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Business Level Strategy

Strategic Business Unit


A strategic business unit is a par of an organization for which there is a distinct external market for goods or services that is different from another SBU. - External criteria: customers type, market competition, sorts of channels - Internal criteria: strategic capabilities resources and competences

Bases of competitive advantage


Competitive strategy is connected with the basis on which a business unit might achieve competitive advantage in its market. Porter proposed three generic strategies to achieve competitive advantage: - Cost leadership product / service features differentiation - focus

The Strategy Clock: competitive strategy options

Price-based strategies (routes 1 and 2)


Route 1 (No frills strategy): A no frills strategy combines a low price, low perceived product /service benefits and a focus on a price sensitive market segment. - The products or services are commodity - Price sensitive customers - High power and/or low switching cost - Small number of providers with similar market share

Route 2 (Low-price strategy) A low price strategy seeks to achieve of lower price than competitors whilst trying to maintain similar perceived product or service benefits to those offered by competitors. Pitfalls of low price strategy: - Margin reduction - Inability to reinvest - Low cost base

Differentiation strategies (route 4)


A differentiation strategy seeks to provide products or services benefits that are different from those of competitors and that are widely valued by buyers. Factors to be considered to achieve differentiation strategy: - Perfectly identify strategic customers. - Rightly identify competitors group those are serving in the market with similar products. - Analyse strategic gap of existing product or service features . - Offer different product or service features

Hybrid Strategy (route 3)


A hybrid strategy seeks simultaneously to achieve differentiation and a price lower than that of Competitors. Hybrid strategy is following two advantages circumstances - High volumes of production than competitors produces - Entry strategy in a new market

Focused differentiation (route 5)

A focused differentiation strategy seeks to provide high perceived product / service benefits justifying a sustainable price premium, usually to a selected market segment (niche). For example: Wastin hotel, hotel Radisson

Failure Strategies (routes 6, 7 and 8)


A failure strategy is one that does not provide perceived value-for-money in terms of product features, price or both.
Route 6 suggests increasing price without increasing product/service benefits to customers. Route 7 is involving the reduction in product/service benefits whilst increasing relative price. Route 8, reduction in benefits whilst maintaining price, is also dangerous, though firms have tried to follow

Sustaining competitive advantage


Price-based strategies Accept reduced margin Win a rice war Reduce costs Focus on specific segments Differentiation Create difficulties of imitation Achieve imperfect mobility (of resources /competences) Reinvest margin Sustaining competitive advantage

Lock in Achieve size / market dominance First mover advantage Reinforcement Rigorous enforcement

Sustaining price-based advantage

Pursuing low-price strategies may be prepared to accept the reduced margin either because it can sell more volume than competitors or it can crosssubsidies that business unit from else where in its portfolio. Win a price war with competitors either because it has a lower cost structure or deeper pockets to fund short to medium-term loss with the aim of driving out competitors in the longer term. Supermarkets have been accused of pursuing such strategies

An organization has cost advantages through organizationally specific capabilities driving down cost throughout the value chain. For example : cost advantage might be achieved because a business is able to obtain raw materials at lower prices than competitors, or to produce more efficiently, or because it is located in an area where labour cost is low, or because its distribution costs provide advantages. Or it may be possible to reduce substantially the costs of activities by outsourcing their provision. An international example is MacDonals or easyjet.

Focusing on market segments where low price is particularly valued by customers. An example here is the success of dedicated producers of own brand grocery products for supermarkets. i.e. Lux for middle and lower middle class people.

Sustaining differentiation-based advantage

Create difficulties of imitation : It involves identifying capabilities that are likely to be durable and which competitors find difficulties to imitate or obtain. Indeed the criterion of robustness is sometimes referred to as non-imitability. Imperfect mobility :

Effectively manage and maintain intangible assets like: brand value, image or reputation as this not readily transfer given new ownership. Switching costs: are the actual or perceived cost for a buyer of changing the source of supply of a product or service

Lower cost position: an organization that is able to achieve and sustain a lower cost position may have a better margin than competitors which can be reinvested into differentiated products or services. For example : Lux or Kelloggs or Mars

The delta model and lock-in


Lock-in is where an organization achieves a proprietary position in its industry; it becomes an industry standard. Like: Grameen Phone - Size or market dominance: It is unlikely that other organizations seeks standards unless they perceive the organization that promotes it to the dominant in its market. - First mover advantage: In the volatility of growth markets it is more likely that the single-minded pursuit of lock-in by the first movers will be successful when the market is mature. Like: Microsoft or Intel
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Self-Reinforcing : once this position is achieved, it may be self-reinforcing and escalating. When one or more firms support the standard, then more come on board. Then others are obliged to do and so on. Insistence on the preservation: there is likely to be rigorous insistence on the preservation of that lock-in position. Rivals will be seen off fiercely; instance on conformity to the standard will be strict.

