Strategic Management

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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Part II:
Strategic Choices

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The focus of part 2:
strategic choices

• How organisations relate to competitors in terms of their competitive business strategies.
• How broad and diverse organisations should be in terms of their corporate portfolios.
• How far organisations should extend themselves internationally.
• How organisations are creative and innovative.
• How organisations pursue strategies through organic development, acquisitions or strategic alliances.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Strategic choices

Figure II.i Strategic choices

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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Strategic Choices
6: Business Strategy

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Learning outcomes

• 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.
• Apply principles of game theory to business strategy.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Business strategy

Figure 6.1 Business strategy

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Strategic business units (SBUs)

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 corporation is made up of multiple businesses (SBUs).
• SBUs can be called ‘divisions’ or ‘profit centres’
• SBUs can be identified by:
• Market based criteria (similar customers, channels and competitors).
• Capability based criteria (similar strategic capabilities).

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

The purpose of SBUs

• To decentralise 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 held responsible for its own costs, revenues and profits.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Generic 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 strategic business unit 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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Three generic strategies

Figure 6.2 Three generic strategies

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance

by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Economies of scale and the experience curve

Figure 6.3 Economies of scale and the experience curve

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Costs, prices and profits for generic strategies

Figure 6.4 Costs, prices and profits for generic strategies

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Differentiation in the US airline industry

Figure 6.5 Mapping differentiation in the US airline industry

Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), ‘The US airlines relative positioning’, Tourism Management, 26, 5, 57–67: p. 62

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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 segment 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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Focus strategies (2)

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

• Distinct segment needs.
• Distinct segment value chains.
• Viable segment economics.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

‘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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Combining generic strategies

• 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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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Strategy clock

Figure 6.6 The Strategy Clock

Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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:

differentiation without price premium (12 o’clock) – used to increase market share.

differentiation with price premium (1 o’clock) – used to increase profit margins.

focused differentiation (2 o’clock) – used for customers that demand top quality and will pay a big premium.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Strategy clock – low price

Low price combined with:

low perceived product benefits focusing on price sensitive market segments – a ‘no frills’ strategy typified by low cost airlines like Ryanair.

lower price than competitors while offering similar product benefits – aimed at increasing market share typified by Asda /Walmart in grocery retailing.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Strategy clock - hybrid

• Seeks to simultaneously achieve differentiation and low price relative to competitors.
• Hybrid strategies can be used:

to enter markets and build position quickly.

as an aggressive attempt to win market share.

to build volume sales and gain from mass production.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Strategic lock-in

• 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:

Controlling complementary products or services. E.g. Cheap razors that only work with one type of blade.

Creating a proprietary industry standard. E.g. Microsoft with its Windows operating system.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Establishing strategic lock-in

Size or market

dominance

First-mover

dominance

Self-reinforcing

commitment

Insistence on

preservation

of position

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Hypercompetition

• Hypercompetition describes markets with continuous disequilibrium and change e.g. popular music or consumer electronics.
• Successful hypercompetition demands speed and initiative rather than defensiveness.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Interactive price and quality strategies

Figure 6.7 Interactive price and quality strategies

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetition: Managing the Dynamics of Strategic Manoeuvring by Richard D’Aveni with Robert Gunther. Copyright © 1994 by Richard D’Aveni. All rights reserved

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Interactive strategies in hypercompetition

• Four key principles:

Cannibalise bases of success.

A series of small moves rather than big moves.

Be unpredictable.

Mislead the competition.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Cooperating with rivals

Figure 6.9 Cooperating with rivals

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc. from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved

Supplier

Buyer

Rival C

Rival B

Rival A

Entrant

Substitute

• Increased supplier

power

• Standardisation benefits

Improved costs or benefits

reduces substitution threat

• Increased

purchasing

power

• Standardisation

benefits

• Improved costs or benefits

reduces entry threat

• Coordinated retaliation

Improved

competitiveness

Industry

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Game theory

Game theory encourages an organisation to consider competitors’ likely moves and the implications of these moves for its own strategy.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Prisoner’s dilemma

Figure 6.10 Prisoner’s dilemma game in aircraft manufacture

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Lessons from game theory

• Game theory encourages managers to consider how a ‘game’ can be transformed from ‘lose–lose’ competition to ‘win–win’ cooperation.
• Four principles:

Ensure repetition.

Signalling.

Deterrence.

Commitment.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Summary (1)

• Business strategy is concerned with seeking competitive advantage in markets at the business rather than corporate level.
• Business strategy 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 and/or the ability to achieve a ‘lock-in’ position with buyers.

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Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Summary (2)

• In hypercompetitive conditions sustainable competitive advantage is difficult to achieve. Competitors need to be able to cannibalise, make small moves, be unpredictable and mislead their rivals.
• Cooperative strategies may offer alternatives to competitive strategies or may run in parallel.
• Game theory encourages managers to get in the mind of competitors and think forwards and reason backwards.