Strategic Management

Diversification and
Strategies for SBUs
What is a Strategic Business
Unit?
A strategic business unit (SBU) is a part of
an organisation for which there is a distinct
external market for goods or services that is
different from another SBU.
 A ‘unit’ tailoring products or services to specific local
needs is a different SBU from one that offers
standardized products or services globally
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Competitive strategy is concerned with how a

company, business unit or organization achieves

competitive advantage in its domain of activity
Involves issues such as costs, product and service

features and branding

Competitive advantage is about how a company,

business unit or organization creates value for its users

which is both greater than the costs of supplying them
and superior to that of rivals 4
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Cost Leadership – Lidl

Differentiation – Waitrose pursues a strategy of

differentiation, offering a range of quality, fresh and

environmentally-friendly products focused on the upper
market with relatively higher prices
Cost Focus - Tesco, target shoppers who are simply

looking for good-value standard products for their families

Differentiation Focus – Bugatti, Ferrari, Mont Blanc, etc.

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 The Strategy Clock
In a competitive situation, customers make choices on

the basis of their perception of value for money, the

combination of price and perceived product /
service benefits
The ‘Strategy Clock’ represents different positions

in a market where customers have ‘different

requirements’ in terms of value for money

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 The Strategy Clock
Low-price strategies – customers emphasize functionality over

service or aspects such as design or packaging

Differentiation strategies – customers require a customized

product or service for which they are prepared to pay a price

premium
The strategy clock can help managers understand the

changing requirements of their markets and the choices

they can make about positioning and competitive
advantage
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 Cost-Leadership Strategy
Involves becoming the lowest-cost organization in a

domain of activity. For ex: Ryanair, EasyJet

These segments exist because:

 The commodity markets where customers do not

value or discern differences in the offering of different
suppliers (e.g. ALDI, Lidl, Emmaüs France)
 Customers can switch easily → difficult to establish
loyalty

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Low price strategies
 Price-sensitive customers, who cannot
afford, or choose not to buy better-quality
goods
 Buyers have high power and/or low
switching costs → Buyers pay low

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 4 key drivers for Cost Leadership
Input costs – for ex: labor or raw materials. Locating

labor-intensive operations in countries with low

labor costs or locating close to raw material
sources. For ex: service call centers in India or
manufacturing in South East Asia and China
Economies of scale - For the cost-leader, it is

important to reach the output level equivalent to the

minimum efficient scale
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 4 key drivers for Cost Leadership
Experience - implies that the cumulative experience

gained by an organization with each unit of output leads

to reductions in unit costs
There are gains in labor productivity as staff simply learn

to do things more cheaply over time – learning curve

Costs are saved through more efficient designs or

equipment as experience shows what works best

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 4 key drivers for Cost Leadership
Experience curve has 3 crucial implications:

Early entrants into a market will have experience that late

entrants do not yet

Companies with higher market share have more

‘cumulative experience’ simply because of their greater

volumes
Although the gains from experience are typically greatest

at the start, improvements normally continue over time

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 4 key drivers for Cost Leadership
Product/process design – For ex: using cheap standard

component parts rather than expensive ones. Organizations

can interact with customers exclusively through cheap web-
based methods, rather than via telephone or stores.
In designing a product or service, it is important to recognize

whole-life costs. For ex: Canon eroded Xerox’s advantage

(which was built on service and a support network) by
designing a copier that needed far less servicing

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The 1st requirement is that the principle of competitive

advantage indicates that a business’s cost structure

needs to be lowest cost (i.e. lower than all competitors’)
Competitors with higher costs than the cost-leader are

always at risk of being undercut on price, especially in

market downturn
Please see the Illustrations 6.3 and 7.1

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The second requirement is that low-cost should not be

pursued in total disregard for quality.

