Samenvatting STM2

Chapter 7 Business strategy and models

Business strategies: about how to compete in a marketplace so that a other companies in that
market have to consider their strategy.

Strategic business unit (SBU)= unit which supplies goods or services for a distinct domain of activity.
They’re also called ‘divisions’ sometimes. They are decentralised units, which develop a strategy
depending on the specific needs of their served market.

A business model identifies the relationship between the value created for customers, the
organisational activities that create this value and how the organisation and other stakeholders can
capture value from this.
 Organisations need to consider what value is created for whom and how organisational
activities contribute to this in a business model.

Main themes around business strategy:

 Generic competitive advantage
 Interactive strategies
 Business models

Competitive strategy= concerned with how a company, business unit or organisation achieves
competitive advantage in its domain of activity. This includes issues as costs, product features and
branding.

Competitive advantage is about how a company or a SMU created value for its users which is
superior to that of rivals.
- Customers must see sufficient value that they are prepared to pay more for then the costs of
supply
- The organisation must be able to create greater value than competitors
2 means of achieving competitive advantage (Porter):
1. Having structurally lower costs than competitors
2. Having products/services that are differentiated from competitors.
It also depends on the scope of customers that a business chooses to serve.
 These distinctions define a set of ‘generic’ strategies: basic types of strategy that hold across
many kinds of business situations.

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

There are 4 key cost drivers that can help deliver cost leadership:
1. Input costs are often very important -> for example; placing labour-intensive operations in
countries with low labour costs.
2. Economics of scale -> reduces average costs of operation over a particular time period.
3. Experience -> the cumulative experience gained by an organisation with each unit of output
leads to reductions in unit costs.
4. Product/process design -> efficiency can be ‘designed’ at the outset.

2 tough requirements for cost-based strategies (Porter):

1. The company really need to have the lowest costs. Second-lowest are always at risk of being
undercut on price.
2. The low cost should not be pursued in total disregard for quality.

Differentiation strategy= involves uniqueness along some dimension that is sufficiently valued by
customers to allow a price premium. There are many alternative dimensions that are valued by
customers, so it is possible to have many different types of differentiation strategy in a market.

3 primary differentiation drivers to consider when pursuing a differentiation strategy:

 Product and service attributes – certain product attributes can provide better or unique
features than comparable products.
o You have to identify clearly the customer on whose needs the differentiation is
based.
 Customer relationships – besides tangible differences, differentiation can rely on the
relationship between the organisation and the customer.
o This can also be done by customisation
o Another basis for differentiation is ‘marketing and reputation’
 Complements – differentiation can also build on linkages to other products or services.
 o Value of some products can be significantly enhanced when consumed together with
other product complements compared to consuming the product alone.

It is really important to find a good balance between costs and quality. Differentiation involves
additional investments (such as R&D or branding), so their costs will be higher than the average
competitor. But it important that these costs do not exceed the gains in price.

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.
There are 2 variants:
1. Cost focus strategy
 Identify areas where broader cost-based strategies fail because of the added costs of
trying to satisfy a wide range of needs.
2. Differentiation focus strategy
 Look for specific needs that broader differentiators do not serve so well.

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.

Successful focus strategies depend on at lease one of three key factors:

 Distinct segment needs
 Distinct segment value chains
 Viable segment economics

Hybrid strategy= a strategy that combines different generic strategies. This is only possible under
certain circumstances:
 Organisational separation -> create SBU’s
 Technological of managerial innovation
 Competitive failures

Strategy clock: a way of approaching generic strategies. It has 2 distinctive functions:

1. It is focused on prices for the customer rather than costs to the organisation
o Price is more visible, so easier to compare with competitors
2. It allows for more continuous choices

The strategy clock identifies 3 zones of feasible strategies:

 Differentiation strategies
 Low-price strategy
 Hybrid strategy

Chapter 8 Corporate strategy and diversification

As organisations add new units and capabilities, their strategies may no longer be solely concerned
with competitive strategy in one market space.
Corporate strategy: about what business areas to be active in, and this will determine which business
unit to buy, and the direction an organisation might pursue.
 In which areas should a company grow?

