BUSINESS and CORPORATE LEVEL STRATEGY

(Lec:6)

Asst. Professor Mngt. Science (USA), IMRAN HUSSAIN

BUSINESS and CORPORATE LEVEL STRATEGY

Business strategy... is concerned with how the firm competes within a particular industry or market... to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.

BUSINESS and CORPORATE LEVEL STRATEGY

Corporate Strategy.. defines the scope of the business in terms of the industries and markets in which it competes. includes decisions about diversification, vertical integration, acquisitions, new ventures, divestments, allocation of scarce resources between business units.

Objectives
The Strategy Clock. Sustainable Competitive Advantage. Game Theory. Strategic directions (Ansoff matrix). Portfolio Matrix (BCG Matrix).

Strategic Options
Product/market, resource/capability and implementation method may be grouped to form strategic options
Small number Combining top-down and bottom-up thinking

Strategic Options tested:

Aligned with strategic intent Feasible in terms of capabilities and resources Acceptable to those who have to approve and implement it
5

Who should be involved with strategic choice?

Political as much as logical process Political reality revealed by asking: Who stands to gain or lose? How will existing coalitions be affected? Who may be seen to have originated choices? Board approval is one thing Support from those who will make it happen is also essential
6

The Strategy Clock

Point No. 1

Bowmans competitive strategy options

High Hybrid
3

Differentiation Focused 4 differentiation

5

PERCEIVED ADDED VALUE

Low 2 price

7 8

Low price/ low added value Low Low

Strategies destined for ultimate failure

High PRICE Source: Based on the work of Cliff Bowman. See C.Bowman and D.Faulkner. Competitive and Corporate Strategy, Irwin, 1996.

The strategy clock

1 2 3 4 Low price/low added value Likely to be segment specific. Low price Risk of price war and low. margins/need to be cost leader. Hybrid Low cost base and reinvestment in low price and differentiation. Differentiation (a) Without price premium Perceived added value by user, yielding market share benefits. (b) With price premium Perceived added value sufficient to bear price premium. Focused differentiation Perceived added value to a particular segment, warranting price premium. Increased price/standard Higher margins if competitors do not value follow/risk of losing market share. Increased price/low value Only feasible in monopoly situation. Low value/standard price Loss of market share.

5 6 7 8

Low price strategies could be successful if:

The competitor is the cost leader ... but is this sustainable? All sources of cost advantages are exploited, developing competences in low cost management ... but the danger is a low (perceived) value product or service. A competitor has cost advantage over competitors in a price sensitive markets segment ... but this may mean focusing on that market segment.

The Success of Differentiation Strategies depends on

Clear identification of who the customer is Understanding what is valued by the customer Clear identification of who the competitors are and the value they offer Bases of differentiation which are difficult to imitate The recognition that bases of differentiation may need to change

Focused Differentiation
Global market developments increase the need for focus. Clear definition of market segments in terms of customers needs is required. Within a market segment choices of strategic direction relate to competitors within that segment. Multi-focused strategies may be possible in some markets. New ventures started through focus strategies may be difficult to grow. Differences between segments may be eroded making bases of focus redundant.

Key Questions in Strategic Choice

Strategic choices need to take account of the environment and build on core competences Strategic choices need to take account of the expectations and influence of stakeholders Strategic direction and methods should build on broad strategic choices Resources and competences should be developed to deliver and sustain the chosen strategies

Sustainable Competitive Advantage

Point No. 2

Sustainable Competitive Advantage

Having a competitive advantage is necessary for a firm to compete in the market But what is more important is whether the competitive advantage is sustainable A firm must identify its position relative to the competition in the market By knowing if it is a leader, challenger, follower or nicher, it can adopt appropriate strategies to compete

Continued
A good strategist seeks not only to win the hill, but hold on to it. (Subash Jain) Sustaining competitive advantage requires erecting barriers against the competition Aakers suggested looking at the following: How you compete Basis of competition Where you compete Whom you are competing against

Examples of SCA
For many years, Singapore Airlines were riding on its SCA of having the best in-flight service As more airlines improved their service and narrowed the gap, SIA sought other competitive advantages among which are The most modern fleet Outstanding Service on the Ground A super entertainment system in its cabins Comfort in its First Class cabins at an unparallel level Discuss whether the later initiatives had been sustainable

Continued
1. Sustaining Price-Based Strategy. 2. Sustaining Differentiation-Based Strategy. 3. Strategy Lock-in.

1- Sustaining Price-Based Strategy

Lower margin operations. Unique cost structure. Organization specific capabilities. Focus on market segments. Drawbacks: Competitors same approach. Customers association. Inability to pursue differentiation strategy.

2- Sustaining Differentiation-Based Strategy

Create difficulties of imitation. Imperfect mobility. Lower-cost position.

3- Strategy Lock-in
Size and market dominance. First mover dominance. Self-reinforcing commitment. Insistence on the preservation.

