Business Strategy

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Corporate Strategy AND Business Strategy
 Key terms

• strategic business unit • competitive advantage

• hybrid strategies • competitive strategy
• game theory • cost leadership strategy
• business model • differentiation strategy
• focus strategy
 Strategic business units (SBUs)

• 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’

 Criteria for SBUs

• SBUs can be identified by:

– Market based criteria

• Customers, channels and competitors
• Corporate customers vs Retail customers

– Capability based criteria

• Strategic capabilities
• Example: Branded Goods retail with SBU for ‘own brands’
 Purpose of SBUs

• Decentralise initiative
– to smaller units within the corporation so SBUs can
pursue their own distinct strategy

• Allow large corporations to vary business strategies

– according to the different needs of external markets

• Encourage accountability
– each SBU responsible for costs, revenues and profits
 Hypercompetition
• Rapid and dynamic competition characterized by unsustainable
advantage
– Can be based on
• price-quality positioning
• protect or invade established product or geographic markets
• deep pockets (financial capital)
– Often a characteristic of new markets and industries

• Occurs when technologies or offerings are so new that standards and

rules are in flux
– resulting in competitive advantages
– profits resulting from such competitive advantages cannot be
sustained

• Example: popular music or consumer electronics

Competitive strategies for hypercompetitive conditions
 Strategies to deal with hypercompetition
• Imitation:
– Seek advantage by developing new products or entering new markets.
Such moves may be relatively easily imitated

• Strategic (re)positioning
– Attack by adopting a different basis of competitive strategy
• Example, a low-price strategy against a differentiated competitor
• Offer some degree of differentiation without an increase in price

• Blocking first-mover advantages

– Not allowing a competitor to establish dominant position before a response
is made
– Launching an imitation product with enhanced features
– Leapfrog or outflank the first-mover

• Overcoming barriers to entry

– Undermine competitor strongholds
– Create deep pockets
 Characteristics of successful hypercompetitive
strategies
• Cannibalise bases of success
– Sustaining old advantages distracts from developing new advantages

• Series of smaller moves

– may be more effective because the longer-term direction is not easily
discernible by competitors and smaller moves create more flexibility and
give temporary advantages

• Disruption of the status quo is strategic behaviour

• Be unpredictable
– Make it difficult for competitors to imitate or outflank
– Apparent irrationality can be important
 Competitive Advantage

• Anything a firm does especially well compared to rival firms

– Competitive
• Customers should see sufficient value to pay more
than the cost of the product

– Advantage
• Value offered should be greater than competitors
 Competitive Strategy

• How a company, business unit or organization

– achieves competitive advantage in its domain of activity.

 Achieving competitive advantage

• Two fundamental means (Porter’s argument)

– ONE, have structurally lower costs than competitors

– TWO, have products or services that are differentiated from

competitors’

• in ways that are valued by customers

– such that company can charge higher prices

– that cover additional costs of differentiation

• Porter adds a further dimension based on the scope of

customers that the business chooses to serve
 Ryan Air

• Pursues low cost strategy relentlessly

– Purchases aircraft without reclining seats

– 90% tickets are sold online

– Low employee costs

What drives Ryan Air’s ‘low cost’ competitive strategy?

 Drivers of cost leadership
• Input costs
– Labour or raw materials
• Relocating to cheap
countries OR locating close
to raw material sources
• Economies of scale
– When high fixed costs
• Example
– R&D in pharma. Cost
comes down by half
when output goes up
from 1million to 2million
units
– Large airlines negotiate
steep discounts from
aircraft manufacturers\
• Experience
– Can be a source of cost
efficiency
• Gains in labour efficiency
• Efficient designs or
equipment based on
experience
• Product/process design
• Example
• Use cheap standard
components
• Interact with customers
through web interface
 Drivers of differentiation

• Product or service attributes

• Customer relationships
– Customer service or responsiveness
– Customization
– Marketing and reputation

• Complements

• Note:
• Differentiation comes at a higher cost in the form of additional investments
or staff quality or R&D
• Cost can be higher than average competitor

• Cost leaders should not neglect quality

• similarly differentiators should attend to costs
 Hybrid strategies

• In some situations

– Strategies are combined

• Example:

– Two SBUs independently pursuing different generic strategies (with

different cost structures)

– Technological or managerial innovation

• Internet retailing of books (reduction in costs as well as wider range)

