Ch.8 Business strategy and models Flashcards
What is a business strategy?
Concerned with how an organization competes in the market.
Decisions revolve around aspects like product/service concept, pricing, design, etc., considering the
competition.
Example: Exclusive restaurants with Michelin stars have a different strategy than chains like McDonald’s. The former focuses on a luxury niche, while the latter emphasizes cost-efficiency and affordability - low-cost low-
price focus.
What is a business model?
Focuses on the relationship between value creation for customers and other participants (stakeholders), the organizational activities generating this value, and how value can be captured by org and other participants.
Reflects on whether to adopt established business models, innovate new ones, or integrate both.
Example: Amazon’s pioneering e-commerce model contrasted traditional brick-and-mortar retailers. However,
as the model became (established) mainstream, other retailers also adopted e-commerce.
What is competitive strategy? What is competitive advantage?
Competitive strategy: Concerned with how a company, business unit or org achieves and maintain their competitive
advantage in its domain activity. → Competitive strategy therefore involves issues like cost, product, service features
and branding.
Competitive advantage: How a company, business unit or org creates value for its users both greater tan the costs of supplying them and superior to that of rivals. Should support competitive strategies.
Which are the three generic competitive strategies?
Michael Porter introduced an added dimension based on customer scope that the org choses to serve.
Businesses can target narrow customer segments or have a broader scope.
This results in generic strategies including cost leadership (e.g., Asda, use huge economies of scale and tight cost discipline), differentiation (e.g., Waitrose), cost focus (e.g., Iceland Foods), and differentiation focus
(e.g., delicatessens). Feasible no matter how attractive or unattractive an industry is. If competitive forces as strong, as in an unattractive industry - they help neutralise these.
Describe the Cost-leadership strategy.
Aims to be the systematically lowest-cost organisation in a domain of activity.
Example: Ryanair in the European airline industry.
Pursues a relentless low-cost strategy in the European airline industry. Saves costs in almost every aspect of its operations from purchasing a single type of aircraft to selling tickets primarily online to low employee costs.
Cost-leadership strategy: What are the four key drivers that help cost leadership?
Input Costs: Labor, raw materials, location advantages, etc. Competitive advantage by locating their labor-
intensive operations in countries with low labor costs. Ex service call centres in India, manufacturing in South East Asia. Location close to raw materials.
Economies of Scale: Refer to how increasing scale usually reduces the average costs of operation over a
particular time period (Reduction in average operational costs with increased output).
Experience: can be a key source of cost efficiency.
The experience curve implies that The cumulative experience gained with each unit of output results in
unit cost reductions.
Product/Process Design: Efficiency can be ‘designed in’, e.g., using standard components or interacting with customers through cheaper methods.
What are the two requirements for Cost-based strategies?
- The cost structure should be the lowest, with even the second-lowest being a disadvantage. if not nr 1 Risks being undercut on price
- Low cost should not compromise quality. The offerings should either achieve parity or proximity in features
compared to competitors.
i. Parity (equivalence) with competitors in product or service features values by customers. Allows the cost
leader to charge the prices as the average competitor in the marketplace, while translating its cost
advantage wholly into extra profit.
ii. Proximity (closeness) to competitors in terms of features. Customers may only require small cuts in prices to compensate for the slightly lower quality. Ex initial option chosen by chinese car manufacturers in export markets.
Describe the Differentiation strategy.
Involves creating unique value that customers are willing to pay a premium for.
Example: Miele’s high-quality, durable appliances target higher-income households.
Differentiation vary between markets but also within markets. Ex BMW and Mercedes differentiate in different ways even though same top end of the market.
Differentiation strategy: Name the three primary differentiation drivers.
- Product and Service Attributes: Unique features that offer superior performance or appeal, like Dyson’s vacuum cleaner technology.
- Customer Relationships: Enhancing perceived value through customer services, responsiveness, and
branding. E.g., Zalando’s free shipping and returns. Customisation, marketing and reputation including
emotional and psychological aspects. Brand image - Coca cola - Complements: Linking products or services that enhance the perceived value when used together, like Apple’s iTunes and App Store.
Describe the Focus strategy.
Targets a specific narrow segment or domain of activity, and tailors products/services to the needs of that specific segment.
Two variants: Cost focus strategy (e.g., Ryanair) and Differentiation strategy focus (e.g., Ecover’s ecological cleaning products - gaining a price premium).
