Chapter 2 - Looking Outside the Oganisation Flashcards
Strategy
Process of formulation and implementation of a plan. Strategic mission, planning and action.
Strategy involves?
Vision - what/where/who do we want to be
Goals/targets - what do we want to achieve
Allocation of resources’
Actions/tactics to enact it
History of strategy
Origins in military theory and practice
Became prominent in business world after 1945 as environments became more competitive and internal/external change sped up.
Emphasis on SWOT analysis/planning process. Later shifted to focus to content of strategy.
Porter and Positioning School: previous strategy scholars had accepted there was no limit to the range of possible strategies.
Porter’s revolutionary idea: only certain strategies were viable in any given context, and called positions.
Positioning School
A sound position is one that can be defended against competitors.
Positions are generic.
Choice reflects nature of the market in which the organisation operates, but it neglects the individual firm and their capabilities
Rigorous analysis of competitive environment allows strategists to choose the right strategy.
Market drives strategy which drives actions and structures or organisations. i.e. organisations must adapt to context
Five Forces Shaping Strategy
Determination of sound position must be informed by analysis of five forces which shape competition in the market.
Competitors include rivalry among existing competitors, threat of new entrants and substitutes, bargaining power of suppliers and buyers.
Rivalry among existing competitors
If firm is already in the industry, intensity is low. If based on price, competition is high. If based on creating value, competition is less intense. Based on price/ advertising/ innovation.
High profitability, little rivalry. Low profitability, intense rivalry.
Threat of New Entrants
If company is already in the market, threat is very low. Depends on financial costs of entry e.g. Aerospace industry expensive to enter (high profit). Also depends on brand identification e.g. Soft drink industry difficult to enter because of Coca-Cola/Pepsi.
High profitability, high entry barriers.
Low profitability, low entry barriers.
Threat of substitutes
Substitutes: products that are similar or indirect competitors. e.g. Laptops vs. tablets.
High profitability, few potential substitutes. Low profitability, many potential substitutes.
Bargaining power of suppliers
Organisations provide material that we need for our products. Few suppliers show that they have higher bargaining power, as can’t threaten to go to another supplier.
High profitability, weak suppliers. Low profitability, strong suppliers.
Bargaining power of buyers
Few buyers lead to more power in them. e.g. Weapons company - power of state buying products is high.
High profitability, weak buyers. Low profitability, strong buyers.
Porter’s Three Generic Strategies
Firms must make a choice between cost leadership, differentiation, focus/niche.
Cost Leadership
Generic strategy that offers products/services with acceptable quality and features to a broad set of customers at a low price.
Lowest cost producer in an industry, standard quality with low prices. e.g. Aldi - customer manual labour, one brand, unpackaged, no bags.
Economies of scale
When the cost of offering goods and services decreases as firm can sell more items. Expenses are distributed across a greater number of items.
Many firms achieve cost leadership through economies of scale.
Cost Leadership Advantages
High profits can be enjoyed if a cost leader has a high market share
Low cost firms can withstand price wars because high priced competitors will not want to be compete directly with a more efficient rival.
Cost Leadership Disadvantages
If perceptions of quality become too low, business will suffer
Large volume of sales as a must because margins are slim
Need to keep expenses low might lead cost leaders to be late in detecting key environmental trends
Low cost firms’ emphasis on efficiency makes it difficult for them to change quickly if needed
Differentiation
Generic strategy that attempts to convince customer to pay a premium price for its good/services by providing unique and desirable features.
Unique products/services, advertised as luxury product for a high price e.g. designer handbags
Firm competing on uniqueness rather than price. Success depends on offering unique features and communicating the value of features to potential customers
Differentiation Advantages
Buyer loyalty: common along designer handbag buyers
Enjoy strong margins: charge premium for handbags
Differentiation Disadvantages
May avoid expensive products because they are price sensitive buyers - less expensive bags to provide trendy looks
Imitations may steal customers - knockoff handbags sold by street vendors
Focus/Niche
Pursue a narrow segment of market, leader through one product presented to one segment. Involves targeting a relatively narrow niche of potential customers.
e.g. Tesla/Minotaur - small segment of target customers, customer loyalty, little competition, doesn’t try to appeal to everyone.
Focused Cost Leadership
Generic business strategy that requires competing based on price to target a narrow market.
Focused Differentiation
Generic business strategy that requires offering unique features that fulfil demands of a narrow market. e.g. Rolex. Ferrari.
Focused/Niche Advantages
High prices can be charged, good entrance into new market
Develop a great expertise about good/services being sold.
Focused/Niche Disadvantages
Limited demand exists for specialised goods/services so every potential sale counts.
The area of focus may be taken over by others/disappear over time.
Other firms may provide an even narrower focus.
Best Cost/Integrated Strategy
Business level strategy followed by firms that charge relatively low prices and offer substantial differentiation. e.g. Toyota, Ikea.
Difficult to execute because creating unique features and communicating to customers why these features are useful generally raises a firm’s cost of doing business.
Route toward best cost strategy: firm to adopt a business model whose fixed costs and overhead are relatively low to costs that competitors are absorbing. But Porter’s Generic strategies might be too simple.
Stuck in the middle
Where a business level strategy does not offer features that are unique enough to convince customers to buy its offerings and prices are too high to compete on price. Firms become stuck in the middle because they are outmanoeuvred by rivals. E.g. General Motors.
Criticisms of Positioning School
Narrow focus on economic forces and on analysis of quantitative data. Doesn’t explain politics and forces that can’t be quantified.
Focus on big established businesses. Less relevant to small companies, family businesses and start-ups may not apply this strategy.
Focus on analysis in head office. Less focus of experts in the field, employees less involved in creating strategy.
Focus on generic and formulaic strategies. Less creativity and uniqueness.