Competitive Strategy in Hypercompetitive conditions (hyper competition market)


Repositioning Competing successfully -Pre-empt competition (new strategies) - Do not attack competitors weaknesses - Disrupt the market - Mislead competitors -A series r smaller moves

Overcoming competitors barriers -Shorter life cycles -Undermine strongholds -Counter deep pocket advantage

Competitive Strategy in Hypercompetiti ve conditions

Overcoming competitors market-based moves -Block first-mover advantages -Imitate product / market moves

Repositioning

Re-positioning involves changing the identity of a product / servicers / even organisational position, relative to the identity of competing products. In volatile markets, it can be necessary - even urgent - to reposition an entire company, rather than just a product line or brand. i.e. Goldman Sachs and Morgan Stanley suddenly shifted from investment to commercial banks or Nokia from paper manufacturing to Mobile phone manufacturing. Positioning is however difficult to measure, in the sense that customer perception on a product may not tested on quantitative measures.

Overcoming competitors market-based moves

Blocking first-mover advantage: Blocking first-mover advantage by enhancing features, and seeking to further differentiation. Or find to attack a particular segment, eroding the market power of the first mover. Imitate competitors product / market moves: Do follow and imitate competitors product or service features or nature of market moves to take advantage over rivalry competition.

Overcoming competitors barriers

By shorter product life-cycle: Maintain and manage wider product portfolio to control shortest span of time of product life-cycle in the market. An organisation can achieve this process by building competitive advantage through the robustness of their resources and competences. Undermining competitors strongholds: Find alternative or different routes to enter in the market where competitors are not familiar with it. i.e e-commerce or e-business is the example of alternative routes of traditional business.

Countering competitors deep pockets: Competitors surplus resources is known as deep pockets. Large firm normally utilize surplus resources to capitalise in the new market entry or new product of service entry in the existing market. To encounter this competition small or medium firm could build strategic alliances or merge with others to take share market.

Ingredients of successful hypercompetitive strategies


Planning for long-term sustainability (specially operational strategy) will destroy competitive advantage because it will slow down response. In the hypercompetitive environment, competing increases the speed of hyper-competition and makes winning more difficult. However there may be no alternative. Managers have to learn to be better at doing things faster than competitors.

Few important principle emerge

An organization has to be prepared to pre-empt imitation by others by competing in new ways. The organization should willingness to cannibalize the basis of its own success could be crucial. Attacking competitors weakness can be unwise as they learn about how their strengths and weaknesses are perceived and build their strategies accordingly. A series of smaller moves may be more effective than a bigger one off change. The longer-term directions is then not as easily visible by competitors and

Smaller moves create more flexibility and give a series of temporary advantages. Disruption of the status quo is strategic behaviour, not mischief. The ability constantly to break the mould could be a core competence. Predictability is dangerous: so surprise, unpredictability and apparent irrationality may be important. If competitors come to see a pattern in the behaviours of an organisation they can predict the next competitive moves and quickly learn how to imitate or outflank the organisation. At the least managers must learn ways of

to be unpredictable to the external world whilst, internally, thinking strategies through carefully. Misleading signals of strategic intentions may also be useful. In this the strategist may draw on the lessons of game theory to signal moves which competitors may expect but which are not the surprise moves that actually occur.

Game theory

Simultaneous games Simultaneous games discussed so far the competitors were making decisions or move at the same time and without knowing what each other was doing.

A Prisoners Dilemma
Competitor A Heavy marketing spend Low marketing spend

Competitor B

Heavy marketing spend Low marketing spend

B =5

A=5

B=12

A=2

B=2

A=12

B =9

A=9

Bottom right hand quadrant: Low marketing expenditure by both of the companies. Top right and bottom left quadrant: There is likely to be a temptation by one or the other competitors to try to take an advantage over the other. Each knows that if they alone spent more on marketing they would achieve substantial returns. Top left hand quadrant: both parties decide to spend heavily on marketing to ensure that the other competitor does not get an advantage. Danger of this heavy marketing expenditure might lead worse return for both parties.

Prisoners Dilemma illustrates some important principles: A dominant strategy is one that break all other strategies whatever rivals choose. The dominant strategy is to spend heavily on marketing. A dominated strategy is a competitive strategy that if pursued by a competitors, is bound to outperform the company. If an organisation does not have a dominated strategy, it is important to identify whether it faces a dominated strategy, that is,

a competitive strategy that, if pursued by a competitor is bound to outperform the company. Equilibrium is a situation where each competitor engineering to get the best possible strategic solution for themselves given the response from the other.

Sequential games

The guiding principle here is to think forwards and then reason backwards. In other words, start by trying to think through the sequences of moves that competitors might make based on a reasonable assumption about what that competitors desires as the outcome. On that basis then decide the most advantageous moves you can make. Some important strategic lessons need to be recognised, in particular the importance of: - identifying dominant and dominated strategies; - the timing in strategic moves; - the careful weighting of risk - establishing credibility and commitment

Repeated games
In repeated games, competitors interact repeatedly and it has been shown that it such circumstances the equilibrium outcome is much more likely to favour cooperation or accommodation of both parties best interest. This is not necessarily because of explicit collusion, but because they learn to do so through experience.

Changing the rules of the game

In this game theory competitors are flexible to change game plan to gain maximum market share. i.e. If organisation A fails to gain maximum market share by heavily investing on marketing or R&D than change the game plan to price based strategies or either way.

Reference books

Johnson, Scholes at el., Exploring Corporate Strategy, FT, Prentice Hall, 8th edition, 2008.

Fred R. David, Strategic Management: Concepts and Cases, Prentice Hall, 12th edition, 2009