To sell its products or services, the cost-leader must

be able to meet market standards. For ex: low-cost

Chinese car producers exporting to Western markets
need to offer not only cars that are cheap, but cars that
meet acceptable norms in terms of style, safety, service
network, reliability, resale value and other important
characteristics
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Parity - (in other words, equivalence) with

competitors in product or service features valued by

customers
Parity allows the cost-leader to charge the same prices

as the average competitor in the marketplace, while

translating its cost advantage wholly into extra profit
The Brazilian steel producer CSN, with its cheap iron-ore

sources, is able to charge the average price for its steel,

and take the cost difference in greater profit
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Proximity (closeness) to competitors in terms of

features.
Where a competitor is sufficiently close to

competitors in terms of product or service features,

customers may only require small cuts in prices to
compensate for the slightly lower quality
For ex: It might be the option chosen initially by

Chinese car manufacturers in export markets

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 Vanguard’s low-cost strategy comes
to Europe. Page 214
What type of competitive strategy, low-cost,

differentiation, focus or hybrid, would you suggest as a

way of competing with Vanguard?
Using webcam chats is one approach to lower costs in

financial advisory services as indicated above. What

other ways could there be to lower costs to support a
low-cost strategy?
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EasyJet’s Low-Cost Strategy

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EasyJet’s Low-Cost Strategy
 Launched in 1995 with 6 aircrafts

 In 2019 it had 330 aircrafts flying 1100 routes to 35 countries and

carrying over 90 million passengers. Company employs over
12,000 people and 3,300 of them are pilots
 Total revenue of the company is $6,4 billion with $350 million net
income in 2019
 Internet used to reduce costs → over 95% of all seats are sold online

 Maximizing the utilization of substantial assets → aircrafts fly

intensively, with swift turnaround → gives company a very low unit cost

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EasyJet’s Low-Cost Strategy
 Ticket-less travel → Passengers receive booking
details via email rather than paper → reduce the cost of
issuing, distributing, processing and reconciling
 No ‘free lunch’ → no free catering, cargo, pre-assigned
seats and interline connections services
 Efficient use of airports → gaining efficiencies with
rapid turnarounds → it does not operate hub system,
passengers have to check in and offload their luggage at
each stage
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 Differentiation strategy
Involves uniqueness along some dimension that is

sufficiently valued by customers to allow a price

premium.
For ex: German manufacturer Miele pursues a differentiation

strategy in the domestic appliance industry by targeting high

income households at a price premium by offering high-
quality and durable dishwashers, washing machines and
stoves
BMW differentiate with its sportier image and Mercedes with

more conservative values 26

 Differentiation strategy
Product and service attributes - certain product

attributes can provide better or unique features than

comparable products or services for the customer
For ex: Dyson vacuum cleaner with its unique technology

provides customers with a better suction performance

compared to competitors

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 Differentiation strategy
The possibilities of product differentiation are, however,

virtually endless and only limited by the creativity of an

organization
Apple has been able to charge considerable premiums by

continuously launching novel products with superior

technologies, design and consumer interfaces
It is vital to identify clearly the customer on whose needs the

differentiation is based. For ex: for a newspaper business, the

customers could be readers (who pay a purchase price),
advertisers (who pay for advertising), or both 28
 Differentiation strategy
The difficulty of imitation – highlights the

importance of non-imitable strategic capabilities

The extent of vulnerability to price-based

competition – in some markets customers are more

price sensitive. So, the bases of differentiation are
just not sufficient in the face of lower prices

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 Differentiation strategy
Customer relationship – the differentiation is relied on how

the product is perceived by the customer

The perceived value can increase through customer services

and responsiveness. This can include distribution services,

payment services or after-sales services. For ex: Zalando,
Europe’s leading online retailer for fashion and shoes, offers
not only free shipping to the customer but free returns and a
‘bill-me-later’ service

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 Differentiation strategy
Products can also be differentiated via customization. For ex:

the German software company SAP not only sells its

standardized software packages, but customizes these to meet
specific customer needs
Marketing and reputation → emotional and psychological

aspects. For ex: Starbucks, charge a premium price for its

coffee not only because of its product differences but also
because of the ambiance and image at its outlets
Building on brand image is common for products that

otherwise are difficult to differentiate. 31

Complements – See Complementors topic in the Section 3.2.6,

Chapter 3
The differentiator can expect that the investments (costs) spent

to differentiate its products will be higher than those of the

average competitor
In Figure 7.4, the differentiator needs to ensure that the

additional costs of differentiation do not exceed the gains in price

Historical failure of Bentley and Rolls Royce against Mercedes

Benz was in the luxury elements added to their cars which

drastically increased their price and the cars were not affordable
to even rich people sometimes.
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Examples of Differentiation Strategy
without price premium

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Examples of Differentiation Strategy
without price premium

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Examples of Differentiation Strategy
with price premium

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Examples of Differentiation Strategy
with price premium

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 Volvo’s different Indian buses. Page 217

Rank the elements of Passey’s strategy for Volvo in

order of importance. Could any have been dispensed

with?
How sustainable is Volvo’s luxury bus strategy?

