lec (6)- bus. & cor. strategy
TRANSCRIPT
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BUSINESS and CORPORATE
LEVEL STRATEGY
Asst. Professor Mngt. Science (USA),
IMRAN HUSSAIN
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BUSINESS and CORPORATE LEVEL
STRATEGY
Business strategy... is concerned withhow the firm competes within a particular
industry or market... to win a business unitmust adopt a strategy that establishes acompetitive advantage over its rivals.
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BUSINESS and CORPORATE LEVEL
STRATEGY
Corporate Strategy.. defines thescope of the business in terms of the
industries and markets in which itcompetes.
includes decisions about diversification,vertical integration, acquisitions, newventures, divestments, allocation ofscarce resources between businessunits.
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Objectives
The Strategy Clock.
Sustainable Competitive Advantage.
Game Theory.
Strategic directions (Ansoff matrix).
Portfolio Matrix (BCG Matrix).
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5
Strategic Options
Product/market, resource/capability andimplementation method may be grouped toform strategic options
Small number
Combining top-down and bottom-up thinking
Strategic Options tested:
Aligned with strategic intent Feasible in terms of capabilities and resources
Acceptable to those who have to approve andimplement it
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6
Who should be involved with
strategic choice?
Political as much as logical process
Political reality revealed by asking:
Who stands to gain or lose?
How will existing coalitions be affected?
Who may be seen to have originated
choices? Board approval is one thing
Support from those who will make it happen
is also essential
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The Strategy Clock
Point No. 1
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Source: Based on the work of Cliff Bowman.
See C.Bowman and D.Faulkner. Competitive and Corporate Strategy, Irwin, 1996.
PRICE HighLow
DifferentiationFocuseddifferentiation
Low price/low added value
Strategiesdestined forultimate failure
PERCEIVEDADDED
VALUE
4
5
6
8
Hybrid
Lowprice
7
High
Low
1
2
3
Bowmans competitive strategy options
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1 Low price/low added value 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.5 Focused differentiation Perceived added value to a particular
segment, warranting price premium.
6 Increased price/standard Higher margins if competitors do notvalue 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.
The strategy clock
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Low price strategies could be
successful if:
The competitor is the cost leader
... but is this sustainable?
All sources of cost advantages are exploited,
developing competences in low costmanagement
... but the danger is a low (perceived) valueproduct or service.
A competitor has cost advantage overcompetitors in a price sensitive markets segment
... but this may mean focusing on that marketsegment.
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The Success of Differentiation
Strategies depends on
Clear identification ofwho the customeris
Understanding what is valued by the customer
Clear identification ofwho the competitors areand the value they offer
Bases of differentiation which are difficult to
imitate
The recognition that bases of differentiation
may need to change
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Focused Differentiation
Global market developments increase the needfor focus.
Clear definition of market segments in terms ofcustomers needs is required.
Within a market segment choices of strategicdirection relate to competitors within thatsegment.
Multi-focused strategies may be possible in somemarkets.
New ventures started through focus strategiesmay be difficult to grow.
Differences between segments may be erodedmaking bases of focus redundant.
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Key Questions in Strategic Choice
Strategic choices need to take account of theenvironmentand build on core competences
Strategic choices need to take account of the
expectations and influence ofstakeholders Strategic direction and methods should build
on broad strategic choices
Resources and competences should bedeveloped to deliver and sustain the chosenstrategies
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Sustainable Competitive
Advantage
Point No. 2
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Sustainable Competitive
Advantage
Having a competitive advantage is necessaryfor a firm to compete in the market
But what is more important is whether thecompetitive advantage is sustainable
A firm must identify its position relative to thecompetition in the market
By knowing if it is a leader, challenger,follower or nicher, it can adopt appropriatestrategies to compete
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Continued
A good strategist seeks not only to win the
hill, but hold on to it. (Subash Jain)
Sustaining competitive advantage requires
erecting barriers against the competition
Aakers suggested looking at the following:
How you compete
Basis of competition
Where you compete
Whom you are competing against
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Examples of SCA
For many years, Singapore Airlines were riding on itsSCA of having the best in-flight service
As more airlines improved their service andnarrowed the gap, SIA sought other competitiveadvantages among which are
The most modern fleet
Outstanding Service on the Ground
A super entertainment system in its cabins Comfort in its First Class cabins at an unparallel
