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6BE003
STRATEGIC MANAGEMENT
Session 8
Levels of Stragety, Competitive
Advantage and Strategic Direction
Slides from Johnson, Whittington, Scholes, Exploring Strategy

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Launch Assignment 2
Use relevant strategic management tools and techniques
to evaluate the current strategy of the organisation based
on what you know of their strengths, weaknesses,
opportunities and threats, derived from your analysis in
assignment 1. Analyse why this strategy might be suitable,
acceptable and feasible. Evaluate how the strategic
direction relate to growth, innovation or international
expansion. Briefly identify and justify another potential
strategic direction for the organisation. Given the nature of
this analysis there must be a contemporary and inventive
flavour to much of the relevant data.

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Business strategy

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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).

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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.

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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.

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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

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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.

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Economies of scale and the experience


curve

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Costs, prices and profits for generic


strategies

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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.

Generic Strategy
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Differentiation Drivers
Service quality and levels
Product features
Delivery time
Image

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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, 5767: p. 62

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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).

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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.

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Stuck in the middle?


Porters 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).

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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

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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 oclock)
used to increase market share.
differentiation with price premium (1 oclock)
used to increase profit margins.
focused differentiation (2 oclock) used for
customers that demand top quality and will pay a
big premium.

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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.

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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.

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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.

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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.

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Establishing strategic lock-in


Size or market
dominance

First-mover
dominance

Self-reinforcing
commitment

Insistence on
preservation
of position

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6BE003
STRATEGIC MANAGEMENT
Strategic Direction

Slides from Johnson, Whittington, Scholes, Exploring Strategy

Developing Strategy
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Developing
Strategies
On What
basis?
Basis of Choice

In Which
direction?
Alternative Directions

Corporate
purpose and
aspirations

Protect and build

SBU generic
competitive
strategies

Product development

Market penetration

Adapted from: G.
Johnson and K.
Scholes Exploring
Corporate Strategy
4th edition

How?
Alternative methods
Internal
development

Acquisition

Market development
Diversification:
related
unrelated

Joint development
alliances

In which Strategic Direction?


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Competence
Existing
Existing

Markets
New

Adapted from: G.
Johnson and K.
Scholes Exploring
Corporate Strategy
4th edition

Products

Protect/Build
withdrawal
consolidation
market penetration
Market Development
new segments
new territories
new users

New

Product Development
on existing competences
with new competences
Diversifaction
on existing competences
with new competences

Development

Ansoff Explained
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Market penetration is a strategy of increasing sales in


current market with current products
Market development is a strategy of increasing sales of
current products in new markets
Product development is a strategy of increasing sales by
improving present products or developing new
products for current markets
Diversified growth occurs when new products are
developed to be sold in new markets

Strategic Options
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Withdrawal - ? Whitbread
Consolidation - ? Sainsburys
Market Penetration - ? Northern Rock
Market Development - ? Imperial
Diversification - ? Sony
Unrelated Diversification - ? Hanson
Internal Development - ? Tesco
Mergers & Acquisitions ? Lloyds/HBOS (ABN)
Joint Developments and Strategic Alliances - ? BA
Intermediate Growth - ?
De-merger - Daimler

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Developing strategies that satisfy the organisations mission


objectives and stakeholders is at the core of strategic
management.
British Airways strap line
The Worlds favourite airline
Reveals 2 fundamental aspirations:
Global Operations
Basis of Differentiation
http://www.britishairways.com/travel/home/public/en_gb
Their choice of strategic growth should then make sense in light
of this.

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Consolidation & retrenchment

Consolidation refers to a strategy by which


an organisation focuses defensively on their
current markets with current products.
Retrenchment refers to a strategy of
withdrawal from marginal activities in order
to concentrate on the most valuable
segments and products within their existing
business.

Withdrawal and Consolidation


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These strategies are particularly relevant where:


Organisation lacks resources or competences to
compete.
Organisation wants to concentrate resources into
other activities.
Through cost reduction and asset reduction
Market is in long term decline

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Market penetration
Market penetration refers to a strategy of
increasing share of current markets with the
current product range.
This strategy:

strategic capabilities; builds on established


scope is unchanged; means the organisations
increased power; leads to greater market share
and with buyers and suppliers;
economies of scale; and provides greater and
experience curve benefits.

Market Penetration
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Aim to maximise market share, protect and build


competitive position.
Good where overall market is growing, difficult where
static.
Extend or modify product to fill gaps. New sizes,
options, styles.
Extend to develop the number of distribution outlets in
a geographic area
Penetrate/undermine competitors position.

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Encourage non users to use product and light users


to use more frequently.
This strategy offers two main advantages:
Low risk - operating within known area
Allows specialisation and competitive advantage
However, limitations are:
1. Long term growth slow.
2. Susceptible to industry growth rate and changes
e.g. risk of recession.

Constraints of
market penetration
Retaliation
from
competitors

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Legal
constraints

Economic
Constraints
(recession or
funding crisis)

Product development

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Product development refers to a


strategy by which an organisation delivers
modified or new products to existing markets.
This strategy :
involves varying degrees of related diversification
(in terms of products);
can be an expensive and high risk
may require new strategic capabilities
typically involves project management risks.

Product development
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At some stage all organisations must invest


in substantial product modifications and or
develop new products. Especially where life
cycles are short!
However, research and development is
expensive and risky.
Open source, customer active paradigm

http://web.mit.edu/evhippel/www/

Wikieconomics

http://news.bbc.co.uk/player/nol/newsid_6980000/newsid_6980900/6980955.stm?bw=bb&mp=wm&asb=1&new
s=1#

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Market development (1)


Market development refers to a strategy by
which an organisation offers existing products
to new markets

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Market development (2)


This strategy involves varying degrees of related
diversification (in terms of markets) it;

may also entail some product development (e.g. new styling


or packaging);
can take the form of attracting new users (e.g. extending the
use of aluminium to the automobile industry);
can take the form of new geographies (e.g. extending the
market covered to new areas international markets being
the most important);
must meet the critical success factors of the new market if it
is to succeed;
may require new strategic capabilities especially in
marketing.

Market development

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There are three approaches to exploring


opportunities of extending current production
into new markets.
Extension into new market segments (some
product modification)
Develop new uses for existing products
Geographical expansion nationally or
internationally (product and marketing
modification)

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Diversification
The key objective of diversification is to strengthen the
value chain, obtain synergy and spread risks.

Diversification involves increasing the range of


products or markets served by an organisation.
Related diversification involves diversifying into
products or services with relationships to the existing
business.
Conglomerate (unrelated) diversification involves
diversifying into products or services with no
relationships to the existing businesses.

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Drivers for diversification


Exploiting economies of scope efficiency gains
through applying the organisations existing
resources or competences to new markets or
services.
Stretching corporate management competences.
Exploiting superior internal processes.
Increasing market power.