• TQM for Toyota – reduced defects / costs; increased quality

 Strategy Clock
Another way of approaching generic strategies

• Another way of approaching generic strategies

– Focused on prices to customers
• rather than costs to the organization
• prices are more visible than costs
• easier to use in comparing competitors

– Circular design of clock

• allows for more continuous choices (than Michael Porter’s
sharp contrast between cost leadership and differentiation)

– Identifies
• three zones of feasible strategies
• one zone likely to lead to ultimate failure
Strategy Clock: Competitive Strategy Options
 Strategy Clock: Competitive Strategy Options
Strategy Features Needs / Risks
Combines a low price, low perceived
1. ‘No frills’ product /service benefits and a focus on Likely to segment specific
a price-sensitive market segment
Achieve a lower price than competitors
Risk of price war and low
whilst trying to maintain similar
2. Low price margins; need to be a cost
perceived product or service benefits to
leader
those offered by competitors

Simultaneously achieve differentiation Low cost base and

3. Hybrid and a price lower than that of reinvestment in low price
competitors and differentiation

Provide products or services that offer

4. Differentiation Perceived value add for user
benefits that are different from those of
(With or Without yielding market share or
competitors and that are widely valued
price premium) price premium
by buyers
 Strategy Clock: Competitive Strategy Options
Strategy Features Needs / Risks
Provide high perceived product/service
Perceived value add for a
5. Focused benefits justifying a substantial price
specific segment warranting
Differentiation premium, usually to a selected market
price premium
segment (niche)
6. Increased
Higher margins if
price / No perceived value for money in terms
competitors do not follow;
standard value of product features, price or both
risk of losing market share
(likely failure)
7. Increased
price / low
No perceived value for money in terms Feasible only in monopoly
value (likely
of product features, price or both situation
failure)

8. Low value /
No perceived value for money in terms
standard price Loss of market share
of product features, price or both
(likely failure)
Key themes in Business Strategy
 Business Strategy

• The THREE themes of business strategy

– Generic competitive strategies

• including cost leadership, differentiation, focus and hybrid
strategies

– Interactive strategies
• building on the notion of generic strategies to consider
interaction with competitors, especially in hypercompetitive
environments, and including both cooperative strategies and
game theory

– Business models
• including the three basic components of value creation, value
configuration and value capture
• Two car manufacturers A& B agree on common
component specifications

• Food manufacturers supplying to a retailer agree on

common pallet sizes for deliveries

• Steel companies cooperate on research to reduce weight

of steel used in cars (to discourage car manufacturers
from switching to lighter substitutes such as aluminum or
plastics)
 Collaboration to increase SELLING power

In the automotive and aerospace industries component

manufacturers seek to build close links with customers. They seek to
achieve accredited supplier status. But achieving this status tends to
increase their selling power and often it results in joint planning to
design new products.

Collaboration to increase BUYING power

Traditionally, power and profitability of pharma companies were aided
by the fragmented nature of their buyers – individual doctors and
hospitals. However, in recent times many governments promote
pharma purchase and distribution through centralised drug specifying
agencies.

Collaboration to build ENTRY BARRIERS and AVOID SUBSTITUTION

Often trade associations promote generic features for products in the
industry such as safety standards or technical specifications.
Competition and collaboration
 Cooperating with rivals
• Improved costs or benefits

Entrant
reduces entry threat
• Coordinated retaliation

Industry
Rival A

Supplier Buyer

• Increased Rival B • Increased supplier

purchasing power
power
Rival C • Standardisation benefits
• Standardisation Improved
benefits competitiveness

Substitu Improved costs or benefits

te reduces substitution threat
 Game Theory

• Encourages
– Organization to consider competitors’ likely moves and the implications
of these moves for its own strategy.

