CHAPTER 7:
STRATEGY FORMULATION:
BUSINESS LEVEL STRATEGY
REFERENCE: HENRY “UNDERSTANDING STRATEGIC MANAGEMENT”, CHAPTER 7
Previously……
Strategic Analysis
External environmental analysis
General environment – PESTLE
Competitive environment – 5 Forces
Internal analysis
Value Chain Analysis
Resources and capabilities
Performance analysis
SWOT analysis
Lecture Preview
Defining business and corporate strategy
Business strategy and competitive
advantage;
Porter's generic competitive strategies
Resource-based approach to strategy
Industry life-cycle
Turbulent markets and strategy formulation.
What is Business
Strategy?
• A MEANS OF FORMULATING A COMPETITIVE STRATEGY AT THE
INDIVIDUAL BUSINESS UNIT
•A STRATEGIC BUSINESS UNIT (SBU) IS A DISTINCT PART OF AN
ORGANIZATION WHICH FOCUSES UPON A PARTICULAR
MARKET
FOR ITS PRODUCTS AND SERVICES
• CORPORATE STRATEGY: WHAT BUSINESS DO WE WANT TO BE
IN?
• BUSINESS LEVEL STRATEGY: HOW ARE WE GOING TO COMPETE
IN OUR CHOSEN BUSINESS?
Generic Competitive Strategies
Figure 7.1 Three Generic Competitive Strategies
Competitive
Strategies
PORTER (1980) DEVELOPED THREE GENERIC
STRATEGIES TO HELP AN ORGANIZATION
OUTPERFORM RIVALS WITHIN AN
INDUSTRY
• OVERALL COST LEADERSHIP
• DIFFERENTIATION STRATEGY
• FOCUS STRATEGY
Leadership
Strategy
•INVOLVES A FIRM BEING THE LOWEST COST
PRODUCER
WITHIN THE INDUSTRY
•THIS ALLOWS THE FIRM TO OUTPERFORM
RIVALS WITHIN
THE INDUSTRY BECAUSE IT CAN CHARGE
LOWER
PRICES
•ITS LOWEST COST BASE STILL ALLOWS IT TO
EARN A
Lower costs >> lower prices and/or higher margins
PROFIT
Economies of scale! Experience!
Overall Cost Leadership Strategy and Experience
Curve
•A DOMINANT MARKET SHARE ALLOWS A
FIRM TO
ACCUMULATED THE GREATEST EXPERIENCE
•AS ITS MARKET-SHARE CONTINUES TO GROW
SO ITS
COST ADVANTAGE INCREASES
• A STRATEGY OF GROWTH WHICH ENHANCES
ITS
ACCUMULATIVE EXPERIENCE AND FURTHER
LOWERS
“Virtuous
ITS COSTS Circle”
economies-of-scale
growth growth
experience
Cost Leadership strategies and
Porter’s Five Forces Analysis
A cost leadership strategy allows an
organization to generate above-average profits
even where there is intense rivalry.
Defend itself against customer power and
supplier power
A low cost producer will be in a better
position in relation to the threats of new
entrants and or substitutes
Being the lowest cost producer strengthens the firm
in relation to all five forces!
The Risks of Following an Overall Cost
Leadership Strategy
•CAN BE EXPENSIVE AS THE ORGANIZATION
CONTINUALLY UPDATES ITS CAPITAL
EQUIPMENT
• MAY BE EASY TO IMITATE THE
ACTIVITIES OF THE COST LEADER
•CHANGING TECHNOLOGY MAY NULLIFY
PAST
INVESTMENTS IN CAPITAL EQUIPMENT
•CUSTOMERS MAY BECOME LESS PRICE
SENSITIVE
Differentiation
Strategy
AIMED AT A BROAD MARKET.
COMPETING ON THE BASIS OF A PRODUCT OR SERVICE
THAT IS RECOGNISED BY CONSUMERS AS UNIQUE.
• CONSUMERS ARE WILLING TO PAY A PREMIUM PRICE
•A DIFFERENTIATED PRODUCT IS DIFFICULT TO
IMITATE
REQUIRES DIFFERENT RESOURCES, CAPABILITIES
AND ORGANIZATIONAL ARRANGEMENTS THAN COST
LEADERSHIP
Resource and capability analysis may favour one
generic strategy or another!
