IMDR - PGDM 2

Strategic Management - 2009

November 30 ppt
Part III on Strategic Choices
Chapters 5 : Business level Strategy

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We Now Switch Over to - -

Strategic Choices

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 Strategic Choice
• Concerned with ways to respond to
influences identified in Strategic Analysis
• Concerned with decisions about an
organization’s future
• The framework helps to promote a
wider consideration of strategy
• It also helps to decide on appropriateness
and consequences of options available
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 Strategic Choice (Contd)
• Discussion divided into three mutually
consistent elements to develop a strategy
– Business Level Strategy ( Chapter 5)
– Corporate Level Strategy and
international Strategy (Chapter 6)
– Choices of Directions and Methods for
Development (Chapter 7)

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 Outline for Discussion
• Concept of Strategic Business Units
• Alternatives for Competitive Advantage (Strategy
Clock) for each SBU
– Price Based
– Differentiation
– Hybrid & Focus
• Work for Sustainability of Competitive Advantage
• Recourse to Co-operation to maintain Competitive
Advantage
• So, we first discuss Strategy Choices at SBU level

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 SBUs – Definition and Basics
• A SBU Definition: “A SBU is a part of an organization
for which there is a distinct external market for goods
or services that is different from another SBU”
• Opposing pitfalls in identifying SBUs
– Too many different products/markets means lack of focus
– Too few means not reflecting diversity of products/markets

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 Criteria for Identifying SBUs
External Internal
Same customer types Similar products/services

Same channels Similar technologies

Similar competitors Similar resources and

competences

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Bases of Competitive Advantage
• 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 (Enlarging Porter’s three)

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The Strategy Clock

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 The Strategy Clock - Needs & Risks

Price Based Strategies

Needs/Risks
1. No Frills More Likely to be segment specific

2. Low Price Entails price wars and low margins,

hence, need to be cost leader

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 Need & Risks - - - Continued
Differentiation-based Strategies
3. Hybrid - - - Achieve Low Cost Base and need for
reinvestment in low price and differentiation
4. Differentiation
(a) Without price premium - - - Through perceived added
value by user to yield market share benefits
(a) With price premium - - - - Through perceived added
value sufficient to bear price premium
5. Focused Differentiation - - - Perceived added value to
a particular segment, warranting price premium

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 Need & Risks - - - Continued
Strategies Likely to be Failure ( 6,7,8)

Increased Price/Standard Value - - - When higher

margins are realized if competitors do not follow
immediately; nut, risk losing market share
Increased Price/Low Value - - - Only feasible in
monopoly situation
Low Value/Standard Price - - - Risk Loosing of
Market Share

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 “””“No Frills” Strategy
Low price
Low perceived product/service benefits
Focus on price-sensitive market segment
Low price
• For Commodity-like
Low perceived product/service
products or services
benefits
• For non-affording Price Sensitive Customers
• When buyerFocus on price-sensitive
power is or when market switching costs
segment
are low; generally, if customer loyalty is difficult
• When number of providers are small, and if
market shares & cost structures are almost same
• For low-price segment If major competitors are
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 Low Price Strategy
- Lower price than competitors
- Maintain similar product/service benefits
• Pitfalls of low price strategy
- Margin reduction (Competitor reaction)
- Inability to reinvest to develop the product,
leading to loss of perceived benefit of product
• Hence, Low Cost Base is essential
- Low cost by itself may not be a basis for
advantage since it could be imitated. Hence,
- Low cost achieved in ways that competitors
cannot match to give sustainable advantage
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 Differentiation Strategies
1. Offering benefits different from competitors
2. Widely valued by buyers
3. Better products/services at same/higher prices

• Success depends on Identification of Strategic

Customers and knowing what they value,
• And, on Knowing the Competitors
- Adopt Focused differentiation if competitor
base is small/narrow
- If competitor base is wide, address on “what
parameters differentiate” for value to customers
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 Hybrid Strategy
Simultaneously achieving differentiation & lower price

Could be advantageous in the following cases:

• If much greater greater volumes can be achieved than
competitors, thus decreasing costs to enlarge margins
• If there is clarity about activities on which
differentiation can be built (core competences)
– And, be able to reduce costs on other activities
• Use the Hybrid Strategy to enter a market where
there are already established competitors
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 Focused Differentiation
High perceived product/service benefits to niche
market segments & Premium branded products
• First, Choice to be made between focused
differentiation (5) and broad differentiation (4)
• Difficult when the focus strategy is applicable only
for part of an organization’s overall strategy
• Possible conflicts with stakeholder expectations,
when the focused benefits are not uniform
• New ventures usually start off this way, but it may
be difficult to grow with focused approach
• Market situation may change, making focus
irrelevant, if differences in segments get reduced
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 Failure Strategies
Results if perceived value-for-money does
not get provided in terms of product
features or price, or both

• For example, Increase price without

increasing benefits in products or
services
• Or, Reduce benefits whilst maintaining
price

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Sustaining Competitive Advantage

When the Strategies are price based:

• Be ready to accept reduced margin (either
because higher volumes or by cross-subsidies)
• Get ready to sustain and Win a Price War
• Reduce Costs through organization specific
strategic capabilities
• Focus on Specific Segments that value price
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Sustaining Competitive Advantage
- (Continued)

If the Strategies are differentiation-based:

• Create Difficulties of imitation

• Achieve imperfect mobility (of
resources/competences e.g. key R & D
personnel)
– Many intangible assets such as brand, image or
reputation are difficult for imitation

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Sustaining Competitive Advantage
- (Continued)
Derive sustenance by achieving “Lock-in” Status - - -
- achieving proprietary position in the industry by
creating the industry’s standard - - like what IBM,
or Microsoft, Xerox, Intel had achieved
• By Achieving Size/Market Dominance
• By deriving First Mover Advantage
• Reinforcement
• Rigorous Enforcement thorough insistence on
conformities to standards thus seeing off
competitors

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 Competitive Strategies in
Hyper-competitive Conditions
To compete Successfully in hyper-competitive situations
(turbulent/uncertain environment, and/or increased
levels of competition)

Successful ingredients for such strategies are:

• Preempt competition (new strategies for competing)
• May be unwise to attack competitors’ weaknesses,
since they get prepared for it
• Become unpredictable; predictability is dangerous
• Keep sending Misleading Signals to Competitors
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Competitive Strategies in Hyper-
competitive Conditions - Continued
To overcome competitors’ barriers

• Practice Shorter life cycles

• Undermine Competitors’ strongholds
• Find ways to counter competitors’ deep-pocket
advantages (when they have surplus resources
to withstand your competing)

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Competitive Strategies in Hyper-
competitive Conditions - Continued
To overcome competitors’ market-based
moves
• Block potential first mover advantages, say by
leapfrogging into a superior product
• Imitate product/market moves of competitors
so that all of you have same issues on
sustenance of advantage

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Competitive Strategies in Hyper-
competitive Conditions - Continued
Or, else
• Reposition on the Strategy Clock
• This is feasible even to think only if the
organization is extremely agile
• Still, such repositioning has to be
safeguarded against imitation
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Competition and Collaboration
Collaboration may help to achieve
advantage or avoid competition
• Using Five-force model concepts,
Collaboration can be
– Between potential competitors
– Or, between buyers and sellers

• Can help build switching costs

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 Competition and Collaboration
- Continued
Competitiveness might be improved by collaboration to
achieve (Use 5-force model):
• Increased selling power
• Increased buying power
• Increased barriers to entry
• Decreased risks of substitution
• Entry to new markets
• Shared work with customers
• Stakeholder expectations

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