Business Strategy

UNDERSTANDING BUSINESS STRATEGY & MODELS
IAN LEWIS ROGERS

business.ulster.ac.uk Ian.rogers@qa.com
Learning objectives
• Assess business strategy in terms of the generic strategies of cost

leadership, differentiation, focus and hybrid strategy.
• Identify business strategies suited to hypercompetitive conditions.
• Assess the benefits of co-operation in business strategy.
• Apply principles of game theory to business strategy.
• Identify and apply business model components: value creation,
configuration and capture.
2
Copyright © Pearson Education, Inc. All rights reserved
Introduction
• Note: Large companies

can comprise several
strategic business units
(SBUs) each with its own
business strategy.
• A SBU supplies goods or
services for a distinct
domain of activity.
4
PORTERS Generic competitive strategies
• Competitive strategy is concerned
with how a company, business unit,
or organisation achieves competitive
advantage in its domain of activity.
• Competitive advantage is about
how a company, business unit, or
organisation creates value for its
users, both greater than the costs of
supplying them and superior to that
of rivals.
• EXPLAINING THE BOXES…… Source: Adapted from Porter, M. (1985). Competitive Advantage:
Creating and Sustaining Superior Performance
5
Cost leadership strategy
• Low cost should not be pursued in
total disregard for quality. Businesses
have two options:
• Parity with competitors – equivalent
quality in terms of product or service Av
features. The cost leader can then

charge the same price as rivals and
make higher profits.
• Proximity to competitors in terms of
features – only slightly lower quality
allows the cost leader to offer a
slightly lower price and still make
higher profits.
6
Differentiation strategy
• Differentiation involves uniqueness along some dimension that is
sufficiently valued by customers to allow a price premium.
• Within each market, businesses may differentiate along different
dimensions.
• Key drivers of differentiation are:
• Product and service attributes – providing better or unique features.
• Customer relationships – customer service and responsiveness,
customisation, or marketing and reputation.
• Complements – building on linkages with other
products/services.
e.g. Apple
7
Focus strategy
• A focus strategy targets a narrow segment (smaller group of customers)
or domain of activity and tailors its products or services to the needs of
that specific segment to the exclusion of others.
e.g. Checkers
• Two types of focus strategy:
• Cost-focus strategy.
• Differentiation focus strategy.
• Cost focusers identify areas where broader cost based strategies fail
because of the added cost of trying to satisfy a wide range of needs.
• Differentiation focusers look for specific needs that broad differentiators
do not satisfy so well.
8
Focus strategy
• Successful focus strategies depend on at least one of three key factors:
• Distinct segment needs.
• Distinct segment value chains.
• Viable segment economics.
9
Stuck in the middle?
• Porter argues:
• It is best to choose which generic strategy to adopt and then stick
rigorously to it.
• Failure to do this leads to a danger of being ‘stuck in the middle’ – doing
no strategy well.
10
Hybrid strategy
• A hybrid strategy combines different generic strategies.
• Possible under the following circumstances:
• Organisational separation - A company can create separate strategic
business units each pursuing different generic strategies and with
different cost structures.
• Technological or managerial innovations where both cost efficiency and
quality are improved.
11
The strategy clock
• The strategy clock provides a
dynamic approach for examining
alternative generic strategies and
gives more scope for hybrid
strategies.
• It has two distinct features:
• It is focused on the prices to
customers rather than the costs to
organisations.
• The circular design allows for
incremental adjustments in
strategy rather than stark choices. Source: Adapted from D. Faulkner and C. Bowman. (1995).
The Essence of Competitive Strategy, Prentice Hall.
12
BOWMANS CLOCK
• Looking at Porter's strategies in a different way, in 1996, Cliff Bowman and David Faulkner
developed Bowman's Strategy Clock. This model of corporate strategy extends Porter's
three strategic positions to eight, and explains the cost and perceived value combinations
many firms use, as well as identifying the likelihood of success for each strategy.
13
• Position 1: Low Price/Low Value
• Firms do not usually choose to compete in this category. This is the "bargain basement" bin
and not a lot of companies want to be in this position. Rather it's a position they find
themselves forced to compete in because their product lacks differentiated value. The only
way to "make it" here is through cost effectively selling volume, and by continually attracting
new customers. You won't be winning any customer loyalty contests, but you may be able to
sustain yourself as long as you stay one step ahead of the consumer (we're not going to
mention any names here!) Products are inferior but the prices are attractive enough to
convince consumers to try them once.
14
• Position 2: Low Price
• Companies competing in this category are the low cost leaders. These are the companies
that drive prices down to bare minimums, and they balance very low margins with very high
volume. If low cost leaders have large enough volume or strong strategic reasons for their
position, they can sustain this approach and become a powerful force in the market. If they
don't, they can trigger price wars that only benefit consumers, as the prices are
unsustainable over anything but the shortest of terms. Walmart is a key example of a low
price competitor that persuades suppliers to enter the low price arena with the promise of
extremely high volumes.
15
• Position 3: Hybrid (Moderate Price/Moderate Differentiation)
• Hybrids are interesting companies. They offer products at a low cost, but offer products with
a higher perceived value than those of other low-cost competitors. Volume is an issue here
but these companies build a reputation of offering fair prices for reasonable goods. Good
examples of companies that pursue this strategy are discount department stores. The
quality and value is good and the consumer is assured of reasonable prices. This
combination builds customer loyalty.
16
• Position 4: Differentiation
• Companies that differentiate offer their customers high perceived-value. To be able to afford
to do this they either increase their price and sustain themselves through higher margins, or
they keep their prices low and seek greater market share. Branding is important with
differentiation strategies as it allows a company to become synonymous with quality as well
as a price point. Nike is known for high quality and premium prices; Reebok is also a strong
brand but it provides high value with a lower premium.
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• Position 5: Focused Differentiation
• These are your designer products: high perceived value and high prices. Consumers will buy
in this category based on perceived value alone. The product does not necessarily have to
have any more real value, but the perception of value is enough to charge very large
premiums. Think Gucci, Armani, Rolls Royce; clothes either cover you or they don't, and a
car either gets you around the block or it doesn't. If you believe pulling up in your Rolls
Royce Silver Shadow is worth 25 times more than in an economy Ford then you will pay the
premium. Highly targeted markets and high margins are the ways these companies survive.
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• Position 6: Increased Price/Standard Product
• Sometimes companies take a gamble and simply increase their prices without any increase
to the value side of the equation. When the price increase is accepted, they enjoy higher
profitability. When it isn't, their share of the market plummets, until they make an
adjustment to their price or value. This strategy may work in the short term, but it is not a
long-term proposition as an unjustified price premium will soon be discovered in a
competitive market.
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• Position 7: High Price/Low Value
• This is classic monopoly pricing, in a market where only one company offers the goods or
service. As a monopolist, you don't have to be concerned about adding value because, if
customers need what you offer, they will pay the price you set, period. Fortunately for
consumers in a market economy, monopolies do not last very long, if they ever get started,
and companies are forced to compete on a more level playing field.
20
• Position 8: Low Value/Standard Price
• Any company that pursues this type of strategy will lose market share. If you have a low
value product, the only way you will sell it is on price. You can't sell day-old bread at fresh
prices. Mark it down a few cents, and suddenly you have a viable product. That is the nature
of consumer behavior, and you will not get around it, no matter how hard you try.
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Interactive strategies
• Business strategy choices
depend on what
competitors do (they are
interactive).
• Fig: how firms might
respond to the entry of a
low price rival.
Source: Kumar, N. (2006). ‘A framework

