Topic 7 Strategies Def

Topic 7.
Strategies
Grado en Turismo
Strategic Management
Prof.: Mara Razumova
Strategies
Competitive
strategies
are concerned with the bases on

which a firm can achieve a
competitive advantage
Growth
strategies
are concerned with how a firm

grows
Escuela Universitaria de Turismo Felipe Moreno

Escuela de Turismo de Baleares www.etb-baleares.ess
Strategies
Competitive
strategies
Generic (basic):
Specific:
Cost differentiation
Product differentiation
Focus (niche)
Low price
Hybrid
Growth
strategies
Organic
(internal growth)
External growth

Contents
7.1 Generic strategies
7.2 Specific strategies

Generic strategies
Porter (1985): Generic strategies
Cost leadership
Focus strategy

Generic strategies
Cost leadership
Focus strategy

Generic strategies
How it works:
1) Lower (than competitors) cost >> Lower (than
competitors) price >> bigger market share
Necessary condition:
price sensitive demand (price elasticity)
(compare water and cinema tickets)

Generic strategies
How it works:
2) Lower (than competitors) cost >> Same (than
competitors) price >> bigger benefits

How to achieve cost

leadership?

How to achieve cost leadership?

How to produce at a lower cost than the
competitors?
Economy of scale
Economy of learning
Economy of reach
Process design
Product design
Use of full capacity
Inputs cost
Organizational efficiency

10

Economy of scale
How it works: more units produced smaller cost per unit
a) Technical relations between inputs and outputs (the cost of
an aircraft for 200 pax is less that 2 times more expensive
than for 100 pax )
b) Inseparability of inputs (promotional campaign)
c) Specialization (e.g. a big hotel can have specialized
departments >> all activities are more efficient)
11

Economy of scale
How it works: more units produced smaller cost per unit
d) Discounts for high volume purchases
e) Discounts for high volume distribution

12

Economy of reach
How it works: same input is used for different products
Example: An accountant or IT-specialist working for different
firms
Example: Food supplies in bulk for a restaurant, bar and hotel.

13

Economy of learning
How it works: more experienced we are more efficient we
are (less time less, resources)
a) Individual level (a travel agent searching for a package
satisfying clients needs)
b) Group (organizational) level (e.g. a theme park staff
scheduling, minimizing power costs, waste disposal)

14

Process design
How it works: more efficient processes smaller cost per unit
a)
b)
c)
d)
Time
Productivity
Quality
Imperfections
Standardizing of the inputs is the main source of process

optimization: Southwest Airlines operate only one aircraft
type Boeing 737
15

Product design
How it works: easier design smaller cost per unit
Standardizing of the products/services is the main source
(Holiday Inn - very standardized concept of a hotel >>
franchising opportunities)
Only important features (no frills concept)
Use of copying (original design of a web / use of a
template)

16

Full use of capacity
How it works: full capacity reduction of fixed costs per unit
In tourism unused capacity is very frequent:
Hotels
Airlines
Bars/restaurants
Entertainment parks
But: overutilization should be avoided! (e.g. restaurant:

excessive number of tables - more time to wait for the
waiter, more time to wait for the plate, extra hours, etc. )
17

Input costs
How it works: cheaper inputs smaller cost per unit
Cheap labor markets
Government help (subsidies to be working in a certain areas,
certain activities, goods, services. British Airways started to
locate call centers in peripheral areas, nowadays many call
centers are in LA)
Cheap resources (easyJet started to use Internet for booking
instead of call centers or travel agents)
Negotiation power with suppliers and distributors
Vertical integration
18

Organizational efficiency
How it works: an efficient organization would always be
searching how to reduce its costs >> smaller cost per unit
Excessive staff / Deficient staff
Efficient management
Efficient R&D

19
Generic strategies
How it works: Unique characteristics (real o
perceived) >> higher price
Necessary conditions:
High quality
Additional services
Importance for clients
Possibility for differentiation (fresh water vs mobile phones?)
Clients have different tastes ((fresh water vs mobile
phones?)
20
Generic strategies
Cost leadership
Focus strategy

21
How to differentiate from

competitors?