• Send signals or messages

– to competitors about how fiercely organization is willing to defend
position in a particular market.
 Game Theory assumptions

• Rationality

– Competitors will behave rationally in trying to win to their own benefit

• Interdependence
– Competitors are in an interdependent relationship with each other
– Outcome of choices made by one competitor is dependent on the
choices made by another
– Competitors are aware of such interdependencies and the moves that
competitors could take
 Game Theory guiding principles

• Get in the mind of the competitors

– Ask what competitors are likely to do
– Choose own strategy

• Think forwards and reason backwards

– Understand competitor responses to own moves
– Reason backwards and DO NOW what would be sensible to do in the
light of this
 Prisoners’ Dilemma

B stays silent B betrays A

A stays silent B goes free

Both serve 1 Year
A serves 3 years

A betrays B A goes free

Both serve 2 years
B serves 3 years
 Prisoners’ Dilemma in aircraft manufacture

The most attractive strategy for Airbus and Boeing jointly is for them both
to hold their prices, yet in practice they are likely to cut prices because
they must expect the other to do so anyway. A
 Value of Game Theory
• Highlights the value of a more cooperative approach to competitor
interaction
– rather than aggressive competition

• Cooperation need not be in the form of an explicit agreement

– It can be tacit, supported by the recognition of mutual self-interest in not
attacking each other head-to-head

• Encourages managers to consider how a ‘game’ can be transformed from

lose–lose competition to win–win cooperation

• If players know that their interaction will be repeated this can encourage
cooperation

• Signalling by responding quickly and aggressively and deterring unwanted

strategic moves by competitors can also encourage cooperation and so can
a strong commitment to a particular strategy.
 BUSINESS MODEL …1
(Airbnb)

• Airbnb is a San Francisco, US based accommodation broker

– Offers value to

• customers that rent apartment (or house or private room)

• for hosts who offer homes for rent

 BUSINESS MODEL …2
(Airbnb)

• Exchange activities between hosts and guests are configured via

web platform

– hosts list, describe, present pictures of property

– customers choose from wide variety available

– review system for both accommodations and guests is available

to build references and prevent deception
 BUSINESS MODEL …3
(Airbnb)

• Both hosts and Airbnb captures value from the business model

– hosts receive guest payments

– Airbnb gets 6% - 12% commission fee on reservations

• 3% for payment processing for host

• credit card processing fees from guests

 ATTRIBUTES OF
BUSINESS MODEL
 Value Creation

• What is offered
– How value is created through the offering
• For all parties involved - customers, partners and other
participants

• Main concern is the targeted customer segment

– how their needs are fulfilled and problems solved
– And how to create value for any other parties involved
 Value Configuration

• How various interdependent resources and activities in the value

chain underlie the value proposition
– Example technology, equipment, facilities, brands, managerial
processes, etc.

• Explains
– Activities that create value
– How they are linked
– Which participants perform them
– While system is centred on the organization
• can also involve activities conducted by customers, partners,
and other participants
 Value Capture

• Describes
– cost structure of resources and activities
– revenue stream from customers and any other parties

• Also shows how the value created will be apportioned between

– organization and other stakeholders involved
– And firm will make profit
 Points to note about Business Models

• ONE, All businesses rely on business models

– But once established in an industry, business models are often
taken for granted
• And rarely questioned
• Example: Until Airbnb came on the scene no one thought of
challenging the ‘hotel business model’

• TWO, competitors may share business models

– But their business strategy can still differ
– Example: Walmart shares same discount retailer model with
several competitors, but has a distinct low cost strategy.
 Business Model Patterns

• There are many business models, but three typical

patterns include:

– Razor and blade

– Freemium

– Multi-sided platforms
 Business Model: Razor and blade

• Probably most well-known

– Primary focus is on value capture component
• Making it more of a revenue model

– Builds on Gillette’s classic model of selling the razors at a very

low price and the compatible replacement blades at a quite high
price

• Mobile operators offering consumers a cheap or even a free

mobile phone and then catching them through a two year
fee-based subscription plan

• Ink-jet printers are sold at relatively low prices

– But manufacturers make their margins on selling
expensive ink / cartridges
 Business Model: Freemium

• Combines ‘free’ and ‘premium’ - primarily relates to online

businesses
– Basic version is offered free to build high volume of customers
– Eventually convince a portion of the customers to buy premium
services

• Revenue is generated by the premium buying customers

– Example LinkedIn, Skype, Spotify

• Aim of freemium is
– Not only to convince premium customers
– But attract a larger volume of customers
– Gain network effects as result of more users
 Business Model: Multi-sided platforms

• Brings together two or more distinct, but interdependent groups of

customers on one platform
– Platform is of value to each group of customers only if the other
group of customers is also present

– Example: Video games

• Players favour consoles with a wide variety of games
– dependent on the other side of the platform, the game
developers
• In turn game developers favour a platform with large enough
customer group to regain their development costs
– Companies like Google, Uber, Ola are also examples of such
paltforms