The content of strategy - business level and positioning Flashcards
A strategic business unit (SBU) supplies goods or services for a…
…distinct domain of activity
Within large organisations, SBUs:
- Decentralise initiative to smaller units
- Allow the units’ business strategies to be varied according to the different needs
- Encourage accountability
SBU business strategy can be divided into:
- Generic strategies
2. Interactive strategies
Porter’s generic strategies are developed across two dimensions:
- Competitive advantage
2. Competitive scope
The generic strategies are:
- Cost Leadership
- Differentiation
- Focused - low cost
- Focused - differentiation
Cost drivers:
- Input costs
- Economies of scale
- Experience
- Product/process design - choice between cost of components and degree of customer service
Economies independent of scale provide most durable basis for cost leadership:
- Access to raw materials - backward integration
- Access to product or process technology - temporary cost advantages that can be sustained by capitalising on learning effects
- Access to distribution channels - forward integration
(Murray, 1988)
Economies of scale may be a result of:
- Input/output relationships
- Specialisation
- Indivisibility i.e. large companies incur lower advertising costs per unit
Experience (economies of learning) may result from:
- Gains in labour productivity - through the learning curve employee spend less time making mistakes
- More efficient design of equipment - experience shows what works best so process can be standardised and thus improves efficiency
The “Law of Experience” states that the unit cost value added to a standard product declined by…each time cumulative output doubled.
…a constant % (typically 20-30%)…
Product/process design can lower costs by:
- Reengineering business processes
2. Standardising design and components
Cost leaders have two options:
- Parity - equivalence in features values by customers allows same prices
- Proximity - closeness in terms of features met with either slightly higher or lower prices
VCA can be used to assess cost leader strategies by showing:
- The relative importance of each activity with respect to total cost
- The cost drivers and comparative efficiency with which the SBU performs each activity
- How costs in one activity influence costs in another
Differentiation require clarity about key factors:
- The strategic customer - on whose needs is the differentiation based
- Key competitors - easy to fail to see who can also compete in their particular niche
- Key drivers of uniqueness
Differentiation viability is dependent on:
- Customers’ attachment of importance to product attributes other than price
- Industry maturity
- The costs customers incur of inconvenience, uncertainty and potential unpleasantness - if these are low compared to product cost then differentiation is viable
- Product quality and reliability - known to the customer as the industry matures (Porter, 1985)
(Murray, 1988)
Differentiation comes at a cost, requiring additional investment in…
…R&D, branding or staff quality.
VCA and differentiation
1.
The focuser achieves… by dedicating itself to…
…CA…serving its target segments better than others (which are trying to cover a wide range of segments).
Successful focus strategies depend on at least on of the three factors:
- Distinct segment needs
- Distinct segment value chains
- Viable segment economies - segments may become too small to economically serve as demand changes
What does Porter mean by the phrase ‘stuck in the middle’?
If managers pursue multiple strategies they risk not performing adequately in any. Thus they should stick rigorously to one.
Though Porter makes the exception where:
- Organisational separation - separate SBUs
2. Technical and managerial innovation - allow radical improvements in both cost and quality
Strategies should be continuously… to create and ever-improving fit between…
…defended and reinvented… competencies and customers.
Bowman’s strategy clock dimensions are:
x - Price
y - Perceived value to customer
The points on the clock are:
- Low price
- Hybrid
- Differentiation
- Focused differentiation
(5. Risky high margins) - Monopoly
The purpose of the clock is to explore options for… in order to get the most…
…strategic positioning…competitive position in the market.
Movement around the clock can be influenced by:
- Product life cycle
- Threats from competitors
- Changes in the dynamic market
Strategic lock-in is where users… without switching costs.
…become dependent on a supper and are unable to use another supplier…
Strategic lock-in can be achieved by:
- Controlling complementary products and services
- Creating a proprietary industry standard
- First mover dominance
Why does Murray (1988) propose that the simultaneous adoption of cost leadership and product differentiation strategies is not precluded?
The exogenous conditions for a cost leadership strategy stem from industry’s structural characteristics, and the preconditions for product differentiation stem from customer tastes. These conditions are independent.
Peters and Austin (1985) propose what argument that challenges Porter’s ‘stuck in the middle’ concept?
They argue that there is “no such thing as a commodity”, meaning that customers in any market will base purchases on attributes other than price.
What relationship do Phillips et al. (1985) propose that disproves Porters (1985) arguments that a CL that competes against a PD but also be a PD?
They found a negative relationship between product quality, through a positive association with relative market share, and relative direct costs.
The structural conflict between functional areas may result what?
Different value orientations.
The application of conflict resolution techniques may minimise said conflict to a point that permits firms to…
…pursue CL and PD strategies simultaneously.
Characteristics of a red ocean:
- Industries in existence today
- Boundaries defined and accepted
- Overcrowding and shrinking profits and growth
- Products/ services commoditised
- Price wars - similar brands and customers price sensitive
(K&M, 2007)
Characteristics of a blue ocean:
- Industries not in existence
- Boundaries can be reconstructed - reconstructionist view
- Irrelevant competition in uncontested market space
- Invest in and capture new demand
- High profits and growth
(K&M, 2007)
K&M suggest… which sees organisations favour red oceans due to…
…‘The Paradox of Strategy’… the military nature of strategy. (confront and eliminate)
Blue oceans are not about… innovation.
Technological
Blue oceans are generally created within… by…
red oceans… incumbents (though can be created by new entrants).
Companies and industries should not be used as benchmarks (unit of analysis) since…
no company or industry in consistency excellent.
K&M
A more appropriate unit of analysis is…
the strategic move - the set of managerial actions and decisions involved in making a major market-creating business offering.
Blue ocean barriers to imitation:
- Immediately attract a large volume of customers, generate economies of scale, putting would-be imitators at cost disadvantage
- Would require a change to the whole system of activities
- Leap in value earned brand buzz and following
- Imitation can conflict with existing brand image
Game theory encourages and organisation to…for its own strategy.
consider competitors’ likely moves and the implication of these moves…
