L18 - Business strategy and models

Question 1

What is a strategic business unit?

Answer 1

An SBU supplies goods or service for a distinct domain of activity

Question 2

What is competitive strategy and competitive advantage?

Answer 2

Competitive strategy is concerned with how an SBU achieves competitive advantage in its domain of activity. Competitive advantage is about how an SBU creates value for its user both greater than the costs of supplying them and superior to that of rival SBUs.

Question 3

What are the 3 generic strategies?

Answer 3

Cost leadership, differentiation, focus (differentiation and cost)

Question 4

What are 5 key cost drivers for the cost-leadership strategy?

Answer 4

Input costs

Economies of scale, especially important when there are high fixed costs, cost-leaders should reach output level equivalent to minimum efficient scale. Might be achieved through time as well – a moving target

Experience, the experience curve implies that the
cumulative experience gained by an organisation with each unit of output leads to reductions in unit costs. Two types of efficiencies: labour productivity (learning curve) and more efficient designs or equipment.

Product/process design, efficiency can be ‘designed in’, important to recognise whole-life costs

Capacity utilization – ratio of fixed to variable costs, cost of installing and closing capacity

Question 5

Which 3 implications does the experience curve have for business strategy?

Answer 5

(1) entry timing important – earlier entrants will have more experience than later entrants

(2) important to gain and hold market share, companies with higher market share have more ‘cumulative experience’ simply because of their
greater volumes.

(3) although the gains from experience are typically greatest at the start, improvements normally continue over time. Opportunities for cost reduction are theoretically endless

Question 6

What are Porter’s two requirements for cost-based strategies?

Answer 6

(1) needs to be the lowest cost, having the second lowest implies a competitive disadvantage against somebody
(2) low cost should not be pursued in total disregard for quality, has to be able to meet market standards in order to sell product

Two options here:

(a) Parity (equivalence): with competitors in product or service features value by customers, allows cost-leader to charge the same prices as the average competitor while translating its cost advantage wholly into extra profit
(b) Proximity (close to): competitors in terms of features. Customers may only require small cuts in prices to compensate for the slightly lower quality.

Question 7

What is differentiation (according to Porter)?

Answer 7

Uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Many different ways to differentiate, can be mapped via strategy canvas.

Question 8

Which two factors do we need to consider when implementing a differentiation strategy?

Answer 8

(1) The strategic customer – on whose needs the differentiation is based
(2) Key competitors – are they too close to what we are doing?

Question 9

What is a focus strategy?

Answer 9

Based on competitive scope, targets a narrow segment or domain of activity and tailors its products or service to the needs of that specific segment to the exclusion of others. Cost or differentiation.

Question 10

How are cost focus strategies able to seek out the weak spots of broad cost-leaders and differentiators?

Answer 10

(1) Cost focusers identify areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs
(2) Differentiation focusers look for specific needs that broader differentiators do not serve so well. Focus on one particular need helps to build specialist knowledge and technology, increases commitment to service and can improve brand recognition and customer loyalty.

Question 11

Which 3 factors do successful focus strategies depend on?

Answer 11

(1) Distinct segment needs – if segment distinctiveness erodes, it becomes harder to defend the segment against broader competitors
(2) Distinct segment value chains – focus strategies are strengthened if they have distinctive value chains that will be difficult or costly for rivals to construct
(3) Viable segment economics – segments can easily become too small to serve economically as demand or supply conditions change

Question 12

What is the strategy clock?

Answer 12

Another way of approaching the generic strategies, gives more scope for hybrid strategies. Has 2 distinctive features: focused on prices to customers rather than costs to the organisation (can thus be easier to use in comparing competitors). The circular design of the clock allows for more continuous choices than Porter. Organisations often travel around the clock as they adjust over time. Zone 4 are unfeasible strategies (low benefits and high prices)

Question 13

What are the 3 feasible strategies in the strategy clock?

Answer 13

Zone 1 – Differentiation: Close to the 12 o’clock
position is a strategy of differentiation without price premium . Differentiation without
a price premium combines high perceived benefits and moderate prices, typically used to gain market share. If high benefits also entail relatively high costs, this moderate pricing strategy would only be sustainable in the short term. Once increased market share has been achieved, it might be logical to move to differentiation with price premium closer to a 1 or 2 o’clock position. Movement all the way towards the 2 o’clock position is likely to involve a focus strategy, in Michael Porter’s terms.