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 Focus Strategy
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
Ryanair follows a cost focus strategy, targeting price-

conscious travelers with no need for connecting flights

The Belgian detergent company Ecover follows a

differentiation focus strategy, gaining a price premium

over rivals on account of its ecological cleaning products
targeted at environmental conscious customers
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 Focus Strategy
Cost focusers identify areas where broader cost-based

strategies fail because of the added costs of trying to

satisfy a wide range of needs.
For ex: Iceland Foods (UK) has a cost-focused strategy

concentrated on frozen and chilled foods, reducing costs

against discount food retailers with a wider product range
and more diverse suppliers which have all the complexity
of fresh foods and groceries

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 Focus Strategy
Differentiation focusers look for specific needs that

broader differentiators do not serve so well.

For example, ARM Holdings dominates the world market

for mobile phone chips, despite being only a fraction of

the size of the leading microprocessor manufacturers like
AMD and Intel, which also make chips for a wide range of
computers

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 Focus Strategy
Successful focus strategies depend on following key factors:

Distinct segment needs – If segment distinctiveness erodes,

it becomes harder to defend the segment against broader

competitors
For ex: Tesla Motors currently targets a narrow segment with

its expensive premium electric vehicles. However, if the

boundaries become blurred between Tesla’s focus on electric
cars used by affluent environmentally conscious consumers
and electric cars used by general consumers it could become
easier for competitors to also attack this distinctive niche 41
 Focus Strategy
Distinct segment value chains - Focus strategies are strengthened if

they have distinctive value chains that will be difficult or costly for rivals to
construct
If the production processes and distribution channels are very similar, it is

easy for a broad-based differentiator to push a specialized product

through its own standardized value chain at a lower cost than a rival
focuser.
Procter & Gamble cannot easily respond to the Belgian ecologically

friendly cleaning products company Ecover because achieving the same

environmental soundness would involve transforming its purchasing and
production processes
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 Focus Strategy
Viable segment economics - Segments can easily

become too small to serve economically as demand or

supply conditions change
For ex: changing economies of scale and greater

competition have eliminated the traditional town-center

department stores from many smaller cities, with their
wider ranges of different kinds of goods from hardware to
clothing
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Examples of Focus Strategy

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Examples of Focus Strategy

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 Hybrid strategy
Seeks simultaneously to achieve differentiation and low

price relative to competitors (e.g. IKEA, Tesco, Toyota)

American Southwest Airlines low-cost services – budget and

no-frills offering; differentiating services – frequent departures

and friendly service
Singapore Airlines differentiating services - passenger

comfort, attentive personal service and amenities; low-cost

services – low maintenance costs, standardization and
outsourcing of various activities
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 Hybrid strategy
Hybrid strategy could be advantageous when:

 Much greater volumes can be achieved than competitors →

margins may steel be better because of a low cost base
 Cost reductions are available outside its differentiated
activities → IKEA mainly concentrate on marketing,
product range, logistics and store operations but low
customer expectations on service levels allow cost
reductions
 Used as an entry strategy in a market with established
competitors 47
 Hybrid strategy
Organizational separation - It is possible for a company to

create separate strategic business units (SBUs), each

pursuing different generic strategies and with different cost
structures. The challenge, however, is to prevent negative
spill-overs from one SBU to another
For ex: Europe’s leading airline Lufthansa has struggled to

combine its low-cost subsidiaries, Eurowings, with its

traditional higher-service core business. So, sometimes it can
be very difficult to pursue different generic strategies within a
single set of related businesses 48
 Hybrid strategy
Technological or managerial innovation - Sometimes

technological innovations allow radical improvements in

both cost and quality
Managerial innovations are capable of such

simultaneous improvements too. For ex: The Japanese

car manufacturers’ introduction of Total Quality
Management led to reductions in production line
mistakes that both cut manufacturing costs and improved
car reliability, a point of successful differentiation
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 Hybrid strategy
Competitive failures - where competitors are also

stuck in the middle, there is less competitive

pressure to remove competitive disadvantage

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Non-competitive Strategies

Increase prices without increasing

service/product benefits → Monopoly

Reduction in product/service benefits with

increase in relative price

Reduction in benefits whilst maintaining

price
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Interactive price and quality strategies
Richard D’Aveni depicts competitor interactions in

