business level or generic strategies

8/10/2019 Business Level or Generic Strategies

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Slide 5.2

Generic (Business Level) StrategiesSpecimen Question

Porter identifies two basic types of strategic advantage a firm can pursue: low cost or differentiation. Discuss with examples from thecourse and your own research.

Today's Agenda Porters Generic Strategies Treacy & Wirsemas 3 Value Disciplines

Being Best of Both or stuck in the middle ? Blue Ocean Strategy

Miles and Snow Strategy Typology


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Slide 5.3

Through External Analysis we analyse the environment / industry /competitive factors that can affect a firms profits

In Internal Analysis we disucssed firm -specific factors that impacton a firms profits and now we further analyse firm specific factors vis--vis rivals

So we are concerned with where

companies position themselves relativeto rivals in order to obtain competitiveadvantage


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Slide 5.4

Here we are looking at Competitive advantage coming cost andbenefit advantages

External

Internal

Are you in an attractive market? ieone where average player makes an

economic profit

Have you got acompetitive advantage?


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Slide 5.5

But before that What is Business Level ?SBU becomes the focal point

A strategic business unit is a part of an organisationfor which there is a distinct external market forgoods or services that is different from another SBU

External Internal

Same customer types Similar products/services

Same channels Similar technologies

Similar competitors Similar resources andcompetences


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Slide 5.6

also a Quick View of Porters Value Chain

Firm Infrastructure

Human Resource ManagementTechnology Development

Procurement

I n b o u n d

L o g i s t

i c s

O p e r a

t i o n s

O u t b o u n

d

L o g i s t i c s

M a r k e t i n g

& S a l e s

S e r v i c e

Primaryactivities


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Slide 5.7

The Value ChainSeparates the firms activities into a sequential chain: thebuilding blocks of customer value

Displays total value comprising value activities & margins Divided into primary and support activities Useful framework for analysing opportunities for

Resource allocation Differentiation

Cost reductions

Value chain for the firm and value chain for the industry


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Slide 5.8

Porters Business-Level

GenericStrategies

Figure 4.1

SOURCE: Adapted with thepermission of The Free Press, animprint of Simon & Schuster AdultPublishing Group, from Competitive

Advantage: Creating and SustainingSuperior Performance, by Michael E.Porter, 12. Copyright 1985, 1998by Michael E. Porter.

Stuck inthe Middle ?


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Slide 5.9

Generic Strategy Choices (Porter 1985)

Cost-leadership strategy the firm strives to be the lowest-cost supplier and thus

achieve superior profitability from an above-averageprice cost margin.

(Product) differentiation strategy the firm strives to differentiate its product (or service)

from rivals products, such that it can raise price morethan the cost of differentiating and thereby achievesuperior profitability.

Focus strategy the firm concentrates on a particular segment of the

market and applies either a cost-leadership or adifferentiation strategy.


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Slide 5.10

Cost Leadership: low cost relative tocompetitors

Can still earn returns when rivals havecompeted away profits

Buyers can only bargain down to level of next

most efficient competitor Have flexibility to cope with price increasesfrom suppliers

Scale economies deter new entrants andmake substitutes less attractive


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Slide 5.11

Cost strategy is more attractive when: Economies of scale and learning effects are potentially

significant, but no firm seems to be exploiting them provided the opportunity for Walmart and Dell then. Opportunities for enhancing the products perceived

benefit are limited by the nature of the product (commodities --- garments sector in Malaysia was getting

commoditised during/post asian crisis even a brand like BritishIndia was selling at RM 20/unit)

Consumers are relatively price sensitive and areunwilling to pay much of a premium for enhancedproduct attributes (eg. selling to government - In the food-retailing in Malaysia

Jusco is also forced to ???

