Strategy and Decision

Making

Session 3Glyn LittlewoodStrategic purpose & choice business level

strategy

Outcomes covered in this session

• Identify strategic business units (SBUs) in organisations

• Explain bases of achieving competitive

advantage in terms of Porter’s generic

strategies & ‘routes’ on the strategy clock

• Assess the extent to which these are likely

to provide sustainable competitive

advantage

• Identify strategies suited to

hyper-competitive conditions

• Explain the relationship between

competition and collaboration

• Employ principles of game theory in

relation to competitive strategy

Outcomes covered in this session

Google set to launch branded smartphones

•Why would they do this & what is driving this

strategy?

In the news

Google set to launch branded smartphones

•This week will see the launch of new devices aimed

at competing in markets with Apple and Amazon

•They will carry Googles own brand & design,

including a voice responsive “smart speaker”, they are the first products of a new hardware division set up

earlier this year

•Previously Google have concentrated on the

development of software & services

In the news

• This development offers a distinctive product aimed

at competing in the high end of the market with Apple iPhone & Samsung Android devices

• Apple lead the way on the amount spent in its App

Store compared with the amount spent in Google’s rival Play Store – Google cannot stand by & let the wealthy end of the market go to Apple

• Google are also developing a virtual reality headset that be paired to its Android phones

• Global revenue from Smartphone sales 2016 $425.9 billion dollars

In the news

https://www.ft.com/content/31ad45f4-88b2-11e6-8cb7-e7ada1d123b1

https://www.statista.com/statistics/237505/global-revenue-from-smartphones-since-2008/

Business level strategies: what are we

going to cover?

• Opposing pitfalls in identifying SBUs

– Too many different products/markets

means lack of focus

– Too few means not reflecting diversity of products/markets

Strategic business units

A strategic business unit is a part of an organisation for which there is a distinct external market for

goods or services that is different from another SBU

A strategic business unit is a part of an organisation for which there is a distinct external market for

goods or services that is different from another SBU

Strategic business units

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)

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.

Criteria for identifying SBU’s

External Internal

Same customer types Similar

products/services

Similar competitors Similar resources and

competences

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

• Competitive strategy

– The bases for achieving competitive advantage

– The bases for providing best value

• Porter’s generic strategies

– Cost leadership

– Differentiation

– Focus

• Bowman and D’Aveni’s market facing strategies

– Provide customer needs better or more effectively than competitors

– The strategy clock

Bases of competitive advantage

Three generic strategies

Source: Exploring Strategy - Johnson,G., Scholes, K & Whittington, R (9 edition) PrenticeHall Page: 199

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

Three generic strategies

Source: Exploring Strategy - Johnson,G., Scholes, K & Whittington, R (9th edition) PrenticeHall Page: 199

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

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.

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 (EasyJet?).

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.

‘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).

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.

Strategy clock

Source: Adapted from D Faulkner and C Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995

The strategy clock

• Commodity-like products or services

• Avoiding the major competitors

Route 1: no frills strategy

Low price combined with low perceived product/service  benefits

focusing on price­sensitive market segments

Low price combined with low perceived product/service  benefits

focusing on price­sensitive market segments

Easyjet & Ryanair no frills strategy?

• Pitfalls of low price strategy

– Margin reduction for all (competitor reaction)

– Inability to reinvest leading to loss of

perceived benefit of product

• Need a low cost base

– Low cost itself not a basis for advantage

– Low cost achieved in ways that competitors

cannot match to give sustainable advantage

Route 2: low price strategy

Lower price than competitors whilst offering and trying to maintain similar product/service benefits to those offered by competitors

Public sector – year on year efficiency gains

Lower price than competitors whilst offering and trying to

maintain similar product/service benefits to those offered by competitors

Public sector – year on year efficiency gains

Morrison’s/Asda’s Low Price Strategy?

• Achieve greater volumes

• Clarity about activities on which

differentiation can be built (core

competences)

• Reduce costs on other activities

• Entry strategy in market with

Tesco & IKEA’s Hybrid strategy?

• Success depends on

– Identification of strategic customers and

knowing what they value– Knowing the competitors

• Narrow competitor base – focused differentiation

• Wide competitor base – address bases of differentiation valued by customers

Route 4: Differentiation strategies

Differentiation?

• Choice to be made between focused

differentiation (5) and broad differentiation (4) if growth required

• Difficult when the focus strategy is only part of an organisation’s overall strategy

• Possible conflict with stakeholder expectations

• New ventures start off focused, but need to grow

• Market situation may change, reducing

differences between segments

Route 5: Focussed differentiation

Focussed differentiation?

