U4 What Strategic Options Are Available to the Strategic Business Unit (SBU)? Flashcards
Case Study
What Strategic Options Does the SBU Have?
A strategic business unit is a?
unit that provides specific products or services in a specific business or market.
Small companies often consist of?
one strategic business unit, whereas larger corporations have many SBUs.
Strategic business units are defined by?
having similar customers or competitors or by having similar strategic capabilities.
An example of a SBU is ?
the medical division of a large corporation which serves hospitals.
SBUs make decisions on?
product portfolios and on the markets they serve.
They can make decisions about which strategy to use in their markets in order to?
meet corporate goals.
They are the experts in?/
their markets and they know their customers.
SBUs are evaluated on ?
the sales and profits they generate and are responsible for the results of their business.
The strategies that the SBUs pursue are?
either generic (i.e. strategies regularly employed by organizations) or interactive (i.e. the organization’s direct response to changes in the market or the competitive environment).
The interactive strategy influences the market itself and necessitates a high level of flexibility by the organization to?
react quickly to these changes.
The strategy serves to make marketing decisions for?
the individual SBUs of an organization.
Generic Strategies
Michael Porter (1996) :
coined the term ‘generic strategy’ to describe those strategies most often deployed by organizations.
He systemized possible strategies that lead to a competitive advantage in the market.
Porter classifies the defined strategies according to the strategic goals that organizations set for themselves and by the strategic advantage the company pursues in order to reach its goal.
From Porter’s point of view, there are three main strategies:
-cost leadership (being cheaper)
-differentiation (being different)
-focus (being better)
Cost\/price leadership
In order to pursue cost leadership, companies have to produce the product or service at?
the lowest costs in the market so as to provide the lowest prices to the customers.
Cost leadership can be reached by:
==Low purchasing costs: the more a company purchases from a supplier, the more pressure they can exert on the supplier and the purchase prices.
==Economies of scale: the more a product or service is produced by a company, the more the product or service improves. This is called economies of scale as failure rates and costs go down.
==Experience: the more experience an organization gains, the better it gets at anticipating market fluctuations and reacting to them. By analyzing accumulated experience, companies can look to optimize internal processes and save costs.
Case study: ALDI
One example of a successful implementation of the cost\/price leadership strategy is the retailer ALDI.
ALDI pursues several principles, the main being to guarantee low prices to its customers. To drive down purchasing costs, the company has an international purchasing department, negotiates low transportation costs, and offers a limited product range in its stores.
Further cost savings are achieved through?
very simple,
sparse layout of their stores and their cheap location at the periphery of cities and towns, where the rent is affordable.
ALDI consistently strives to?
optimize and simplify internal processes.
It has neither a ————————nor a ———unit. Instead of forecasting, ALDI runs its business on ———————————–.
controlling
staff
current data
Differentiation
A differentiation strategy forces organizations to?
offer something unique.
This unique product or service has to be of such value to?
the customers that they are willing to pay a higher price for the product or service.
One advantage of this strategy is that companies create a unique market position, which allows?
them to operate with high profit margins due to higher prices charged.
Disadvantages are the relatively high investment costs to build ?
an image and brand in the market and the risk that others will copy the strategy and the company will lose its unique position.
Case study: Southwest Airlines
Southwest Airlines is one of the most successful airlines in the US. Southwest excels due to ?
its service attitude and punctuality.
Even though the airplanes are equipped with just one seating class,
no seating reservations are possible, and only snacks are served during flights, the service is well received by the customers as all Southwest staff are trained to be extremely friendly.
Punctuality is excellent as the turnaround time for the airplanes was drastically?’
reduced via a major company initiative.
This strategy has rewarded Southwest Airlines with a ——————————— sheet. It has created a unique position in the crowded ——————————– and differentiated itself from the competition.
positive balance
US airline market
The focus strategy
Companies pursuing a focus strategy direct their attention towards?
a small market segment or niche and offer a product or service that is designed specifically for this small group of customers.
The position in a small market niche protects?
the organization from the competition.
It can concentrate fully on its customers and charge ?
higher prices as it offers high quality products and services.
The disadvantages of this strategy are:
that growth may be limited and changes in the market will impact sales of these high-end products or services.
Bhutan is an example of?
a focus strategy. In 2008, the parliament decided to increase the tariff to $250 per visitor.
The decision is in line with?
the mission and structure of the country.