Scope= concerned with ow far an organisation should be diversified in terms of two different
dimensions: products and markets.
Parenting advantage= the value-adding effect of head office to individual SBU’s, that make up
organisation’s portfolio. When this is done effectively, this will result in competitive advantage.

Ansoff’s growth matrix= a classic corporate strategy framework for generating four basic directions
for organisational growth.
 Can be used for brainstorming strategic options,

A company starts in zone A. Then it can choose in what direction it wants to go.
Diversification: increasing the range of products or markets served by an organisation (zone B)
Related diversification: expanding into products or services with relationship to the existing business
(zone B).
Conglomerate diversification: diversifying into products or services with no relationships to existing
businesses (zone D)

Market penetration= increasing share of current markets with the current product range.
 Build on established strategic capabilities and does not require the organisation to venture
into uncharted territory.
 The organisation’s scope is exactly the same
When seeking greater market penetration, you may face two constraints:
1. Retaliation from competitors
2. Legal constraints -> may raise concern from official competition regulators concerning
excessive market power.

Product development= where organisations deliver modified or new products to existing markets.
This can be an expensive and high-risk activity for 2 reasons:
 New resources and capabilities -> new processes/technologies need to be mastered -> heavy
investments and high risk of project failures
 Project management risk -> project development projects are typically subject to the risk of
delays and increased costs due to project complexity.

Market development= offering existing products to new markets. This is attractive by being
potentially cheaper and quicker to execute (than product development).
 A form of related diversification given its origins in similar products.
 Needs to be based on products or services that meet the critical success factors of the new
market.
It takes two basic forms:
 New users
 New geographic -> example: internationalisation

Zone D (conglomerate diversification) takes the organisation beyond both its existing markets and its
existing products. It radically increases the organisation’s scope.

Four potentially value-creating drivers for diversification are as follows:

1. Exploiting economies of scope= efficiency gains made through applying the organisation’s
existing resources or competences to new markets or services.
2. Stretching corporate management competences. -> special case of economies of scope,
refers to the potential for applying the skills of talented corporate-level managers.
o Dominant logic= the set of corporate-level managerial competences applies across
the portfolio of businesses.
3. Exploiting superior internal processes -> internal processes within a diversified corporation
can often be more efficient than external processes in the open market.
 Especially the case where external capital and labour markets do not yet work well.
4. Increasing market power. -> this increases the power to cross-subsidise one business from
the profits of the others.

Where diversification creates value, it Is described as ‘synergistic’.

Synergies= benefits gained where activities or assets complement each other so that their combined
effect is greater than the sum of the parts.
Some drivers for diversification involve negative synergies. 3 potential value-destroying drivers are:
 Responding to market decline
 Spreading risk
 Managerial ambition

Studies show that related diversification outperform both firms that remain specialised and those
that have unrelated diversified strategies.

Another direction for corporate strategy is vertical integration.

Vertical integration= entering activities where the organisation is its own supplier or customer.
 Involves operating at another stage of the value network.
 It is like diversification in increasing corporate scope.

Vertical integration can go in 2 directions:

 Backward integration: movement into input activities
 Forward integration: movement into output activities
2 dangers of vertical integration: it involves investment and it is likely to involve quite different
strategic capabilities.

Outsourcing= the process by which activities previously carried out internally are subcontracted to
external suppliers.
 Often based on strategic capabilities.

Assessing whether to integrate or outsource an activity, Williamson warns against underestimating

the long-term costs of opportunism by external subcontractors.
Market relationships tend to fail in controlling subcontractor opportunism where:
 There are few alternatives to the subcontractor;
 The product or service is complex and changing;
 Investments have been made in specific asses.
This transaction cost framework suggests that he costs of opportunism can outweigh the benefits of
subcontracting to organisation with superior strategic capabilities.

If there are few alternative suppliers, if activities are complex and likely to change, and if there are
significant investments in specific assets, then it is likely to be better to vertically integrate rather
than outsource.

Corporate parents need to demonstrate that they create more value than they cost. Competition
takes place between different corporate parents for the right to own and control businesses. Parents
therefore must be clear on how they create value. Parenting activities can be value-destroying as
well as value-creating.