(Bezanko 2000 )


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Slide 5.12

Using the Value Chain to Reduce Costs Disaggregate the firms value chain into

separate activities (processes) Establish the relative importance of

different activities in the total cost of theproduct

Compare the costs by activity Identify the cost drivers

Identify linkages: how costs in one activity

influence costs in another Identify opportunities for reducing costs

(increase volume, reduce labour costs,outsource)


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Slide 5.13

Differentiation Strategy An integrated set of actions taken to

produce goods or services (at an acceptablecost) that customers perceive as beingdifferent in ways that are important to them

Nonstandardized products

Customers value differentiated features morethan they value low cost


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Slide 5.14

Differentiation: creating something that isperceived by market as being unique

Brand loyalty means buyers are less pricesensitive and therefore less likely to move tolower cost rivals or substitutes

Customer loyalty and uniqueness createentry barriers

Higher margins provide protection againstpowerful suppliers


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Slide 5.15

Differentiation creates lines of defence1. Raises the firm above intense price competition

rivalry2. Uniqueness and customer loyalty act as a barrier

to entry

3. Able to ward off threat of substitutes.Genetic cures vs Conventional Drugs ?

4. Reduces bargaining power of buyers.

5. Increases bargaining power with suppliers


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Slide 5.16

Using the value chain to identifydifferential potential

Inbound Logistics: quality of components &materials

Operations: defect free products (6 sigma)

Outbound logistics: fast delivery Marketing & sales: building brand reputation Service: consumer credit

(What are your classic examples?)


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Slide 5.17

Using the value chain to identify differentialpotential

Firm Infrastructure: eg. GE strategic planningprocesses

HRM: Training to support customer serviceexcellence: eg. IBM

Technology Development: Fast NPD eg. Sony


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Slide 5.18

Bottom of the Pyramid MarketAs an extension of Cost

Leadership ?

Fortune at the Bottom of the Pyramid - Prahlad


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Slide 5.19

But are Porters Generic Strategies the only ways to competitiveposition?

Treacy & Wiersema Three Value Disciplines

Operational Excellence

Product Leadership Customer Intimacy

Best total cost

Best product Best total solution


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Slide 5.20

Operational Excellence

Providing reliable products and services atcompetitive prices with minimal difficulty andinconvenience (Similar to Cost ?)

Eg Dell,

GE White goods business (direct connect vsloaded-dealer)


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Slide 5.22

Product/Service Leadership Offering customers leading-edge products

and services that consistently enhance thecustomers use or application of the product,thereby making rival's goods obsolete

Speed to market

Eg Nike, Sony, 3M


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Slide 5.23

Focus on one,have to meet the threshold in all

Or become the master in two!Eg Toyota: operational excellence + product leadership


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Slide 5.25

Value ChainImplications of competitive positioning for functional area strategiesIts the overall strategy that counts

CompetitiveCost Advantage

PositionBenefit Advantage

Product & Marketing Standardise products Customise products

Production Mass-productionInventory control

Make to orderAnticipate demand

Engineering & design Design for ease ofmanufacture

Create customerbenefits

R&D Process innovations Product innovation

HR Transactionalleadership

Transformationalleadership


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Slide 5.26

Best of Both/ Best of All

or Stuck in the Middle?(Whether Porters or T&W)


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Slide 5.27

Stuck in the MiddleA firm that engages in both cost+diff. but fails to achieve

either of them is stuck in the middle

The worst strategic error is to be stuck inthe middle or to try simultaneously topursue all the strategies.

This is a recipe for strategic mediocrity andbelow-average performance, becausepursuing all strategies simultaneouslymeans that a firm is not able to achieve

any of them because of their inherentcontradictions. (Porter, 1990, p.40).


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Slide 5.30

Ritz Carlton

Sheraton

Travelodge

(Porter 1996)


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Slide 5.31

Productivity Frontier The argument is that though organisations improve on

multiple dimensions of performance at the same time asthey move towards the frontier, They mae fail to compete successfully on the basis of operational

effectiveness over an extended periods as competitors are quicklyable to imitate best practices like management techniques, new

technologies, input improvements, etc. Thus competition based on OR shifts the frontier outward

and effectively raises the bar for everyone. produces absolute improvement in operational

effectiveness no relative improvement for anyone and can be

mutually destructive

Counter Argument: in practice a firms advantage


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Slide 5.32

Counter Argument: in practice a firm s advantageis rarely based entirely on lower cost or superiorbenefits

Why? High quality products drives market share which gives

scale and learning benefits and reduces average costs The rate at which accumulated experience reduces costs is

greater for higher quality products Inefficiencies muddy the relation between cost position and

differentiation position: Porter may have been observinginefficient firms, not a true trade-off between quality andcost

Do Consumers think in terms of polar opposites? Think of a trade-off in terms of value for money e.g. Hotels ?! Airlines ?!


