Week 5 Flashcards
What are the different types of business strategy?
Generic strategies
-Cost, Differentiation, focus & hybrid
Interactive strategies (competiton) - Cooperation, hypercompetitive, game theory
What is an Stragetic Business Unit? (SUB)
Suppiers goods and services for a distinct domain of activity.
Features include: - Each SBU responsible for thier own strategy and profit performance. -Small businesses just have one SBU -called "divisions" or "profit centers" -SBU’s can be identified by: Market-based criteria Capabilities – based criteria
What are the three effects that SBU’s have on large organisations?
- Increased accountability
- allows them to vary their business strategies based on the market
- they decentralise initiative to smaller units.
what is a competitive strategy?
How an SBU achieves compatitive advanatge in its activity domain.
How can a company achieve low-cost leadership.
- Cost focused strategy.
- Economies of scale
- experience
- inputs costs
- product design
- Parity (competitive parity)
- proximity
What are some of the discussions about low cost leadership?
- having the second cost structre leads to competitive disadvantage.
- Cost above quality/
What are the pros and cons of Low cost leadership?
Effective when:
- standardised procuts
- homogenous prodcts
- buyers use the products in the same way
- low switching costs
- price competition is vigirious
cons
- price cut too large
- not sustaibable
- price is the only tool used.
How can you differentiate a product?
- Lower the buyers’ costs of using the product
- Raise the performance of the product
- Increase intangible benefits from a product
- Deliver value through the value chain
Pros and cons of differentiation.
Pros (Effecitve when)
- Buyers and user needs are diverse
- Few competitors following similar approach
- Dynamic environment
cons
- Differentiation does not benefit the buyer
- Over-differentiation
- Trying to charge too high a price for differences
what are the three factors that focus stratgies depend on?
- Distinct segment needs
- Distinct segment value chains
- Viable segment economies
Pros and cons of focus strategy?
Pros (Effective)
- Target market offers growth potential
- Few rivals
- An industry has many segments
- Competitors do not have the specialised needs for the market
Risks of focused strategy
- Low entry barriers
- Niche market may not be long lived
- Segment is very attractive
What does Porter say about the generic strategies?
- Choose one and stick to it.
- Danger to not choose on - stuck in the middle
- Pure generic strategies = controversial - all strategies can be combines.
- Organisational seperation - speperate SBU pursue seperate strategies
- Technological and managent innovation - improve both cost and quality
- Competitive failures - competitors also stuck in the middle = less competitive pressure to remove competitve disadvantage.
What is the strategy clock?
Focus on three zones of feasible strategies (cost, differentiation, hybrid)
focus and costs - incremental adjustments provide a more dynamic view on strategy
- gives more scope for hybrid strategies
The strategy clock
12 O’ clock - differentiation without premium - moderate prices - used to gain market share
1 O’ Clock - differentiation with premium - high precieved benefits at a price
9 O’Clock - Low price strategy (Low price and low precieved value) - Pariy with competitors.
7 O’Clock - Price sensitive market groups - low pice - low quality.
11 O’Clock - Hybrid - (low prices and differentiation strategies.- used to make aggresive bids for increased market space. - effective way of entering a market
- Non competitive strategies- low benefits and high price. - lead to failure unless firm is locked in.
What is a strategic lock in?
is where users become dependent on a supplier and are unable to use another supplier without substantial switching costs.
What is game theory?
- encourages managers to get in the mind of competitors and think forwards and reason backwards.
- “Prisioners Dilema”
- Cooperative rather than aggressive competition
Key principles:
- Detterence
- ensure repetition
- Signalling
What is scope?
Scope is how far the organisation should be diversified in terms of products and markets.
Increase scope through:
- Increase scope engaging in market spaces or new products.
- Verticle integration
- related or unrelated
- Outsourcing
Ansoff matrix - Diversification and value creation
Effeciency gaines from applying existing resouces and capabilities to new markets and products.
- benefit from Economies of scope, and synergies
- gain increased market power from diverse products.
what is Diversification ?
increasing the range of products or markets served by an organisation.
what is unrelated diversification?
expansion into new areas, unrelated to the existing operations of the firm - (aquisition)
what is related diversification?
involves expanding into products or services with relationships to the existing business. (Internal development)
what is market penetration?
increasing the share of the market with the current product range.
