Chapter 4 - Business level strategy

Question 1

Business strategy is a part of “strategy content”. What is strategy content?

Answer 1

Strategy content refers to the question of what the strategy should be. We’re talking about what course of action the firm should follow

Question 2

Strategy content cares about 2 kinds of “fits”

Answer 2

1) The fit between the firm and its environment (external consonence)

2) Internal fits between various parts of the firm (internal consistency).

Question 3

external consonance and internal consistency differ in terms of how the organization might perform

Answer 3

External consonance, recall that it is about the alignment between a firm and its environemnt, is in danger of not meeting the demands of the environement. This cause underperformance.

Internal consistency problems is more about the efficeincy in which the organization can operate.

Question 4

why is so difficult to adapt to environement, and align current stnegths, opportunities, weaknesses, threats with that of the environemtn?

Answer 4

Mostly due to the competitiveness of the environment.

A firm needs to gain a competitive advantage over its rivals

Question 5

What is this chapter about?

Answer 5

How firms should create a sustainable competitive advantage in each business they are in

Question 6

elaborate on the core issue of this chapter

Answer 6

The core issue is “the issue of competitive advantage”. Naturally, this issue is about how firms need to have some sort of competitive advantage over its rivals to succeed.

Porter 5 forces is very strong here. Ideally, a firm needs to have a competitive advantage as it will:
1) Counterbalance the demands of suppliers
2) Counterbalance the demands of buyers
3) Outperform rivals
4) Discourage new firms to enter the industry/business
5) To fend off the threat against substituties.

This is essentially porter five forces. The issue of having competitive advantage is paramount.

Question 7

What is a competitive advantage?

Answer 7

Can by anything. it depends largely on the business model the firm has developed.

abstractly speaking, business model is a function.

X -> f(X)

X is the inputs, such as resourcs.
The function itself is a transformaiton of activities that does something to the resources.
Finally we get the output.

the business model is the way the firm intends to create value for its customers.

The idea of competitive advantage means that the firm must have a way to create superior value (at least on some area) as compared to rivals.

Question 8

elaborate on the entirey of business model

Answer 8

As already defined, business model is the way the firm intends to create value for its customers. It is paramount and a very important part of the firm, because it defines the very nature of the competitive advantage that the firm has (or has not).

We define a business model as a an abstract function of resources that are applied with some activities, which result in product.
Therefore, the business model is an interplay between the firms resource base, its activities (value chain) and finally the product offering.
It is the entire relation between all of them that defines the business model, and ultimately the compatitive advantage that the firm has.

PRODUCT OFFERING
At the very basis of the competitive advantage: The products must be superior in some way. Superior in the sense that they must be more hihgly valued than that of rivals products.
The very first things we should note is that it is generally not advisable to go broad. There are good reasons for this, such as low economies of scale, slow organizational learning, unclear brand image, unclear corporate image, high organizational complexity.

A crucial insight is regarding the delineating of industries. We must be able to define an industry, because this is our basis of competitors. This is crucial because we have to decide what businesses to be in, and to do that, we need insihgt into how the industries appear.
The simplest way to describe an industry, is by product. However, this is not that good. As strategists, we like to consider industries from the perspectives of the value, or the need, that they satisfy. Ancient example: Is a watch really a watch, or is it fashion/jewelry. Is it status?

THe next thing we need to do, is the segmenting of markets. Same product, but differnet market, is differnet business. For instance, air travel at different routes.

Next up is the term “business”. Business refer to the competitive arena where companies are offering similar products serving similar needs against one another for the favor of the buyers.

Given a selected business, the task up ahead is positioning. Positioning refer to how we place our products/services against other rivals’. Porter: positioning is where and how to compete. what we determine here will lay the foundation of our competitive advantage.
Accordign to Porter, competitive advantage cooks down to two things: cost vs differentiation. Differentiation includes everything from image, quality, features, availability, relations etc. The reason why porter has this definition of competition, is that they are almost impossible to achieve simultaneusly.

That wraps up the product offering. This is sort of the idea-stage where we figure out some needs in the market or whatever, and develop an edge. however, we still need to be able to make it.

VALUE CHAIN
not really that intersting, difficult to conceptualiuze. Core idea: Activities that facilitate everuything.

RESOURCES
we make the disinction between tangible and intangible resources.

Question 9

elaborate on the paradox, the demands, the issue and how to deal

Answer 9

We start by the issue: the issue is about the competitive advantage. We know what it is based on: Creating superior value proposition. This comes from the business model.

