SM Lecture Five : Business Strategy

Strategic Management BUSM 3200

These Lecture Slides summarize the key points covered in the respective chapters in your

recommended text; these slides do NOT substitute, at all, the required reading of the assigned

chapter from the text. These slides also may contain additional supplementary material extracted

from other texts and sources outside your text book.

5-1 BUSM 3200- Strategic Management (Jan 2013) GDS

The importance of Business Strategy topic:

Is very important part of the group assignment as Business Strategy is a key aspect of the discussion in the report

Section 5 of the report asks you to discuss the type of generic business strategy the firm (or SBU) implements by examining its strategy statement and/or its value chain activities.


Classifying Strategies

Strategies can be depicted in many ways and hence use different models

How do we compete? Generic Strategies

Where are we going? Strategic Directions (Ansoff Matrix)

Under what contexts or conditions do we develop strategy?

Level of the business: corporate or SBU

Stage of Industry Maturity (Growth or Maturity)

Scope of operation (local or international?)

Scale of operation (SME- entrepreneurial strategy)

So there are many ways of describing ‘strategy’ 5-3 BUSM 3200- Strategic Management (Jan 2013) GDS

The focus of part 2: strategic choices

How organisations relate to competitors in terms of their competitive business strategies.

How broad and diverse organisations should be in terms of their corporate portfolios.

How far organisations should extend themselves internationally.

How organisations are creative and innovative.

How organisations pursue strategies through organic development, acquisitions or strategic alliances.


Strategic choices

Figure II.i Strategic choices

5-5

This is the subject matter for Part 2 of the text

BUSM 3200- Strategic Management (Jan 2013) GDS

2–6 Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

The Strategy-Making Hierarchy

Corporate

Strategy

Multibusiness Strategy—how to gain synergies from managing a

portfolio of businesses together rather than as separate businesses

Business

Strategy

• How to strengthen market position and gain competitive advantage

• Actions to build competitive capabilities of single businesses

• Monitoring and aligning lower-level strategies

Functional Area

Strategies

• Add relevant detail to the how‘s of the business strategy

• Provide a game plan for managing a particular activity in ways that

support the business strategy

Operating

Strategies

• Add detail and completeness to business and functional strategies

• Provide a game plan for managing specific operating activities with

strategic significance

Two-Way Influence

Two-Way Influence

Two-Way Influence

4-6 5-6

Before we go into the topic of Business Strategy….

It is important to see how strategy fits into the total process of planning and strategic management

We have just completed the sections on External Analysis, Internal Analysis and Strategic Purpose

How does strategy link with those elements?

Remember that strategy is a “outcome” of external and internal analysis

Therefore any strategy that is proposed or analyzed must be mapped against the implications of internal and external analysis


Linking Strategy…..

5-8

Stra

teg

y

External analysis –

PESTEL

Industry analysis

Internal Resources

Capabilities

Competencies

Strategic Purpose

Vision, Mission,

Objectives

Implications for Strategy Formulation

Strategies developed must be aligned to taking advantage of opportunities or overcoming threats.

Strategies developed but leverage on the internal strengths of the firm.

Strategies developed must be consistent with the scope defined by the mission; strategies will be benchmarked by specific objectives


Copyright ©2011 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781442528680/Hubbard &

Beamish/Strategic Management/4th edition

Business strategic options: from current to future strategy

Gaps identified in analysis influence

future strategy choices

Large gaps may require a new business strategy

Small gaps suggest retaining current business

strategy and focus on implementation issues

(functional strategies)

A change of business strategy will

produce new gaps that must be

addressed 5-9



The Ansoff Matrix: Directions

/Options for Strategic Growth

Diversification

5-10

We will cover

this in Chapter7



Product and market options (Ansoff)

Growth in existing product-markets

Increase market share by increasing penetration eg:

Obtaining new customers

Increasing frequency of use

Increasing quantity used

New applications for current customers

Related products for existing market

Marketing new products related to current products eg:

Add features or refinements

Expand product line

New generation products

New products

5-11



Product and market options (Ansoff)

Existing products into related market

Finding new markets for existing products eg

Target new customer segments

Expand geographically

Other less common growth strategies include:

Related products into related markets

Existing and related products into unrelated markets

Unrelated products into existing and related markets

Unrelated diversification 5-12

Slide 6.13

Strategic Choices 6: Business Strategy

Learning outcomes for Chapter 6

Identify strategic business units (SBUs) in organisations.