terms of movements against the variables of price (the

vertical axis) and perceived quality (the horizontal axis),
similar to the Strategy Clock: see Figure 7.6
Figure 7.6 shows different organizations competing by

emphasizing either low prices or high quality or some

mixture of the two

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 Interactive price and quality strategies
The cost-leading firm L offers relatively poor perceived quality, but

customers accept this because of the lower price – for ex: Hyundai
The differentiator (D) has a higher price, but much better quality –

for ex: Mercedes Benz

Mid-point firm (M) offering a combination of reasonable prices and

reasonable quality – for ex: Ford

firm U is uncompetitive, falling behind the value line - its price is

higher than M’s, and its quality is worse – stuck in the middle
U no longer offers acceptable value and must quickly move back

onto the value line or fail

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Interactive price and quality strategies
Differentiator (D) makes an aggressive move by substantially

improving its perceived quality while holding its prices

This improvement in quality shifts customer expectations of quality

right across the market. These changed expectations are reflected

by the new, second value line (in green)
The cost-leader (L) may have to make some improvement to quality,

or accept a small price cut

The greatest threat is for the mid-point competitor, M – it should

respond either by making a substantial improvement in quality while

holding prices, or by slashing prices, or by some combination of the
two 55
Interactive price and quality strategies
Mid-point competitor M makes an aggressive counter-

attack. (graph ii of Figure 7.6)

M makes radical cuts in price while sustaining its new

level of perceived quality → customer expectations are

changed and a third value line (in red) is established
Now it is differentiator D that is at most risk of being

left behind, and it faces hard choices about how to

respond in terms of price and quality

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 Responding to low-cost rivals
For instance, a high-cost Western manufacturer facing possible

attack by cheap imports from Asia. There are three key decisions:
Threat assessment - The first decision point is whether the

threat is substantial or not

The high-cost organization should not automatically respond to a

low-price competitor by trying to match prices → losing a price

war with its existing cost structure
The high-cost organization needs a more sophisticated response

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 Responding to low-cost rivals
Differentiation response - If there are enough

consumers prepared to pay for them, the high-cost

organization can seek out new points of differentiation
Western manufacturer may exploit its closeness to local

markets by improving service levels and can strip out the

unnecessary costs
If increased differentiation is not possible, then more

radical cost solutions should be sought

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 Responding to low-cost rivals
Cost response - Merger with other high-cost organizations may

help reduce costs and match prices through economies of scale

If a low-cost business is synergistic with the existing business, this

can be an effective platform for an aggressive cost-based counter-

attack
For ex: Western manufacturer can outsource all production to low-

cost operator and just apply its design and branding expertise
Or may become a ‘solution provider’ by aggregating manufactured

components from different suppliers and adding value through

whole-systems design, consultancy or service 59
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Responding to low-cost rivals
When Apple entered the phone market with its

expensive iPhone, established handset manufacturers

had first to decide whether Apple was a serious long-
term threat, and then choose how far they should either
match the iPhone’s features or increase the price
differential between their products and Apple’s
expensive ones

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 Responding to low-cost rivals
According to Richard D’Aveni, these kinds of moves and

counter-moves are a constant feature of hypercompetitive

environments
In these conditions, it may no longer be possible to plan for

sustainable positions of competitive advantage. Indeed,

planning for long-term sustainability may actually destroy
competitive advantage by slowing down response.
Managers have to be able to act faster than their competitors.

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 Responding to low-cost rivals
Richard D’Aveni highlights four key principles:

An organization has to be willing to cannibalize the basis of its

own old advantage and success

Smaller moves can create a series of temporary advantages

Unpredictability, even apparent irrationality can be important

An organization might signal particular moves, but then do

something else (see Section 7.3.3 on game theory)

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Strategic lock-in
Is where an organization achieves a proprietary

position in its industry → it becomes am industry

standard → For ex: Microsoft became an industry
standard and other businesses have to conform or
relate to that standard in order to prosper
The achievement of lock-in is dependent on:

 Achieve size/market dominance → others will not

conform to such standards unless they perceive the
organizations which promotes it as dominant
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Strategic lock-in
 First-mover dominance → such standards are likely
to be set early in life cycles of markets. First-movers
will be successful when the market is mature
 Self-reinforcing commitment → When one or more
firms support the standard, more come on board, then
others are obliged to
 Insistence on the preservation of the lock-in
position → Insistence on conformity to the standard is
strict so rivals will be seen off fiercely.
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Competition and Collaboration
 Collaboration between some organizations in a market
may give them advantage over other competitors in the
same market, or potential new
 Collaboration can be explicit in terms of formal
agreements to cooperate, or tacit in terms of informal
mutual understandings between organisations.

