Chapter 6 - Competitive advantage and strategic choice Flashcards
What does Porter’s generic strategies say?
Organisations need to adopt an appropriate generic strategy to achieve a competitive advantage, based on lowest cost or to differentiate. Failure to do neither results in being ‘stuck in the middle’
What are Porter’s generic strategies?
Based on axes of competitive scope (broad or narrow) and competitive basis (cost driven or differentiation driven)
- Cost leadership (broad, cost) - lowest-cost producer in industry
- Differentiation (broad, differentiation) - exploiting product which industry believes is unique
- Cost focus (narrow, cost) - restricts to part of market at lower cost
- Differentiation focus (narrow, differentiation) - differentiated product to part of market.
How can cost leadership be achieved?
- Economies of scale
- Latest technology
- Exploit learning curve effect
- Improve productivity
- Minimise overhead
How can differentiation be achieved?
- Build brand image
- Give product special features
- Exploit other activities in value chain e.g. quality of after sales
- Innovation
- Complementary products
What are the seven Ps for achieving a sustainable competitive advantage?
- Product
- Place - how it is delivered - online?
- Promotion - telling the customer about product
- Price
- People - interaction between customers and staff
- Process - fast and efficient
- Physical evidence - provide evidence of ownership
What is lock-in?
When an organisation’s product becomes the industry standard so competitors make their products compatible e.g. Apple
What does the BCG matrix do?
Categorises strategic business units in terms of:
- Market growth rate
- Relative market share
What are the components of the BCG matrix?
- Stars (high growth, high share) - good future returns, invest in them to become cash cows
- Question marks (high growth, low share) - assess potential to see if can become star
- Cash cow (low growth, high share) - doesn’t need much investment, cash used to invest in stars or return to shareholders
- Dog (low growth, low share) - tie up funds, poor return
What does the public sector portfolio matrix do?
Classifies activities of public sector bodies based on the below axes:
- Ability to serve effectively (resources available)
- Public or political need (popularity)
What are the components of the public sector portfolio matrix?
- Public sector star (high need, high ability) - doing well and should not change
- Political hot box (high need, low ability) - public wants, but no resources
- Golden fleece (low need, high ability) - service done well but low demand - cost cuts here
- Back drawer issue (low need, low ability) - low priority, if perceived essential increase support and move to political hot box
What does Ansoff’s matrix do?
Decides the strategy for growth based on a combination of activities in new and current markets, with existing and new products
What are the components of Ansoff’s matrix?
- Market penetration (existing market, existing product) - increase market share of existing products through promotion - low risk
- Product development (existing market, new product) - riskier as needs new investment
- Market development (new market, existing product) - exporting or selling via new distribution channels - low risk
- Diversification (new market, new product) - growth potential but risky
What are the advantages of diversification?
- Economies of scope
- Corporate management skills may be extendible e.g. Virgin
- Increase market power through cross-subsidisation
- Lower risk
Define related diversification
Strategy development within the value network of the organisation
Define horizontal integration
Developing into activities that are competitive with, or complementary to an organisation
Define vertical integration
When an organisation expands backwards or forwards within value network and so becomes its own supplier or distributor
What are the advantages of vertical integration?
- Secure supply of materials
- Stronger relationship with final consumer
- Creates barriers to entry
What are the disadvantages of vertical integration?
- Overconcentration - increases dependence on customer demand
- Fails to benefit from economies of scale in industry they diversify into e.g. in publishing industry printing work is subcontracted to specialists
What is conglomerate diversification?
Development of products or services beyond the current value network
What are the advantages of conglomerate diversification?
- Risk spreading
- Improved profit opportunities
- Escape declining market
- Use image and reputation
What are the disadvantages of conglomerate diversification?
- Dilution of shareholder earnings if industry has high P/E ratio
- Lack of common identity and purpose
- Failure in one business may drag rest
- Lack of experience in area
What are the advantages of organic growth?
- Learning - gives understanding
- Innovation
- Planned and offers less disruption
- Culture maintained
What are the disadvantages of organic growth?
- Takes a long time - learning curve
- Barriers to entry
- Have to acquire resources independently
- Too slow for dynamics of market
What are the advantages of business combinations?
- Buy in a new product range
- Buy a market presence
- Buy in intellectual property and skills
- Greater production capacity
- Safeguard future raw material supplies
What are the disadvantages of business combinations?
- Cost
- Customers may resent
- Incompatibility
- Asymmetric information
- Driven by personal goals of managers
- Poor success record
What is external partnering?
Arrangements with third parties with a view to achieve a common purpose e.g. joint venture, franchising
Define a joint venture
When two or more entities join forces to create a separate entity which has a purpose which is distinct from existing operations
What are the advantages of franchising?
- Reduce capital requirements
- Reduces managerial resources required
- Return on promotional expenditure through speed of growth
- Lower risk
What are the disadvantages of franchising?
- Profits are shared
- Finding competent candidates
- Control over franchisees
- Risk to reputation
- Sharing information
Define strategic alliance
Sharing of resources and activities to pursue a given strategy
What are the reasons for entering a strategic alliance?
- Share development costs of technology
- Regulatory environment prohibits takeovers
- Complementary markets
- Learning
- Testing core competency in different conditions
How can strategy’s be evaluated?
SAF
- Suitability - strategic logic - fit in with strategic position
- Acceptability - to stakeholders, what is the impact on them and what do they want?
- Feasibility - do organisation have strategic capability and resources?