Assess business strategy in terms of the generic strategies of cost leadership, differentiation and focus.

Identify business strategies suited to hypercompetitive conditions.

Assess the benefits of cooperation in business strategy.

Apply principles of game theory to business strategy.


Business strategy

Figure 6.1 Business strategy


Strategic business units (SBUs)

A strategic business unit (SBU) supplies

goods or services for a distinct domain of activity.

A small business has just one SBU.

A large diversified corporation is made up of multiple businesses (SBUs).

SBUs can be called ‘divisions’ or ‘profit centres’

SBUs can be identified by: Market based criteria (similar customers, channels and

competitors).

Capability based criteria (similar strategic capabilities).


The purpose of SBUs

To decentralise initiative to smaller units within the corporation so SBUs can pursue their own distinct strategy.

To allow large corporations to vary their business strategies according to the different needs of external markets.

To encourage accountability – each SBU can be held responsible for its own costs, revenues and profits.


Generic strategies

Porter introduced the term ‘Generic Strategy’ to mean basic types of competitive strategy that hold across many kinds of business situations.

Competitive strategy is concerned with how a strategic business unit achieves competitive advantage in its domain of activity.

Competitive advantage is about how an SBU creates value for its users both greater than the costs of supplying them and superior to that of rival SBUs.


Three generic strategies

Figure 6.2 Three generic strategies Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance

by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved



THE FIVE GENERIC COMPETITIVE STRATEGIES

Low-Cost

Provider

Striving to achieve lower overall costs than rivals on

products that attract a broad spectrum of buyers.

Broad

Differentiation

Differentiating the firm‘s product offering from rivals‘ with

attributes that appeal to a broad spectrum of buyers.

Focused

Low-Cost

Concentrating on a narrow price-sensitive buyer

segment and on costs to offer a lower-priced product.

Focused

Differentiation Concentrating on a narrow buyer segment by meeting

specific tastes and requirements of niche members

Best-Cost

Provider

Giving customers more value for the money by offering

upscale product attributes at a lower cost than rivals

5-20

Some authors suggest

there is a fifth strategy


There is also the view that it is possible to combine

different strategies

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Cost-leadership

Cost-leadership strategy involves becoming the lowest-cost organisation in a domain of activity.

Four key cost drivers that can help deliver cost leadership:

Lower input costs.

Economies of scale.

Experience.

Product process and design.



LOW-COST PROVIDER STRATEGIES

♦ Effective Low-Cost Approaches:

● Pursue cost-savings that are difficult imitate.

● Avoid reducing product quality to unacceptable levels.

♦ Competitive Advantages and Risks:

● Greater total profits and increased market share

gained from underpricing competitors.

● Larger profit margins when selling products at prices

comparable to and competitive with rivals.

● Low pricing does not attract enough new buyers.

● Rival‘s retaliatory price cutting set off a price war.

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Major Avenues for Achieving a Cost Advantage

♦ Low-Cost Advantage

● A firm‘s cumulative costs for its overall value chain

must be lower than its rival‘s cumulative costs.

♦ How to Gain a Low-cost Advantage:

● Do a better job than rivals of performing value chain

activities more cost-effectively.

● Revamp the firm‘s overall value chain to eliminate or

bypass cost-producing activities.

5-24

Economies of scale and the experience curve

Figure 6.3 Economies of scale and the experience curve



Cost-Efficient Management of Value Chain Activities

♦ Cost Driver

● Is a factor with a strong influence on a firm‘s costs.

● Can be asset- or activity-based.

