Strategy and Innovation 5 6

Strategy
Session 5 & 6
Strategy and Innovation
Indika Liyanahewage
MBA (PIM - SriJ), B. Sc. (Mgt. Sp.) Hons. (SriJ),
FCMA (UK), CGMA (UK),
Certified NLP Practitioner (Aus.), Certified NLP Coach (Aus.),
Time Line Therapy® Practitioner (Aus.), Hypnosis Practitioner (Aus.)
Session outline
• Competitive Strategies
• International Strategy
• Innovation & Entrepreneurship
Strategy indika.liyanahewage@gmail.com 2
Competitive Strategies
Competitive advantage is about how an SBU

creates value for its users, both greater than ‘Edge over competitors’
the costs of supplying them and superior to
that of rival SBUs
A strategic business unit (SBU) supplies goods

or services for a distinct domain of activity
• Cost centre
• Profit centre
• Investment centre
1. How to Compete?
Porter’s Generic Strategies
Cost Leadership Differentiation
Focus
Porter’s Generic Strategies (Cont.)
• These are basic types of strategy that hold across many kinds of Business
situations
• Fundamental basis of above-average performance in the long run is

Sustainable Competitive advantage. Without a sustainable competitive
advantage, above-average performance is usually a sign of harvesting
• Though a firm can have a myriad of Strengths and Weaknesses vis-a-vis its
competitors, there are two basic types of competitive advantage a firm can
possess:
• Low cost
• Differentiation
• With Scope of activities for which the firm seek to achieve them lead to three
generic strategies:
• Low cost
• Differentiation
• Focus
Porter’s Generic Strategies (Cont.)
Cost Leadership
• No frills
• Basic features
• Good quality
Cost Leadership
• The firm sets out to become the lowest cost producer in
its industry
• Broader scope serves many segments in the industry
• Cost drivers:
• Input costs
• Economies of scale
• Experience
• Product/process design
Cost Leadership (Cont.)
• Cost leader must achieve
Parity or Proximity in the
bases of differentiation
relative to its
competitors to be an
above-average
performer
• Strategic logic of cost

leadership usually
requires that a firm be
THE cost leader, not one
of several firms vying for
position
• However, while cost leader will be the most profitable, it is not necessary to be the
cost leader to sustain above-average returns in commodity industries where there are
limited opportunities to build efficient capacity
Case study 12 (p. 196)
indika.liyanahewage@gmail.com Strategy 12
Differentiation
• High value addition

• Notable difference from competitors
• High price – High value
Differentiation
• This involves uniqueness along some dimension that is sufficiently

valued by customers to allow a price premium
• In a differentiation strategy, a firm seeks to be unique in its
industry along some dimensions that are widely valued by buyers
• A firm that can achieve and sustain differentiation will be an
above-average performer in its industry if its price premium
exceeds the extra costs incurred in being unique
• Strategic logic of differentiation requires that a firm choose
attributes in which to differentiate itself that are different from its
rivals
• Differentiation strategies require clarity about two key factors:
• The strategic customer (E.g.: Daily Mirror – Readers or Advertisers)
• Key competitors
Focus
• It rests on the choice of a narrow competitive scope within an industry

• The target segments must either have buyers with unusual needs or else the
production and delivery system that best serves the target segment must differ
from that of other industry segments
• A focus strategy targets a narrow segment or domain of activity and tailors its
products or services to the needs of that specific segment to the exclusion of
others
• Focus strategies are able to seek out the weak spots of broad cost-leaders and
differentiators:
• Cost focusers
• Differentiation focusers
• Successful focus strategies depend on at least one of three key factors:
• Distinct segment needs
• Distinct segment value chains
• Viable segment economics
Best cost provider strategy
Value for money
‘Stuck in the Middle’
• A firm that engages in each generic strategy but fails to achieve any of them is “stuck in
the middle”
• For a company seeking advantage through low costs, it makes no sense to add extra
costs by half-hearted efforts at differentiation
• For a differentiator, it is self-defeating to make economies that jeopardize the basis for
differentiation
• For a focuser, it is dangerous to move outside the original specialized segment, because
products or services tailored to one set of customers are likely to have inappropriate
costs or features for the new target customers
• According to Porter, there are three conditions under which a firm can simultaneously
achieve both Cost leadership and Differentiation:
I. Competitors are stuck in the middle
II. Cost is strongly affected by market
share or interrelationships
III. A firm pioneers a major innovation

“The essence of strategy is
choosing what not to do” - Michael
Porter
Risks of Generic strategies
Bowman’s Strategy Clock
Strategic Lock-in
• Strategies are more likely to be sustained if underpinned by capabilities that
combine all the VRIO characteristics of value, rarity, inimitability and non-
substitutability. Another approach to sustaining business strategies is
creating ‘lock-in’
• Strategic lock-in is where users become dependent on a supplier and are

unable to use another supplier without substantial switching costs
Controlling complementary products or Creating a proprietary industry standard

services
‘Razor and blade’ strategy ‘Stuck with Windows’
Game theory (Strategy backfire !)
1. Prisoner’s Dilemma
2. Battle of Sexes
▪ A couple deciding how to spend the evening
▪ Wife would like to go for a movie
▪ Husband would like to go for a cricket match
▪ Both however want to spend the time together
▪ Scope for strategic interaction
2. Where to Compete?
Ansoff Matrix
This matrix shows possible strategies for products and markets.
Igor Ansoff is regarded as the Father of Corporate Strategy in
1965.
Product/SBU portfolio Management
Stars Question mark
High
Strong & Growing Could neither
Market Growth
quickly become star or fail
Cash cow
Dogs
Milked to supply
Low
Keep if profitable,
stars and question
otherwise sell
mark
BCG Matrix
High Low
Market Share
Balancing Business and Financial Risk
Strategy Canvas (Competitor analysis)
- Strategy Canvas
Directional policy (GE-McKinsey) matrix
Use Competitor analysis (Strategy canvas)