level
Discuss whether the later initiatives had been
sustainable
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Continued
1. Sustaining Price-Based Strategy.
2. Sustaining Differentiation-Based Strategy.
3. Strategy Lock-in.
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1- Sustaining Price-Based Strategy
Lower margin operations.
Unique cost structure.
Organization specific capabilities.
Focus on market segments.
Drawbacks:
Competitors same approach.
Customers association. Inability to pursue differentiation strategy.
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2- Sustaining Differentiation-Based
Strategy
Create difficulties of imitation.
Imperfect mobility.
Lower-cost position.
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3- Strategy Lock-in
Size and market dominance.
First mover dominance.
Self-reinforcing commitment.
Insistence on the preservation.
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Game Theory
Point No.3
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An example:
Big Monkey and Little Monkey
Monkeys usually eat ground-level fruit
Occasionally climb a tree to get a coconut (1per tree)
A Coconut yields 10 Calories
Big Monkey expends 2 Calories climbing thetree.
Little Monkey expends 0 Calories climbing thetree.
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If BM climbs the tree BM gets 6 C, LM gets 4 C
LM eats some before BM gets down
If LM climbs the tree BM gets 9 C, LM gets 1 C
BM eats almost all before LM gets down
If both climb the tree BM gets 7 C, LM gets 3 C
BM hogs coconut
How should the monkeys each act so as to maximizetheir own calorie gain?
Continued
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Assume BM decides first
Two choices: wait or climb
LM has four choices:Always wait, always climb, same as BM,
opposite of BM.
These choices are called actionsA sequence of actions is called a strategy
Continued
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Continued
Big monkey w
ww
c
cc
0,0
Little monkey
9,1 6-2,4 7-2,3
What should Big Monkey do?
If BM waits, LM will climb BM gets 9
If BM climbs, LM will wait BM gets 4 BM should wait.
What about LM?
Opposite of BM (even though well never get to the right side
of the tree)
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These strategies (w and cw) are called best
responses.
Given what the other guy is doing, this is the best
thing to do. A solution where everyone is playing a best response
is called a Nash equilibrium.
No one can unilaterally change and improve
things.
This representation of a game is called extensive
form.
Continued
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What if the monkeys have to decide
simultaneously?
Continued
Big monkey w
ww
c
cc
0,0
Little monkey
9,1 6-2,4 7-2,3
Now Little Monkey has to choose before he sees Big Monkey move
Two Nash equilibria (c,w), (w,c)
Also a third Nash equilibrium: Big Monkey chooses between c & w
with probability 0.5 (mixed strategy)
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It can often be easier to analyze a game
through a different representation, called
normal form
Continued
c
c v
v
5,3 4,4
0,09,1
Little Monkey
Big Monkey
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Continued
In the simultaneous game, its harder to seewhat each monkey should do
Mixed strategy is optimal.
Trick: How can a monkey maximize its payoff,given that it knows the other monkeys willplay a Nash strategy?
Oftentimes, other techniques can be used toprune the number of possible actions.
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Eliminating Dominated Strategies
The first step is to eliminate actions that are
worse than another action, no matter what.
Big monkeyw
ww
c
cc
0,0
Little monkey
9,1 6-2,4 7-2,3
Little Monkey will
Never choose this path.
Or this one
w c
9,1 4,4
We can see that BigMonkey will always choose
w.
So the tree reduces to:
9,1
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Continued
We can also use this technique in normal-form games:
a
a b
b 5,3
4,4
0,0
9,1
Row
Column
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Continued
We can also use this technique in normal-form games:
a
a b
b 5,3
4,4
0,0
9,1
For any column action, row will prefer a.
