Lecture 5&6
Strategies for competitive advantage
Methods of strategic development
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2. Competitive strategy options. Generic
strategies
Porter identified 3 generic strategies through which an
organization could achieve competitive advantage
1. Cost leadership
2. Differentiation
3. Focus
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The Aim
Cost
Differentiation Focus
Leadership
• To offer a
•To cut costs of product that
production/ can't be • Position the
•Purchasing/ matched by business in one
service and in rivals and particular niche
turn cut selling charge a in the market
prices premium for
this "difference"
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How (examples)
Cost
Differentiation Focus
Leadership
• economies of
scale • find a segment
• branding where the cost
• use of learning • quality & leader or
effects design differentiators
• large • innovation have little or no
production • knowledge presence and
management build business
•runs using here
cheaper labour
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Benefits
Cost
Differentiation Focus
Leadership
• high volumes • develops brand
• builds brand loyalty
• creates a loyalty and
barrier to entry repeat purchases • little
competition
• can operate in • higher margins
unattractive • reduction in • often a first
power of step towards the
segments other generic
customers
• win price wars strategies
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Threats
Cost
Differentiation Focus
Leadership
• perform badly in a
recession • low volumes
• no fallback position if
leadership is lost • often easily copied • if successful, it
in the long run attracts cost leaders
• larger rivals may enter
the market • need to constantly and differentiators
innovate • few barriers to
• strong currency
makes imports cheaper • needs much higher entry
marketing than cost
leadership
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Suitability
Cost
Differentiation Focus
Leadership
Small business
with
Large Innovative entrepreneurial
organizations companies with flair, strong
with economies large marketing market
of scale budgets knowledge and
a risk taking
attitude
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2. Competitive strategy options.
The strategy clock
An alternative way of identifying strategies that
might lead to competitive advantage is to look at
‘market facing’ generic strategies
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The strategy clock
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The STRATEGY CLOCK
Type Description Example
1 = no frills Commodity-like RyanAir (a very
products and services. successful, no-frills
Very price-sensitive airline)
customers
2 = low price Aim for a low price Dell computers. Good
without sacrificing quality computers at
perceived quality or low prices
benefits
3 = hybrid strategy Achieves IKEA- Cheap furnishings,
differentiation, but also but smart design and
keeps prices down large range of
through high volumes inventories
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The STRATEGY CLOCK
Type Description Example
4 = differentiation Offering better British Airways
products and services
at higher selling prices.
5 = focused Offering high perceived Business/first class on
differentiation benefits at high prices full service airlines
6, 7, 8 = failure Ordinary products and -
strategies services being sold at
high prices
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Class discussion
Where on the strategy clock should the following
companies or products be placed?
(1) McDonalds
(2) Zara
(3) Apple i-Pods
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2. Competitive strategy options
(1) McDonalds
Probably no-frills. Prices are low, products are standardized
and not perceived to be of huge value.
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2. Competitive strategy options
(2) Zara
Zara is a Spanish-based international clothing retailing
business. It specializes in the fast production of small runs
of very-up-to date fashions, sold at low prices. Probably a
hybrid approach
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2. Competitive strategy options
(3) Apple i-Pods
Very stylish MP3-type players. Relatively expensive
compared to many competitors’ products. Probably a
hybrid strategy
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3. Further examples of competitive strategies
analysis. Cost efficiency
• Ansoff’s matrix
• Strategy evaluation
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Ansoff’s matrix
• Ansoff’s matrix is a very useful tool and
can be used in nearly every scenario
• summarizes many of the strategic options
facing organizations
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The matrix
Existing New
products Products
• Consolidation,
• Withdrawal
Existing markets • Efficiency gains Product development
• Market
penetration/growth
New Markets Market development Diversification
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Strategy evaluation
Johnson, Scholes and Whittington argue that for a
strategy to be successful it must satisfy three criteria:
• Suitability – whether the options are adequate responses
to the firm’s assessment of its strategic position
• Acceptability – considers whether the options meet and
are consistent with the firm’s objectives and are acceptable
to the stakeholders
• Feasibility – assesses whether the organisation has the
resources it needs to carry out the strategy
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Strategy evaluation
Suitable:
A company that depends on one supplier for an important
component, decides to take over that supplier.
