6. Competitive Advantage and Strategic Choice Flashcards
Explain Porter’s generic strategies?
Porter argued that once a company understands it’s the strategic capability and competitive advantage, a company should develop its competitive basis. This is when a company decides how it will compete in the market. 2 Main types:-
- Cost leader
- Differentiator
Or Risk being stuck in the middle only leading to low profits and high costs
The competitive scope relates to how broad or narrow Size of the market.
How to achieve Cost Leadership?
- Economies of scale
- Use of latest technologies to reduce costs, or enhance productivity
- Use of cheap labour
- High tech industries, Exploit the Learning curve effect, By producing more items than any other competitor.
- Focus on improving productivity
- Minimise overheads
- Get favourable access to suppliers
How can a company differentiate its products or services?
Porter (1980) suggests that a differentiation strategy assumes that competitive advantage can be gained through particular characteristics of an organisation’s products
Products are divided into three main categories:-
- Breakthrough Products offer a radical performance advantage over the competition - e.g. Tesla Cars
- Improved products are not radically different from their competition but are obviously
superior in terms of better performance at a competitive price.
- Competitive products derive their appeal from a particular compromise of cost and performance. For example, cars are not all sold at rock-bottom prices, nor do they all provide immaculate comfort and performance.
How to differentiate:-
- Brand image
- Product special features
- Exploit other activities of the value chain
- Use IT and Innovation to create new products
- Build Customer relationship
- Create Complementary products
Explain what is a focused strategy?
2 Main types?
When do they occur?
Advantages & Disadvantages?
- A Focused strategy is when a company concentrates its attention on particular segments or niches.
2 main types:-
1) A Cost focus strategy & 2)ADifferentiation strategy
They occur when the Broad market:-
1) Underperforms, when a product does not fully meet the requirements of the market.
2) Overperformance, gives the market more then what they want and gives space for a cost focus player.
Advantages
- Insulate against the competition as a niche market is more secure
- Organisation does not spread too thin
- Life is easier in niche (Cost Leadership and Differentiation needs superior performance and resources)
Disadvantages
- Sacrifice some economies of scale
- Competitors can move into the segment with increased resources
- Segment needs may eventually align with the rest of the market
Name the 7 P’s of the Marketing Mix
- Price
- Place
- Product
- Promotion
- People
- Processes
- Physical Evidence
How can you sustain a price-based strategy
- Low Margins by increasing volume - Economies of scale
- Cost Leader by operating at a cost price advantage
- Price War - Organisations with extensive financial resources can win in a price war
- No-Frills strategy
How to sustain differentiation strategies?
- Any differentiation must be valued by the customer.
- Attempts at imitation can be obstructed. e.g Patents or restricting suppliers to an exclusivity deal.
- Some resources are Inherently immobile. This could be a result of intangibility e.g Branding, high customer switch costs
- Cost advantage, rather than a priced advantage by investing in innovation, improved quality
Define “LOCK IN”
Lock-in: Is achieved in a market when an organisation’s product becomes the industry standard.
Customers and all other stakeholders, now compare all other competing products or service to the quality of the “Locked In Standard”
Direct competitors are reduced to becoming minor niches
and
Compatibility with the industry-standard becomes a prerequisite for complementary products. E.g The Lighting connector on apple IPHONE means all other add on manufacturers must meet this requirement.
The BCG Matrix
The BCG matrix devised by Henderson (1970) categorises SBUs in terms of market growth rate and relative market share. It assesses SBUs based on financial performance only.
- Stars offer good future returns, so it needs investment to develop them. Due to the industry life cycle, stars will become cash cows in time.
- Cash cows do not need much investment so will generate cash income. This cash is then used to invest in stars or simply provide a return to shareholders
- Question marks should be assessed to see whether they have the potential to become stars. If so, the parent should invest in them; if not, they should be sold or run down.
- Dogs can tie up funds and provide a poor return. In general, they should be sold off, although maybe retained if they are a useful niche business.
