BUSINESS LEVEL STRATEGY

Nguyen Hong Van

 RECAP OF PREVIOUS SESSIONS – STRATEGIC CHOICES BASED ON INTERNAL AND EXTERNAL
ANALYSIS
• INTERNAL ANALYSIS → STRENGTHS & WEAKNESSES
• EXTERNAL ANALYSIS → OPPORTUNITIES & THREATS
• SWOT can help focus on future choices and the extent to which an organisation is capable
of supporting these strategies.
• TOWS matrix can be used to identify strategic options that address different combinations
of internal (strengths and weaknesses) and external factors (opportunities and threats).
 STRATEGIC CHOICES FOR AN ORGANISATION

Business-level strategy is Corporate-level strategy is For any of these choices,

concerned with the way a
business seeks to compete
successfully in its particular
market.
concerned with the
overall scope of an
organisation and how
value is added to the
constituent business units.
should they be pursued
independently by organic
development, by acquisitions
or by strategic alliances with
other organisations
BUSINESS STRATEGY AND STRATEGIC BUSINESS UNITS (SBUS)
• A strategic business unit (SBU) supplies goods or services for a distinct
domain of activity.
Purpose of SBUs:
• To decentralise initiative to smaller units within the company so SBUs can
pursue their own distinct strategy.
• To allow large companies to vary their business strategies according to
the different needs of external markets.

Corporate level strategy

(Parent company or HQ)

Business level strategy

(Strategic Business Units)
COMPETITIVE STRATEGY
• Competitive strategy is a combination of different decisions
and actions to gain the competitive advantage of the
enterprise by exploiting the fundamental factors – the product,
the market and the core competence of the enterprise.
• The objective of a competitive strategy is to create a
sustainable competitive advantage, to achieve long-term and
superior profitability
• 2 factors affecting long-term profitability
• The foundation of competitive strategy: value chain
 COMPETITIVE ADVANTAGE

• Competitive advantage is the core competence of enterprises that are accepted and
appreciated, through which enterprises will create the superiority as compared to
competitors

• Source of competitive advantage:

- Do the same as the competitors but cheaper
- Differentiate from the competitors

• Select target market:

- Broad scope
- Narrow scope
 COMPETITIVE ADVANTAGE
“Competitive advantage grows out of value a firm is able to
create for its buyers that exceeds the firm's cost of creating it.
Value is what buyers are willing to pay, and superior value stems
from offering lower prices than competitors for equivalent benefits
or providing unique benefits that more than offset a higher price.
There are two basic types of competitive advantage: cost
leadership and differentiation.”
-- Michael Porter, Competitive Advantage, 1985, p.3
 PORTER’S GENERIC COMPETITIVE STRATEGIES

Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. 1985
 GENERIC STRATEGIES AND COMPETITIVE SCOPE
The four generic competitive strategies:
1. Broad low-cost strategy aims to achieve the lowest overall costs in the
industry by offering similar products to rivals at better value for money for
a broad range of buyers.
2. Broad differentiation strategy seeks to differentiate the firm’s
product/service offer from that of rivals so that it will appeal to a broad
range of buyers who are willing to pay a premium price for the offering.
3a. Low-cost focus strategy concentrates on a narrowly defined target
market segment by outcompeting rivals on costs by being able to offer a
low-priced product to a customer segment whose needs may be slightly
below average.
3b. Differentiation focus strategy concentrates on a narrowly defined
target market segment who are willing to pay a premium for a
product/service that meets their specific needs better than the rival
product/service offerings.
 DRIVERS OF COST ADVANTAGE

ECONOMIES OF SCALE • Technical input-output relationships

• Specialization and division of labor

ECONOMIES OF LEARNING • Increased dexterity

• Improved organizational routines

• Process innovation
PRODUCTION TECHNIQUES • Reengineering business processes

PRODUCT DESIGN • Standardizing designs & components

• Design for manufacture

• Location advantages
INPUT COSTS • Ownership of low-cost inputs
• Non-union labour
• Bargaining power

CAPACITY UTILISATION • Ratio of fixed to variable costs

• Speed of capacity adjustment

• Motivation & culture

RESIDUAL EFFICIENCY
• Managerial efficiency
COST LEADERSHIP STRATEGY: 5 FORCES MODEL
MAJOR RISKS OF COST LEADERSHIP STRATEGY

• Dramatic technological change could take away your cost

advantage.

• Competitors may learn how to imitate Value Chain.