for responding to low-cost rivals’ Harvard
Business School Publishing.
22
Interactive strategies - hypercompetition
• Hypercompetition describes markets with continuous disequilibrium and
change.
• It may be impossible to plan for long-term sustainable competitive
advantage.
• Planning may actually destroy competitive advantage by slowing down
responses.
• Successful hypercompetition demands speed and initiative rather than
defensiveness.
23
Business models
• A business model describes a value proposition for customers and other
participants, an arrangement of activities that produces this value and
associated revenue and cost structures.
• New entrants with new business models can radically change the
dynamics and competition in a market and establish superior positions
(e.g. Uber, Spotify).
24
Business models
• Business model components
• Value creation – a
proposition that addresses
customer segment’s needs.
• Value configuration – the
way resources and
activities are organised to
produce this value.
• Value capture – the way
the cost structures and
revenue streams create
added value for
stakeholders. 25
Business models
• Business models once established are often taken for granted. Models can
become institutionalised and form a ‘recipe’ for the industry.
• Even if competitors share a business model their strategies may still
differ.
26
Business models
• Typical business model patterns are:
• Razor and blade – named after the Gillette strategy of selling razors
cheaply and profiting from sales of high priced blades.
• Freemium – named by combining ‘free’ and ‘premium’. Basic services
are free to attract customers who then upgrade to expensive premium
services.
• Multi-sided platforms – bringing together two or more distinct but
interdependent groups of participants.
27
Summary
• Business strategy is concerned with seeking competitive advantage in
markets at the business rather than corporate level. Porter’s framework
and the Strategy Clock define various generic strategies, including cost
leadership, differentiation, focus and hybrid strategies.
• In hypercompetitive conditions, sustainable competitive advantage is
difficult to achieve and competitors need to carefully consider moves and
counter-moves.
• Cooperative strategies may offer alternatives to competitive strategies.
• Game theory encourages managers to get in the mind of competitors and
think forwards and reason backwards.
• A business model describes the business logic of an enterprise including
the domains of value creation, value configuration and value capture.
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Reading
Lecture material based on:
• Johnson, G., Scholes, K., Whittington, R., Regner, P., and Angwin, D. (2018).
Fundamentals of Strategy, Pearson, 4th Edition, Chapter 6.
• Whittington, R., Regner, P., Scholes, K., Angwin, D., and Johnson, G. (2017).
Exploring Strategy: Text and Cases, Pearson, 11th Edition, Chapter 7.
Additional supporting texts:

• Barney, J.B. and Hesterly, W.S. (2019). Strategic Management and Competitive
Advantage: Concepts and Cases, Pearson, Global Edition, 6th Edition, Chapter 4, 5.
• Lynch, R. (2018). Strategic Management, Pearson, 8th Edition, Chapter 8.
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UNDERSTANDING BUSINESS STRATEGY & MODELS

IAN LEWIS ROGERS

• Assess business strategy in terms of the generic strategies of cost

• Note: Large companies

features. The cost leader can then

Source: Kumar, N. (2006). ‘A framework

Additional supporting texts:

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