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DM 2 -Str Mngmnt-30 Nov 09 1
IMDR - PGDM 2Strategic Management - 2009
November 30 ppt
Part III on Strategic Choices
Chapters 5 : Business level Strategy
DM 2 -Str Mngmnt-30 Nov 09 2
We Now Switch Over to - -
Strategic Choices
DM 2 -Str Mngmnt-30 Nov 09 3
Strategic Choice
• Concerned with ways to respond to influences identified in Strategic Analysis
• Concerned with decisions about an organization’s future
• The framework helps to promote a wider consideration of strategy
• It also helps to decide on appropriateness and consequences of options available
DM 2 -Str Mngmnt-30 Nov 09 4
Strategic Choice (Contd)• Discussion divided into three mutually
consistent elements to develop a strategy
– Business Level Strategy ( Chapter 5)
– Corporate Level Strategy and international Strategy (Chapter 6)
– Choices of Directions and Methods for Development (Chapter 7)
DM 2 -Str Mngmnt-30 Nov 09 5
Outline for Discussion• Concept of Strategic Business Units• Alternatives for Competitive Advantage (Strategy
Clock) for each SBU– Price Based– Differentiation– Hybrid & Focus
• Work for Sustainability of Competitive Advantage• Recourse to Co-operation to maintain Competitive
Advantage• So, we first discuss Strategy Choices at SBU level
DM 2 -Str Mngmnt-30 Nov 09 6
SBUs – Definition and Basics
• A SBU Definition: “A SBU is a part of an organization for which there is a distinct external market for goods or services that is different from another SBU”
• Opposing pitfalls in identifying SBUs
– Too many different products/markets means lack of focus
– Too few means not reflecting diversity of products/markets
DM 2 -Str Mngmnt-30 Nov 09 7
Criteria for Identifying SBUs
External Internal
Same customer types Similar products/services
Same channels Similar technologies
Similar competitors Similar resources and competences
DM 2 -Str Mngmnt-30 Nov 09 8
Bases of Competitive Advantage• Competitive strategy
– The bases for achieving competitive advantage – The bases for providing best value
• Porter’s generic strategies– Cost leadership– Differentiation – Focus
• Bowman and D’Aveni’s market facing strategies– Provide customer needs better or more
effectively than competitors– The strategy clock (Enlarging Porter’s three)
DM 2 -Str Mngmnt-30 Nov 09 9
The Strategy Clock
DM 2 -Str Mngmnt-30 Nov 09 10
The Strategy Clock - Needs & Risks
Price Based Strategies
Needs/Risks
1. No Frills More Likely to be segment specific
2. Low Price Entails price wars and low margins, hence, need to
be cost leader
DM 2 -Str Mngmnt-30 Nov 09 11
Need & Risks - - - Continued
Differentiation-based Strategies3. Hybrid - - - Achieve Low Cost Base and need for
reinvestment in low price and differentiation
4. Differentiation(a) Without price premium - - - Through perceived
added value by user to yield market share benefits
(a) With price premium - - - - Through perceived added value sufficient to bear price premium
5. Focused Differentiation - - - Perceived added value to a particular segment, warranting price premium
DM 2 -Str Mngmnt-30 Nov 09 12
Need & Risks - - - Continued
Strategies Likely to be Failure ( 6,7,8)
Increased Price/Standard Value - - - When higher margins are realized if competitors do not follow immediately; nut, risk losing market share
Increased Price/Low Value - - - Only feasible in monopoly situation
Low Value/Standard Price - - - Risk Loosing of Market Share
DM 2 -Str Mngmnt-30 Nov 09 13
“””“No Frills” StrategyLow price
Low perceived product/service benefitsFocus on price-sensitive market segment
Low price
Low perceived product/service benefits
Focus on price-sensitive market segment
• For Commodity-like products or services• For non-affording Price Sensitive Customers• When buyer power is or when switching costs are low; generally, if customer loyalty is difficult• When number of providers are small, and if market shares & cost structures are almost same• For low-price segment If major competitors are on non-prise basis
DM 2 -Str Mngmnt-30 Nov 09 14
Low Price Strategy- Lower price than competitors
- Maintain similar product/service benefits
• Pitfalls of low price strategy- Margin reduction (Competitor reaction)- Inability to reinvest to develop the product, leading to loss of perceived benefit of product
• Hence, Low Cost Base is essential- Low cost by itself may not be a basis for advantage since it could be imitated. Hence,- Low cost achieved in ways that competitors cannot match to give sustainable advantage
DM 2 -Str Mngmnt-30 Nov 09 15
Differentiation Strategies1. Offering benefits different from competitors
2. Widely valued by buyers3. Better products/services at same/higher prices
• Success depends on Identification of Strategic Customers and knowing what they value, • And, on Knowing the Competitors