♦ Ways to Secure a Cost Advantage:

● Use lower-cost inputs and hold minimal assets

● Offer only ―essential‖ product features or services

● Offer only limited product lines

● Use low-cost distribution channels

● Use the most economical delivery methods

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Costs, prices and profits for generic strategies

Figure 6.4 Costs, prices and profits for generic strategies


Cost-Leadership Strategy

Advantages:

Charge lower price than competitors but make the same level of profit

Withstand competition based on price

Disadvantages:

Easy to lose sight of changes in customers’ taste

Competitors will try to beat the cost leader at its own game

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When a Low-Cost Provider Strategy Works Best

♦ Price competition among rival sellers is vigorous.

♦ Products are readily available from many sellers.

♦ Industry products are not easily differentiated.

♦ Most buyers use the product in the same ways.

♦ Buyers incur low costs in switching among sellers.

♦ Large buyers have the power to bargain down prices.

♦ New entrants can use introductory low prices to attract

buyers and build a customer base.

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Pitfalls of a Low-Cost Provider Strategy

♦ Lowering selling prices results in gains that

are smaller than the increases in total costs,

reducing profits rather than raising them.

♦ Relying on a cost advantage that is not

sustainable because rivals can copy or

otherwise overcome it.

♦ Becoming too fixated on cost reduction such

that the firm‘s offering is too features-poor to

generate sufficient buyer appeal.

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Differentiation strategies

Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium.

Two key issues:

The strategic customer on whose needs the differentiation is based.

Key competitors – who are the rivals and who may become a rival.

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See Illustration 6.2 – Volvo in India



BROAD DIFFERENTIATION STRATEGIES

♦ Effective Differentiation Approaches:

● Carefully study buyer needs and behaviors, values

and willingness to pay a unique product or service.

● Incorporate features that both appeal to buyers and

create a sustainably distinctive product offering.

● Use higher prices to recoup differentiation costs.

♦ Advantages of Differentiation:

● Premium prices for products

● Increased unit sales

● Brand loyalty

5-32


Uniqueness Drivers: The Keys to Creating

a Differentiation Advantage

5-33

Differentiation in the US airline industry

Figure 6.5 Mapping differentiation in the US airline industry Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), ‗The US airlines relative positioning‘, Tourism Management, 26, 5, 57–67: p. 62


Differentiation Strategy

Advantages:

Customers develop brand loyalty for a product

Differentiation creates barriers to entry for other companies

Disadvantages:

Difficult to maintain uniqueness in the customer’s eye

Threat of substitute products

5-35


When a Differentiation Strategy Works Best

Diversity of

buyer needs

and uses for

the product

Many ways that

differentiation

can have value

to buyers

Few rival firms

follow a similar

differentiation

approach

Rapid change

in technology

and product

features

Market Circumstances

Favoring Differentiation

5-36


Pitfalls of a Differentiation Strategy

♦ Relying on product attributes easily copied by rivals.

♦ Introducing product attributes that do not evoke an

enthusiastic buyer response.

♦ Eroding profitability by overspending on efforts to

differentiate the firm‘s product offering.

♦ Not opening up meaningful gaps in quality, service, or

performance features vis-à-vis the products of rivals.

♦ Adding frills and features such that the product

exceeds the needs and uses of most buyers.

♦ Charging too high a price premium.

5-37

Focus strategies (1)

A focus strategy targets a narrow segment of domain of an activity and tailors its products or services to the needs of that specific segment to the exclusion of others.

Two types of focus strategy:

cost-focus strategy (e.g. Ryanair).

differentiation focus strategy (e.g. Ecover).



Focus strategy may be based on either of the two advantages

Figure 6.2 Three generic strategies Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance

by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved

5-39

Focus strategies (2)

Successful focus strategies depend on at least one of three key factors:

Distinct segment needs.

Distinct segment value chains.

Viable segment economics.


Focus Strategy

Advantages:

Customer loyalty lessens the threat of substitutes

Power over buyers because they cannot get the same product elsewhere

Disadvantages:

Suppliers have power over focused firms, making the firms vulnerable to changes

Vulnerable to attack, therefore must define its niche constantly

5-41


When a Focused Low-Cost or Focused Differentiation Strategy Is Attractive

♦ The target market niche is big enough to be profitable

and offers good growth potential.