22
How to differentiate from competitors?

There are two sources of differentiation:
1) Product (good or service)
2) Firm

23

When it is easy to differentiate a product:
1) When it has complex physical
characteristics
technical complexity
satisfy specific needs, tastes
not standardized
(compare water VS mobile phone; mass tourism package VS
customized package)

24

2) When there can be complementary
services/goods
-
After sale services

Accessories
Home delivery
Credit sale
(compare basic hotel and an upscale hotel)

25

3) Intangible characteristics
-
Social (image/lifestyle, community affiliation)

Physiological (security, tailoring)
Ethics
Esthetics (fashion)

26

4) Access to superior resources
- A chain of TO with its offices located only in prime
locations

27

Differentiation in Hyatt Regency hotels
Very crowded upscale market (Ritz-Carlton, Shangri-La,
Regent International Hotels..)
1967: opens first atrium hotel in Atlanta (first hotel with wideopen public spaces)
Hyatt retains the reputation (and hence differentiates from
competitors) for creative and innovative design

28

A firm can also be a source of differentiation
In this case all its products are seen as different by the clients
How a firm can differentiate:

-
Way it makes business (R&D leaders - Apple)

Ethic values (Body Shop)
Relationship with clients

29
Generic strategies
Cost leadership
Focus strategy

30
Generic strategies
Focus (niche, segmentation) strategy
How it works: Few or no rivals or weak rivals;
strategy of cost or differentiation leadership
Niche: High quality
hotels
NH hotels:
Cost leadership
Paradores Nacionales:
Differentiation strategy: Special
locations with historic/artistic
value

31
Generic strategies
Focus (niche, segmentation) strategy
Advantages:
- Low investment comparing to a strategy aiming
to an entire market
- Allow for specialization and better knowledge of
the focus segment

32
Generic strategies
Some examples of focus strategy
- Special needs: Contiki coach-based holidays.
Started as a safe secure means for Australians to
see Europe
- Special locations: Sunvil Holidays UK-based firm
specialized on holidays on Cyprus
- Special ages: PGL Adventure Holiodays (UK)
holidays for children
- Special interests: La Manga (Spain) resorts for
sports enthusiasts
33
Generic strategies SUMMARY

34
Contents
7.1 Generic strategies
7.2 Specific strategies

35
Specific strategies
There is no pure generic strategies
It is a mean to analyze a strategy
It is a general recipe to generate CA

36
Specific strategies
Hybrid strategy = cost differentiation +
product differentiation
Disadvantage: a risk to get stock in between
Example: low cost airlines
When additional cost savings are becoming more
difficult to achieve, the companies have to
differentiate their products by providing a limited
range of added service benefits
37
Specific strategies
Low price strategy (low quality strategy)
How it works: Some clients would consider a lower
quality if the price is very attractive
Compare:
1) low price 20 Euros/night hotel with bad quality
bed linen and facilities located
2) Low cost but not so low price Yotel hotel

38
Specific strategies
The strategy clock framework
3. Hybrid (low
cost,
differentiation
(Yotel)
High
Perceived
added
value
4. Differentiation
(Paradores)
2. Higher quality,
low costs
1. Low quality, low

price (Arenal)
5. Focused
differentiation
(Boutique hotels)
6. Likely failure
8. Likely failure
7. Likely failure
Low
Low
Price
High

39
Specific strategies
The strategy clock framework
Strategy
Success factors/risks
Low price/low added value
Likely to be segment
specific (very price sensitive customers would
accept low quality)
Low price
Risk of copying, price war, low margins, need to

be cost leader
Hybrid
Cost leadership and differentiation needed
Differentiation
a) Without price premium
b) With price premium
a) Perceived added value, market share

benefits
b) Perceived added value sufficient to bear
price premium
Focused differentiation
Perceived added value to a particular segment

warranting price premium
Increased price / standard value
Higher margins if the competitors dont follow/

risk of loosing market share
Increased price / low value
Only feasible in monopoly position
Low value / standard price
Loss of market share

40
Portfolio matrixes
Allow analysis of a group of services,
products, businesses
Place all services, products, businesses in
a two dimension matrix
Allow to decide in which of them:
1) invest
2) not to invest
3) reduce the investment

41
Portfolio matrixes BCG matrix

Boston Consulting Group (BCG) matrix
Market growth: slow mature markets
fast new markets
Market
Growth, %
Relative market share=
Firms or products market share

