Week 6 Notes (Business Strategy)

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LOs:

Identify strategic business units (SBUs) in organisations

Assess business strategy in terms of the generic strategies of cost leadership, differentiation, and focus

Identify business strategies suited to hypercompetitive conditions

Assess the benefits of cooperation in business strategy

Key Words:

Competitive advantage

Competitive strategy

Cost-leadership strategy

Differentiation

Focus Strategy

Strategic business unit (SBU)

Summary:

Business strategy is concerned with seeking competitive advantage in markets at the level of strategic business units (SBUs) rather than corporate levels.

Porter's framework and the Strategic Clock define various generic strategies, including cost-leadership, differentiation, focus, and hybrid strategies.

Cooperative strategies may offer alternatives to competitive strategies or may run in parallel.

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Chapter Definitions

Strategic Business Unit (SBU): supplies goods or services for a distinct domain of activity

May be a smaller business (like a restaurant) focused on a single market

Often businesses within a larger corporation

Generic Competitive Strategies

Competitive Strategy: concerned with how an SBU achieves competitive advantage in its domain of activity

Competitive Advantage: how an SBU creates value for its users both greater than the costs of supplying them and superior to that of rival SBUs

To be competitive, the SBU must ensure customers see sufficient value that they are prepared to pay more than the cost of supply

For advantage, the SBU must be able to create greater value than competitors

In the absence of competitive advantage, competitive strategy is vulnerable to rivals with better products!

Need lower costs than rivals, OR P&Ss that are differentiated in ways that are valued by customers, allowing it to charge higher prices

Cost Leadership: the lowest-cost organisation in a domain of activity

Input costs such as labour or raw materials

Economies of Scale where increasing scale usually reduces average costs of operation of a period of time

Experience gained with each unit of output can reduce unit costs and increase efficiency (the learning curve)

Product/Process Design where efficiency can be designed at the outset, e.g. designed with cheaper materials

Must be the lowest, but not at total disregard for quality (you must meet market standards to be able to sell)

2 options: Parity (equivalence) allowing you to make a greater profit since your costs are lower while your price is at the average; or Proximity (closeness) where you may have to drop your price a little to account for the lower quality

Differentiation: uniqueness along some dimension that is sufficiently valued by customers to allow a price premium.

Must be clear on 2 factors: The Strategic Customer (on whose needs is the differentiation based?) and Key Competitors (will broader differentiators be able to serve that market just as well?)

Charging higher prices may often come at a cost, e.g. R&D to develop the product to want to sell

These additional costs must not outweigh gains in price

Focus Strategy: targets a narrow market or domain of activity and tailors its P&Ss to the needs of that specific segment at the exclusion of others.

Based on competitive scope

Serves its target market better than others who are trying to cover a wider range of segments

Cost Focus - serve segments where broader differentiators fail due to added pricing of trying to satisfy many needs

Differentiation Focus - look for specific needs that wider differentiators are not paying much attention to

These focus on 3 Key Factors: (1) Distinct Segment Needs, (2) Distinct Segment Value Chains, (3) Viable Segment Economics

The Strategy Clock: focused on prices to customers (rather than to firms) and has a circular design to allow for incremental adjustments over time

Prices are more visible and allow better comparison to rivals

Differentiation (Zone 1) builds high perceptions of P&S benefits for customers; close to 12 is 'without price premium'; 2 is 'with price premium'

Low-price (Zone 2) allows combinations of low price and low perceived benefits; close to 7 is 'no-frills'; 9 is 'low-price'

Hybrid (Zone 3) have lower prices than differentiation and higher benefits than low-price, and are often used to gain market share

Non-Competitive (Zone 4) aka DEATH, leads to failure in the long run!!