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Continued
We can also use this technique in normal-form games:
a
a b
b 5,3
4,4
0,0
9,1
Given that row will pick a, column will pick b.
(a,b) is the unique Nash equilibrium.
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Prisoners Dilemma
Each player can cooperate or defect
cooperate defect
defect 0,-10
-10,0
-8,-8
-1,-1
Row
Column
cooperate
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Continued
Each player can cooperate or defect
cooperate defect
defect 0,-10
-10,0
-8,-8
-1,-1
Row
Column
cooperate
Defecting is a dominant strategy for row
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Continued
Each player can cooperate or defect
cooperate defect
defect 0,-10
-10,0
-8,-8
-1,-1
Row
Column
cooperate
Defecting is also a dominant strategy for column
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Continued
Even though both players would be better off
cooperating, mutual defection is the dominant
strategy.
What drives this?
One-shot game
Inability to trust your opponent
Perfect rationality
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Continued
Relevant to:
Arms negotiations
Online Payment
Product descriptions Workplace relations
How do players escape this dilemma?
Play repeatedly
Find a way to guarantee cooperation
Change payment structure
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Tragedy of the Commons
Game theory can be used to explain overuse ofshared resources.
Extend the Prisoners Dilemma to more than two
players.
A cow costs a dollars and can be grazed on common
land.
The value of milk produced (f(c) ) depends on the
number of cows on the common land. Per cow:f(c) / c
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Continued
To maximize total wealth of the entire village:maxf(c) ac.
Maximized when marginal product = a
Adding another cow is exactly equal to the cost of
the cow.
What if each villager gets to decide whetherto add a cow?
Each villager will add a cow as long as the costof adding that cow to that villager isoutweighed by the gain in milk.
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Continued
When a villager adds a cow: Output goes fromf(c) /c to f(c+1) / (c+1)
Cost is a
Notice: change in output to each farmeris less than global
change in output.
Each villager will add cows until output- cost = 0.
Problem: each villager is making a localdecision (will I
gain by adding cows), but creating a net globaleffect(everyone suffers)
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Continued
Problem: cost of maintenance is externalized Farmers dont adequately pay for their impact.
Resources are overused due to inaccurate
estimates of cost.
Relevant to:
IT budgeting
Bandwidth and resource usage, spam
Shared communication channels
Environmental laws, overfishing, whaling,
pollution, etc.
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Avoiding Tragedy of the Commons
Private ownership Prevents TOC, but may have other negative effects.
Social rules/norms, external control
Nice if they can be enforced.
Taxation
Try to internalize costs; accounting system needed.
Solutions require changing the rules of the game
Change individual payoffs
Mechanism design
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Ansoff Matrix
Point No. 4
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Background
Long-term business strategy is dependant on
planning for their introduction.
Ansoff Matrix represents the different options
open to a marketing manager when
considering new opportunities for sales
growth.
i bl i h i
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Variables in the matrix
Two variables in Strategic marketing
Decisions:
The market in which the firm was going to operate
The product intended for sale
In terms of the market, managers had two options:
Remain in the existing market
Enter new ones
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Continued
In terms of the product, the two options are:
selling existing products
developing new ones
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Existing PRODUCTS New
INCREASING RISK
INCRE
ASINGRISK
Existing
MARKETS
New
MARKET
PENETRATION
Sell more in existing
Markets
MARKET EXTENSION
Achieve higher
sales/market share
of existing products
in new markets
PRODUCT DEVELOPMENT
Sell new products in
existing markets
DIVERSIFICATION
Sell new products in new
markets
E i ti PRODUCTS N
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Existing PRODUCTS New
INCREASING RISK
INCREASIN
GRISK
Existing
MARKETS
New
MARKET
PENETRATION
Sell more in existing
Markets
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1- MARKET PENETRATION
This is the objective of higher market share in
existing markets.
E.g. in 2000, Mitsubishi announced a 10%
reduction in prices in the UK in order to
encourage purchases
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Continued
Retaliation from competitors.