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Slide 5.33

Generic Strategies-Reconceptualisation by Parnell (2006)


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Slide 5.34

Blue Ocean StrategyHow to create uncontested market space and make the

competition irrelevantW.C. Kim and R. Mauborgne

The Imperative for BOS supply exceeds demand globalization accelerated commoditization of products and services increasing price wars shrinking profit margins brands are becoming more similar

select based on price


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Slide 5.35

Two worlds


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Slide 5.36

Two worlds

Red Ocean Strategy Blue Ocean StrategyCompete in existing marketspace.

Create uncontested marketspace.

Beat the competition. Make the competitionirrelevant.

Exploit existing demand. Create and capture newdemand.

Make the value-cost trade-off. Break the value-cost trade-off.

Align the whole system of astrategic firm's activities withits choice of differentiation orlow cost.

Align the whole system of afirm's activities in pursuit ofdifferentiation and low cost.

VALUE INNOVATION


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Slide 5.39

BOS Logic: Reach beyond existing demand

Core Customer Noncostumer

Soon-to-be-NC

Refusing Customer

BOS Logic: Get the Strategic Sequence right


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Slide 5.40

BOS Logic: Get the Strategic Sequence right

Buyer utility

Is there exceptional buyerutility in your business idea?

AdoptionWhat are the adoption hurdles inactualizing your business idea?

Are you addressing them upfront?

PriceIs your price easily accessible to

the mass of buyers?

Cost

Can you attain your cost target toprofit at your strategic price?

A commercially viable Blue Ocean Strategy

YES

YES

YES

YES

No Rethink

No Rethink

No Rethink

No Rethink


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Slide 5.41

The case of Accor's Formule 1

The value curve of Formule 1 in the French Low Budget Hotel Industry


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Slide 5.42

References

W. Chan Kim, Rene Mauborgne, Blue Ocean Strategy , 2005,

Havard Business School Press.

http://www.blueoceanstrategy.com

http://www.hotelformule1.com
http://www.blueoceanstrategy.com/http://www.hotelformule1.com/http://www.hotelformule1.com/http://www.blueoceanstrategy.com/


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Slide 5.43

Strategy Typologies

Miles and Snow


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Slide 5.45

Miles and Snow Classification based the4 types of business strategies on the business's intended rate of product-

market development ie. its approach to penetrations of new markets

and its approaches to new product development /R&D

ANDthis can be combined with the genericbusiness strategies of Cost-leadershipand Differentiation to get more categories.


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Slide 5.47

And so far we haveonly been talking

about strategies ofdifferentiation

Mintzberg provides a widerframework

Luckily we wont bother youwith this for examination


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Slide 5.48

Mintzbergs Families of GenericStrategies

Almost every serious author concerned withcontent issues in strategic management

has their own list of strategiesThe problem is that[they] either focus

narrowly on special types of strategies orelse aggregate arbitrarily across all varieties

of them with no real order.


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Slide 5.49

Mintzbergs families of strategies 1. Locating the core business

A business can be thought to exist at a junction in a network ofindustries that take raw materials and through selling to andbuying from each other produce various finished products orservices .

2. Distinguishing the core business (Porter: generic strategies and value chain)

3. Elaborating the core business (Ansoffs growth matrix (done in session 7)

4. Extending the core business Strategies of Integration (Aquisions, Mergers), Diversification

5. Reconceiving the core business1. Redefining Business ie. The way is conducted Old eg.Poloroid

New Eg. Starbucks not just a coffee shop an ISP ? MusicRetailor? 2. Business Re-combination Strategies3. Core Relocations Eg. P&G from Soaps to Personal Care


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Key Points Business level strategy

Competing better/providing best value Strategy development for each SBU

Generic strategies for competitive advantage

No frills, low price, differentiation, hybrid,focused differentiation Sustainable competitive advantage requires

Linked competences, difficult to imitate Ability to achieve lock-in as industry standard

Hypercompetition Need speed, flexibility, innovation and change

business level or generic strategies

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