strategy formulation business strategy

8/3/2019 Strategy Formulation Business Strategy

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Strategy FormulationStrategy Formulation

Business StrategyBusiness Strategy

Prof. Rushen ChahalProf. Rushen Chahal


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Focuses on improving the competitive

position of a companys or business

units product or services within thespecific industry or market segment that

the company or business unit serves.

Business Strategy


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Competitive

Cooperative

Business Strategy


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Should we compete on the basis of low

cost, or should we differentiate our

products or services on some basis

other than cost?

Should we compete head to head with

our major competitors for the biggestshare of market, or should we focus on a

niche ?

Competitive Strategies


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A firm cannot be everything to

everybody; it must choose what todo and what not to do.

Michael Porter

Competitive Strategies


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Competitive Advantage

Lower Cost Differentiation

Costleadership Differentiation

Cost Focus Differentiation

FocusCompetitiveSco

pe

BroadTarget

NarrowT

arget

Michael Porters Generic Strategies (1985)


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Cost leadership strategywhere theorganizations resources and attention are

directed toward minimizing costs to operate

more efficiently than the competition.

Such firms exploit economies of scale,

scope and learning (experience) effects and

are obsessed with efficiency and costcontrol.

Michael Porters Generic Strategies


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The cost leader is able to charge lower pricefor its products than its competitors and still

make a satisfactory profit.

Having a low cost position gives a company

a defense against rivals:

The cost leader has high market share

which leads to high bargaining power

relative to its suppliers.

Its low price is a barrier to entry



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Differentiation strategy

where theorganizations resources and attention are

directed toward distinguishing its products

from those of the competition.

The specialty can be associated with design

or brand image, technology, features, dealer

network, or customer service. The resulting brand lowers customers

sensitivity to price.

Buyer loyalty serves as an entry barrier



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Differentiation strategy is more likely to

generate higher profits than is a low-cost

strategy.

But a low-cost strategy is more likely,

however, to generate increases in market

share.



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Focused differentiation strategywhere the

organization concentrates on one special

market segment and tries to offer customers in

that segment an unique product.

Focused cost leadership strategywhere the

organization concentrates on one special

market segment and tries to be the lowest costprovider in that segment.



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Competitive Advantage

Lower Cost Differentiation

NissanTesco

Dell Computers

Mercedes carsMaytag

Apple Computer

Smaller retailersfeaturing

own-label or

discounted

products

Any successfulniche retailers

CompetitiveScope

BroadTarget

NarrowT

arget



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Unsegmentation:the firm offers the same products

across a broad range of market segments e.g. CocaCola, Wal-Mart, Google

Segmentation:the firm still addresses a broad range of

market segments but designs different products for thosesegments, e.g. Honda, Dell, British Airways

Niche:the firm focuses on one segment of the market

e.g. Ryanair, Cray Computers, Morgan Cars

Customisation:the firm focuses on individual customersand shapes their offering to the unique requirements of

that buyer, e.g. event organization, golf course design

Mintzbergs Four Generic Approaches to Scope


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Mintzbergs Differentiation Strategies (1998)

Strategy Description

Price (low cost) A lower price than rivalse.g. the no frills airlines versus the big

carriers in the US and Europe

Image A brand or reputation

e.g. Coca cola, Mercedes, Gucci, Harvard

Business School, etc.

Support Provision of back-up or after sales service

e.g. Dell

Quality A more durable or reliable product or one

with higher performance

e.g. digital cameras (pixels)

Design Different product functions

e.g. pharmaceuticals, mobile phones

Undifferentiation Same as the others

e.g. Car rental firms, financial service firms,

petrol stations, steel companies etc.


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Risks in Competitive StrategiesRisks ofCost

Leadership

Risks of

Differentiation

Risks of Focus

CL is not sustained:

Competitors intimate

Technology changes

Other bases for cost

leadership erode

Proximity in differentiation

is lost

Cost focuses achieve

even lower cost in

segments

Dif is not sustained:

Competitors intimate

Bases for differentiation

become less important to

buyers

Cost proximity is lost

Differentiation focuses

achieve even greater

differentiation in segments

Focus strategy is imitated

The target segment

becomes unattractive:

Structure erodes

Demand disappearsBroadly targeted

competition:

The segments

differences from other

segments narrow

The advantages of broad

line increase

New focusers subsegment

the industry


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Requirements for Generic Competitive StrategiesGeneric Strategy Commonly Required Skills and

Resources

Common Organizational

Requirements

Overall CostLeadership

Differentiation

Focus

Sustained capital investment &access to capital

Process engineering skills

Intense supervision of labor

Product designed for ease of

manufacture

Low-cost distribution system

Strong marketing abilities

Product engineering

Creative flair

Strong capability in basic research

Corporate reputation

Long tradition in industry

Strong cooperation from channels

Combination of above policies

directed at the particular strategic

target

Tight cost

Frequent, detailed control

reports

Structured organization &

responsibilities

Incentives based on meeting

strict quantitative targets

Strong coordination among

functions in R&D, product

development & marketing

Subjective measurement and

incentives instead ofquantitative measures

Amenities to attract highly

skilled labor, scientists, or

creative people

Combination of above policies

directed at the particular

strategic target


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It is becoming increasingly difficult to sustain acompetitive advantage for very long (DAveni):

Short product life cycles

Short product design cycles

New technologies Frequent entry by unexpected outsiders

The only way to sustain any competitive

advantage is through a continuous series ofmultiple short-term initiatives aimed at replacing

a firms current successful products with the

next generation of products (Intel, Microsoft).

Hypercompetition and Competitive Strategies


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Build an early monitoring system to identify

turning points in business

Monitor new entrants, niche players and newly

established firms Do not focus too much on your existing

customers monitor fringe customers

Seek feedback from suppliers, customers,

distributors and employees Create a culture that welcome change

Institutionalize a questioning attitude

Tactics for Achieving Dynamic Fit

by Constantinos Markides


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Shock the system into active thinking through

the creation of positive crises

Develop processes which allow for continuous

experimentation of ideas Build a variety of competencies (build core

competencies into diverse product lines)

Allow slack in the system

Encourage decentralized decision-making

(within clear parameters by top management)

Continuously challenge the organizations

unquestioned assumptions and sacred cows

Tactics for Achieving Dynamic Fit

by Constantinos Markides


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Timing

Tactics (when) First mover

Late mover

Market location tactics (where)

Offensive tactics Frontal assault Flanking maneuver

Bypass Attack

Encirclement

Guerrilla warfare Defensive tactics

Raise structural barriers

Increase expected retaliation

Lower the inducement for attack

Competitive Tactics


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Cooperative strategies can also be used to

gain competitive advantage within an

industry by working with other firms.

Collusion

Strategic alliance

Cooperative Strategies


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Collusion is active cooperation of firms

within industry to reduce output and raise

prices in order to get around the normal

economic law of supply and demand.

Explicit - through direct negotiations, is

illegal in most countries

Tacit through informal system of signals



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Strategic alliance is a partnership of two ormore corporations orBU to achieve strategically

significant objectives that are mutually

beneficial.

Reasons:

To obtain technology and/or manufacturing

capabilities

To obtain access to specific markets

To reduce financial risks

To reduce political risk

To achieve or ensure competitive advantage


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