Business Strategy 2024/2025 PDF

BUSINESS STRATEGY Sandra RAMOS 2024/2025 STRATEGIC CHOICES BUSINESS STRATEGY  INTRODUCTION 3 INTRODUCTION Competitive strategy is concerned with how a company, business unit or organisation achieves competitive advantage in its domain of activity....

BUSINESS STRATEGY Sandra RAMOS 2024/2025 STRATEGIC CHOICES BUSINESS STRATEGY  INTRODUCTION 3 INTRODUCTION Competitive strategy is concerned with how a company, business unit or organisation achieves competitive advantage in its domain of activity. It involves costs, product and service features and branding. Competitive advantage is about how a company, business unit or organisation creates value for its users which is both greater than the costs of supplying them and superior to that of rivals. 4 INTRODUCTION There are two important features of competitive advantage: To be competitive at all, an organisation must ensure To have an advantage, the that customers see organisation must be able sufficient value that they to create greater value are prepared to pay more than competitors. than the costs of supply. In the absence of a competitive advantage, an organisation’s competitive strategy is always vulnerable to competitors with better products or offering lower prices. 5  INTRODUCTION 6 INTRODUCTION Porter’s argues that they are two fundamental means of achieving competitive advantage: 1. An organisation can have structurally lower costs than its competitors. 2. An organisation can have products or services that are differentiated from competitors’ products and services in way that are so valued by customers that it can charge higher prices that cover additional costs of the differentiation. 7 INTRODUCTION Porter’s added a third dimension based on scope of customers that the business choose to serve. An organisation can choose to focus on narrow customer segments (e.g. a particular demographic group such as the youth market). An organisation can adopt a broad scope, targeting customers across a range of characteristics (e.g. age, wealth or geography). 8 Porter’s distinctions between cost, differentiation and scope define a set of ‘generic’ strategies. INTRODUCTION 9 GENERIC COMPETITIVE STRATEGIES COST-LEADERSHIP STRATEGY Cost-leadership strategy involves becoming the lowest-cost organisation in a domain of activity. There are four key cost drivers that can help deliver cost leadership: 1. Inputs costs. E.g. Outsourcing to developing countries. 2. Economies of scale. Reduction of average costs over a particular period time; Industries in high fixed costs. COST-LEADERSHIP STRATEGY 3. Experience. Cumulative experience gained by an organisation with each unit of output leads to reduction in unit costs. The efficiencies are basically of two sorts: 1. There are gains in labour productivity as staff simply learn to do things more cheaply over time (this is the specific learning curve effect). 2. Costs are saved through more efficient designs or equipment as experience shows what works best. COST-LEADERSHIP STRATEGY 4. Product/Process design. Efficiency can be ‘designed in’ at the outset. E.g.: Engineers can choose to build a product from cheap standard components rather than expensive specialised components. Organisations can choose to interact with customers exclusively through cheap web-based methods, rather than via telephone or stores. In designing a product or service, it is important to recognise whole-life costs. COST-LEADERSHIP STRATEGY Porter underlines two tough requirements for cost-based strategies: 1. Lowest cost. The principle of competitive advantage indicates that a business’s cost structure needs to be lowest cost (= lower than all competitors’). Having the second-lowest cost structure implies a competitive disadvantage against somebody. Competitors with higher costs than the cost-leader are always at risk of being undercut on price, especially in market downturns. For businesses competing on a cost basis, cost leadership is always more secure than being second or third in terms of costs. 14 COST-LEADERSHIP STRATEGY Market standards. The second requirement is that low cost should not be pursued in total disregard for quality. To sell its products or services, the cost-leader has to be able to meet market standards. Cost-leaders have two options here: Parity (or equivalence) with Proximity (closeness) competitors in to competitors in product or service terms of features. features valued by 15 customers.  Parity allows the cost-leader to charge the same prices as the average competitor in the marketplace, while translating its cost advantage wholly into extra profit. The proximate cost-leader still earns better profits than the average competitor because its lower price eats up only a part of its cost advantage. MARKET STANDARDS 16 DIFFERENTIATION STRATEGY Differentiation strategy involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Relevant points of differentiation vary between markets; and within each market (businesses may differentiate along different dimensions). Where there are many alternative dimensions that are valued by customers, it is possible to have many different types of differentiation strategy in a market. 17 DIFFERENTIATION STRATEGY E.g. Clothing retail: competitors may differentiate by store size, locations or fashion. Automobile: competitors may differentiate by safety, style or fuel efficiency. Even at the same top end of the car market, BMW and Mercedes differentiate in different ways, the first typically with a sportier image, the second with more conservative values. 18 DIFFERENTIATION STRATEGY Various aspects to consider in pursuing a differentiation strategy: 1. Product and service attributes. Certain products can provide better or unique features than comparable products or services to the customers. 2. Customer relationship. Between the organisation and the customer through customer services and responsiveness. Marketing and reputation. 3. Complements. Linkages to other products or services. 19 DIFFERENTIATION STRATEGY Differentiation allows higher prices, but usually this comes at a cost. Differentiators should attend closely to costs, especially in areas irrelevant to their sources of differentiation. E.g. Rolls Royce and Bentley. 20 FOCUS STRATEGY 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 variants: Cost focus strategy. E.g. Ryanair -> targeting price-conscious travellers with no need for connecting flights. Differentiation focus strategy. E.g. Ecover -> gaining a price premium over rivals on account of its ecological cleaning products targeted at environmental conscious customers. 21 FOCUS STRATEGY The focuser achieves competitive advantage by dedicating itself to serving its target segments better than others that are trying to cover a wider range of segments. Cost focusers identify areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs. Differentiation focusers look for specific needs that broader differentiators do not serve so well. Focus on one particular need helps to build specialist knowledge and technology, increases commitment to service and can improve brand recognition and customer loyalty. 22 FOCUS STRATEGY Three key factors for successful focus strategies: 1. Distinct segment needs. 2. Distinct segment value chains. 3. Viable segment economics. 23 HYBRID STRATEGY Hybrid strategy combines different generic strategies. Some companies start out with one strategy that is later combined with another. E.g. Singapore Airlines It has a differentiation strategy based on passenger comfort, attentive personal service and amenities. This is, however, combined with a lowest-cost position among its key competitors based on low maintenance costs, standardisation and outsourcing of various activities. 24 HYBRID STRATEGY Particular circumstances in which strategies can be combined: Organisational separations -> an organisation may create separate SBUs, each pursuing different strategies with different cost structures. Technological or managerial innovation -> allow radical improvements in both cost and quality. Competitive failures -> When competitors are stuck in the middle or when a company dominates a market, the pressure to address competitive disadvantages or maintain a single strategy is reduced. 25 HANDBOOK Johnson, G., Whittington, R., Scholes, K., Angwin, D., & Regner, P. (2017). Exploring Strategy - Text and Cases (11th ed.). Pearson Education. 26