Lecture 6 Business Strategy
Exploring Business Strategy
(247SAM)
Where are we now?
Position
Exploring
strategy
Choices
Action
Intended learning outcomes
 Identify strategic business units (SBUs) in organisations
 Assess business strategy in terms of the generic
strategies of cost leadership, differentiation and focus
 Identify business strategies suited to hypercompetitive
conditions
 Assess the benefit of cooperation in business strategy
Strategic Business Unit
 A strategic Business Unit
(SBU) supplies goods or
services for a distinct
domain of activity.
 Distinct businesses within
Food
Water
Beverage
a large diversified
corporation
Nestle
SBUs
 SBUs boundaries is often
complex
Dairy
products
Confectionery
Competitive strategy
 Competitive strategy is concerned with how an SBU
strategy achieves competitive advantage in its
domain of activity.
 Competitive advantage is about how an SBU creates
value for its users both greater than the cost of
supplying them and superior to that of rival SBUS
5
Generic vs. Interactive Strategies
Porter’s generic strategies
Advantage
Broad target
(Industry
Wide)
Target scope
Narrow target
(Market
Segment)
Low Cost
Differentiation
Cost Leadership
Strategy
Differentiation
Strategy
(Cost) focus
Strategy
(Differentiation) focus
Strategy
Cost leadership strategy
 Cost-leadership strategy “involves becoming the lowest-cost
organisation in a domain of activity” (Johnson et al. 2012:200)
Cost leadership strategy
Figure 5.3 Economies of scale and the experience curve
Differentiation strategy
 Differentiation “involves uniqueness along some dimension
that is sufficiently valued by customers to allow a price
premium” (Johnson et al. 2012:203)
 Differentiation gives customers a reason to prefer one
product over another
 Within each market businesses may differentiate along
different dimensions
Examples of differentiation strategy
Differentiation strategy
Two key factors that require clarity before choosing
attributes to differentiate on:
 The strategic customer
 Key competitors
Focus Strategies
 Focus strategy “targets a narrow segment of domain of
activity and tailors its products or services to the needs of
that specific segment to the exclusion of others” (Johnson et al.
2012:205)
 Focuser achieves CA by dedicating itself to serving target
segments better than others which are trying to cover a
wide range of segments
 There are two categories of focus strategies: cost focus and
differentiation focus.
E.g.: Differentiation in the Airline Industry
Figure 6.5
Mapping differentiation in the US airline industry
Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), ‘The US airlines relative positioning’, Tourism Management, 26, 5, 57–67: p. 62
Differentiation focus
Which one is…
MaxMara?
Burberry?
H&M?
Cost focus
https://www.youtube.com/watch?v=069y1
MpOkQY
Reviewing generic strategies:
Cost, price and profits
Figure 5.4 Costs, prices and profits for generic strategies
Reviewing generic strategies:
Combining generic strategies
 A company can create separate strategic business units each
pursuing different generic strategies and with different cost
structures.
 Technological or managerial innovations where both cost
efficiency and quality are improved.
 Competitive failures – if rivals are similarly ‘stuck in the
middle’ or if there is no significant competition then ‘middle’
strategies may be OK.
Reviewing generic strategies:
“Stuck in the middle”
Porter’s argues:
 It is best to choose which generic strategy to adopt and
then stick rigorously to it.
 Failure to do this leads to a danger of being ‘stuck in the
middle’ i.e. doing no strategy well.
 The argument for pure generic strategies is controversial.
Even Porter acknowledges that the strategies can be
combined (e.g. if being unique costs nothing).
Interactive strategies
(student self-guided study)
 Generic strategies to be chosen and adjusted based
on competitors’ strategies.
 The business strategy choices interact with those of
competitors
 Two interactive strategies: cooperative strategy and
game theory, particularly in a hypercompetitive
context.
Hypercompetitive situation
 Hypercompetition describes markets with continuous
disequilibrium and change, e.g. popular music or consumer
electronics
 Successful competitive interaction in hypercompetition
demands speed and initiative rather than defensiveness.
Cooperation strategy: Cooperating with rivals
Figure 5.8
Cooperating with rivals
Source : Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press (Michael E. Porter 1998) with the permission of The Free Press,
a Division of Simon & Schuster, Inc. Copyright © 1980, 1998 by The Free Press. All rights reserved
Game theory
 Game theory encourages an organisation to consider
competitors’ likely moves and the implications of
these moves for its own strategy.
 Game theory is particularly applicable in an
interdependent market situation.
 One company’s strategic decision will be made on
the base of anticipating competitor counter-moves.
Summary (1)
 Business strategy is concerned with seeking competitive
advantage in markets at the business rather than corporate
level.
 Business strategy needs to be considered and defined in
terms of strategic business units (SBUs).
 Different generic strategies can be defined in terms of cost-
leadership, differentiation and focus.
Summary (2)
 In hypercompetitive conditions sustainable
competitive advantage is difficult to achieve.
 Competitors need to be able to cannibalise, make
small moves, be unpredictable and mislead their
rivals.
 Cooperative strategies may offer alternatives to
competitive strategies or may run in parallel.
FURTHER READING
 CHAPTER 6 OF CORE TEXT
Seminar case study: IKEA
 Identify where (in its value network) and how IKEA has
achieved cost leadership.
 Identify how IKEA has achieved differentiation from its
competitors.
 Explain how IKEA tries to ensure that its ‘Hybrid’ strategy
remains sustainable and does not become ‘stuck-in-themiddle’.
 What are the lessons from China about IKEA’s approach?