Strategic Analysis

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Strategic Management

Module 6 Business Strategy

Dr Xueli (Charlie) Huang

Senior Lecturer

School of Management

A roadmap of strategic management

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Strategic

Analysis Strategy

formation

Strategy

implementation

Strategic Management

• Macro environment

analysis

• Industry environment

analysis

• Internal environment

analysis

• Stakeholder analysis

• Business strategy

(Module 6)

• Corporate

strategy (M7)

• International

strategy (M8)

• M&A (M9)

• Strategy Evaluation &

Measurement (Module

10)

• Strategy implementation

(module 11)

• Course Summary

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Opening story: Apple

- Apple: One of the world’s most innovative companies

• Its market value is currently over $1 trillion 2020

• Major new products developed and launched

– iPhone 12 Pro, iPod Pro, Apple Watch 5, and New Apple TV+

content

.

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How Apple is competing?

• Apple’s products are different and very expensive.

• How Apple is competing?

–https://www.youtube.com/watch?v=uPo_wmR4a68&t=353s (first

2’36”)

• Tim Cook- Apple’s CEO

– “Stock price is a result, not an achievement by itself. For me, it’s

about products and people”.

• Product differentiation (quality and industry design) has

been the most important competitive advantage for Apple

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Learning Objectives

• To understand and critically analyse three generic business strategies

–Cost leadership

–Differentiation

–Focus

• Business Model Innovation

• The comparison of two dominant strategic perspectives:

– Market positioning vs resource based view (RBV)

– Strategic fit: integrating market position with firms’ strategic capability

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What is Business Strategy?

• What is strategy? – Strategy is the long-term direction of the organisation

• Three levels of strategy – Corporate strategy

– Business strategy

– Functional strategy

• Business strategy is usually made at the Strategic Business Unit (SBU) level. –A SBU is an organizational unit for strategy-making purpose.

–Business strategy is about how to compete successfully in the markets.

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Corporate

Business

Function (e.g., marketing, HR)

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Porter’s three generic business strategies

• Three generic business strategies

– Proposed by Michael Porter

– It is based on two fundamental ways of competition (cost

and differentiation) and the scope of competition

– Competitive advantage: Cost vs differentiation

– Competitive scope: Large vs small (market segments)

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Porter’s three generic strategies

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Costs, prices and profits for generic strategies

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Competitive advantage and value chain (Porter, 2012)

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These activities

need to be

consistent

These activities

need to be

reinforced

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The relationship

between business

strategy and value

chain activities

Strategic

leaders

Functional

managers

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Cost-leadership

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

– e.g., Toyota, Coles, Bunnings

–It is about low cost, rather than low price (Low cost ≠ Low price) • Four key cost drivers that can help deliver cost leadership:

• Lower input costs, e.g., labour or raw materials

• Economies of scale

• Experience.

• Product and process design.

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Fixed costs

Unit of production

T o ta

l c o s ts

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Cost-leadership

– Implementation considerations

• Strategic requirements

–Tight cost and overhead control

–Avoidance of marginal customer accounts

–Cost minimization in all activities in the firm’s value chains

–This “cost leadership” strategy should be used to direct

cross-functional, organization-wide activities to LOWER

costs

• Example: Toyota

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Primary Activities

S u

p p

o r t

A c ti

v it

ie s

Cost Effective

MIS Systems

Relatively Few

Management Layers to

Reduce Overhead

Simplified Planning

Practices to Reduce

Planning Costs

Consistent Policies to

Reduce Turnover Costs

Effective Training Programs

to Improve Worker

Efficiency and Effectiveness

Highly Efficient

Systems to Link

Suppliers’

