Week 7 - Business Level Strategy

Question 1

3 Fundamental elements/Pillars of strategy:

Answer 1

1) Corporate-level - Where should a business compete? 

2) Business-level - How should a business compete? 

3) Functional (operational) - How should a business execute its strategy?

Question 2

Strategic business unit (SBUs)

Answer 2

• A strategic business unit (SBU) supplies goods or services for a distinct domain of activity. 

  • A small business (typically) has just one SBU. 

  • A large diversified corporation is made up of multiple businesses (SBUs). 

  • SBUs can be called divisions or profit centres. 

  • SBUs can be identified by: - Market-based criteria (similar customers, channels and competitors); - Capabilities-based criteria (similar strategic capabilities)

Question 3

Strategic business unit (SBUs)

Answer 3

• To decentralise initiatives to smaller units within the corporation so SBUs can pursue their own distinct strategy.
  
- To allow large corporations to vary their business strategies according to the different needs of external markets.
  
- To encourage accountability. Each SBU can be held responsible for the success or failure of its own strategy

Question 4

Stategists at the business level

Answer 4

• We also need to think about the people who work within (and lead) SBUs. 

• Strategists are responsible for the ‘everyday’ of strategy, and for strategising (the doing of strategy). 

• Where an organisation competes, how they compete, and how they execute strategy ultimate comes down to people (a key resource).
  
- We often think of the C-suite but strategists exist across firms and SBUs.

Question 5

Strategists and Strategic decisions

Answer 5

• As we begin to explore levels of strategy in more depth (both business and corporate) we need to consider strategists and their decision-making. 

• Strategic decisions are likely to be concerned with, or affect, the longterm direction of an organisation.
  
- Who makes decisions? it depends on structure, the type of organisation, the culture, priorities

Question 6

Porters generic strategics

Answer 6

• Michael Porter introduced the term ‘generic strategy/ies’ to mean basic types of competitive strategy that hold across many kinds of business situations:
  
• Competitive strategy is concerned with how a company, business unit or organisation achieves competitive advantage in its domain of activity.
  
• Competitive advantage is about how a company, business unit or organisation creates value for its users, both greater than the costs of supplying them and superior to that of rivals.

Question 7

Porters generic strategies - 3 options 


Answer 7

• Cost-leadership – focused on deriving competitive advantage by aiming to be the lowest cost player in the market.
  
- Differentiation – focused on deriving competitive advantage by being unique, more attractive, and offering quality.
  
- Focus– focused on the above but in a specific narrow market (a market segment, a particular demographic, etc.).

Question 8

Cost-leadership strategy

Answer 8

• Cost-leadership strategy involves becoming the lowest-cost organisation in a domain of activity. 

• Four key cost drivers that can help deliver cost leadership:
  
• Lower input costs (e.g. labour or raw materials). 

  • Economies of scale (i.e. reduction in the average costs).
  
• Experience (e.g. H&M). 

  • Product/process design (e.g. electronics giants, automotive industry). 
(There may be other sources, too, such as technological advantages).

Question 9

Cost-leadership strategy - parity/proximity

Answer 9

• Low cost should not be pursued in total disregard for quality. Businesses have two options here: 

  • Parity – equivalent quality in terms of product or service features. The cost leader can then charge the same price as rivals and make profit.
  
• Proximity – only slightly lower quality allows the cost leader to offer a slightly lower price and still make higher profits

Question 10

Differentiation strategy

Answer 10

• Differentiation involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium.
  
- The key drivers of differentiation are:
  
• Product and service attributes and quality – providing better or unique features (e.g. Dyson, 5-star hotels). 

  • Customer relationships – customer service and responsiveness (e.g. John Lewis); customisation (e.g. SAP) or marketing and reputation (e.g. Coca Cola, designer clothing). 

  • Complements – building on linkages with other products/services (Apple and iTunes, Microsoft and Windows).

Question 11

Differentiation strategy - 2 dimensions

Answer 11

• Within each market businesses may differentiate along different dimensions. 

• Two key issues to consider:
  
• The strategic customer on whose needs the differentiation is based. 

  • Key competitors – who are the rivals and who may become a rival?

Question 12

Focus strategy

Answer 12

• A focus strategy targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others.
  
- Two distinct types of focus strategy:
  
• Cost-focus strategy
  
• Differentiation focus strategy

Question 13

Focus strategy - key differences

Answer 13

• Cost focusers identify areas where broader cost based strategies fail because of the added cost of trying to satisfy a wide range of needs (e.g. Iceland Foods). 

• Differentiation focusers look for specific needs that broad differentiators do not satisfy so well (e.g. ARM Holdings in the market for mobile phone chips)

Question 14

Stuck in the middle - porter argues

Answer 14

• 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’ – doing no strategy well.
  
- The argument for pure generic strategies is controversial. Porter acknowledges that the strategies can be combined (e.g. if being unique costs nothing). 

  1) bad at both 2) big investment 3) Jeopardisation

Question 15

Hybrid strategy

Answer 15

• A hybrid strategy combines different generic strategies. 

• A balance of cost and differentiation but is hard to achieve (as noted by Porter).
  
- Few organisations manage this in practice, though some do try and succeed.

Question 16

Hybrid strategy - when to combine strategies

Answer 16

• 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 work. However, hybrid strategies should be pursued after careful considerations – if at all

Question 17

An alternative - Bowmans strategy clock and price (Ryanair)

Answer 17

• Seek low price combined with low perceived value. 

  • A standard low-price strategy (9 o’clock) Low prices combined with similar quality to competitors aimed at increasing market share. Needs a cost advantage (such as economies of scale) to be sustainable, e.g. Asda/Walmart in grocery retailing.
  
• A ‘no-frills’ strategy (7 o’clock) Focusing on price sensitive market segments – typified by low-cost airlines like Ryanair, shops such as Poundland.

Question 18

The strategy clock and differentiation (Golden jewellery thing)

Answer 18

• Strategies in this zone seek to provide products that offer perceived benefits that differ from those offered by competitors. There is a range of alternative strategies:
  
• Differentiation without price premium (12 o’clock) – used to increase market share.
  
• Differentiation with price premium (1 o’clock) – used to increase profit margins.
  
• Focused differentiation (2 o’clock) – used for customers that demand top quality and will pay a big premium.

Question 19

The strategy clock and hybrid (etsy)

Answer 19

• Seek to simultaneously achieve higher benefits and lower prices relative to those of competitors.
  
- Hybrid strategies can be used: 

  • To enter markets and build position quickly. 

  • As an aggressive attempt to win market share. 

  • To build volume sales and gain from mass production.

Question 20

The Strategy clock and non-competitive strategies

Answer 20

• Increased prices with low perceived product or service benefits. 

  • In competitive markets, such strategies will be doomed to failure.
  
• Only feasible where there is strategic ‘lock-in’ or a near monopoly position.

Question 21

Barney (Reccomended reading)

Answer 21

• Barney established the RBV of the firm and that resources and capabilities are key to competitive advantage (parity, temporary, sustained).
  
- Barney’s work is relevant to the business level and how organisations should compete in their industry, market, or in different market segments. 

• Firms need to consider their resources and capabilities in creating unique value (through low cost, differentiation, or focus).
  
- What core competences are developed as they strive for sustained competitive advantage.

• Discusses the concept of first-mover advantages in relation to competitive advantage. In particular a firm might gain the following advantages by being a first mover:

  1) Access to distribution channels, better deals.
  
2) Develop ‘good will’/relationship with customers.

  3) Gain a positive reputation (perhaps impacting the ‘brand’).