-market power over buyers and suppliers, experience curve benefits, economies of scale:
drawbacks:
- price war retaliation from competitors
- legal constrants (too much market power)
what is retrenchment?
withdrawal from marginal activities in order to concentrate on the most valuable segments and products within their existing business.
why are product development expensive?
- New strategic capabilities – involve mastering new processes or technologies that are unfamiliar to the organisation.
- Project management risk – projects are subject to risk of delays and increased costs due to project complexity and changing project specifications over time.
what is market development
offering existing products to new markets.
- Related diversification
- New users, new geographies.
what is conglomerate diversification?
- goes beyond existing markets and products.
- benefits from being part of a larger groups
- increases organisations scope
- helps reduce the cost of finance
- can lead to “conglomerate discount” - beaucracy due to manager costs.
what are some diversification drivers for growth?
1) exploiting economies of scope
2) streching managerial competences
- dominant logic - managerial capabilities accross protfolio of businesses
3) exploiting internal process
4) increasing market power
- mutual foberance - retaliate against competitors
- corss -subside - leveraging profits from other businesses to support aggressive bid to drive competitors out.
What is a synergy?
the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts.
examples of value distroying diversification drivers.
- Spreading risk - accros markets
- Responding to market decline
- Managerial ambition
what is verticle integration?
means entering activities where the organisation is its own supplier or customer.
- Backwards integration = Inputs
- Foward Integration = Outputs.
What are the dangers of verticle integration?
- Level of finance needed
- involve different strategic capabilities
benefits of outsourcing ?
Cost advantage - lower cost of inputs (economies of scale, distinctive competences)
strategic flexibility
- technology change - obselete
- demand uncertainity - excess capacity
distinctive competence - focus of value creating activities.
The risk to intergrate or subcontract rests on which two factors?
- relative strategic capabilities - contactor have the capabilities to do the work?
- risk of opportunism - likely to take advantage of relationship over period of time?
Market relationships fail in controlling subcontractor opportunism where:
- there are few alternatives
- product of service is complex or changing
- investments made in specific assets.
what is parenting advantage?
creating more value than your competitors would with the same business.
examples of value adding activities
- Envisioning
- facilitating synergies
- coaching
- providing central service and businesses
- Intervening
value distroying activities
- Adding management costs
- adding beaucratic complexity
- obscuring financial performance
Explain components of corporate rational
- Portfolio manager - small office. downwards, investing and interving
- Synerger manager - big office. accross, faciliting cooperationg
- Parental developer -big office. downward, providing parental capabilities.
The BCG Matrix
Stars (high growth, high share)- (Nominal dividends, growth investors, low financial risk, high business risk)
Question market (Launch) (High growth, low share) - (Zero dividends, high business risk, low financial risk, venture capitalist)
Cash Cows (High share, low growth) -(high dividends, medium business risk, medium financial risk - retained earnings)
Dogs (decline) - (Zero dividends, low business risk, high financial risk, debt)
What are the Problems with BCG matrix?
- Capital market assumption ( assumes cash cows- no external sources)
- definition vagueness (hard to decide with category)
- unkind to animals
- ignores commercial linkages (SBU)
what is the directional policy GE matrix?
Categorises business units into those with good prospects and those with less good prospects. (looks at attractiveness of the market)
- acknowledges the possibility of a difficult middle ground
- if market is not attractive = Harvest or diverst.
- 9 cells
- faces same criticisms as BCG
what is the parenting matrix?
(Look at the fit)
Introduces parental fit as an important criterion for including business in the portfolio.
Two dimensions:
- Feel - looks at the fit between different BU and critical success factors.
- Benefit - mesures the fit between pareting opportunities and needs of Busines.
what are the four kinds of business’ along dimension of fell and benefit. (Parenting matrix)
Heartland business units - parents have the capabilties, there is an opportunity, should focus on this area (high feel and high benefit)
Ballast business unit - understands- but can do little.
Value trap - high opportunity - no parental capabilities does more harm than good)
Alient business (little opporuntity - not enough parental capabilities - shouls leave)