Value-adding activities:
 Envisioning: the corporate parent can provide a clear overall vision of strategic intent for
business units, and also provide stakeholders with a clear external image.
 Facilitating synergies: the corporate parent can facilitate cooperation and sharing across
business units
 Coaching: the corporate parent can help business unit managers develop strategic
capabilities, by coaching them to improve their skills and confidence
 Providing central services and resources
 Intervening: the corporate parent can intervene within its business units to ensure
appropriate performance.

Value-destroying activities
 Adding management costs: corporate staff and facilities are expensive.
 Adding bureaucratic complexity: an additional layer of management and the need to
coordinate with sister businesses.
 Obscuring financial performance: one danger in a large diversified company is that the
under-performance of weak businesses can be obscured.

Business unit managers will concentrate on maximising their own individual performance rather than
looking out for ways to cooperate with other business unit managers for the greater good of the
whole. For this reason, corporate parenting roles tend to fall in three main types:
Portfolio manager= operates as an active investor in a way that shareholders in the stock market are
either too dispersed or too inexpert to be able to do.
o Acting like an agent on behalf of financial markets and shareholders
o Role: identify and acquire under-valued assets or businesses and improve them
o The portfolio manager concentrates on intervening and the provision of investment
o Seek to keep the cost of the centre low and set clear financial targets.

Synergy manager= a corporate parent seeking to enhance value for business units by managing
synergies across business units.
o Particularly rich when new activities are closely related to the core business.
o Focus: envisioning building a common purpose, facilitating cooperation across businesses,
and providing central services and resources.
o Achieving synergistic benefits involves at least 3 challenges:
1. Excessive costs
2. Overcoming self-interest -> managers have to want to cooperate
3. Illusory synergies -> it’s easy to overestimate skills or resources

Parental developer= seeks to employ its own central capabilities to add value to its businesses.
o They focus on the resources or capabilities they have as parents which they can transfer
downwards to enhance the potential of business units
o Key value-creating activities: provision of central services and resources
o 2 crucial challenges to managing a parental developer:
1. Parental focus -> focused in identifying their unique value-adding capabilities.
2. The ‘crown jewel’ problem -> parental developers should divest businesses they
do not add value to, even profitable ones.

There are a few models by which managers can determine financial investment and divestment
within their portfolios of business:
- BCG matrix
- The directional policy matrix
 - The parenting matrix
BCG matrix: uses market share and market growth criteria for determining the attractiveness and
balance of a business portfolio.
There needs to be a balance within the portfolio, so that there are some low-growth businesses that
are making sufficient surplus to fund the investment needs of higher-growth businesses.

The growth/share axes of the BCG matrix define four sorts of business:
 Star: a business unit within a portfolio that has a high market share in a growing market
 Question mark: in a growing market, but does not yet have high market share. To develop it
into a star takes heavy investment.
 Cash cow: high market share in a mature market. It should be a cash provider, helping to
fund investments in question marks.
 Dogs: low share in declining markets, this is the worst of all combinations.

Several advantages of the BCG matrix:

- Good way of visualising different needs and potentials of all the diverse businesses
- It warns corporate parents of the financial demand
- Reminds corporate parents that stars are likely eventually to wane.

Several problems with the BCG matrix:

- Definitional vagueness
- Capital market assumptions
- Ignore commercial linkages

Directional policy matrix: categorises business units into those with good prospects and those with
less good prospects.
o Offers strategy guidelines given the positioning of the business units
o Advantages:
o The nine cells acknowledge the possibility of a difficult middle ground.
o The two axes are not based on single measures

It positions business units according to:

I. How attractive the relevant market is in which they are operating
II. The competitive strength of the SBU in that market

Attractiveness can be identified by PESTEL or five forces analyses.

Parenting matrix: introduces parental fit as an important criterion for including businesses in the
portfolio.

There are 2 dimensions of fit in the parenting matrix:

- ‘Feel’: this is a measure of the fit between each business units critical success factors and the
capabilities of the corporate parent.
‘Benefit’: measures the fit between the parenting opportunities of business units and the capabilities
of the parent.

