Strategy Formulation

Business Strategy

Prof. Rushen Chahal

Business Strategy Focuses on improving the competitive position of a companys or business units product or services within the specific industry or market segment that the company or business unit serves.

Business Strategy

Competitive Cooperative

Competitive Strategies Should we compete on the basis of low cost, or should we differentiate our products or services on some basis other than cost? Should we compete head to head with our major competitors for the biggest share of market, or should we focus on a niche ?

Competitive Strategies

A firm cannot be everything to everybody; it must choose what to do and what not to do. Michael Porter

Michael Porters Generic Strategies (1985)

Competitive Advantage
Lower Cost Narrow Target Broad Target Competitive Scope Differentiation

Cost leadership

Differentiation

Cost Focus

Differentiation Focus

Michael Porters Generic Strategies Cost leadership strategywhere the organizations resources and attention are directed toward minimizing costs to operate more efficiently than the competition. Such firms exploit economies of scale, scope and learning (experience) effects and are obsessed with efficiency and cost control.

Michael Porters Generic Strategies The cost leader is able to charge lower price for its products than its competitors and still make a satisfactory profit. Having a low cost position gives a company a defense against rivals:  The cost leader has high market share which leads to high bargaining power relative to its suppliers.  Its low price is a barrier to entry

Michael Porters Generic Strategies Differentiation strategywhere the organizations resources and attention are directed toward distinguishing its products from those of the competition. The specialty can be associated with design or brand image, technology, features, dealer network, or customer service. The resulting brand lowers customers sensitivity to price. Buyer loyalty serves as an entry barrier

Michael Porters Generic Strategies

Differentiation strategy is more likely to generate higher profits than is a low-cost strategy. But a low-cost strategy is more likely, however, to generate increases in market share.

Michael Porters Generic Strategies

Focused differentiation strategywhere the organization concentrates on one special market segment and tries to offer customers in that segment an unique product. Focused cost leadership strategywhere the organization concentrates on one special market segment and tries to be the lowest cost provider in that segment.

Michael Porters Generic Strategies

Competitive Advantage
Lower Cost Narrow Target Broad Target Competitive Scope Differentiation

Nissan Tesco Dell Computers

Mercedes cars Maytag Apple Computer

Smaller retailers featuring own-label or discounted products

Any successful niche retailers

Mintzbergs Four Generic Approaches to Scope Unsegmentation: the firm offers the same products across a broad range of market segments e.g. Coca Cola, Wal-Mart, Google Segmentation: the firm still addresses a broad range of market segments but designs different products for those segments, e.g. Honda, Dell, British Airways Niche: the firm focuses on one segment of the market e.g. Ryanair, Cray Computers, Morgan Cars Customisation: the firm focuses on individual customers and shapes their offering to the unique requirements of that buyer, e.g. event organization, golf course design

Mintzbergs Differentiation Strategies (1998)

Strategy Price (low cost) Description A lower price than rivals e.g. the no frills airlines versus the big carriers in the US and Europe A brand or reputation e.g. Coca cola, Mercedes, Gucci, Harvard Business School, etc. Provision of back-up or after sales service e.g. Dell A more durable or reliable product or one with higher performance e.g. digital cameras (pixels) Different product functions e.g. pharmaceuticals, mobile phones Same as the others e.g. Car rental firms, financial service firms, petrol stations, steel companies etc.

Image

Support Quality

Design Undifferentiation

Risks in Competitive Strategies

Risks of Cost Leadership
CL is not sustained: Competitors intimate Technology changes Other bases for cost leadership erode Proximity in differentiation is lost

Risks of Differentiation
Dif is not sustained: Competitors intimate Bases for differentiation become less important to buyers Cost proximity is lost

Risks of Focus
Focus strategy is imitated The target segment becomes unattractive: Structure erodes Demand disappears Broadly targeted competition: The segments differences from other segments narrow The advantages of broad line increase New focusers subsegment the industry

Cost focuses achieve even lower cost in segments

Differentiation focuses achieve even greater differentiation in segments

Requirements for Generic Competitive Strategies

Generic Strategy Overall Cost Leadership Commonly Required Skills and Resources
Sustained capital investment & access to capital  Process engineering skills  Intense supervision of labor Product designed for ease of manufacture Low-cost distribution system
 Strong

Common Organizational Requirements

Tight cost  Frequent, detailed control reports Structured organization & responsibilities Incentives based on meeting strict quantitative targets


Differentiation

marketing abilities Product engineering Creative flair Strong capability in basic research Corporate reputation Long tradition in industry Strong cooperation from channels
Combination

Focus

of above policies directed at the particular strategic target

coordination among functions in R&D, product development & marketing Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labor, scientists, or creative people Combination of above policies directed at the particular strategic target

Strong

Hypercompetition and Competitive Strategies It is becoming increasingly difficult to sustain a competitive advantage for very long (DAveni): Short product life cycles Short product design cycles New technologies Frequent entry by unexpected outsiders The only way to sustain any competitive advantage is through a continuous series of multiple short-term initiatives aimed at replacing a firms current successful products with the next generation of products (Intel, Microsoft).

Tactics for Achieving Dynamic Fit by Constantinos Markides

Build an early monitoring system to identify turning points in business Monitor new entrants, niche players and newly established firms Do not focus too much on your existing customers monitor fringe customers Seek feedback from suppliers, customers, distributors and employees Create a culture that welcome change Institutionalize a questioning attitude

Tactics for Achieving Dynamic Fit by Constantinos Markides

Shock the system into active thinking through the creation of positive crises Develop processes which allow for continuous experimentation of ideas Build a variety of competencies (build core competencies into diverse product lines) Allow slack in the system Encourage decentralized decision-making (within clear parameters by top management) Continuously challenge the organizations unquestioned assumptions and sacred cows

Competitive Tactics
Timing Tactics (when) First mover Late mover Market location tactics (where) Offensive tactics
Frontal assault Flanking maneuver Bypass Attack Encirclement

Guerrilla warfare Defensive tactics

Raise structural barriers Increase expected retaliation Lower the inducement for attack

Cooperative Strategies
Cooperative strategies can also be used to gain competitive advantage within an industry by working with other firms. Collusion Strategic alliance

Cooperative Strategies
Collusion is active cooperation of firms within industry to reduce output and raise prices in order to get around the normal economic law of supply and demand. Explicit - through direct negotiations, is illegal in most countries Tacit through informal system of signals

Cooperative Strategies
Strategic alliance is a partnership of two or more corporations or BU to achieve strategically significant objectives that are mutually beneficial. Reasons: To obtain technology and/or manufacturing capabilities To obtain access to specific markets To reduce financial risks To reduce political risk To achieve or ensure competitive advantage