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Competition and Collaboration
Suppliers – cooperation between rivals A and B in an
industry will increase their purchasing power against
suppliers → squeezes supplier prices
 Cooperation enables companies to standardize
requirements → allows suppliers make cost reductions
 For ex: 2 car manufacturers agreed on common
component specifications → their suppliers gain
economies by producing of the standardized part on a
greater scale
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Competition and Collaboration
Buyers – cooperation between rivals A and B will
increase their power as suppliers → it will be harder for
buyers to shop around
 Collusion between rivals can help maintain or raise
prices, but it may well attract penalties from
competition regulators
 Buyers may benefit if their inputs are standardized →
enabling reductions in costs that all can share

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Competition and Collaboration
Rivals – cooperative rivals A and B are getting benefits
with regard to both buyers and suppliers → C – will be at
a competitive disadvantage
 Rival C will be in danger of being squeezed out of the
industry

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Competition and Collaboration
Entrants – potential entrants will likely lack the
advantages of the combined rivals A and B
 A and B can coordinate their retaliation strategies against
any new entrant → cutting prices by the same proportions
in order to protect their own relative positions

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Competition and Collaboration
Substitutes – the improved costs or efficiencies that
come from cooperation between rivals A and B reduce
the incentives for buyers to look to substitutes
 For ex: Steel companies have cooperated on research to
reduce the weight of steel used in cars, in order to
discourage car manufacturers from switching to lighter
substitutes such as aluminum or plastics

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Game Theory
Game Theory encourages an organization to consider

competitors’ likely moves and the implications of these

moves for its own strategy.
 There are 2 key assumptions:
Rationality: competitors will behave rationally in trying

to win to their own benefit

Interdependence: one competitor’s move is likely to

galvanize response from another and the outcome of

choices made by one competitor is dependent on
the choices made by another 73
Game Theory
 Two principles guiding the development of
successful competitive strategies:
a) ‘Get in the mind’ of the competitors – strategists
need to put themselves in the position of
competitors
b) ‘Think forward and reason backward’ – decide
strategy on the basis of understanding the
outcomes of possible strategic moves of
competitors 74
The prisoner’s dilemma
 Two suspects are arrested by the police. The police have
insufficient evidence for conviction, and, having
separated both prisoners, visit of them to offer the same
deal:
 If one testifies (defects from the other) for the
prosecution against the other and the other remains
silent (cooperates with the other), the betrayer goes
free and the silent accomplice receives a full 10-year
sentence
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The prisoner’s dilemma

 If both remain silent, both prisoners are

sentenced to only 6 month in jail for a minor
charge
 If each betrays the other, each receives a 5-year
sentence.

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The prisoner’s dilemma
 Each prisoner must choose to betray the other or to
remain silent. Each one is assured that the other would not
know about the betrayal before the end of the investigation.
How should the prisoners act?
 Dominant Strategy – one that outperforms other
strategies whatever rivals choose
For ex: Airbus and Boeing in the aircraft business, Sony

and Microsoft in the games market, or British Airways and

Virgin in transatlantic travel 77
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The problem of cooperation

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The problem of cooperation
 In this game the best option would be to cooperate

 But it is most likely that both parties will decide to go

it alone to ensure that the other competitor doesn’t
get an advantage
 If either of the competitors breaks rank the other
one will suffer badly. So the dominant strategy is to
choose “not to cooperate”
 A general principle is that if there is a dominant
strategy it makes sense to use it. 81
Game theory in practice in the
public sector. Page 227
Besides the public sector, can you think of other

business situations where war games could be

useful?
War games could possibly play a role when

preparing for strategic change at a university. What

stakeholders or players would be relevant and what
would their interests be?
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 The IKEA approach
Kevan Scholes* Page: 237-240
Identify where (in their value system) and how IKEA have

achieved cost leadership.

Identify how IKEA have achieved differentiation from their

competitors.
Explain how IKEA tries to ensure that their ‘hybrid’ strategy

remains sustainable and does not become ‘stuck-in-the-middle’.

How would you explain IKEA’s business model in terms of value

creation, configuration and capture?

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