It also reflects the unique position the country holds in the —————–industry.
tourism
As mentioned earlier, this position also involves some risks;
if there is a worldwide recession,
the number of travellers to Bhutan could drop drastically given the high costs of visiting the country.
Generic strategies can be ————————.
combined
Southwest Airlines does not just excel by reason of its service and punctuality but also?
by offering low prices.
Bhutan also combines strategies by setting itself?
apart from other tourist destinations, offering superior service and focusing on a very specific market segment.
Different SBUs in a corporation can pursue different generic strategies, depending on?
their cost structure and the markets they serve.
Lufthansa has a high quality image and is positioned in?
the high-end segment of air travel.
Nevertheless, the company decided to enter the low cost air travel market when?
buying the charter airline Germanwings.
Moreover, technological developments influence?
the cost efficiency of companies and the quality of the products and services offered.
This could change the generic strategy of an organization.
Interactive Strategies
Interactive strategies require an organization to?
react to the strategies pursued by its competitors.
Interactive strategies can be observed in?
highly competitive and volatile markets.
In these markets, companies compete in two areas—namely,?
price and quality.
If a company reduces its prices for?
a specific product, all the competitors follow suit.
The same holds true for product quality or new functions. If, for example,
one company integrates a camera into its mobile phones, other mobile phone manufacturers are forced to do the same in order to compete in this market.
Hypercompetition
A business environment with fierce competition is called ?
a hypercompetitive environment.
In a hypercompetitive environment, competitive advantages are ?
created and destroyed at a fast pace.
Companies that operate in a hypercompetitive market cannot defend their competitive edge for?
long and are forced to compete on price and quality.
To be successful in this market environment, organizations have to be?
flexible, react fast, and be prepared to take risks.
Even outstanding organizations may fail if ?
they hold onto success strategies of the past instead of looking to the future.
A prime example of a hypercompetitive market is?
the consumer electronics market.
The following excerpt describes the battle between the two giants, Samsung and Apple.
Battle of the Tech Giants
Mobile platforms are hitting critical mass across smartphones and tablets. Globally in the fourth quarter (Q4) of 2010, smartphone and tablet shipments exceeded desktop and PC shipments.
In 2011, it is estimated that approximately 480 million smartphones and tablets were shipped as opposed to approximately 380 million desktop and PCs. As the mobility trend heats up, we see the mobile tech giants battle it out to try and gain more market share in the industry.
With the Samsung Galaxy Nexus banned in the United States, consumers are losing out as it hampers competition and innovation. The patent wars between Apple and Samsung have gone on for a while now and have assumed ridiculous proportions.
For Apple, this is a fight for survival and profitability since Samsung is quite capable of flooding the worldwide market with quality alternatives to the iPad, that too at varying price points—something Apple has yet to do.
Samsung has already done this quite successfully if you take a look at the sales of its Galaxy SII smartphone and Galaxy tablet devices.
This is expected to continue for some time if there is no intervention from government or regulatory authorities [such as the recent verdict against Samsung].
What this brings into question is the legality of seemingly generic patents that have been filed by all manufacturers over the years, and not just Apple, something that does not look like it will get settled soon.
Source: Frost & Sullivan 2012.
Strategic Alliances
In order to reduce the number of competitors in an environment of hypercompetition, companies can form strategic alliances, which are?
a type of partnership between companies. Alliances allow companies to bring together competencies.
The primary goal of an alliance is to combine the strengths of the organizations to develop?
a competitive advantage in existing markets or in new markets.
Successful strategic alliances require an analysis of:
===the fundamental fit of the organizations (i.e. forming the partnership results in a competitive advantage)
===the strategic fit (i.e. the strategies and goals of both partners are similar or identical)
—the cultural fit (i.e. the corporate cultures of the two organizations can be united without much friction)
Case Study: Star Alliance
In 1997, the first network of international airlines was formed under the name ————————–. Due to national restrictions, it was not permitted for foreign airlines to serve ————————————- in a country.
Star Alliance
domestic routes
The Star Alliance allowed passengers to book?
connecting flights in foreign countries through the domestic airline.
The larger the Star Alliance became, the more positive the effects for ?
the network and its passengers.
This horizontal alliance of airlines is ?
today the largest network of airlines worldwide.