- Cost focusers identify areas where broader cost-based strategies fail beacuse of added costs trying to satisfy
wide range of needs. Ex Iceland Foods, frozen foods → reducing costs against discount food retailers with a wider range and more diverse suppliers. - Differentiation focusers look for specific needs that broader differentiators do not serve so well. Focus on one need helps build specialist knowledge and technology → increases commitment to service → can improve brand recognition and customer loyalty.
A successful focus strategy depends on three elements, which?
- Distinct Segment Needs: The distinctiveness of segment needs.
- Distinct Segment Value Chains: Unique processes and distribution that competitors cannot easily replicate. If product processes and distribution channels similar → easy for broad bases differentiators to push a
specialised product through its own standardised value chain at a lower cost than rival focuser. Ex. Detergents
- P&G vs Ecover - Viable Segment Economics: The segment should be sizable enough to be economically viable.
Describe the Hybrid strategy.
Combining different generic strategies are possible under certain conditions.
Combines elements of both low-cost and differentiation strategies.
Example: Southwest Airlines offers low-cost flights but also differentiates with frequent departures and friendly service.
Circumstances for hybrid strategies include:
- Companies starting with one strategy and later combining another, like McDonald’s (differentiation, later scale and low cost).
- Companies maintaining a hybrid strategy over time, like IKEA (scale advantages, low prices, differentiated
scandi design) - Also possible for companies to create 2 separate strategic business units (SBUs), pursuing different generic strategies and with different cost structures. Challenge: prevent negative spillover from one SBU to another.
Challenges: Balancing the trade-offs between low cost and differentiation, and preventing negative spillovers between different strategic units.
Blue Ocean: What is the Strategy Canvas? Name the three key features.
A tool to help managers think creatively about competitive positioning in an industry.
Compares competitors based on their performance on Critical Success Factors (CSFs) to establish future
strategies.
Key features:
1. Critical Success Factors (CSFs): Factors highly valued by customers or that provide a significant cost advantage.
- Value Curves: Depict how customers perceive competitors’ performance across CSFs.
- Value Innovation: Creation of new market space by excelling on established CSFs poorly handled by competitors or by identifying new CSFs that meet unrecognised customer needs.
Describe Interactive strategies.
Competitive strategies interact with those of competitors.
Strategic choices are dynamic and should be seen in the light of competitor moves and countermoves.
Competitors’ strategies are interdependent and interact through moves and countermoves.
Generic strategies (cost and diff) should be viewed as dynamic paths rather than static positions.
The following image highlights the dynamic nature of business strategy by showing various moves and countermoves.
Decisions include assessing threats, choosing differentiation response or cost response, and understanding
the implications of each.
What is Game theory?
Game theory encourages an org to consider competitors’ likely moves and the implications of these moves for its own strategy.
Give insights to understand competitor interaction and decide between competition and cooperation.
Examines how competitive moves might signal intentions to rivals and anticipates responses to strategic moves.
Two kinds of interaction:
1. Consider how a competitor response to a strategic move
2. Game theorist are sensitive to the Strategig signals
Business models are composed of three interconnected components, which?
Value Creation: Describes what’s offered and how value is created for participants.
Value Configuration: Explains the resources and activities underpinning the value proposition.
Value Capture: Describes the cost structure and revenue streams, showing how value is distributed among stakeholders.
Example: Airbnb creates value for both hosts and guests, configures this value through its online platform, and captures value through various fees. Network effects.
Name the three typical Business model patterns.
- Razor and Blade: Selling a primary product at a low price while making profits on the complementary product (e.g., Gillette razors and blades).
- Freemium: Offering basic services for free while charging for premium features (e.g., Flickr, LinkedIn, Spotify). not
only attract premium cust. but also gain network effects - Peer-to-Peer (P2P): Facilitating direct interactions between individuals, often bypassing traditional intermediaries
(e.g., Kiva, Airbnb, Uber).
Describe Multi-sided platforms.
Multi-sided platforms connect two or more distinct but interdependent groups of participants (e.g., YouTube connects video creators, viewers, and advertisers).
They’re behind some of the world’s most valuable companies (e.g., FAANG and BAT).
Multi-sided platforms: Name the three important considerations for platforms strategies.
Platform Distinctiveness and Size: Platforms need unique features and a significant size to attract
participants.
Choosing Platform Sides: Deciding which sides to include can be challenging. Adding more sides can lead to growth but may introduce competition or harm relationships.
Multi-homing Costs: Costs associated with participants using multiple platforms simultaneously.