- Adopt Focused differentiation if competitor base is small/narrow
- If competitor base is wide, address on “what parameters differentiate” for value to customers
DM 2 -Str Mngmnt-30 Nov 09 16
Hybrid StrategySimultaneously achieving differentiation & lower price
Could be advantageous in the following cases:
• If much greater greater volumes can be achieved than competitors, thus decreasing costs to enlarge margins
• If there is clarity about activities on which differentiation can be built (core competences)
– And, be able to reduce costs on other activities
• Use the Hybrid Strategy to enter a market where there are already established competitors
DM 2 -Str Mngmnt-30 Nov 09 17
Focused Differentiation High perceived product/service benefits to niche market segments & Premium branded products
• First, Choice to be made between focused differentiation (5) and broad differentiation (4)
• Difficult when the focus strategy is applicable only for part of an organization’s overall strategy
• Possible conflicts with stakeholder expectations, when the focused benefits are not uniform
• New ventures usually start off this way, but it may be difficult to grow with focused approach
• Market situation may change, making focus irrelevant, if differences in segments get reduced
DM 2 -Str Mngmnt-30 Nov 09 18
Failure Strategies Results if perceived value-for-money does
not get provided in terms of product features or price, or both
• For example, Increase price without increasing benefits in products or services
• Or, Reduce benefits whilst maintaining price
DM 2 -Str Mngmnt-30 Nov 09 19
Sustaining Competitive Advantage
When the Strategies are price based:
• Be ready to accept reduced margin (either because higher volumes or by cross-subsidies)
• Get ready to sustain and Win a Price War
• Reduce Costs through organization specific strategic capabilities
• Focus on Specific Segments that value price
DM 2 -Str Mngmnt-30 Nov 09 20
Sustaining Competitive Advantage- (Continued)
If the Strategies are differentiation-based:
• Create Difficulties of imitation
• Achieve imperfect mobility (of resources/competences e.g. key R & D personnel)– Many intangible assets such as brand, image
or reputation are difficult for imitation
DM 2 -Str Mngmnt-30 Nov 09 21
Sustaining Competitive Advantage- (Continued)
Derive sustenance by achieving “Lock-in” Status - - - - achieving proprietary position in the industry by creating the industry’s standard - - like what IBM, or Microsoft, Xerox, Intel had achieved
• By Achieving Size/Market Dominance• By deriving First Mover Advantage• Reinforcement• Rigorous Enforcement thorough insistence on
conformities to standards thus seeing off competitors
DM 2 -Str Mngmnt-30 Nov 09 22
Competitive Strategies in Hyper-competitive Conditions
To compete Successfully in hyper-competitive situations (turbulent/uncertain environment, and/or increased levels of competition)
Successful ingredients for such strategies are:
• Preempt competition (new strategies for competing)
• May be unwise to attack competitors’ weaknesses, since they get prepared for it
• Become unpredictable; predictability is dangerous
• Keep sending Misleading Signals to Competitors
DM 2 -Str Mngmnt-30 Nov 09 23
Competitive Strategies in Hyper-competitive Conditions - Continued
To overcome competitors’ barriers
• Practice Shorter life cycles
• Undermine Competitors’ strongholds
• Find ways to counter competitors’ deep-pocket advantages (when they have surplus resources to withstand your competing)
DM 2 -Str Mngmnt-30 Nov 09 24
Competitive Strategies in Hyper-competitive Conditions - Continued
To overcome competitors’ market-based moves
• Block potential first mover advantages, say by leapfrogging into a superior product
• Imitate product/market moves of competitors so that all of you have same issues on sustenance of advantage
DM 2 -Str Mngmnt-30 Nov 09 25
Competitive Strategies in Hyper-competitive Conditions - Continued
Or, else
• Reposition on the Strategy Clock
• This is feasible even to think only if the organization is extremely agile
• Still, such repositioning has to be safeguarded against imitation
DM 2 -Str Mngmnt-30 Nov 09 26
Competition and CollaborationCollaboration may help to achieve
advantage or avoid competition
• Using Five-force model concepts, Collaboration can be– Between potential competitors– Or, between buyers and sellers
• Can help build switching costs
DM 2 -Str Mngmnt-30 Nov 09 27
Competition and Collaboration - Continued
Competitiveness might be improved by collaboration to achieve (Use 5-force model):
• Increased selling power• Increased buying power• Increased barriers to entry• Decreased risks of substitution• Entry to new markets• Shared work with customers• Stakeholder expectations