♦ Industry leaders do not see that having a presence in

the niche is crucial to their own success.

♦ It is costly or difficult for multisegment competitors to

meet the needs of target market niche buyers.

♦ The industry has many different niches and segments.

♦ Rivals have little or no interest in the target segment.

♦ The focuser has a reservoir of buyer goodwill and

long-term loyalty.

5-42


The Risks of a Focused Low-Cost or Focused Differentiation Strategy

♦ Competitors will find ways to match the focused

firm‘s capabilities in serving the target niche.

♦ The specialized preferences and needs of niche

members to shift over time toward the product

attributes desired by the majority of buyers.

♦ As attractiveness of the segment increases, it

draws in more competitors, intensifying rivalry

and splintering segment profits.

5-43

‘Stuck in the middle’?

Porter’s 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’ i.e. doing no strategy well.

The argument for pure generic strategies is controversial.

Even Porter acknowledges that the strategies can be combined (e.g. if being unique costs nothing).


Combining generic strategies

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.

Competitive failures – if rivals are similarly ‘stuck in the middle’ or if there is no significant competition then ‘middle’ strategies may be OK.



Value-Conscious Buyer

BEST-COST PROVIDER STRATEGIES

Best-Cost Provider

Hybrid Approach

Differentiation:

Providing desired quality/

features/performance/

service attributes

Low Cost Provider:

Charging a lower price

than rivals with similar

caliber product offerings

5-46


Market Characteristics Favoring a Best-Cost Provider Strategy

♦ Product differentiation is the market norm.

♦ There are a large number of value-conscious buyers

who prefer midrange products.

♦ There is competitive space near the middle of the

market for a competitor with either a medium-quality

product at a below-average price or a high-quality

product at an average or slightly higher price.

♦ Economic conditions have caused more buyers to

become value-conscious.

5-47


The Big Risk of a Best-Cost Provider Strategy—Getting Squeezed on Both Sides

High-End

Differentiators

Low-Cost

Providers

Best-Cost

Provider

Strategy

5-48

Linking Business Strategy to other Porter Frameworks on Strategy

The Generic Business Strategies discussed by Professor Michael Porter is LINKED to the two frameworks we learnt in earlier lectures- the Five Forces Industry Model and the Value Chain

We need to ask two questions:

1. If a company pursues a given generic strategy, how would it impact its configuration of its “value chain”?

2. If a company pursues a given generic strategy, how does it help to mitigate or reduce the impact of threats as identified in the five forces model?


Linking Differentiation Strategy and Value Chain

5- 50

Differentiation Strategy impact on the specific

activities within the Value Chain

BUSM 3200- Strategic Management (Jan

2013) GDS


Translating Company Performance of Value Chain Activities

into Competitive Advantage – Differentiation Strategy

We covered VC in Lecture 3. Now see how this is linked to the

strategy of Differentiation (Porter)

3-51 5-51

Examples of Value-Creating Activities Associated with the Differentiation Strategy

SOURCE: Adapted with the permission

of The Free Press, an imprint of Simon &

Schuster Adult Publishing Group, from

Competitive Advantage: Creating and

Sustaining Superior Performance, by

Michael E. Porter, 47. Copyright © 1985,

1998 by Michael E. Porter.

5-52 BUSM 3200- Strategic Management

(Jan 2013) GDS

So we know there are 3 generic strategies: how then do you FIT this to the 5 Forces Model?

Differentiation Strategy

Focus Strategy

Cost Leadership Strategy Linkage?

4–53

How would Differentiation Strategy impact on the Five Forces?

DIFF Strategy

CL Strategy

Focus Strategy

4–54

Linking Differentiation Strategy and the Five Forces Model

5- 55

Differentiation Strategy impact

on the Five Forces

The strategies used following the differentiation approach should help to mitigate or reduce the impact of the threats created by the respective force

BUSM 3200- Strategic Management (Jan

2013) GDS

4–56

Differentiation Strategy: Competitors

Defends against competitors because brand loyalty to differentiated product offsets price competition.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Rivalry with

Competitors

Differentiation Strategy: Buyers

Can mitigate buyers’ power because well differentiated products reduce customer sensitivity to price increases.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Bargaining Power

of Buyers

5-57 5-57

Differentiation Strategy: Suppliers

Can mitigate suppliers’ power by:

Absorbing price increases due to higher margins.