Unsuitable:
A company with weak marketing abilities decides to expand
abroad.
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Strategy evaluation
Acceptable:
A company where most shareholders are pension funds
decides to expand using finance that does not cause
dividends to be cut.
Unacceptable:
A company with a very strong environment-friendly reputation
decides to use genetically modified crops.
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Strategy evaluation
Feasible:
A company with strong cash balances acquires a competitor
for cash.
Non-feasible:
A company with a manufacturing base in Germany decides
to cut prices radically to match those of a producer based in
a low-cost economy.
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Case study
Evaluate this strategy: McCafe to open a café & bookstore
&
Costin Ciora - Business Strategy & Analysis 23
Methods of strategic
development
Methods of strategic development
• Organic growth, acquisitions and alliances
• Portfolio analysis tools
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1. Organic growth, acquisitions and
alliances
Advantages of acquisitions over organic
growth
• High-speed access to resources – example: acquisition
can provide a powerful brand name that could take
years to establish through internal growth
• Avoids barriers to entry – acquisition may be the only
way to enter a market where the competitive structure
would not admit a new member or the barriers to entry
were too high
• Less reaction from competitors – there is less likelihood
of retaliation because an acquisition does not alter the
capacity of the competitive arena
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1. Organic growth, acquisitions and
alliances
• It can block a competitor
• It can help restructure the operating environment –
some mergers of car companies were used to reduce
overcapacity
• Asset valuation – if the acquiring company believes the
potential acquisition’s assets are undervalued, it might
undertake an asset-stripping operation
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1. Organic growth, acquisitions and
alliances
Disadvantages of acquisitions growth
• May be more costly than internal growth because the
owners of the acquired company will have to be paid for
the risk already taken
• There is bound to be a cultural mismatch between the
organisations – a lack of ‘fit’ can be significant in
knowledge-based companies, where the value of the
business resides in individuals
• Differences in managers’ salaries – another example of
cultural mismatch that illustrates how managers are
valued in different countries
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1. Organic growth, acquisitions and
alliances
Disadvantages of acquisitions growth (cont.)
• Disposal of assets – companies may be forced to
dispose of assets they had before the acquisition
• Risk – of not knowing all there is to know about the
business it seeks to buy
• Reduction in return on capital employed – quite often an
acquisition adds to sales and profit volume without
adding to value creation
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1. Organic growth, acquisitions and
alliances
Joint venture
• A separate business entity whose shares are owned by
two or more business entities. Assets are formally
integrated and jointly owned
A very useful approach for:
• sharing cost
• sharing risk
• sharing expertise
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1. Organic growth, acquisitions and
alliances(6/13)
Strategic alliance
• can be defined as a co-operative business activity,
formed by two or more separate organisations for
strategic purposes, that allocates ownership, operational
responsibilities, financial risks, and rewards to each
member, while preserving their separate
identity/autonomy.
Costin Ciora - Business Strategy & Analysis
1. Organic growth, acquisitions and
alliances(7/13)
Franchising
The purchase of the right to exploit a business brand in
return for a capital sum and a share of profits or turnover
• The franchisee pays the franchisor an initial capital sum
and thereafter the franchisee pays the franchisor a
share of profits or royalties
• The franchisor provides marketing, research and
development, advice and support
• The franchisor normally provides the goods for resale
• The franchisor imposes strict rules and control to
protect its brand and reputation
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1. Organic growth, acquisitions and
alliances
Licensing
The right to exploit an invention or resource in
return for a share of proceeds. Differs from
franchise because there will be little central
support
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Group work
Which of licensing, joint venture, strategic alliance
and franchising might be the most suitable for the
following circumstances?