Products with the

Firm’s Production

Processes Timing of Asset

Purchases

Efficient Plant

Scale to Minimize

Manufacturing

Costs Selection of Low

Cost Transport

Carriers

Delivery Schedule

that Reduces

Costs

National Scale

Advertising

Products Priced to

Generate Sales

Volume

Small, Highly

Trained Sales

Force

Effective Product

Installations to

Reduce Frequency

and Severity

of Recalls

Easy-to-Use Manufacturing

Technologies

Investments in Technology in order

to Reduce Costs Associated with

Manufacturing Processes

Systems and Procedures to find the

Lowest Cost Products to Purchase

Raw Materials

Frequent Evaluation Processes to

Monitor Suppliers’ Performances

Located in Close

Proximity with

Suppliers

Policy Choice of

Plant Technology

Organizational

Learning

Efficient Order

Sizes

Interrelationships

with Sister Units

Value creating activities common to cost leadership

business level strategy

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These activities should

be consistent

These activities

should be reinforced

each other

Functional

strategy –

Marketing strategy

Functional

strategy –

Technology

strategy

Functional

strategy –

Operations

strategy

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Differentiation strategies

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

• Three primary differentiation drivers

– Product and service attributes – Dyson, Ikea, Apple Computer, Singapore Airlines

– Customer relationship – Customization of product and services

–Smart technology

– Complements – E.g., iTune and Apple store

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A companywide

emphasis on producing

high quality products

Highly Developed Information

Systems to better understand

customers’ purchasing preferences

Compensation programs

intended to encourage worker

creativity and productivity

Extensive use of subjective

rather than objective

performance measures

Superior

handling of

incoming raw

materials to

minimize

damage and

improve the

quality of the

final product

Rapid responses

to customers

unique

manufacturing

specifications

Consistent

manufacturing of

attractive

products

Accurate and

responsive order

processing

procedures

Complete field

stocking of

replacement parts

Strong

capability in

basic research

Investments in technologies that will

allow the firm to consistently produce

highly differentiated products

Systems and procedures used to find

the highest quality raw materials

Purchase of highest quality

replacement parts

Rapid and timely

product deliveries

to customers

Superior

personnel

training

Coordination among R&D,

product development and

marketing

Extensive

personal

relationships

with buyers

Strong Coordin-

ation among

functions in R&D,

Marketing and

Product

Development

Premium

Pricing

Primary Activities

S u

p p

o r t

A c ti

v it

ie s

Value creating activities common to differentiation

business level strategy – implementation considerations

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These activities

should be

consistent

These activities

should be reinforced

each other

Functional

strategy –

Operations

strategy Functional

strategy –

Marketing strategy

Functional

strategy –

Technology

strategy

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Focus strategies

A focus strategy targets a narrow segment of domain of an

activity and tailors its products or services to the needs of that

specific segment to the exclusion of others.

Two types of focus strategy:

• cost-focus strategy (e.g. Aldi, Jetstar, Ryanair).

• differentiation focus strategy (e.g. Miele, BMW, Dyson).

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Limitations of Porter’s three generic strategies

•How much focus is enough?

– How many segments of market are we going to serve?

–What opportunities present in other market segments?

–Do we have enough resources and competences to serve these markets?

–Can we serve these market segments better than our competitors?

• How can we organise our value chain activities to gain the

competitive advantage offered by differentiation and cost?

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‘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 ( such as Virgin Australia).

• 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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Case study: Business strategy at Qantas, Jetstar, and

Virgin Australia

• Flight performance attributes

– Fight operations: new aircraft, terminal access, on-time flight,

luggage processing, etc.

• Service attributes

– In-cabin entertainment, meal, Wi-fi, cabin crew, newspapers, etc

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Integrated low-cost/differentiation strategy (1/3)

Cost leadership

Differentiation

Focused

low cost

Cost Uniqueness

Broad

Narrow

Bases (sources) of competitive advantages

Breadth of competitive scope

Focused

differentiation

Integrated low cost/differentiation

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Combining generic strategies (2/3)

• Integrated low-cost/differentiation strategy as a combing generic strategy

• Firms using an integrated strategy may:

–Utilise flexible manufacturing systems (Flexible Manufacturing System (FMS), Computer-Aided Design (CAD), Computer-Aided Manufacturing (CAM)) to create differentiated products at low cost

–Leverage core competencies through information networks across multiple business units (e.g., Enterprise Resources Planning (ERP))

–Utilise total quality management (TQM) to create high-quality differentiated products while simultaneously driving down costs

–Examples: Toyota

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Combining generic strategies (3/3)

• A company can create separate strategic business units each

pursuing different generic strategies and with different cost

structures (Qantas and Jetstar).