Passing along higher supplier prices because buyers are loyal to differentiated brand.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Bargaining Power

of Suppliers

5-58 5-58

Differentiation Strategy: New Entrants

Can defend against new entrants because:

New products must surpass proven products.

New products must be at least equal to performance of proven products, but offered at lower prices.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

The Threat of

Potential Entrants

5-59 5-59

Differentiation Strategy: Substitutes

Well positioned relative to substitutes because:

Brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Product

Substitutes

5-60 5-60

5 - 61

Summary (differentiation strategy): Improving

Competitive Position vis-à-vis the Five Forces

• Differentiation

- Creates higher entry barriers due to customer

loyalty

- Provides higher margins that enable the firm to

deal with supplier power

- Reduces buyer power because buyers lack suitable

alternative

- Reduces supplier power due to prestige associated

with supplying to highly differentiated products

- Establishes customer loyalty and hence less threat

from substitutes

Linking Cost Leadership Strategy and Value Chain

Cost Leadership Strategy impact on the specific

activities within the Value Chain

5-62 BUSM 3200- Strategic

Management (Jan 2013)

GDS

62


Translating Company Performance of Value Chain Activities

into Competitive Advantage – Cost Leadership Strategy

3-63

We covered the Value Chain in Lecture 3. Now see how this is linked

to the strategy of Cost Leadership (Porter)

5-63

4–64

Examples of Value-Creating Activities Associated with the Cost Leadership Strategy

SOURCE: Adapted with the permission

of The Free Press, an imprint of Simon &

Schuster Adult Publishing Group, from

Competitive Advantage: Creating and

Sustaining Superior Performance, by

Michael E. Porter, 47. Copyright © 1985,

1998 by Michael E. Porter.



GDS

CL Strategy

DIFF Strategy

Focus Strategy

How would Cost Leadership Strategy impact on the Five Forces?

4–65

Linking Cost Leadership Strategy and the Five Forces Model

5- 66

Cost Leadership Strategy impact

on the Five Forces

The strategies used following the cost leadership approach should help to mitigate or reduce the impact of the threats created by the respective force

BUSM 3200- Strategic


GDS

Cost Leadership Strategy: Competitors

Due to cost leader’s advantageous position:

Rivals hesitate to compete on basis of price.

Lack of price competition leads to greater profits.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Rivalry with

Existing Competitors

5-67 BUSM 3200- Strategic Management (Jan 2013) GDS 5-67

Cost Leadership Strategy: Buyers

Can mitigate buyers’ power by:

Driving prices far below competitors, causing them to exit, thus shifting power with buyers back to the firm.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Bargaining Power

of Buyers


Cost Leadership Strategy: Suppliers

Can mitigate suppliers’ power by:

Being able to absorb cost increases due to low cost position.

Being able to make very large purchases, reducing chance of supplier using power.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Bargaining Power

of Suppliers


Cost Leadership Strategy: Substitutes

Cost leader is well positioned to:

Make investments to be first to create substitutes.

Buy patents developed by potential substitutes.

Lower prices in order to maintain value position.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

Product

Substitutes

5-70 5-70

Cost Leadership Strategy: New Entrants

Can frighten off new entrants due to:

Their need to enter on a large scale in order to be cost competitive.

The time it takes to move down the learning curve.

