chapter 5-kapil doshi
TRANSCRIPT
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Chapter 5Business Level Strategy
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Business Level Strategy - Outline
• Strategic business units.
• Competitive advantage (strategy clock)
– Price-based
– Differentiation – Hybrid and focus
• Sustainability of competitive advantage.
• Competition & Collaboration.
• Game theory in competitive strategy.
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Business-Level Strategy
An integrated and coordinated set of commitmentsand actions the firm uses to gain a competitiveadvantage by exploiting core competencies in
specific product markets
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In selecting a business-level strategy, the firm
determines
Customer needsWHAT is to be satisfied?
Customer groups WHO is to be satisfied?
Distinctive competencies HOW customers are to be satisfied?
Contd….
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SBUStrategies
Business-Level Strategy
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Strategic Business Units
It is a part of an organisation for whichthere is a distinct external market for
goods or services that is different fromanother SBU
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Identifying SBUs
• External Criteria- Marketplace for different parts of the
organisation.
• Internal Criteria
- Strategic Capabilities
- Recourses
- Competence
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Bases of Competitive Advantage
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The strategy clock: competitive strategy options
1. Low price/low added value likely to be segment specific
2. Low price risk of price war and low margins/need tobe cost leadeer
3. Hybrid low cost based and reinvestment in lowprice and differentiation
4. Differentiation
(a) without price premium perceived added value by user, yelding
market share benefits
(b) with price premium perceived added value sufficient to bearprice premium
5. Focused differentiation perceived added value to a particularsegment, warranting price premium
6. Increased price/standard value higher margins if competitors do not
follow/risk of losing market share
7. Increased price/low value only feasible in monopoly situation
8. Low value/standard price loss of market share
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The strategy clock: competitive strategy options
4. Differentiation
5. Focused
differentiation
6,7,8, strategies
destined for ultimatefailure
3. Hybrid
2. Low price
1. ‘no frills’
High
High
Low Price
P e r c e i v e d a
d d e d v
a l u e
1. ‘no frills’ Likely to be
segment specific
2. Low price Risk of price war
and low margins;
need to be cost
leader
3. Hybrid Low cost base and
reinvestment inlow price and
differentiation
4. 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
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The strategy clock: competitive strategy options
4. Differentiation
5. Focused
differentiation
6,7,8, strategies
destined for ultimatefailure
3. Hybrid
2. Low price
1. ‘no frills’
High
High
Low Price
P e r c e i v e d a
d d e d v
a l u e
5. Focused differentiation
Perceived added
value to a
particular
segment,
warranting price
premium
segment specific
6. Increased price/ low value
Higher margins if
competitors do
not follow; risk
of losing market
share
7. Increased price/standard value
Only feasible inmonopoly
situation
8. Low value/standard price
Loss of market
share
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Price based Strategy (Routes 1 & 2)
An integrated set of actions designed to produce ordeliver goods or services at the lowest cost, relative
to competitors with features that are acceptable to
customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price
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Cont…
1. No frills strategy- a low price , low perceived product/ services benefits and a focus on a price sensitivemarket segment
2. The low price strategy- it seeks to achieve a lowercompetitors whilst trying to maintain similar perceivedproducts or service benefits to those offered bycompetitors
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Differentiation Strategy (Route 4)
This strategy seeks to provide products or servicesbenefits that are different from those of competitors andthat are widely valued by buyers.
– price for product can exceed what the firm’s targetcustomers are willing to pay
– no standardized products
– customers value differentiated features more than
they value low cost
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Goal is to provide value to customers through unique features andcharacteristics of a firm’s products.
Differentiators focus or concentrate on product innovation and
developing product features that customers value. Productsgenerally cost more (offset cost of differentiation).
Can’t completely ignore costs.
Differentiation Strategy (Route 4)
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Focus Strategies: (Route 5)
A focused differentiation strategy seeks to provide highperceived product/ services benefits justifying a substantial pricepremium , usually to a selected market segment (niche)
Primary goals of a focused strategy:
• Focus on a particular buyer group, segment of the market, etc.
• To serve a narrow target or market segment more effectively thanbroad-based competitors can due to core competencies.
