Lecture 5&6

Strategies for competitive advantage

Methods of strategic development

Costin Ciora - Business Strategy & Analysis

2. Competitive strategy options. Generic
strategies
Porter identified 3 generic strategies through which an
organization could achieve competitive advantage

1. Cost leadership

2. Differentiation

3. Focus

Costin Ciora - Business Strategy & Analysis

 The Aim

Cost
Differentiation Focus
Leadership

• To offer a
•To cut costs of product that
production/ can't be • Position the
•Purchasing/ matched by business in one
service and in rivals and particular niche
turn cut selling charge a in the market
prices premium for
this "difference"

Costin Ciora - Business Strategy & Analysis

 How (examples)

Cost
Differentiation Focus
Leadership
• economies of
scale • find a segment
• branding where the cost
• use of learning • quality & leader or
effects design differentiators
• large • innovation have little or no
production • knowledge presence and
management build business
•runs using here
cheaper labour

Costin Ciora - Business Strategy & Analysis

 Benefits

Cost
Differentiation Focus
Leadership
• high volumes • develops brand
• builds brand loyalty
• creates a loyalty and
barrier to entry repeat purchases • little
competition
• can operate in • higher margins
unattractive • reduction in • often a first
power of step towards the
segments other generic
customers
• win price wars strategies

Costin Ciora - Business Strategy & Analysis

 Threats

Cost
Differentiation Focus
Leadership

• no fallback position if
leadership is lost
• larger rivals may enter
the market
• strong currency
makes imports cheaper
• perform badly in a
recession • low volumes
• often easily copied • if successful, it
in the long run attracts cost leaders
• need to constantly and differentiators
innovate • few barriers to
• needs much higher entry
marketing than cost
leadership

Costin Ciora - Business Strategy & Analysis

 Suitability

Cost
Differentiation Focus
Leadership
Small business
with
Large Innovative entrepreneurial
organizations companies with flair, strong
with economies large marketing market
of scale budgets knowledge and
a risk taking
attitude

Costin Ciora - Business Strategy & Analysis

2. Competitive strategy options.
The strategy clock
An alternative way of identifying strategies that
might lead to competitive advantage is to look at
‘market facing’ generic strategies

Costin Ciora - Business Strategy & Analysis

 The strategy clock

Costin Ciora - Business Strategy & Analysis

 The STRATEGY CLOCK
Type Description Example
1 = no frills Commodity-like RyanAir (a very
products and services. successful, no-frills
Very price-sensitive airline)
customers

2 = low price Aim for a low price Dell computers. Good

without sacrificing quality computers at
perceived quality or low prices
benefits

3 = hybrid strategy Achieves IKEA- Cheap furnishings,

differentiation, but also but smart design and
keeps prices down large range of
through high volumes inventories

Costin Ciora - Business Strategy & Analysis

 The STRATEGY CLOCK
Type Description Example
4 = differentiation Offering better British Airways
products and services
at higher selling prices.

5 = focused Offering high perceived Business/first class on

differentiation benefits at high prices full service airlines

6, 7, 8 = failure Ordinary products and -

strategies services being sold at
high prices

Costin Ciora - Business Strategy & Analysis

 Class discussion
Where on the strategy clock should the following
companies or products be placed?

(1) McDonalds

(2) Zara

(3) Apple i-Pods

Costin Ciora - Business Strategy & Analysis

 2. Competitive strategy options
(1) McDonalds
Probably no-frills. Prices are low, products are standardized
and not perceived to be of huge value.

Costin Ciora - Business Strategy & Analysis

 2. Competitive strategy options

(2) Zara
Zara is a Spanish-based international clothing retailing
business. It specializes in the fast production of small runs
of very-up-to date fashions, sold at low prices. Probably a
hybrid approach

Costin Ciora - Business Strategy & Analysis

 2. Competitive strategy options
(3) Apple i-Pods

Very stylish MP3-type players. Relatively expensive

compared to many competitors’ products. Probably a
hybrid strategy

Costin Ciora - Business Strategy & Analysis

3. Further examples of competitive strategies
analysis. Cost efficiency

• Ansoff’s matrix
• Strategy evaluation

Costin Ciora - Business Strategy & Analysis

Ansoff’s matrix

• Ansoff’s matrix is a very useful tool and

can be used in nearly every scenario

• summarizes many of the strategic options

facing organizations

Costin Ciora - Business Strategy & Analysis

 The matrix

Existing New
products Products
• Consolidation,
• Withdrawal
Existing markets • Efficiency gains Product development
• Market
penetration/growth