Threat of

new

entrants

Bargaining

power of

suppliers

Rivalry

among

competing

firms

Bargaining

power of

buyers

Threat of

substitute

products

The Threat of

Potential Entrants

5-71 5-71

5 - 72

Summary (cost leadership strategy): Improving

Competitive Position vis-à-vis the Five Forces

• An overall low-cost position

- Protects a firm against rivalry from competitors

- Protects a firm against powerful buyers

- Provides more flexibility to cope with demands

from powerful suppliers for input cost increases

- Provides substantial entry barriers from economies

of scale and cost advantages

- Puts the firm in a favorable position with respect to

substitute products

The Strategy Clock

Provides another way of approaching the generic strategies

The Strategy Clock has two distinctive features:

1. More Market- focused: focuses on price to customers rather than costs to organization

2. The circular design of the clock allows for more continuous choices rather than the discrete options offered in the Porter model; there is a full range of incremental adjustments that can be made


Strategy clock

Figure 6.6 The Strategy Clock Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995


Strategy clock - differentiation

Strategies in this zone seeks to provide products that offer benefits that differ from those offered by competitors.

A range of alternative strategies from:

differentiation without price premium (12 o’clock) – used to increase market share.

differentiation with price premium (1 o’clock) – used to increase profit margins.

focused differentiation (2 o’clock) – used for customers that demand top quality and will pay a big premium.


Strategy clock – low price

Low price combined with:

low perceived product benefits focusing on price sensitive market segments – a ‘no frills’ strategy typified by low cost airlines like Ryanair.

lower price than competitors while offering similar product benefits – aimed at increasing market share typified by Asda /Walmart in grocery retailing.


Strategy clock - hybrid

Seeks to simultaneously achieve differentiation and low price relative to competitors.

Hybrid strategies can be used:

to enter markets and build position quickly.

as an aggressive attempt to win market share.

to build volume sales and gain from mass production.


Strategy clock – non-competitive

Increased prices without increasing service/product benefits.

In competitive markets such strategies will be doomed to failure.

Only feasible where there is strategic ‘lock-in’ or a near monopoly position.


Strategic lock-in

Strategic lock-in is where users become dependent on a supplier and are unable to use another supplier without substantial switching costs.

Lock-in can be achieved in two main ways:

Controlling complementary products or services. E.g. Cheap razors that only work with one type of blade.

Creating a proprietary industry standard. E.g. Microsoft with its Windows operating system.


Establishing strategic lock-in

Size or market dominance

First-mover dominance

Self-reinforcing commitment

Insistence on preservation

of position



GDS

80

INTERACTIVE STRATEGIES

Generic strategies are chosen and implemented

But what happens when a strategy interacts with those of its competitors?

Need to study ‘competitor moves’ – what if?

Two areas to study:

Theory of Hyper-competition

Theory of Gaming


Interactive price and quality relationships

See Figure 6.7 and read page 211

Shows how different organizations compete by emphasizing either low prices or high quality

To plot the competitors moves and counter-moves

Also study Figure 6.8 : Responding to low cost rivals

And – read the case illustration 6.3: “McCafes challenges Starbucks” – page 213


Hypercompetition

Hypercompetition describes markets with continuous disequilibrium and change e.g. popular music or consumer electronics.

Successful hypercompetition demands speed and initiative rather than defensiveness.




Hypercompetition framework

D‘Aveni argues that ‘…frequency, boldness and aggressiveness of dynamic movement by players creates constant disequilibrium and rapid change, often involving unexpected new players and radical redefinitions of an industry.’

This situation is called ‗hypercompetition‘

In hypercompetition traditional strategic concepts and long-term sustainable advantage are perceived to be inappropriate

Not all industries experience hypercompetition

Different levels of competition can exist across industries

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Interactive price and quality strategies

Figure 6.7 Interactive price and quality strategies Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetition: Managing the Dynamics of Strategic Manoeuvring by Richard

D‘Aveni with Robert Gunther. Copyright © 1994 by Richard D‘Aveni. All rights reserved


Figure 6.8- Responding to low cost rivals


Interactive strategies in hyper-competition

Four key principles:

Cannibalise bases of success.

A series of small moves rather than big moves.

Be unpredictable.

Mislead the competition.

5-87

See page 214


Cooperative Strategy

5-88

Competition may be zero-sum or negative returns

Better to collaborate between organizations

Leverage on their strengths and their competences

Create win-win outcomes

Grow the total market (‘pie’) instead of fighting for share of the pie

Use M Porter Five Forces Model (key benefits of cooperation with each force)

See page 215

See Figure 6.9

In a later lecture we will cover ‘strategic alliances’

BUSM 3200- Strategic Management (Jan 2013) GDS 5-88

Cooperative Strategy

89 BUSM 3200- Strategic Management (Jan 2013) GDS

Game theory

Game theory encourages an organisation to consider competitors’ likely moves and the implications of these moves for its own strategy.