Game Theory
Point No.3

An example: Big Monkey and Little Monkey

Monkeys usually eat ground-level fruit Occasionally climb a tree to get a coconut (1 per tree) A Coconut yields 10 Calories Big Monkey expends 2 Calories climbing the tree. Little Monkey expends 0 Calories climbing the tree.

Continued
If BM climbs the tree
BM gets 6 C, LM gets 4 C LM eats some before BM gets down

If LM climbs the tree

BM gets 9 C, LM gets 1 C BM eats almost all before LM gets down

If both climb the tree

BM gets 7 C, LM gets 3 C BM hogs coconut

How should the monkeys each act so as to maximize their own calorie gain?

Continued
Assume BM decides first Two choices: wait or climb LM has four choices: Always wait, always climb, same as BM, opposite of BM. These choices are called actions A sequence of actions is called a strategy

Continued
Big monkey
w w c c

Little monkey

w 0,0

9,1

6-2,4

7-2,3

What should Big Monkey do? If BM waits, LM will climb BM gets 9 If BM climbs, LM will wait BM gets 4 BM should wait. What about LM? Opposite of BM (even though well never get to the right side of the tree)

Continued
These strategies (w and cw) are called best responses. Given what the other guy is doing, this is the best thing to do. A solution where everyone is playing a best response is called a Nash equilibrium. No one can unilaterally change and improve things. This representation of a game is called extensive form.

Continued
What if the monkeys have to decide simultaneously?
Big monkey

w
w

c c

Little monkey

w 0,0

9,1

6-2,4

7-2,3

Now Little Monkey has to choose before he sees Big Monkey move Two Nash equilibria (c,w), (w,c) Also a third Nash equilibrium: Big Monkey chooses between c & w with probability 0.5 (mixed strategy)

Continued
It can often be easier to analyze a game through a different representation, called normal form
Little Monkey c Big Monkey c v v

5,3

4,4

9,1

0,0

Continued
In the simultaneous game, its harder to see what each monkey should do
Mixed strategy is optimal.

Trick: How can a monkey maximize its payoff, given that it knows the other monkeys will play a Nash strategy? Oftentimes, other techniques can be used to prune the number of possible actions.

Eliminating Dominated Strategies

The first step is to eliminate actions that are worse than another action, no matter what.
Big monkey w Little monkey w w c w c c 9,1 c 4,4

0,0

9,1

6-2,4

7-2,3

Little Monkey will Never choose this path.

Or this one

We can see that Big Monkey will always choose w. So the tree reduces to: 9,1

Continued
We can also use this technique in normalform games:
Column a b

a Row b

9,1

4,4

5,3

0,0

Continued
We can also use this technique in normalform games:
a b

a b

9,1

4,4

5,3

0,0

For any column action, row will prefer a.

Continued
We can also use this technique in normalform games:
a b

a b

9,1

4,4

5,3

0,0

Given that row will pick a, column will pick b. (a,b) is the unique Nash equilibrium.

Prisoners Dilemma
Each player can cooperate or defect
Column
cooperate defect

cooperate
Row defect

-1,-1

-10,0

0,-10

-8,-8

Continued
Each player can cooperate or defect
Column
cooperate defect

cooperate
Row defect

-1,-1

-10,0

0,-10

-8,-8

Defecting is a dominant strategy for row

Continued
Each player can cooperate or defect
Column
cooperate defect

cooperate
Row defect

-1,-1

-10,0

0,-10

-8,-8

Defecting is also a dominant strategy for column

Continued
Even though both players would be better off cooperating, mutual defection is the dominant strategy. What drives this?
One-shot game Inability to trust your opponent Perfect rationality

Continued
Relevant to:
Arms negotiations Online Payment Product descriptions Workplace relations

How do players escape this dilemma?

Play repeatedly Find a way to guarantee cooperation Change payment structure

Tragedy of the Commons

Game theory can be used to explain overuse of shared resources. Extend the Prisoners Dilemma to more than two players. A cow costs a dollars and can be grazed on common land. The value of milk produced (f(c) ) depends on the number of cows on the common land. Per cow: f(c) / c

Continued
To maximize total wealth of the entire village: max f(c) ac.
Maximized when marginal product = a Adding another cow is exactly equal to the cost of the cow.

What if each villager gets to decide whether to add a cow? Each villager will add a cow as long as the cost of adding that cow to that villager is outweighed by the gain in milk.

Continued
When a villager adds a cow:
Output goes from f(c) /c to f(c+1) / (c+1) Cost is a Notice: change in output to each farmer is less than global change in output.

Each villager will add cows until output- cost = 0. Problem: each villager is making a local decision (will I gain by adding cows), but creating a net global effect (everyone suffers)

Continued
Problem: cost of maintenance is externalized Farmers dont adequately pay for their impact. Resources are overused due to inaccurate estimates of cost. Relevant to: IT budgeting Bandwidth and resource usage, spam Shared communication channels Environmental laws, overfishing, whaling, pollution, etc.