• Increase price without increasing

product/service benefit

• Reduce benefits whilst maintaining price

• In competitive markets such strategies

will be doomed to failure

• Only feasible where there is strategic

‘lock-in’ or near monopoly position

Route 6, 7 & 8: Failure strategies

Does not provide perceived value­for­money in

terms of product features, price or both 

Does not provide perceived value­for­money in

terms of product features, price or both 

Sustaining competitive advantage

Achieving low prices

Operate with lower

margins

Develop a unique cost structure

Create efficiency in

organisational

capabilities

Focus on market segments with low expectations

• Competitors might follow suit

• Customers associate low price with

low benefits

• Cost reductions may result in inability

to pursue differentiation strategy

Dangers of low price strategies

Ways of attempting to sustain advantage through differentiation

• Strategic lock-in is where an organisation achieves a proprietary position in its

industry; it becomes an industry standard

• Users become dependent on a supplier or using another supplier would incur

significant switching costs

– Controlling complementary products or services

‘the razor & blade’ strategy

• i.e buying a particular razor ties the customer into buying the compatible blade

• Apple & Digital rights management - iTunes

Strategic lock-in

• Proprietary industry standard

– Where a company is so successful it creates an

industry standard which under their own control

• Microsoft – holds around 90% of the market with its Windows operating system - for a business to

switch to another operating system would incur significant switching costs

– i.e retraining staff, translating files to the new systems, creating communications compatibility problems with network members

Strategic lock-in

Establishing strategic lock-in

Size or market

dominance

First-mover dominance

Self-reinforcing

commitment

Insistence on preservation

of position

Competitive strategies in hypercompetitive conditions

• Hypercompetition describes markets with

continuous disequilibrium and change e.g

popular music or consumer electronics.

• Successful hypercompetition demands speed and initiative rather than defensiveness.

• Competitive advantage is temporary

– Rapid imitation

– Not sustainable

• Competitive advantage relates to

– Organisation’s ability to change

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 reserved

Competitive strategies in hypercompetitive conditions

• Collaboration may help to achieve advantage or avoid competition

• Organisations may compete in some markets and collaborate in others

• Collaboration can be

– between potential competitors or

– between buyers and sellers

• Collaboration is advantageous when the

transaction costs are lower than when operating alone

• Collaboration can help build switching costs

Competition & collaboration

Competition & collaboration

Game theory

Game theory encourages an organisation to consider competitors’ likely moves and the implications of these moves for its own

strategy.

• Strategist must anticipate competitor

reactions

• Core assumptions:

– Competitor will behave rationally and try to

win to their own benefit

– Competitor is in an interdependent

relationship with other competitors

– Competitors are aware of the

interdependencies and of the moves that

competitors could take

Game theory

The inter­relationships between the competitive 

moves of a set of competitors

• To benefit from game theory strategists need to:

– Put themselves in the position of the

competitors

• Take an informed, rational view on likely competitor actions

• Choose best course of action

– Identify if there is any competitor strategy which might lead to their domination of the market

• Take steps to eliminate the strategy

Implications of game theory

• Game theory attempts to predict the outcomes

of customer reactions or;

• In some cases, to show how the outcome of negotiations may well produce a suboptimal

solution unless both sides of the negotiations realise the consequences of their actions

• Game theory has some value in negotiations but suffers from three difficulties: mathematical complexity; ambiguous conclusions; being

only one small part of the strategy process

Implications of game theory

• The logic of the game may mean that it is impossible to compete within existing

rules

• Alternative approach: Change the rules of the game

• In price-based market

– Shift bases of differentiation

– Make pricing more transparent

– Incentives for customer loyalty

Changing rules of the game

• Business level strategy

– Competing better/providing best value

– Strategy development for each SBU

• Generic strategies for competitive advantage

– No frills, low price, differentiation, hybrid, focused differentiation

• Sustainable competitive advantage requires

– Linked competences, difficult to imitate

– Ability to achieve lock-in as industry standard

Summary

• Hypercompetition

– Need speed, flexibility, innovation and change

• Collaboration and competition

– As alternatives or in parallel

• Game theory

– Pre-empt or counter competitors’ moves

Summary

• Grant, R Strategic Planning in a Turbulent

Environment, Strategic management journal,

vol 24, p 499, 2003

• Johnson, G., Scholes, K., & Whittington, R

Prentice Hall

• Johnson, G., Scholes, K & Whittington, R

(2008) Exploring Corporate Strategy, 8th Edition, Prentice Hall

• Johnson, G, Whittington, R, & Scholes, K (2011)

Sources & Further reading

• Lynch, R Corporate Strategy 4th Edition (2006) Prentice Hall

• Mintzberg, H., Lampel, J., Quinn, J, B, &

Ghoshal, S The Strategy Process 4th

International Edition (2003)

Sources & Further reading