• Technological or managerial innovations where both cost

efficiency and quality are improved, such as 3D printing,

Artificial Intellegence (AI), and (Internet of Things (IoT).

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What is a business model?

A business model describes a value proposition for

customers and other participants, an arrangement of

activities that produces this value and associated

revenue and cost structures.

New entrants with new business models can radically

change the dynamics and competition in a market and

establish superior positions.

(e.g. Uber, Airbnb, Spotify).

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What are the key elements of a business model?

There are three essential elements in a business model:

• Value creation – a proposition that addresses a

customer segment’s needs.

• Value configuration – the way resources and activities

are organised to produce this value.

• Value capture – the way the cost structures and

revenue streams create added value for stakeholders.

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Business model components

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The business model of Afterpay – How it works?

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AfterPay

Retailers

Service

Providers, such

as flight

organisations

Customers

For more details: watch:

https://www.youtube.com/watch?v=u7IK7pSuBME

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Business models

Two points need emphasis:

• Business models once established are often taken for

granted. Models can become institutionalised and form a

‘recipe’ for the industry.

• Even if competitors share a business model their strategies

may still differ. e.g. Airbnb have differentiation advantages

based on their size and network effects even though others

use the same model.

• Another example: Uber and Grab in Singapore

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Some patterns of new business model

Three typical business model patterns are:

• Razor and blade – named after the classic Gillette strategy of selling

razors cheaply and profiting from sales of high priced blades (mobile

phones, ink-jet printers).

• Freemium – named by combining ‘free’ and ‘premium’. Basic services

are free to attract customers who then upgrade to expensive premium

services (Zoom, Spotify).

• Multi-sided platforms – bringing together two or more distinct but

interdependent groups of customers (Uber, video games, Alibaba,

AfterPay).

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Knowledge Integration: Two dominant strategic

perspectives: Market positioning vs RBV (competitive vs competence approach)

Resources-based

view (core

competence or

competence

strategy)

Positioning

strategy (or

competitive

strategy)

Organization’s

performance

Positioning school:

an outside-in

approachCompetence perspective:

Inside-out

approach

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The dynamic duo or trio?

• Position in the industry structure shapes a firm’s access to strategic

resources and capability

• The access to resources help shape a firm’s position in the

industry structure.

• Questions

–How stakeholder help shape a firm’s position in the industry

structure and its access to key resources?

–How a firm’s position and access to key resources help shape its

relationships with key stakeholders?

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A dynamic duo or trio –

the concept of strategic fit M

a rk

e t

p o

s it

io n

a tt

ra c ti

v e n

e s s

High

Low

Resource and competence

Weak Strong

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An ideal or

desired

competitive

position

Module summary (1)

• Business strategy is concerned with seeking competitive advantage in markets at the business rather than corporate level.

–It needs to be considered and defined in terms of strategic business units (SBUs).

• Different generic strategies can be defined in terms of cost-leadership,

differentiation and focus.

• Managers need to consider how business strategies can be sustained through strategic capabilities.

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Module summary (2)

• Implementing a business strategy needs to coordinate organisation- wide value chian activities

• Low cost and differentiation can be combined. However, it risks “stuck in the middle”

–The biggest challenge to many managers is which activities should be directed to low cost, which to differentiation

• Cost reduction is necessary to every business

– Value = Benefit – sacrifice (cost)

• Business model has three components: value, creation, value configuration, and value capture

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Module summary (3)

• There are two dominant strategic perspectives in guiding

business strategy development

– Competitive (positioning) approach

– Resource-Base View (RBV) approach

–These two perspectives can be skillfully combined to develop an

organization's strategy

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• Assignment 2 development

– Task 2: Identifying the current business strategy of the

organization under analysis

• Prepare for next module (Module 7)

–Read Chapter 8 Corporate strategy and diversification

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