Explain the Public sector matrix
The public sector portfolio matrix (Montanari and Bracker, 1986) classifies activities in terms of their popularity and the resources available for them. The matrix provides for an analysis of services provided by public sector bodies, which can prove useful particularly when making strategic decisions about public sector activities.
- A public sector star is something that the system is doing well and should not change. They are essential to the viability of the system.
- Political hot boxes are services that the public wants, or which are mandated, but for which there are not adequate resources or competences.
- Golden fleeces are services that are done well but for which there is low demand. They may therefore be perceived to be undesirable uses for limited resources. They are potential targets for cost-cutting.
- Back drawer issues are unappreciated and have low priority for funding. They are obvious candidates for cuts, but if managers perceive them as essential, they should attempt to increase support for them and move them into the political hot box category.
Briefly explain the product-market strategy: the direction of growth
Product-market mix: Is a shorthand term for the products and services a firm sells (or a service which a public sector organisation provides) and the markets it sells them to.
Ansoff (1987) drew up a growth vector matrix, describing how a combination of a firm’s activities in current and new markets, with existing and new products, can lead to growth.
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Market penetration - means increasing market share of existing products via promotions, price reductions, increasing usage etc.
- It is a low-risk strategy since it requires no capital investment. This approach can also apply to an organisation which simply wants to maintain or even reduce its Market position.
- Market development means seeking new customers for existing products, eg exporting or selling via new distribution channels. The risk here is still reasonably low. e.g New Distribution channels or Export
- Product development is selling new products to existing customers. This strategy is riskier than penetration and market development since it is likely to require a major investment in the new product development processes and facilities.
- Diversification, selling new products to new customers, may offer significant growth potential but it is risky as it may require significant investment and new competences.
What are the Benefits of Diversification and the Questionable reasons?
Advantages
- Economies of scope may result from the greater use of under-utilised resources. These benefits are often referred to as synergy.
- Corporate management skills may be extendible across a range of unrelated businesses
- Diversification can increase market power via cross-subsidisation
- Exploit existing superior internal processes to seize opportunities to establish new businesses
Questionable Reasons
- Response to an environmental change, but in reality to cover the interests of top managment.
- Risk Spreading, Reasonable for small owner-managed business, But studies show investors of large organisations are better at managing their own portfolio risk.
- The expectations of powerful stakeholders can lead to inappropriate strategies generally.
Explain 2 Types of Related Diversification?
and What are the Pro’s and Con’s
- *Horizontal integration:** Makes use of current capabilities by development into activities that are competitive with, or directly complementary to, an organisation’s present activities.
- *Vertical integration:** Occurs when an organisation expands backwards or forwards within its existing value network and thus becomes its own supplier or distributor.
Advantages
- Creates barriers of entry
- More effective pursuit of a differentiation strategy
- A share of the profits at all stages of the value network
- Secure supply of components or materials, hence lower supplier bargaining power
Disadvantages
- Overconcentration. make the business inflexible, more sensitive to instabilities and increases the firm’s dependence on customer demand in that particular market.
- Fails to benefit from any economies of scale or technical advances in the industry into which it has diversified.
Describe Unrelated diversification and the Pro’s and Con’s
Unrelated diversification: Is the development of products or services beyond the current capabilities or value network
Advantages
- Risk-spreading. Entering new products into new markets can compensate for the failure of current products and markets.
- Improved profit opportunities. An improvement of the overall profitability and flexibility of the firm
- Escape from a declining market.
- Use an organisation’s image and reputation
Disadvantages
- Dilution of shareholders’ earnings, if they wanted to diversify they could do it themselves
- Lack of common identity and purpose, a conglomerate success will depend on high-quality management
- Failure in one of the business may drag down the rest.
- Lack of management experience is likely to lead to failure
Highlight the link between the level of diversification and strategic success?
- Johnson et al (2017) highlight that organisations undertaking a limited degree of related diversification is likely to perform better than those that remain undiversified.
- However, as the degree of diversification increases, the rate of performance improvement is likely to reduce and may then become negative as the organisation becomes extensively diversified into unrelated fields.