Types of differentiation:
Design or brand image e.g. BMW
Customising products e.g. DELL
Advanced technology e.g. Intel
Marketing abilities e.g. Proctor and Gamble
Reliability e.g. Toyota?
Product engineering skills e.g. e.g. Bosch
Creativity e.g. Apple
Customer service e.g. John Lewis Partnership
Differentiation and
Porter’s Five Forces
A defence against competition e.g. brand loyalty
A defence against new entrants and substitutes
Buyers constrained by a lack of alternatives
Premium price so easier to pay suppliers
The Risks of Following a Differentiated Strategy
•THE HIGH PRICE CHARGED FOR DIFFERENTIATION
MUST NOT BE
TOO FAR ABOVE COMPETITORS THAT IT RESULTS IN
REDUCED
BRAND LOYALTY
• REDUCED NEED FOR A DIFFERENTIATED PRODUCT
E.G. MORE PRICE SENSITIVE
•COMPETITORS MAY NARROW THE ATTRIBUTES OF
DIFFERENTIATION WHICH RESULTS IN CONSUMERS
BEING FACED
WITH A VIABLE SUBSTITUTE
Focus Strategy
SERVES A SEGMENT (OR SEGMENTS) OF THE
MARKET
A GROUP OF CONSUMERS, A GEOGRAPHICAL
distinctive and expensive
MARKET OR ANY VIABLE SEGMENT OF THE
MARKET
EXAMPLES: CARTIER, BURBERRY AND TOYOTA
BY FOCUSING ON A NICHE OF THE MARKET, THE
ORGANIZATION MAY BE BETTER PLACED TO MEET
THE NEEDS OF BUYERS
AN ORGANIZATION CAN ACHIEVE COMPETITIVE
ADVANTAGE EITHER THROUGH LOWER COSTS OR
DIFFERENTIATION FOCUS
Bases for market segmentation
Industrial
buyers
Buyer Demographics
characteristics Households Lifestyle
Purchase occasion
Distribution
channels
Geographic
location
Product features
Price level
Pysical size
Product Technological design
characteristics Performance characteristics
Pre- and post sales service
The Risks of Following a Focus Strategy
• CUSTOMER PREFERENCES MAY CHANGE AND THE NICHE
PLAYER MAY BE UNABLE TO RESPOND
•BROAD-BASED COMPETITORS BELIEVE THE SEGMENT
REPRESENTS AN ATTRACTIVE SUBMARKET AND OUTFOCUS
THE
FOCUSER
• THE DIFFERENCE BETWEEN THE SEGMENT AND THE MAIN
MARKET NARROWS LEAVING FOCUS-BASED COMPETITORS
AT A
DISADVANTAGE E.G. BLACK AND GREEN’S AND CADBURY
IN THE FAIRTRADE CHOCOLATE MARKET
Stuck in the
Middle
AN ORGANIZATION THAT FAILS TO PURSUE AT LEAST ONE OF
THESE GENERIC STRATEGIES WILL BECOME “STUCK IN THE
MIDDLE” PORTER (1980)
IS THIS TRUE?
A Resource-Based Approach to Strategy
Formulation
Grant (1991) distinguishes between
resources and capabilities:
Resources are inputs into the production process
Capability is the capacity to perform some task or activity
Resources are the source of an
organization’s capability but capabilities
are the main source of an organization’s
competitive advantage.
A Resource-
Based
Approach to
Strategy
Formulation
Source:
Grant (1991)
Implications for Strategy
Formulation
Porter’s generic strategies based on Five Forces analysis
- market positioning approach
Resource-based approach
Are the two approaches compatible or incompatible?
Industry Life-Cycle
Strategy Formulation and Market Turbulence
Four Different Competitive Environments
1. Equilibrium
2. Fluctuating Equilibrium
3. Punctuated Equilibrium
4. Disequilibrium
Strategy Formulation and Market Turbulence
Lecture Review
Defining business and corporate strategy
Business strategy and competitive advantage;
Porter's generic competitive strategies
Resource-based approach to strategy
Industry life-cycle
Turbulent markets and strategy formulation.