• Select target segments which are the least vulnerable to substitutes orwhere competitors are the weakest.
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Business Level Strategies
Focus Strategies:
• Focused low-cost strategies:
• Requirements for usage similar to low-cost strategies.
• Defense against the five forces similar to differentiation strategies.• Examples: Rally’s, Martin Brower, White Castle.
- Rally’s (no frills service, limited menu, no dine-in).- Martin Brower- 3rd largest food supplier, serves fast food
chains by:
Gearing to their purchasing cycles.Locating warehouse locations based on their locations.Stocking products only for these 8 firmsMeeting their specialized needs.
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Hybrid Strategy (Route 3)
A firm that successfully uses an Hybrid costleadership/differentiation strategy should be in abetter position to:
– adapt quickly to environmental changes
– learn new skills and technologies more quickly
– effectively leverage its core competencies whilecompeting against its rivals
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Benefits of Hybrid Strategy
• Successful firms using this strategy haveabove-average returns
• Firm offers two types of values to customers – some differentiated features (but less than
a true differentiated firm)
– relatively low cost (but not as low as thecost leader’s price)
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Failure strategy( Route 6, 7,& 8)
• It’s the strategy that does not provide perceived value for
money in terms of product features , price or both
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Sustaining Competitive Advantage
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Sustaining Competitive Advantage
Sustaining
Competitive
Advantage
Differentiation
•Create difficulties of imitation
•Achieve imperfect mobility
(of resources/competences)
•Reinvest margin
Price –
Based Strategies•Accept reduced margin
•Reduce costs
•Focus on specific segments
Lock in•Achieve size/market
dominance
•First- mover advantage
•Reinforcement
•Rigorous enforcement
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Sustaining Price- Based Advantage
• Reduced margin: either by selling volumes or cross
subsidizing.
• Win a price war: either by lower cost structure or deeper
pockets.
• Reduce costs: down cost through out the value chain and
exploit all sources.
• Focusing on market segments:
e.g.: grocery in supermarkets.
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Sustaining Differentiation-Based Advantage
• It is central to the strategy of ones organization.
• Being different not enough- if customer don’t value.
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Conditions to Sustain through Differentiation
• Create difficulties of imitation
• Imperfect mobility:
a) Intangible assets
b) Switching costs
c) Co- specialization
• Reinvest margins
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The Delta Model & Lock in
• Lock in is where an organization achieves a proprietary
position in its industry; it becomes an industry standard.
• It may not be the best product.
e.g.: Microsoft – Apple Macintosh.
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Factors determining Lock in
• Size or market dominance
• First- mover advantage
• Reinforcement
• Rigorous enforcement
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Competitive Strategies in
Hypercompetitive Conditions
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Competitive Strategies in HypercompetitiveConditions
• HyperCompetitive advantage relates to
– Organisation’s ability to change
– Speed
– Flexibility – Innovation
COMPETITIVE STRATEGIES IN HYPERCOMPETITIVE
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CompetitiveStrategies inHypercompetitive
Conditions.
COMPETITIVE STRATEGIES IN HYPERCOMPETITIVECONDITIONS
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REPOSITIONING
• Targeting the existing products into new markets ornewer market segments
• For e.g. When Tata Sumo introduced in the market butdue to competitions from Toyota’s Qualis Tata sumo
didn’t work in rural market. Tata Sumo repositioned as amulti utility vehicle in urban market with better Exterior,Soundproof the cabin and added power steering andcentral locking to make the Sumo attractive in urban
segment
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OVERCOMING COMPETITORS’ MARKET-BASED MOVES
• Blocking first-mover advantages:
For e.g. Mocha was first Hukka bar in Ahmedabad
• Imitate competitor’s product/market moves: For e.g. Sony entered the software side of the
entertainment business with Columbia Pictures - butimitated by Matsushita
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OVERCOMING COMPETITOR’S
BARRIERS
• By shorter life cycles:
For e.g. Pager and mobile phones
Due to technology changes the pager phones has anshorter life cycle
• Undermining competitors’ strongholds:
For e.g. If any company is having stronghold in the
market by having strong distribution channel then newentrants will form different channels like e-business
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Cont….