New Markets Market development Diversification

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 Strategy evaluation
Johnson, Scholes and Whittington argue that for a
strategy to be successful it must satisfy three criteria:

• Suitability – whether the options are adequate responses

to the firm’s assessment of its strategic position

• Acceptability – considers whether the options meet and

are consistent with the firm’s objectives and are acceptable
to the stakeholders

• Feasibility – assesses whether the organisation has the

resources it needs to carry out the strategy

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Strategy evaluation
Suitable:

A company that depends on one supplier for an important

component, decides to take over that supplier.

Unsuitable:

A company with weak marketing abilities decides to expand

abroad.

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Strategy evaluation
Acceptable:

A company where most shareholders are pension funds

decides to expand using finance that does not cause
dividends to be cut.

Unacceptable:

A company with a very strong environment-friendly reputation

decides to use genetically modified crops.

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Strategy evaluation
Feasible:

A company with strong cash balances acquires a competitor

for cash.

Non-feasible:

A company with a manufacturing base in Germany decides

to cut prices radically to match those of a producer based in
a low-cost economy.

Costin Ciora - Business Strategy & Analysis

 Case study
Evaluate this strategy: McCafe to open a café & bookstore

&

Costin Ciora - Business Strategy & Analysis 23

Methods of strategic
development
Methods of strategic development

• Organic growth, acquisitions and alliances

• Portfolio analysis tools

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances
Advantages of acquisitions over organic
growth
• High-speed access to resources – example: acquisition
can provide a powerful brand name that could take
years to establish through internal growth
• Avoids barriers to entry – acquisition may be the only
way to enter a market where the competitive structure
would not admit a new member or the barriers to entry
were too high
• Less reaction from competitors – there is less likelihood
of retaliation because an acquisition does not alter the
capacity of the competitive arena
Costin Ciora - Business Strategy & Analysis
1. Organic growth, acquisitions and
alliances
• It can block a competitor

• It can help restructure the operating environment –

some mergers of car companies were used to reduce
overcapacity

• Asset valuation – if the acquiring company believes the

potential acquisition’s assets are undervalued, it might
undertake an asset-stripping operation

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances
Disadvantages of acquisitions growth

• May be more costly than internal growth because the

owners of the acquired company will have to be paid for
the risk already taken
• There is bound to be a cultural mismatch between the
organisations – a lack of ‘fit’ can be significant in
knowledge-based companies, where the value of the
business resides in individuals
• Differences in managers’ salaries – another example of
cultural mismatch that illustrates how managers are
valued in different countries

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances

Disadvantages of acquisitions growth (cont.)

• Disposal of assets – companies may be forced to

dispose of assets they had before the acquisition
• Risk – of not knowing all there is to know about the
business it seeks to buy
• Reduction in return on capital employed – quite often an
acquisition adds to sales and profit volume without
adding to value creation

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances
Joint venture
• A separate business entity whose shares are owned by
two or more business entities. Assets are formally
integrated and jointly owned

A very useful approach for:

• sharing cost
• sharing risk
• sharing expertise

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances(6/13)

Strategic alliance
• can be defined as a co-operative business activity,
formed by two or more separate organisations for
strategic purposes, that allocates ownership, operational
responsibilities, financial risks, and rewards to each
member, while preserving their separate
identity/autonomy.

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances(7/13)
Franchising

The purchase of the right to exploit a business brand in

return for a capital sum and a share of profits or turnover

• The franchisee pays the franchisor an initial capital sum

and thereafter the franchisee pays the franchisor a
share of profits or royalties
• The franchisor provides marketing, research and
development, advice and support
• The franchisor normally provides the goods for resale
• The franchisor imposes strict rules and control to
protect its brand and reputation
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Costin Ciora - Business Strategy & Analysis
1. Organic growth, acquisitions and
alliances
Licensing

The right to exploit an invention or resource in

return for a share of proceeds. Differs from
franchise because there will be little central
support

Costin Ciora - Business Strategy & Analysis

Group work
Which of licensing, joint venture, strategic alliance
and franchising might be the most suitable for the
following circumstances?