Markets share of the
biggest competitor
Relative market share

42

*
* All values are original values by BCG. A firm can modify them according to its specifics
43

Slow market
growth (mature
market)
Big RMS (we are
leaders)
Slow market growth >> No need to

invest >> Good returns from the
business >> Funds excess !!! >>
we can invest it in other
businesses/products
Example: Iberia mature market, leader

44
Fast market growth

(new market)
Fast market growth >> Need to invest to

maintain competitive position >> Use
funds excess from the Cash Cows
Big RMS (we are

leaders)
Example: European flights of Ryanair fast growing low cost market

45
Fast market growth

(new market)
Small RMS (we are a
small firm)
Small RMS >> weak competitive

position >> Need to invest to become
leader >> But, shall we invest? Will we
become a star? >> If yes, use funds
excess from the Cows
Example: A small restaurant in a rural area: Small size but growing market for rural hotels
46

Slow market growth
(mature market)
Small RMS (we are a
small firm)
Business produces some small

benefits >> our strategic options
are:
1) No investment
2) Reduce investment (use funds for
stars or ?)
3) Quit from the business (use funds
for stars or ?)
Example: A traditional restaurant in a city

47
BCG matrix: example

A hotel chain has 4 businesses in Mallorca:
1.
Traditional hotels on in the seaside in Arenal area. Market

growth 1%, market share 20%. Biggest competitor's market
share 30%. RMS=20/30=0,66
2. Traditional hotels on in the seaside on the North of the

island. Market growth 5%, market share 60%. Biggest
competitor's market share 20%. RMS=60/20=3
3. Rural hotels. Market growth 15%, market share 10%. Biggest
4.
Urban hotels in Palma downtown. Market growth 25%,

market share 10%. Biggest competitor's market share 30%.
RMS=10/30=0,33

48
BCG matrix: example

Rural hotels
Urban hotels in
Palma
Traditional hotels in
Arenal
Traditional hotels on
the North
49
BCG matrix
Limitations of BCG matrix:
1) superficial analysis (only 2 dimensions)
2) should be completed by exhaustive

strategic analysis (external/Internal)
especially for ? and dogs
3) very static - do not consider time
factor and competitors actions
50
Portfolio matrixes McKinsey matrix

McKinsey matrix:
a more complex analysis
Market
attractiveness
(many indicators)
Firms/products
competitive position
(many indicators)
51

Possible market attractiveness indicators
market growth
market size
rivalry in the sector (see T3 Porters 5 forces
framework)
profitability
risks
many more
Possible competitive position indicators:
market share
assortment
image / reputation
costs structure
quality of the HR
technology
.. many more
The managers have

to:
1) Define all
important indicators
for the company
and the
measurement scales
2) Assign weights to
the indicators
3) Evaluate each
business

52

A, B, D most attractive segments for investment, similar to stars in
BCG
Market attractiveness
High
Medium
A: keep on
investing to
maintain leader
position
B: invest to improve
competitive
position
D: focus investment
on the most
attractive segments
Low
Strong
Medium
Weak
Competitive position
53

C, E, G intermediary positions
A
C: similar to ?:
Invest if we are sure
we can improve
our competitive
position
E: very high
uncertainty!, focus
on other businesses
High
Medium
Low
G: similar to Cash
H
Cows: no
investment needed,
good revenues >>
use funds excess for
other businesses
Strong
Medium
Weak
54

F, H, I problematic, similar to dogs in BCG
A
H No investment I
Reduce investment (use funds for
stars or ?)
Quit from the business (use funds
for stars or ?)
High
Medium
Low
Strong
Medium
Weak
55
McKinsey matrix: example

A hotel chain has 4 businesses in Mallorca:
1.
Traditional hotels on in the seaside in Arenal area. Market

growth 1%, market share 20%. Biggest competitor's market
share 30%. RMS=20/30=0,66
2. Traditional hotels on in the seaside on the North of the

island. Market growth 5%, market share 60%. Biggest
3. Rural hotels. Market growth 15%, market share 10%. Biggest
4.
Urban hotels in Palma downtown. Market growth 25%,

market share 10%. Biggest competitor's market share 30%.
RMS=10/30=0,33

56

Market attractiveness measured by market growth and competitive position
as RMS (like in BCG)
A
High
Urban hotels in
Palma (?)
Tradit. Hotels
North (star) *
G
Low
Rural hotels (star)
D
Medium
Tradit. hotels North

