LECTURE 6

Strategic Choices (Part 1) - Business Strategy

 Topic Outline

I. Introduction to strategic choices

II. Business strategy

•Strategic business units
•Generic competitive strategy
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 I. Introduction to strategic choices
• This part is concerned with the strategic
choices/options potentially available to an
organization for responding to the
positioning issues discussed in previous part.
• There are three overarching choices to be
made (figure II.2):
– Business strategy
– Strategic directions
– Strategy methods
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Figure II.2: Strategic choices (course book)

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 Strategic choices (cont)
• Choices as to how an organization at a business
level positions itself in relation to competitors.
This is a matter of how to compete in a market
• Choices of strategic directions: which products,
industries, and markets to pursue? Should it be
focused or much broader in scope?
• Choices about methods by which to pursue
strategies; e.g. independently by organic
development; by acquisitions or strategic
alliances?
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 II. Business strategy
1. Strategic business units
a. Definition:
• A strategic business unit (SBU) supplies goods
or services for a distinct domain of activity.
– A small business has just one SBU
– A large diversified cooperation is made up of
multiple businesses (SBUs)
– SBUs can be called ‘divisions’ or ‘profit centers’
– SBUs can be identified by:
• Market based criteria (similar customers, channels and
competitors)
• Capability based criteria (similar strategic capabilities)
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 b. Three effects of SBUs within large
organization
• To decentralize initiative 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 help responsible for its own costs,
revenues and profits.
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c. Two main themes of strategy for SBU

Figure 6.1: Business strategy (course book)

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 II. Generic competitive strategy
1. Introduction to generic competitive
strategies
2. Cost leadership
3. Differentiation strategies
4. Focus strategies
5. ‘Stuck in the middle’?
6. The Strategy Clock
7. Lock-in and sustainable business strategies
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 1. Introduction to generic competitive
strategies
• Porter introduced the term ‘Generic Strategy’ to
mean basic types of competitive strategy that
hold across many kinds of business situations.
• Competitive strategy is concerned with how a
SBU achieves competitive advantage in its
domain of activity.
• Competitive advantage is about how an SBU
creates value for its users both greater than the
costs of supplying them and superior to that of
rival SBUs.
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Three generic strategies

Figure 6.2: Three generic strategies (course book)

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 2. Cost-leadership
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.
• Economies of scale.
• Experience.
• Product process and design.
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Economies of scale and the experience
curve

Figure 6.3: Economies of scale and the experience curve (course book)

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Costs, prices and profits for generic strategies

Figure 6.4: Costs, prices and profits for generic strategies (course book)
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 3. Differentiation strategies
Differentiation involves uniqueness along some
dimension that is sufficiently valued by customers
to allow a price premium.

Two key issues:

• The strategic customer on whose needs the
differentiation is based.
• Key competitors – who are the rivals and who
may become a rival.

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E.g. Differentiation in the US airline industry

Figure 6.5: Mapping differentiation in the US airline industry (course book)

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 3 primary differentiation drivers
• Product & service attributes:
– Certain product attributes can provide better or unique features than
comparable products/services for customers (e.g. Dyson vacuum
cleaner, Apple’s iPod, iPhone and iPad)
• Customer relationships:
– The perceived value can increase through customer services and
responsiveness including distribution services, payment services or after-
sale services (e.g. Zalando, SAP, Dell, Starbucks)
• Complements:
– Differentiation can also build on linkages to other products or services.
The perceived value of some products can be significantly enhanced when
consumed together with its complementary product/service (e.g. Apple
and complementary services iTunes and App stores).

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 Example of differentiation strategy
• Illustration 6.2 (course book, p.200): Volvo’s
different Indian buses
• Group discussion to answer 2 questions at the
end of the case.

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 4. Focus strategies (1)
A focus strategy targets a narrow segment of domain
of an activity and tailors its products or services to
the needs of that specific market segment ( i.e.group
of customers) to the exclusion of others.

Two types of focus strategy:

• cost-focus strategy (e.g. Ryanair).
• differentiation focus strategy (e.g. Ecover).

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 Focus strategies (2)
Successful focus strategies depend on at least one of
three key factors:
• Distinct segment needs (E.g. Tesla targeted on affluent
environmentally conscious customers)
• Distinct segment value chains (E.g. P&G cannot easily respond
to Ecover’s products as to achieve the same environmental
soundness involve transforming its purchasing and production
process)
• Viable segment economics: segments can easily become too
small to serve economically as demand or supply conditions
change.

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 5. ‘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).
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 Combining generic strategies
Circumstances in which the strategies can be
combined:
• Organizational separation: 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.

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 6. Strategy clock
The strategy clock identifies 3 zones with feasible strategy, and only one zone likely
to lead to ultimate failure.

Figure 6.6 The Strategy Clock (course book) 23

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

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 Strategy clock – low price
Low price combined with:
Ø low perceived product benefits (close to 7
o’clock) focusing on price sensitive market
segments – a ‘no frills’ strategy typified by low
cost airlines like Ryanair.
Ø lower price than competitors (close to 9 o’clock)
while offering similar product benefits – aimed
at increasing market share typified by Asda
/Walmart in grocery retailing.
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 Strategy clock - hybrid
• Seeks to simultaneously achieve differentiation and
low price relative to competitors (i.e. lower price than
differentiation strategy and higher benefits than low-
price strategies).
• Hybrid strategies can be used:
Ø to enter markets and build position quickly.
Ø as an aggressive attempt to win market share.
Ø to build volume sales and gain from mass production.
• Example: IKEA which uses scale advantages to combine relatively
low prices with differentiated Swedish design.
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 Strategy clock – non-competitive

• Increased prices without increasing service/product

benefits.
• In competitive markets such strategies will be
doomed to failure.
• Only feasible where there is strategic ‘lock-in’ or a
near monopoly position (E.g. monopolistic taxi
company at airport)

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 7. Strategic lock-in & sustainable business
strategies
• Strategic lock-in is where users become
dependent on a supplier and are unable to use
another supplier without substantial switching
costs.
• Lock-in can be achieved in two main ways:
Ø Controlling complementary products or services.
E.g. Cheap razors that only work with one type of
blade.
Ø Creating a proprietary industry standard. E.g.
Microsoft with its Windows operating system.
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Essential readings:
• Chapter 7: Business strategy and models
Course book: Johnson, G. et al (2017). Exploring
strategy: text and cases. Harlow: Pearson.
• Case study for group discussion in tutorials for
assignment 3:
The IKEA approach (course book, p.237)

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