Zone 2 – Low price: different combinations of low prices and perceived value. Close to the 9 o’clock position, a standard low-price strategy would gain
market share, by combining low prices with reasonable value (at parity with competitors). To be sustainable, this strategy has to be underpinned by some sort of cost advantage. A variation on the
standard low-price strategy is the no-frills strategy, close to the 7 o’clock position. No-frills strategies involve both low benefits and low prices,

Zone 3 – Hybrid strategy: involve both lower prices than differentiation strategies and higher benefits than low-price strategies. Often used to make aggressive bids for increased market share. Can be an effective way of entering a new market. Even in the case of innovations with high benefits, it can make sense to price low initially in order to gain experience curve efficiencies or lock-in through network effects.

Question 14

How does D’Aveni depict competitor interactions?

Answer 14

D’Aveni depicts competitor interactions in terms of movements against the variables of price (the vertical axis) and perceived quality (the horizontal axis)

Question 15

What is hypercompetition?

Answer 15

Fast moving markets characterised by disequilibrium and change, competitor moves independent. Product changes so rapid generic strategies are not credible.

Question 16

Why and how might value lines move?

Answer 16

If e.g. differentiator makes substantial quality improvements while holding prices

This improvement in quality shifts customer expectations of quality right across the market - reflected by the new, second value line

With the second value line, even the cost-leader (L) may have to make some improvement to quality or accept a small price cut.

But the greatest threat is for the mid-point competitor, M. To catch up with the second value line, M must respond either by making a substantial improvement in quality while holding prices, or by slashing prices, or by some combination of the two.

However, mid-point competitor M also has the option of an aggressive counter-attack.

Given the necessary capabilities, M might choose to push the value line still further outwards,
wrong-footing differentiator D by creating a third value line that is even more demanding in
terms of the price-perceived quality trade-off

Question 17

What are the benefits of a cooperative strategy (illustrate in terms of the 5 forces)?

Answer 17

Suppliers: cooperation between rivals will increase purchasing power against suppliers. May enable the rivals to standardise requirements, allowing suppliers to make cost reductions to all parties’ benefit

Buyers: cooperation will increase their power as suppliers to the buyers – harder for buyers to shop around. Can help maintain or raise prices – might attract penalties from competition regulators (collusion). On the other hand, buyers may benefit if their inputs are standardised, again enabling reductions in costs that all can share

Rivals: if the cooperating organisations are getting benefits (with regard to supplier and buyers), competitors without such agreements will have competitive disadvantage

Entrants: potential entrants will probably lack the advantage of the combined rivals. The cooperating rivals can coordinate retaliation strategies against entrants

Substitutes: the improved costs or efficiencies that come from cooperation between rivals A and B reduce the incentives for buyers to look to substitutes.

Question 18

What is game theory?

Answer 18

Game theory encourages an organisation to consider competitors’ likely moves and implications of these moves for its own strategy. Particularly relevant

Question 19

Which 2 kinds of interactions are game theorists in particular alert to?

Answer 19

Competitor response to strategic moves and strategic signals or messages their moves might convey to competitors.

Question 20

When is game theory particularly relevant?

Answer 20

Where competitors are interdependent. Choose strategy in terms of what competitors are likely to do. Choose competitive moves on the basis of understanding the likely responses of competitors.

Question 21

When does the prisoner’s dilemma arise?

Answer 21

Where there are 2 major players competing head-to-head against each other in a situation of tight interdependence.

Question 22

A good business model… ?

Answer 22

“…describes a value proposition for customers and other participants, an arrangement of activities that produces this value, and associated revenue and cost structures”

Question 23

What is the connection between business models and strategy?

Answer 23

Business Model refers to the logic of the firm, the way it operates and how it creates value for its stakeholders

Strategy refers to the choice of business model through which the firm will compete in the marketplace;

“Every organization has some business model” and “not every organization has a strategy”

In other words strategy reflects what a company aims to become while business models describe what a company really is at a given time

Question 24

What are the 3 components of business models?

Answer 24

(1) Value creation: a proposition that addresses a specific customer segment’s needs and problems and those of other participants. (2) Value configuration of the resources and activities that produces this value (activities in the value chain that underline this). (3) Value capture explains revenue streams and cost structures that allow the organisation and other stakeholders to gain a share of the total value generated.

Question 25

What are 3 typical business model patterns?

Answer 25

Razor and blade: primary focus on value capture, more of a revenue model. Gilette’s classic model of selling razors at low price and compatible replacement blades at high price

Freemium: online businesses. How a basic version of a service or product is offered for free and then eventually convince customers to buy premium services. Another object: attract a larger volume of customers – network effects

Multi-sided platforms: brings together two or more distinct but interdependent groups of customers on one platform. Interdependent as the platform is of value to each group of customers only if the other group of customers is also present. E.g. Google relies on consumer searcher and advertisers to sponsor links