The issue is how we should go about to develop that edge. We know that the business model consists of resources and activities and value proposition, and we know that we are targeting someone with our value proposition.

we can say that there must be a fit between the organization and the environment. We can use SWOT to highlight thus. The SWOT however, drags in opposite directions. The streangths and weaknesses of the organization pulls towards using the current set of resources and acitvities, while the opportunititeis and threats will most likely go the opposite way. So the issue is: What should we do?

In essence, we are talking about the demand for market adaptation vs the demand for resource leveraging.

This leads us to the paradox. Building new competence, or exploiting the current one.

We have the outside-in perspective, which takes the side of the market adaption.

the other perspective, the inside-out consider an approach where the current resource base is the foundation for future decision making.

Question 10

Define business model

Answer 10

business model is the configuration of resources, activities, product/service offerings intended to create value for customers. It is the way a firm conducts its business.

A competitive adantage can be achieved only if a busness modekl creates superior value for buyers.

Question 11

What is the first step/element in a successful business model?

Answer 11

A superior value proposition.

This is about needs. We are talking about eahc element in the firm’s product offering to be targted at a particular segment of the market and have a superior value attributes (price, availability, reliability, etc).

Question 12

Given a superior value proposition, what is next to gain competitive advantage?

Answer 12

Actually being able to develop it

Question 13

generally speaking, elaborate on the distinction between focusing on a limited set of product-market combinations vs focusing on many

Answer 13

Firstly, there is great temptation in going wide. However, this has significant drawbacks. Generally, these drawbacks are so large that it is not possible. We want to be extremely focused in our decision to pick a certain limited number of businesses and within each business focus on a limited group of custoemrs and a limited set of products. The focus should not be arbitrary. This is THE great challenge.

If we go too broad, we risk the following:
1) Low economies of scale, inefficient core
2) Slow organizational learning. Building up specific knwoeldge is crucial. Probably like evolution.
3) Unclear brand image.
4) Unclear ocrporate image. lack of identity.
5) High organizational complexity. Shit load of divisions.
6) Limits to flexibility.

Question 14

What is “the” business level strategy challenge?

Answer 14

Strategizing managers must understand what businesses are structrally attractive and how their firm can gain a competitive advantage within each business, by offering specific value propositions to selected customer segments.

Question 15

Define industry

Answer 15

Group of firms making a similar type of product or employing a similar set of value adding pricesses or resources.

Basically: Supply side simiilarities.

Question 16

Define a market

Answer 16

A group of customers with similar needs.

There is demand side similarity.

This is an interesting case. for instance, the air transportation between London and Oslo is a different market than London and USA, although many similarities. The key is that there are differnet needs, and because there are differnet needs, the products cannot be substituted by each other.

Actually, the AIR market is just a market-segment. The actual market might be more fitting as the “transportation market”. We can easily extend to “meeting market” etc.

Question 17

What is a business?

Answer 17

A competitive arena where companies offering similar products seriving similar needs compete agianst one another for the favor of the buyers.

Hence, a business is delineated in both industry and market terms.

Question 18

Define positioning

Answer 18

Positioning refers to focusing the overall business model to serve the particular needs of a targeted group of buyers in a way that distinguishes the firm from rivals.

Question 19

Elaborate on positioning

Answer 19

Positioning is about where to compete, and how to compete.

Fidnign a way to beat rivals and win over customers for a product offering is the issue of competitive advantage.

Question 20

Name the most common (not necessarily best) dimensions of competitive advantage

Answer 20

1) Price. Easily understood, most buyers are partial to the lower priced offer. Even when selecting between products that are actually somewhat differentiated, price is important.
The most important thing is that if we want ot compete on price, the only way this is successful is if we have the lowest cost. Very difficult to do, we are competing on operational efficiency.

2) Features. Differentiating the product(s) to meet differnet needs.

3) Bundling

4) Quality. Some may pay premium for quality

5) availability

6) Image

7) Relations

Question 21

What competitive advantage should we go for?

Answer 21

Depends on the targeted group. What do they find important?

Question 22

According to porter, what can firms compete on?

Answer 22

Lower cost vs differentiation.

with a great cost structure, firms allow themselves to compete on price. On the other hand, firms can organize their business model to comåete on products or services that offer distintive qualiteis compared to rival offerings.

According to porter, these two categories of competitive advantage requires significantly different business models and therefore are next to impossible to combine.

Question 23

In order to actually make what a firm wants to sell, what does the firm need?

Answer 23

A value chain must be in place.

Value chain consist of the set of value creation priocesses leading ot the supply of product or service offerings. It also consist of a number of activities to successfully satisfy the custoemr’s demands. As these activities are linked together, it is frequently referred to as the value chain.

Question 24

Why do we care so much about the value chain?