• Focus on efficiency could cause Cost Leader to overlook

changes in customer preferences.
ANALYSING DIFFERENTIATION: THE DEMAND SIDE

THE PRODUCT What needs What are key

does it attributes? FORMULATE
satisfy? DIFFERENTIATION
How do patterns of STRATEGY
customer
preferences link to
• Select product
By what positioning in
product attributes
criteria do relation to product
they choose? attributes
What price • Select target
THE premiums do
customer group
CUSTOMER product attributes
command? • Ensure customer/
product
What What are compatibility
motivates demographic,
them? sociological, • Evaluate costs
psychological and benefits of
drivers of customer differentiation
behavior?
 ANALYSING DIFFERENTIATION: THE SUPPLY SIDE

Sources of uniqueness:
• Product features and product performance
• Complementary services (such as credit, delivery, repair)
• Intensity of marketing activities (advertising, promotion)
• Technology embodied in design and manufacture
• Quality of purchased inputs
• Complexity of the product
• Procedures that impact the customer experience (e.g. the rigour of
quality control, service procedures, frequency of sales visits)
• Skill and experience of employees
• Location (e.g. with retail stores)
• Degree of vertical integration (allows control over inputs and
intermediate processes)
DIFFERENTIATION STRATEGY: 5 FORCES MODEL
 COMBINING GENERIC STRATEGIES – HYBRID STRATEGY
• The development of a hybrid strategy is a complex task as it involves consideration of
a tradeoff between low cost and differentiation.
• As Porter (1985) has pointed out, the risk is that once profits accumulate, successful
companies that follow the low-cost strategy will be tempted to relax their obsessive
focus on costs and efficiency.
• Similarly, successful differentiators, having achieved a position where they are able to
justify high prices based on the perceived value of their products, may be tempted to
ease off on R&D, advertising, or even lower the quality of raw material inputs to lower
their costs to maximize profits.
• Circumstances in which generic strategies can be combined –
1. Technological or managerial innovations where both cost efficiency and quality
are improved.
2. A company can create separate strategic business units each pursuing different
generic strategies and with different cost structures.
VALUE CHAIN APPROACH TO IDENTIFYING COMPETITIVE STRATEGY
Organisations use the value chain approach to identify where
cost savings or differentiation can be achieved, and thereby the
sources of competitive advantage.

Internal cost analysis

• identify the firm’s value creating processes;
• determine the portion of the total cost of the product or
service attributable to each value creating process;
• identify the cost drivers for each process;
• identify the links between processes; and
• evaluate the opportunities for achieving relative cost
advantage.

Internal differentiation analysis

• identify the customer’s value creating processes;
• evaluate differentiation strategies for enhancing customer
value; and
• determine the best sustainable differentiation strategies.
 BLUE OCEAN STRATEGY
Blue ocean strategy is the simultaneous pursuit of
differentiation and low cost to open up a new market
space and create new demand. It is about creating
and capturing uncontested market space, thereby
making the competition irrelevant. It is based on the
view that market boundaries and industry structure
are not a given, and rejects the fundamental tenet of
conventional strategy – that a trade-off exists
between cost and value.

Value innovation is created when a company’s actions favourably affect both its
cost structure and its value proposition to buyers. Cost savings are made by
eliminating and reducing the factors an industry competes on. Buyer value is
lifted by raising and creating elements the industry has never offered. Over time,
costs are reduced further as scale economies kick in due to the high sales
volumes that superior value generates.

Kim, W. C. and Mauborgne, R. (2004). Blue ocean strategy. Harvard Business Review, October, 1-9.
 BLUE OCEAN STRATEGY – FOUR ACTIONS FRAMEWORK

The Four Actions framework is used to reconstruct buyer value elements in crafting
a new value curve. To break the trade-off between differentiation and low cost in
creating a new value curve, the framework poses four key questions, shown in the
figure, to challenge an industry’s strategic logic.
EXAMPLE: VALUE CURVE (STRATEGY CANVAS) OF APPLE IPHONE

• A value curve is the graphic depiction of a company’s relative performance across its
industry’s factors of competition.
• Strategy canvas propels users to action by reorienting their focus from competitors to
alternatives and from customers to non-customers of the industry, and allows to
visualise how a blue ocean strategic move breaks away from the existing red ocean.
BLUE OCEAN STRATEGY VS TRADITIONAL COMPETITIVE STRATEGIES

Traditional Competitive Strategies:

• Cost leadership (e.g: Asda)
• Differentiation (e.g: Waitrose)
• Cost focus (e.g: Aldi) and differentiation focus (e.g: Fortnum & Mason)
Blue Ocean Strategy
• Value innovation strategy – competes in an uncontested market space
• ‘Combination Strategy’: pursue differentiation while controlling costs.
• Achieved via the delivery of features that have a highest marginal
benefit to customer needs
• Nil competitive rivalry (five forces) initially, but blue oceans may
become red oceans over time