• Countering competitors’ Deep Pockets:
Some competitors may have substantial surplusresources, which they can use during competitive war
For e.g. Smaller firms may avoid direct competition byconcentrating on niches market.
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INGREDIENTS OF SUCCESSFULHYPERCOMPETITIVE STRATEGIES
• Pre-empt competition:
An organization always have to be prepare of beingimitated by its competitors for particular Method orStrategy.
• Attacking competitors’:
Attacking competitors weakness can be unwise as they
learn about how their strengths and weakness areperceived and build their strategies accordingly.
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Cont….
• A series of smaller moves:
Smaller step is more effective and flexible where as longterm direction gives later reaction to compete with thecompetitors
• Disruption of markets:
If a company introduces something that is different fromthe constant pattern or method followed in the industry ormarket, it may act as its core competence
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Cont….
• Predictability is dangerous:
For any organization it is dangerous that its competitorpredict next step
So the managers must learn ways of appearingunpredictable to the external world and think for thestrategies internally
• Misleading competitors:
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Competition and Collaboration
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Competition and Collaboration
• Collaboration may help to achieve advantage or avoidcompetition
• Organisations may compete in some markets and
collaborate in others• Collaboration can be
– between potential competitors or – between buyers and sellers
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Competitiveness
might be improvedby collaboration
to achieve
Decreased RiskOf Substitution
IncreasedSelling Power
Increased
Buying Power
IncreasedBarriers to Entry
Entry to NewMarkets
Shared Workwith Customer
Stakeholderexpectations
Organization in an
industry might buildclose link with
customers
Faced with threatened
entry or substituteproducts, org may
collaborate.
Faced with threatened
entry or substituteproducts, org may
collaborate.
Org seeking to develop
beyond traditionalboundaries may
collaborate with others.
Move-towards more co-production with clients.To gain more leverage
for investments.
Mafg. Supplier
ERP
GAME THEORY
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GAME THEORY
• Game theory provides a basis for thinking throughcompetitors’ strategic moves in such a way tocounter them.
• Game theory is concerned with theinterrelationships between the competitive movesof a set of competitors.
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CONT….
CORE ASSUMPTIONS
1. The competitor will behave rationally andalways try to win to their own benefit.
2. The competitor is in an interdependentrelationship with other competitors.
3. A greater or lesser extent competitors areaware of the interdependencies that exist andof the sorts of move that competitors could
take.
TWO KEY PRINCIPLES
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A ‘PRISONER’S DILEMMA’
Heavy marketingspend
Low marketingspend
Heavy marketingspend
B = 5
A = 5
B = 12
A = 2
Low marketingspend
B = 2
A = 12
B = 9
A = 9
Competitor A
C o m p e t i t o r B
SIMULTANEOUS GAMES
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CONT….
• Dominant Strategy
• Dominated Strategy
• Equilibrium
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LOW HIGH
LOW
DOLLA = 3
INNOVA = 4
DOLLA = 4
INNOVA = 2
HIGH DOLLA = 2
INNOVA = 3
DOLLA = 1
INNOVA = 1
DOLLA INVESTMENT
INNOVA
INVESTMENT
A SIMULTANEOUS MOVE GAME
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SEQUENTIAL GAMES
In sequential games later players have some knowledgeabout earlier actions. This need not be perfectinformation about every action of earlier players; it might
be very little knowledge. The study of sequential gamesalso tells us when it is an advantage to move first andwhen second.
CONT
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CONT….
INNOVA
DOLLA
DOLLA
DOLLAINNOVA
1 1
3 22 4
4 3
A
B
C
D
Pay-off
High
High
High
Low
Low
Low
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REPEATED GAMES
By repeated games the equilibrium outcome is much
more likely to favor cooperation from both parties.
Implicit Co-operation depend upon number of factors.
• The number of competitors• Small competitors
• Substantial differences between organizations
• Lack of transparency
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CHANGING THE RULES OF THE GAME
If market dominated by price-based strategies thenrules of games towards:
• Bases of differentiation• Making pricing more transparent
• Building incentives for customer loyalty.
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