Legal constraints.
Defending market share.
Downsizing or divestment.
Existing PRODUCTS New
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Existing PRODUCTS New
INCREASING RISK
INCREASIN
GRISK
Existing
MARKETS
New
MARKET
PENETRATION
Sell more in existing
Markets
MARKET EXTENSION
Achieve higher
sales/market shareof existing products
in new markets
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2- MARKET EXTENSION
This is the strategy of selling an existing
product to new markets. This could involve
selling to an overseas market, or a new market
segment.
Nintendo are making hand held games
consoles (e.g. DS) appeal to the adult/grey
market by introducing games such as BrainTrain.
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Continued
New segments.
New users.
New geographies.
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Existing PRODUCTS New
INCREASING RISK
INCREASINGRISK
Existing
MARKETS
New
MARKETPENETRATION
Sell more in existing
Markets
MARKET EXTENSION
Achieve highersales/market share
of existing products
in new markets
PRODUCT DEVELOPMENT
Sell new products in
existing markets
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3- PRODUCT DEVELOPMENT
Where an organization deliver modified or
new products to existing markets.
Least risky of all four strategies.
E.g. Coca-Cola. This has been developed tohave vanilla, lime, cherry and diet varieties(amongst others) in the SOFT DRINKS
market.
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Continued
New strategic capabilities.
Project management risk.
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Existing PRODUCTS New
INCREASING RISK
INCRE
ASINGRISK
Existing
MARKETS
New
MARKET
PENETRATION
Sell more in existing
Markets
MARKET EXTENSION
Achieve higher
sales/market share
of existing products
in new markets
PRODUCT DEVELOPMENT
Sell new products in
existing markets
DIVERSIFICATION
Sell new products in new
markets
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4- DIVERSIFICATION
This is the process of selling different,unrelated goods or services in unrelatedmarkets
This is the most risky of all four strategies.E.g. the Virgin group
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Summary
Risks involved differ substantially
The matrix identifies different strategic areasin which a business COULD expand
Managers need to then asses the costs,potential gains and risks associated with theother options
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Portfolio Matrix
Point No. 5
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The Boston Matrix
A means of analysing the product portfolio
and informing decision making about
possible marketing strategies.
Developed by the Boston Consulting Group a business strategy and marketing
consultancy in 1968.
Links growth rate, market share and cashflow.
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1- Stars
Products in markets experiencing high growth
rates with a high or increasing share of the
market.
- Potential for high revenue growth.
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2- Cash Cows
High market share
Low growth
markets maturitystage of PLC
Low cost support
High cash revenue
positive cash
flows
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3- Dogs
Products in a low
growth market.
Have low or declining
market share (declinestage of PLC).
Associated with
negative cash flow.
May require largesums of money to
support.
Is your product starting toembarrass your company?
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4- Problem Child
- Products having a low marketshare in a high growthmarket.
- Need money spent to develop
them.- May produce negative cash
flow.
- Potential for the future?
Problem children worth spendinggood money on?
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The Boston Matrix
Problem Children Stars
Dogs Cash Cows
Market Growth
Market Share
High
Low High
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The Boston Matrix
Implications:
Dogs:
Are they worth persevering with?
How much are they costing? Could they be revived in some way?
How much would it cost to continue
to support such products?
How much would it cost to removefrom the market?
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The Boston Matrix
Implications:
Problem Children:
What are the chances of these products securing a
hold in the market?
How much will it cost to promote them to a
stronger position?
Is it worth it?
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The Boston Matrix
Implications:
Stars:
Huge potential
May have been expensive to develop
Worth spending money to promote
Consider the extent of their product life cycle in
decision making
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The Boston Matrix
Implications:
Cash Cows:
Cheap to promote
Generate large amounts of cash
use for further R&D?
Costs of developing and promotinghave largely gone
Need to monitor their performance
the long term? At the maturity stage of the PLC?
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THANK YOU