The Star Alliance is a so-called ———————————————. Vertical alliances can be formed in two directions, either —————————————————–from the perspective of the organization; upstream means with a supplier, ————————–means with a distributor.
horizontal alliance
upstream or downstream
downstream
An example of an upstream alliance is?
the cooperation of a pharmaceutical company in the area of research and development.
The pharmaceutical organization partners with a research institute to?
conduct research for specific projects.
A downstream alliance would be an internet shop cooperating with PayPal as?
a form of payment method offered on their internet platform.
PayPal
PayPal is a digital payment system that allows online shoppers to pay through an online PayPal account.
In order to make decisions on the product level, companies can analyze their products according to?
the model of the product life cycle (PLC).
The product life cycle model presumes that?
products follow a similar cycle to living beings.
The cycle
starts with the development of the product,
then it watches the product grow and mature,
and finally it ends with its decline.
The product life cycle is an important marketing concept and provides information on?
the competitive dynamics of a product.
It helps make decisions on?
prices, the product portfolio, markets, technology, capacity, and marketing and promotional measures.
Let us look at the phases in the product life cycle:
Figure 5: Product Life Cycle
Figure 5: Product Life Cycle
Each phase has ?
opportunities and threats regarding the marketing strategy.
Even though few products actually follow the exact product life cycle, the model is used for?
forecasting sales and formulating strategies.
Development Phase
The product or service is born and enters the market. This phase can take a long time and often shows low growth rates. The high marketing costs to ————————————————————————— the product eat up the profit in this phase.
launch, establish, and distribute
There are usually few competitors in the market, especially when the product is new to the world. In this phase, the organization needs?
a well-defined marketing plan that takes into consideration all the parts of the marketing mix (product, price, promotion, and distribution) and which clearly positions the product in the market.
Growth Phase
A successfully introduced product moves into?
the growth phase.
Sales increase in line with the demand for the product. The number of competitors also?
increases as the market for the product or service grows.
The increase in sales and production of the product or service reduces ?
the production costs.
The company benefits from these economies of ?
scale and profits rise.
Companies try to prolong this phase as it ——————————–. To keep the product interesting, companies need to increase marketing and promotional ——————————-.
promises profits
expenditures
Maturity Phase
The product or service is established and accepted in the market. The growth curve flattens and the climax of —————- is reached.
profitability
Competition becomes?
fierce and products are less differentiated. Companies must therefore fight for market share.
Organizations try to extend this phase by introducing improvements or by introducing new marketing measures such as?
relaunches. The relaunch is a re-introduction of the product, which might be modified.
A relaunch helps stabilize the slow growth in this ————————.
phase
Further reasons for a product relaunch may be that customer preferences change or the company has to?
adjust the product or service to meet new regional demands if the product is sold internationally.
Developing new markets or new market segments for?
the product prolong the duration of this phase.
Decline Phase
Sales decline during this phase as the product or service is considered outdated or?
customer preferences have changed.
In this phase it is important for companies to monitor and control sales, costs, and profit margins in order to?
be able to make strategic product decisions.
The company has several options in this phase. It can take the product or service off the market or it can drive down?
the costs of production to increase the profit margin and keep the product in the market.
If a company can maintain this strategy long enough, it might see rival products leave the market until their product is?
the only one available to a small segment of loyal buyers.
A third strategy is for companies to just introduce a product that?
succeeds the old one once it is taken off the market.
The strategic business units (SBUs) make decisions regarding ?
products and markets.
The strategies for specific businesses may be categorized into —————————– which most organizations pursue, and ——————————which react to competitive market moves.
generic strategies
interactive strategies
Generic strategies are?
price\/cost leadership, differentiation, and the focus strategy.
Companies that use an interactive strategy adjust their strategies in line with?
competitive action.
Interactive strategies are?
mostly seen in highly competitive and volatile markets, which force competitors to compete on price and quality.
To be successful in these markets, companies have to be ?
flexible, fast, and risk takers.
In hypercompetitive markets, strategic alliances offer an opportunity to?
reduce the number of competitors.
These partnerships can be formed between companies at the same economic stage, which is called?
a horizontal alliance, or with suppliers or buyers, which is called a vertical alliance.
According to the product life cycle model, products follow a similar life cycle as?
living beings. An analysis of the stages in the product life cycle helps companies make strategic and marketing decisions.
The phases of the product life cycle for products and services are divided into?
the developing, growth, maturity, and decline stages.