(1) A company has invented a uniquely good ice cream and

wants to set up an international chain of strongly branded
outlets

(2) Oil companies are under political pressure to develop

alternative, renewable energy sources

(3) A beer manufacturer wants to move from their existing

domestic market into international sales
Costin Ciora - Business Strategy & Analysis
1. Organic growth, acquisitions and
alliances

(1) A company has invented a uniquely good ice cream and

wants to set up an international chain of strongly branded
outlets

Solution :

A franchise arrangement would work well here. There is

more than just manufacturing involved – there is the whole
retail offering, and entering into franchise agreements
would be a quick, effective way of expanding.

Costin Ciora - Business Strategy & Analysis

1. Organic growth, acquisitions and
alliances
(2) Oil companies are under political pressure to develop
alternative, renewable energy sources.

Solution:

Unless the oil companies felt that, because of their size,

there was no need for joint research, development,
marketing and lobbying, a strategic alliance of some sort
could be useful. Research costs and findings could be
shared.

Alternatively, the new energy technology could be

developed within a joint venture organization.
Costin Ciora - Business Strategy & Analysis
1. Organic growth, acquisitions and
alliances

(3) A beer manufacturer wants to move from their

existing domestic market into international sales.

Solution: Almost certainly, this company would

expand by licensing local brewing companies to
make and distribute its product.

Costin Ciora - Business Strategy & Analysis

 2. Portfolio analysis tools

The BCG growth share matrix

• The two-by-two matrix classifies businesses, or products

according to the present market share and the future
growth of that market
• Growth is seen as the best measure of market
attractiveness
• Market share is seen to be a good indicator of
competitive strength

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis
 2. Portfolio analysis tools
Balanced portfolio:

• cash cows of sufficient size and/or number that can support

other products in the portfolio
• stars of sufficient size and/or number which will provide
sufficient cash generation when the current cash cows can
no longer do so
• problem children that have reasonable prospects of
becoming future stars
• no dogs or – if there are any – there would need to be good
reasons for retaining them.
Costin Ciora - Business Strategy & Analysis
 2. Portfolio analysis tools

The Ashridge portfolio display (parenting matrix)

• Focuses on the benefits that corporate parents can bring to

business units and whether they are likely to add or destroy
value
• How good is the match between perceived parenting
opportunities and the parent’s skills?
• How good is the match between the CSFs of the business
units and the skills and resources that the parent can bring?

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis
2. Portfolio analysis tools
Heartland business units

• High degree of match and the parent company has the

capabilities and experience to add value by providing the
support required by the business unit

• These businesses should be central to future strategy

Costin Ciora - Business Strategy & Analysis

2. Portfolio analysis tools

Edge of heartland business units

• There is a good fit in some areas where the parent can

bring particular skills that add value to the business unit,
but not in others, where the parent may destroy value

• However, if the parent develops sufficient understanding

of the business to avoid this, then the business may
move into the heartland
Costin Ciora - Business Strategy & Analysis
 2. Portfolio analysis tools
Ballast businesses

• The parent understands the business well but there are

limited opportunities to offer help, sometimes because
the business has been owned for a long time and has no
further support needs.

• These businesses would do better if left alone or indeed

divested

Costin Ciora - Business Strategy & Analysis

2. Portfolio analysis tools
Value trap businesses

• Many parenting opportunities but there is a poor fit with

the critical success factors of the business

• Good potential but in practice because of the lack of fit

with the strategy there is a high possibility of destruction
of value

Costin Ciora - Business Strategy & Analysis

 2. Portfolio analysis tools

Alien businesses

• These are those where there is a complete mismatch.

• These should not remain part of the corporate portfolio

Costin Ciora - Business Strategy & Analysis

 Case study
Apple – portfolio analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis
 References

• ACCA P3 – Business Analysis, Kaplan Publishing, 2012

• Vaughan Evans – Key strategy tools, Pearson Publishing, 2013

• Martin Reeves, Knut Haanaes, Janmejaya Sinha - Your strategy

needs a strategy. How to Choose and Execute the Right
Approach. Harvard Business Review Press, 2015

Costin Ciora - Business Strategy & Analysis

Thank you for your attention

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