(1) A company has invented a uniquely good ice cream and
wants to set up an international chain of strongly branded
outlets
(2) Oil companies are under political pressure to develop
alternative, renewable energy sources
(3) A beer manufacturer wants to move from their existing
domestic market into international sales
Costin Ciora - Business Strategy & Analysis
1. Organic growth, acquisitions and
alliances
(1) A company has invented a uniquely good ice cream and
wants to set up an international chain of strongly branded
outlets
Solution :
A franchise arrangement would work well here. There is
more than just manufacturing involved – there is the whole
retail offering, and entering into franchise agreements
would be a quick, effective way of expanding.
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1. Organic growth, acquisitions and
alliances
(2) Oil companies are under political pressure to develop
alternative, renewable energy sources.
Solution:
Unless the oil companies felt that, because of their size,
there was no need for joint research, development,
marketing and lobbying, a strategic alliance of some sort
could be useful. Research costs and findings could be
shared.
Alternatively, the new energy technology could be
developed within a joint venture organization.
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1. Organic growth, acquisitions and
alliances
(3) A beer manufacturer wants to move from their
existing domestic market into international sales.
Solution: Almost certainly, this company would
expand by licensing local brewing companies to
make and distribute its product.
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2. Portfolio analysis tools
The BCG growth share matrix
• The two-by-two matrix classifies businesses, or products
according to the present market share and the future
growth of that market
• Growth is seen as the best measure of market
attractiveness
• Market share is seen to be a good indicator of
competitive strength
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2. Portfolio analysis tools
Balanced portfolio:
• cash cows of sufficient size and/or number that can support
other products in the portfolio
• stars of sufficient size and/or number which will provide
sufficient cash generation when the current cash cows can
no longer do so
• problem children that have reasonable prospects of
becoming future stars
• no dogs or – if there are any – there would need to be good
reasons for retaining them.
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2. Portfolio analysis tools
The Ashridge portfolio display (parenting matrix)
• Focuses on the benefits that corporate parents can bring to
business units and whether they are likely to add or destroy
value
• How good is the match between perceived parenting
opportunities and the parent’s skills?
• How good is the match between the CSFs of the business
units and the skills and resources that the parent can bring?
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Costin Ciora - Business Strategy & Analysis
2. Portfolio analysis tools
Heartland business units
• High degree of match and the parent company has the
capabilities and experience to add value by providing the
support required by the business unit
• These businesses should be central to future strategy
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2. Portfolio analysis tools
Edge of heartland business units
• There is a good fit in some areas where the parent can
bring particular skills that add value to the business unit,
but not in others, where the parent may destroy value
• However, if the parent develops sufficient understanding
of the business to avoid this, then the business may
move into the heartland
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2. Portfolio analysis tools
Ballast businesses
• The parent understands the business well but there are
limited opportunities to offer help, sometimes because
the business has been owned for a long time and has no
further support needs.
• These businesses would do better if left alone or indeed
divested
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2. Portfolio analysis tools
Value trap businesses
• Many parenting opportunities but there is a poor fit with
the critical success factors of the business
• Good potential but in practice because of the lack of fit
with the strategy there is a high possibility of destruction
of value
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2. Portfolio analysis tools
Alien businesses
• These are those where there is a complete mismatch.
• These should not remain part of the corporate portfolio
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Case study
Apple – portfolio analysis
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Costin Ciora - Business Strategy & Analysis
References
• ACCA P3 – Business Analysis, Kaplan Publishing, 2012
• Vaughan Evans – Key strategy tools, Pearson Publishing, 2013
• Martin Reeves, Knut Haanaes, Janmejaya Sinha - Your strategy
needs a strategy. How to Choose and Execute the Right
Approach. Harvard Business Review Press, 2015
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Thank you for your attention
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