Use PESTEL & Five forces
Directional policy (GE-McKinsey) matrix strategy guidelines
Parenting Matrix (Ashridge portfolio display)
• The corporate parent
refers to the levels of
management above
that of the business
units, and therefore
without direct
interaction with buyers
and competitors.
• Businesses may be
attractive in terms of
the BCG or directional
policy matrices, but if
the parent cannot add
value, then the parent
ought to be cautious
about acquiring or
retaining them.
➢ Heartland business units are ones which the parent understands well
and can continue to add value to. They should be at the core of future
strategy.
➢ Ballast business units are ones the parent understands well but can do
little for. They would probably be at least as successful as independent
companies. If not divested, they should be spared as much corporate
bureaucracy as possible.
➢ Value trap business units are dangerous. They appear attractive

because there are opportunities to add value (for instance, marketing
could be improved). But they are deceptively attractive, because the
parent’s lack of feel will result in more harm than good (i.e. the parent
lacks the right marketing skills). The parent will need to acquire new
capabilities if it is to be able to move value trap businesses into the
heartland. It might be easier to divest to another corporate parent
that could add value, and will pay well for the chance.
➢ Alien business units are clear misfits. They offer little opportunity to
add value and the parent does not understand them anyway. Exit is
definitely the best strategy.
3. Which Investment vehicle
to use?
Lynch Matrix
Note:
 Franchising
The purchase of the right to exploit a brand in return for a capital sum or share of profit
 Licenses
A right to exploit an invention or resources in return for a share of proceeds
‘Blue Ocean’ strategy – Kim & Mauborgne
• ‘Blue ocean’ is an
Untapped market
space, unknown
market space,
industries that are
not in existence
today which has
opportunity for
highly profitable
growth
• In blue oceans,
competition is
irrelevant because
the rules of the
game are waiting to
be set
- Strategy Canvas
International Strategy
• Looks at national source of competitive advantage. Porter

explored why some nations tend to produce firms with sustained
competitive advantage in some industry more than others. He
answers;
• Why do certain nations house so many successful international firms?

• How do these firms sustain superior performance in a global market?
• What are the implications of this for government policy and competitive
strategy?
• Porter says that entire nations do not have competitive

advantage, rather it is specific industries or firms that are able to
use their national backgrounds to get competitive advantage.
Porter’s Diamond
Firm strategy structure

Role of: and rivalry
Chance Fierce, capable national
Government firms
Factor conditions Demand conditions

Advanced specialized Sophisticated and
with good technical demanding with
know how international outlook
Related and
supporting industries
Home based suppliers
and related industries
that are internationally
competitive
International strategies
Export strategy. This
strategy leverages
home country
capabilities,
innovations and
products
in different foreign
countries.
Multi-domestic strategy.
This is a strategy that
maximises local
responsiveness. It is based
on Global strategy. This is a strategy that maximises global integration. In this
different product or strategy the world is seen as one marketplace with standardised products
service offerings and and services that fully exploits integration and efficiency in operations.
operations in each country
depending on local Transnational strategy. This is the most complex strategy that tries to
market conditions and maximise both responsiveness and integration. Its aim is to unite the key
customer preferences. advantages of the multi-domestic and global strategies while minimising their
disadvantages.
Innovation & Entrepreneurship
Innovation involves the

conversion of new knowledge
into a new product,
process or service and the
putting of this new product,
process or service into actual
use
a) Product innovation relates to the final product (or service) to be sold,

especially with regard to its features
b) Process innovation relates to the way in which this product is produced

and distributed, especially with regard to improvements in cost or
reliability.
• Technology push innovation - the new knowledge
created by technologists or scientists that pushes
the innovation process
• Market pull innovation - Reflects a view of

innovation that goes beyond invention and sees
the importance of actual use
Entrepreneurship
The activity of
setting up a
business or
businesses, taking
on financial risks in
the hope of profit.
Social entrepreneurs are individuals

and groups who create independent
organisations to mobilise ideas and resources
to address social problems, typically earning
revenues but on a not-for-profit basis
The entrepreneurial life cycle progresses through
start-up, growth, maturity and exit
E.g.: Otara – ODEL & Embark

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Strategy

• Innovation & Entrepreneurship

Competitive advantage is about how an SBU

A strategic business unit (SBU) supplies goods

Cost Leadership Differentiation

• Fundamental basis of above-average performance in the long run is

• Strategic logic of cost

• High value addition

• This involves uniqueness along some dimension that is sufficiently

• It rests on the choice of a narrow competitive scope within an industry

Value for money

II. Cost is strongly affected by market

III. A firm pioneers a major innovation

• Strategic lock-in is where users become dependent on a supplier and are

Controlling complementary products or Creating a proprietary industry standard

‘Razor and blade’ strategy ‘Stuck with Windows’

Stars Question mark

Use Competitor analysis (Strategy canvas)

➢ Value trap business units are dangerous. They appear attractive

• Looks at national source of competitive advantage. Porter

• Why do certain nations house so many successful international firms?

• Porter says that entire nations do not have competitive

Firm strategy structure

Factor conditions Demand conditions

Innovation involves the

a) Product innovation relates to the final product (or service) to be sold,

b) Process innovation relates to the way in which this product is produced

• Market pull innovation - Reflects a view of

Social entrepreneurs are individuals

E.g.: Otara – ODEL & Embark

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