Avoiding Tragedy of the Commons

Private ownership Prevents TOC, but may have other negative effects. Social rules/norms, external control Nice if they can be enforced. Taxation Try to internalize costs; accounting system needed. Solutions require changing the rules of the game Change individual payoffs Mechanism design

Ansoff Matrix
Point No. 4

Background
Long-term business strategy is dependant on planning for their introduction. Ansoff Matrix represents the different options open to a marketing manager when considering new opportunities for sales growth.

Variables in the matrix

Two variables in Strategic marketing Decisions:
The market in which the firm was going to operate The product intended for sale

In terms of the market, managers had two options:

Remain in the existing market Enter new ones

Continued
In terms of the product, the two options are:
selling existing products developing new ones

Existing

PRODUCTS
INCREASING RISK

New

Existing

MARKET PENETRATION

PRODUCT DEVELOPMENT
INCREASING RISK

Sell more in existing Markets MARKETS MARKET EXTENSION

Sell new products in existing markets

DIVERSIFICATION

New

Achieve higher sales/market share of existing products in new markets

Sell new products in new markets

Existing

PRODUCTS
INCREASING RISK

New

Existing

MARKET PENETRATION

INCREASING RISK

Sell more in existing Markets MARKETS

New

1- MARKET PENETRATION
This is the objective of higher market share in existing markets. E.g. in 2000, Mitsubishi announced a 10% reduction in prices in the UK in order to encourage purchases

Continued
Retaliation from competitors. Legal constraints. Defending market share. Downsizing or divestment.

Existing

PRODUCTS
INCREASING RISK

New

Existing

MARKET PENETRATION

INCREASING RISK

Sell more in existing Markets MARKETS MARKET EXTENSION

New

Achieve higher sales/market share of existing products in new markets

2- MARKET EXTENSION
This is the strategy of selling an existing product to new markets. This could involve selling to an overseas market, or a new market segment. Nintendo are making hand held games consoles (e.g. DS) appeal to the adult/grey market by introducing games such as Brain Train.

Continued
New segments. New users. New geographies.

Existing

PRODUCTS

New

Existing

MARKET PENETRATION

INCREASING RISK
PRODUCT DEVELOPMENT

INCREASING RISK

Sell more in existing Markets MARKETS

Sell new products in existing markets

MARKET EXTENSION

New

Achieve higher sales/market share of existing products in new markets

3- PRODUCT DEVELOPMENT
Where an organization deliver modified or new products to existing markets. Least risky of all four strategies. E.g. Coca-Cola. This has been developed to have vanilla, lime, cherry and diet varieties (amongst others) in the SOFT DRINKS market.

Continued
New strategic capabilities. Project management risk.

Existing

PRODUCTS
INCREASING RISK

New

Existing

MARKET PENETRATION

PRODUCT DEVELOPMENT
INCREASING RISK

Sell more in existing Markets MARKETS MARKET EXTENSION

Sell new products in existing markets

DIVERSIFICATION

New

Achieve higher sales/market share of existing products in new markets

Sell new products in new markets

4- DIVERSIFICATION
This is the process of selling different, unrelated goods or services in unrelated markets This is the most risky of all four strategies. E.g. the Virgin group

Summary
Risks involved differ substantially The matrix identifies different strategic areas in which a business COULD expand Managers need to then asses the costs, potential gains and risks associated with the other options

Portfolio Matrix
Point No. 5

The Boston Matrix

A means of analysing the product portfolio and informing decision making about possible marketing strategies. Developed by the Boston Consulting Group a business strategy and marketing consultancy in 1968. Links growth rate, market share and cash flow.

1- Stars
Products in markets experiencing high growth rates with a high or increasing share of the market. - Potential for high revenue growth.

2- Cash Cows
High market share Low growth markets maturity stage of PLC Low cost support High cash revenue positive cash flows

3- Dogs
Products in a low growth market. Have low or declining market share (decline stage of PLC). Associated with negative cash flow. May require large sums of money to support.

Is your product starting to embarrass your company?

4- Problem Child
- Products having a low market share in a high growth market. - Need money spent to develop them. - May produce negative cash flow. - Potential for the future?
Problem children worth spending good money on?

The Boston Matrix

Market Growth High

Problem Children

Stars

Dogs

Cash Cows

Low

Market Share High

The Boston Matrix

Implications: Dogs:
Are they worth persevering with? How much are they costing? Could they be revived in some way? How much would it cost to continue to support such products? How much would it cost to remove from the market?

The Boston Matrix

Implications: Problem Children:
What are the chances of these products securing a hold in the market? How much will it cost to promote them to a stronger position? Is it worth it?

The Boston Matrix

Implications: Stars:
Huge potential May have been expensive to develop Worth spending money to promote Consider the extent of their product life cycle in decision making

The Boston Matrix

Implications: Cash Cows:
Cheap to promote Generate large amounts use for further R&D? Costs of developing have largely gone Need to monitor their the long term? At the maturity stage of the PLC? of and cash

promoting

performance

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