The figure shows 4 kinds of business along these two dimensions of feel and benefit:
o Heartland businesses: the ones that the parent understand well and can continue to add
value to.
o Ballast businesses: the units the parent understands but can do little for.
o Value trap: appear attractive but are dangerous. The parent will need to acquire new
capabilities.
o Alien businesses: they offer little opportunity and the parent does not understand them
anyway. Exit is definitely the best strategy.
Chapter 9 International strategy

International strategy= a range of options for operating outside an organisation’s country of origin.
Global strategy: involves high coordination of extensive activities dispersed geographically in many
countries around the world.

Yip’s globalisation framework: sees international strategy potential as determined by market drivers,
cost driver, government drivers and competitive drivers.
To understand internationalisation, you can look at the internationalisation drivers:
1. Market drivers: several things are needed at a market:
o Similar customer needs
o Global customers
2. Cost drivers; several elements are important; scale economies, country-specific differences
and favourable logistics
3. Governments drivers -> 3 main factors that facilitate internationalisation:
o Reduction of barriers to trade and investment
o The liberalisation and adoption of free markets
o Technology standardisation
4. Competitive drivers: interdependence between countries and competitors’ global strategy

Key insight of Yip’s drivers framework: the internationalisation potential of industries is variable.

A competitor entering a market from overseas typically starts with considerable disadvantages
relative to existing local competitors. Firm- or organisation-specific advantages are important.

The geographical location of activities is a crucial source of potential advantage. An organisation can
improve the configuration of its value chain and system by taking advantage of country-specific
differences.
There are 2 principal opportunities available:
1. Exploitation of locational advantages
2. Sourcing advantages overseas via an international value system.

1. Exploitation of locational advantages

Michael Porter had proposed a ‘diamond’ to explain why some locations tent to produce firms with
sustained competitive advantages in some industries more than others.
Porter’s diamond: suggests that locational advantages may stem from local factor conditions; local
demand conditions ; local related and supporting industries; and from local firm strategy, industry
structure and rivalry.
Factor conditions: factors of production (materials, labour, etc.)
Home demand conditions: demand customers train a company to work effective for example.
Related and supporting industries: local ‘clusters’

Porter’s diamond model underlines the environmental conditions and structural attributes of nations
and their regions that contribute to their competitive advantage.

2. The international value system

As companies continue to internationalise, the country of origin becomes relatively less important for
competitive advantage. This implies that for international companies, advantage also needs to be
drawn from the international configuration of their value system.
Global sourcing= purchasing services and components from the most appropriate suppliers around
the world, regardless of their location.
Different locational advantages can be identified:
1. Cost advantages: labour costs, transportation and communications costs.
2. Unique local capabilities: may allow an organisation to enhance its competitive advantage.
3. National market characteristics: can enable organisations to develop differentiated product
offerings aimed at different market segments.

It is difficult for organisations to choose an international strategy. The fundamental issue in

formulating an international strategy is to balance pressures for global integration versus those for
local responsiveness.
Global integration: encourage organisations to coordinate their activities across diverse countries to
gain efficient operations.
Local responsiveness: implies a greater need to disperse operations and adapt to local demand.
Global-local dilemma= the extent to which products and services may be standardised across
national boundaries or need to be adapted to meet the requirements of specific national markets.

This dilemma suggest several possible international strategies.

There are 4 different kinds of international strategy:

Export strategy: leverages home country capabilities, innovations and products in different foreign
countries.
Multi-domestic strategy: this strategy maximises local responsiveness. It is based on different
product or service offerings and operations in each country depending on local market conditions
and customer preferences.
 Each country is treated differently
 Disadvantage; manufacturing inefficiencies and risks towards brand and reputation
Global strategy: the world is seen as one marketplace with standardised products and services that
fully exploits integration and efficiency in operations.
 Focus on capturing scale economies and exploiting location economies
 Example: IKEA
Transnational strategy: tries to maximise both responsiveness and integration, which is very
complex. It maximise learning and knowledge exchange between dispersed units.
 No centralised coordination
 Innovation and efficiency are important.

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Export & franchising is belangrijk voor het tentamen