Answer 24

The value chain often makes up the important parts of the competitive advantage. While the product offering is nice, the value chain actually facilitate it.

An extrordinary value chain significantly raise the barrier of entry.

Question 25

Elaborate on a firm’s resource base

Answer 25

Commonly referred to as either resource base or assets.

Consists broadly of the tangibles and intangibles.

The tangibles are easy: Land, buildings, machinery, cash etc-

We typically divide intangible resources into two groups:
1) Relational resources
2) Competencies

Relational resources are things like actual relationships and reputation.
Competencies is better described as 3 feats:
1) Capabilityies
2) knowledge
3) Attitude

Attitude is often neglected, but can make all the difference.

Question 26

according to porter, what makes a competitive advantage sustainable?

Answer 26

It needs to be protected against being copied by rivals, being substitued, eroded by actions of rivals etc. It should not be made redundant.

We can bake this down to 2 things:
1) Competitive defendability
2) Environemtnal consonance

THe first one relates to how easy it is to imitate and all that. Core idea is that it is actually easier to defend a competitive advantage by outpacing rivals, rather than building walls around it.

The second is related to the market as a dynamic thing. Custoemr needs change with time. If the competitive advantage is no more given time., then it is not good.

Question 27

What is competitive advantage?

Answer 27

Firstly, competitive advantage is related to the business model. The business model is the composition of product offering, value chain and resource base.

A firm has competitive advnatage if the business model creates superior value for its customers.

Question 28

In simple terms, what is a SWOT

Answer 28

A tool made for matching the strengths and weaknesses to the opportunities and threats. we take the strneghts and weaknesses of the firm, and relate them to the opportunities and threats of the environemtn that the firm operate in.

Question 29

explain the paradox

Answer 29

A firm’s resources and the demand for market adaptation typically pull in different directions. The firm wil ltypically have a valeu chain and resource base that highlight a core strength in a certain direction. However, opportunities and threats in the environment will most likely highlight a need for adaptation. This creates a difficult scenario.

Question 30

Explain the entire chapter

Answer 30

Firms want to achieve long term goals, and to do so, they need to align the firm to its environment. The environment is the general place of demand from customers etc.

This is easier said than done. Part of why it is so difficult is due to rivals/competitorts.

In order to be successful, a firm needs to have a competitive advantage on its rivals. This is the core issue of business level strategy.

Whether a firm has competitive advantage or not, depends on the business model.

The business model is the configuraiton of product offering, value chain and resource base. In essence, business model is the wya the firm conducts business.

Generally speaking, the firm must first have a superior value proposition. Then it must be able to create the dream (value chain).
Finally the resources must be there to create it.

PRODUCT OFFERING: core idea is to be selective, dont focus on too many. We need to segment markets, position ourselves, and choose our basis of competition.

VALUE CHAIN: Porter has defined some steps/parts of the value chain.
The value chain is important because it basically determine how difficult it is to imitate it.

RESOURCE BASE: Required to carry out the activities and to produce goods and servieces. It includes everything: fro mthe most tangible (land) to shit like knowledge, capability, attitude.

Given all of this, we must determine the sustainability of the competitive advantage. In general, the question is basically “how easy is it to copy it, imitate it, create substitutes for it, or make it less relevant in any way?”. Also, “is the competitive advantage in danger of the environemtn being dynamic?”.

Then we arrive at the paradox: In our search for a competitive advantage, either forming it or changing it, firms will typically encounter something like this:
“Our key strengths is our current niche in our existing business, but we have threats and opportunities as a result of market dynamics”. What should we do?
Basically, there must be a fit with the environment and the firm. SWOT highlight this by showing internal strneghts and weaknesses against the external opoportunities and threats.

There is a demand for adapting to changing markets. For instance, the move from non-touch mobile phones to touch phones.
At the same time, there is need for firms to leverage exisiting resources. If we are not going to use existing resources, it will be extremely expensive.

The diametrically opposed perspectives are:
- Outside-in
- Inside-out

Outside-in perspective claim that one must always place the greatest emphasis on the market environment. Understand the environement, and then invest in it.
Inside-out perspective will build up an asset base, and then attack environemtns fit for this asset base.

Note that both perspectives recognize the importance of each other’s feats. However, they are differnet in the approach.
Outside-in will develop a style of play, and pull in players that are suitabel for this style of play.
inside-out will develop a set of great players, and fit them to a style of play suitable for their abilities.

The key for the outside-in perspective is to be market driven. Resources come second. The process is to search for customers whose needs you can satisfy better than current players are doing. Then invest, and protect.

The key for the inside-out perspective is to understand the resource base it wants to have. A good starting point is that it should be difficult to imitate.