(cash cow)*
Tradit. hotels
Arenal
Strong
Medium
Weak
* Depending on whether the firm considers 5% market growth as low attractive or moderately attractive,
hotels on the North can be considered D (star) or G (cash cow)
57

Imagine our considered firm considers a market to be
attractive if 1) grows fast, and 2) has low risk.
Scale for growth (low=1, moderate=2, fast=3) Weight=40%
Scale for risk (low=3, moderate=2, fast=1) Weight=60%
1.
Traditional hotels, Arenal area. Market growth 1% (low=1), risk (low=3).

Total score for market attractiveness=1*0,4+3*0,6= 2,2
2.
Traditional hotels North. Market growth 5% (moderate=2), risk (low=3).

Total score for market attractiveness=2*0,4+3*0,6= 2,6
3.
Rural hotels. Market growth 15% (fast=3), risk (high=1). Total score for
market attractiveness=3*0,4+1*0,6= 1,8
4.
Urban hotels in Palma downtown. Market growth 25 (fast=3), risk

(moderate=2). Total score for market attractiveness=3*0,4+2*0,6= 2,4

58

Market attractiveness measured as market growth x risk
A Tradit. Hotels
North (star)
maintain position
High
Medium
G
Low
Tradit. hotels Arenal

(look for better
business hotels on
the North)
F
Urban hotels in
Palma (?)
Rural hotels (cow):

(keep on, dont
invest)
Strong
Medium
Weak

59
Strategies according to product/firm life

cycle
Product / firm life cycle

60

cycle
Relationship between BCG matrix and product life cycle

61

cycle
New firm/
New product

62

cycle
Strategic focus on:
Introduce the
product to the
market: promotions,
low prices, discounts,
innovation..
First competitors
appear: focus on
making CA
sustainable
Maintain
leading
position as long
as possible (no
changes if it is
working)
Survival strategies:
1) No investment
2) Reduce investment
3) Quit
4) Revival (for the
firms)

63
Strategies according to sector life cycle

Home reading (pdf in Aula Virtual):
T7 Decisiones estratgicas I

64
Exercise 1
Reading: La primera clase gana altura
Questions:
What type of generic strategies do the
airlines apply?
What cost factors (or differentiation factors)
appear in the text?

65
Case to be delivered by email

Reading: Catering areo

66
Basic reading
Casanueva Rocha et al: Captulo 5
Evans et al: Chapter 10
Johnson et al., p.209-216 (Strategy clock)

67
Review questions
Define three generic strategies

Explain the sources of cost leadership
Explain the sources of product differentiation
Explain the concept and advantages of the niche strategy
Explain the logic of the strategy clock framework
Why strategies 6,7,8 are likely to fail?
Explain the logic of BCG matrix and its limitations
Explain the difference between BCG and McKinsey matrices
Explain life cycle concept and its implications for strategy
formulation

68

Topic 7 Strategies Def

Uploaded by

Copyright:

Available Formats

You might also like

Topic 7 Strategies Def

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Topic 7 Strategies Def

Uploaded by

Copyright:

Available Formats

Topic 7.

are concerned with the bases on

are concerned with how a firm

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost leadership?

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost leadership?

How to achieve cost leadership?

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost leadership?

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost leadership?

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost leadership?

Standardizing of the inputs is the main source of process

How to achieve cost leadership?

Escuela Universitaria de Turismo Felipe Moreno

How to achieve cost leadership?

But: overutilization should be avoided! (e.g. restaurant:

How to achieve cost leadership?

How to achieve cost leadership?

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

After sale services

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

Social (image/lifestyle, community affiliation)

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

Escuela Universitaria de Turismo Felipe Moreno

How to differentiate from competitors?

How a firm can differentiate:

Way it makes business (R&D leaders - Apple)

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Escuela Universitaria de Turismo Felipe Moreno

Generic strategies SUMMARY

Escuela Universitaria de Turismo Felipe Moreno

7.2 Specific strategies

Escuela Universitaria de Turismo Felipe Moreno