Interdependence exists where the choices made by one competitor is dependent on the choices made by other competitors

Anticipate the ‘probabilities’ and expected outcomes of moves and counter-moves


Prisoner’s dilemma

Figure 6.10 Prisoner‘s dilemma game in aircraft manufacture


Lessons from game theory

Game theory encourages managers to consider how a ‘game’ can be transformed from ‘lose–lose’ competition to ‘win–win’ cooperation.

Four principles:

Ensure repetition.

Signalling.

Deterrence.

Commitment.

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Read page 221


Summary (1)

Business strategy is concerned with seeking competitive advantage in markets at the business rather than corporate level.

Business strategy needs to be considered and defined in terms of strategic business units (SBUs).

Different generic strategies can be defined in terms of cost-leadership, differentiation and focus.

Managers need to consider how business strategies can be sustained through strategic capabilities and/or the ability to achieve a ‘lock-in’ position with buyers.


Summary (2)

In hypercompetitive conditions sustainable competitive advantage is difficult to achieve. Competitors need to be able to cannibalise, make small moves, be unpredictable and mislead their rivals.

Cooperative strategies may offer alternatives to competitive strategies or may run in parallel.

Game theory encourages managers to get in the mind of competitors and think forwards and reason backwards.


PRACTICE ESSAY QUESTIONS

IMPORTANT NOTE: →

These questions are provided for your reference only – they are only INDICATIVE of the standard of questions you might expect in the final exam.

DO NOT use these questions to “spot”

The RMIT examiner will post advice on the exam on the Learning Hub closer to the exam; you are required to pay attention to that advise

The questions here show the range of topics that could be tested from this lecture; they are NOT exhaustive

To score a high grade it is important to LINK the theory to applications and examples. Where from?

You have been assigned specific cases to read from the text. Each case study will show you the kinds of strategic decisions the case company needs to make. You can draw from these examples.

You have selected a case company for your project; you may use examples from there.

You are supposed to read widely from the business press about local, regional and international companies strategies. You can use examples from there as well.


Sample essay questions

1. Discuss, with examples, how the two main business level strategies differ in fast cycle and slow cycle markets.

2. Explain how the Porter's Five Forces model or the Value Chain model could be used in the formulation of business level strategy.

Illustrate your answer with examples from the ___ cases that you have studied for.


Sample essay questions

3. Examine the advantages and disadvantages for a firm to reply on the value chain to achieve sustainable competitive advantage with a cost leadership strategy.

Use examples from the ___ case to illustrate your answer.


Sample essay question

4. Briefly discuss each of Porter’s three generic strategies. In your opinion, how can cost-based advantages be sustained? Give examples to support your arguments.

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Note: the student should read this question and also consider that it is possible that in future any of the other TWO strategies could be tested. That is how would you answer this question if we substituted focus or differentiation strategy instead?



5. Strategy of an enterprise is defined by answers to two questions

a) Where does the firm compete? (Domain selection)

b) How does it compete (Domain navigation)

Explain this statement from the perspective of corporate and business level strategy with examples.

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Note: this question covers a wide range of topics that also includes the next topic on Corporate Strategy. In this question you need to discuss Ansoff Matrix, Porter 3 Generic Strategies framework and the topic on Corporate Strategy that includes the concept of Diversification.



6. Singapore Airline has implemented its differentiation strategy since its establishment. In doing so, it has offered a high quality of customer services, maintained a very good safety record, and procured new aircrafts, including Airbus 380. At the same time, it attempts to reduce its overall costs through lowering its back-office costs and administrative overhead. Do you think these activities are contradictory or complementary in implementing Singapore Airline’s differentiation strategy? Why? (Hint: You can address these issues based on your understanding of the concept of value, value chain analysis, and business strategy).


Documents

SM Lecture Five : Business Strategy