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Strategy FormulationStrategy Formulation
Business StrategyBusiness Strategy
Prof. Rushen ChahalProf. Rushen Chahal
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Focuses on improving the competitive
position of a companys or business
units product or services within thespecific industry or market segment that
the company or business unit serves.
Business Strategy
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Competitive
Cooperative
Business Strategy
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Should we compete on the basis of low
cost, or should we differentiate our
products or services on some basis
other than cost?
Should we compete head to head with
our major competitors for the biggestshare of market, or should we focus on a
niche ?
Competitive Strategies
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A firm cannot be everything to
everybody; it must choose what todo and what not to do.
Michael Porter
Competitive Strategies
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Competitive Advantage
Lower Cost Differentiation
Costleadership Differentiation
Cost Focus Differentiation
FocusCompetitiveSco
pe
BroadTarget
NarrowT
arget
Michael Porters Generic Strategies (1985)
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Cost leadership strategywhere theorganizations resources and attention are
directed toward minimizing costs to operate
more efficiently than the competition.
Such firms exploit economies of scale,
scope and learning (experience) effects and
are obsessed with efficiency and costcontrol.
Michael Porters Generic Strategies
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The cost leader is able to charge lower pricefor its products than its competitors and still
make a satisfactory profit.
Having a low cost position gives a company
a defense against rivals:
The cost leader has high market share
which leads to high bargaining power
relative to its suppliers.
Its low price is a barrier to entry
Michael Porters Generic Strategies
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Differentiation strategy
where theorganizations resources and attention are
directed toward distinguishing its products
from those of the competition.
The specialty can be associated with design
or brand image, technology, features, dealer
network, or customer service. The resulting brand lowers customers
sensitivity to price.
Buyer loyalty serves as an entry barrier
Michael Porters Generic Strategies
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Differentiation strategy is more likely to
generate higher profits than is a low-cost
strategy.
But a low-cost strategy is more likely,
however, to generate increases in market
share.
Michael Porters Generic Strategies
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Focused differentiation strategywhere the
organization concentrates on one special
market segment and tries to offer customers in
that segment an unique product.
Focused cost leadership strategywhere the
organization concentrates on one special
market segment and tries to be the lowest costprovider in that segment.
Michael Porters Generic Strategies
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Competitive Advantage
Lower Cost Differentiation
NissanTesco
Dell Computers
Mercedes carsMaytag
Apple Computer
Smaller retailersfeaturing
own-label or
discounted
products
Any successfulniche retailers
CompetitiveScope
BroadTarget
NarrowT
arget
Michael Porters Generic Strategies
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Unsegmentation:the firm offers the same products
across a broad range of market segments e.g. CocaCola, Wal-Mart, Google
Segmentation:the firm still addresses a broad range of
market segments but designs different products for thosesegments, e.g. Honda, Dell, British Airways
Niche:the firm focuses on one segment of the market
e.g. Ryanair, Cray Computers, Morgan Cars
Customisation:the firm focuses on individual customersand shapes their offering to the unique requirements of
that buyer, e.g. event organization, golf course design
Mintzbergs Four Generic Approaches to Scope
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Mintzbergs Differentiation Strategies (1998)
Strategy Description
Price (low cost) A lower price than rivalse.g. the no frills airlines versus the big
carriers in the US and Europe
Image A brand or reputation
e.g. Coca cola, Mercedes, Gucci, Harvard
Business School, etc.
Support Provision of back-up or after sales service
e.g. Dell
Quality A more durable or reliable product or one
with higher performance
e.g. digital cameras (pixels)
Design Different product functions
e.g. pharmaceuticals, mobile phones
Undifferentiation Same as the others
e.g. Car rental firms, financial service firms,
petrol stations, steel companies etc.
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Risks in Competitive StrategiesRisks ofCost
Leadership
Risks of
Differentiation
Risks of Focus
CL is not sustained:
Competitors intimate
Technology changes
Other bases for cost
leadership erode
Proximity in differentiation
is lost
Cost focuses achieve
even lower cost in
segments
Dif is not sustained:
Competitors intimate
Bases for differentiation
become less important to
buyers
Cost proximity is lost
Differentiation focuses
achieve even greater
differentiation in segments
Focus strategy is imitated
The target segment
becomes unattractive:
Structure erodes
Demand disappearsBroadly targeted
competition:
The segments
differences from other
segments narrow
The advantages of broad
line increase
New focusers subsegment
the industry
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Requirements for Generic Competitive StrategiesGeneric Strategy Commonly Required Skills and
Resources
Common Organizational
Requirements
Overall CostLeadership
Differentiation
Focus
Sustained capital investment &access to capital
Process engineering skills
Intense supervision of labor
Product designed for ease of
manufacture
Low-cost distribution system
Strong marketing abilities
Product engineering
Creative flair
Strong capability in basic research
Corporate reputation
Long tradition in industry
Strong cooperation from channels
Combination of above policies
directed at the particular strategic
target
Tight cost
Frequent, detailed control
reports
Structured organization &
responsibilities
Incentives based on meeting
strict quantitative targets
Strong coordination among
functions in R&D, product
development & marketing
Subjective measurement and
incentives instead ofquantitative measures
Amenities to attract highly
skilled labor, scientists, or
creative people
Combination of above policies
directed at the particular
strategic target
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It is becoming increasingly difficult to sustain acompetitive advantage for very long (DAveni):
Short product life cycles
Short product design cycles
New technologies Frequent entry by unexpected outsiders
The only way to sustain any competitive
advantage is through a continuous series ofmultiple short-term initiatives aimed at replacing
a firms current successful products with the
next generation of products (Intel, Microsoft).
Hypercompetition and Competitive Strategies
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Build an early monitoring system to identify
turning points in business
Monitor new entrants, niche players and newly
established firms Do not focus too much on your existing
customers monitor fringe customers
Seek feedback from suppliers, customers,
distributors and employees Create a culture that welcome change
Institutionalize a questioning attitude
Tactics for Achieving Dynamic Fit
by Constantinos Markides
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Shock the system into active thinking through
the creation of positive crises
Develop processes which allow for continuous
experimentation of ideas Build a variety of competencies (build core
competencies into diverse product lines)
Allow slack in the system
Encourage decentralized decision-making
(within clear parameters by top management)
Continuously challenge the organizations
unquestioned assumptions and sacred cows
Tactics for Achieving Dynamic Fit
by Constantinos Markides
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Timing
Tactics (when) First mover
Late mover
Market location tactics (where)
Offensive tactics Frontal assault Flanking maneuver
Bypass Attack
Encirclement
Guerrilla warfare Defensive tactics
Raise structural barriers
Increase expected retaliation
Lower the inducement for attack
Competitive Tactics
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Cooperative strategies can also be used to
gain competitive advantage within an
industry by working with other firms.
Collusion
Strategic alliance
Cooperative Strategies
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Collusion is active cooperation of firms
within industry to reduce output and raise
prices in order to get around the normal
economic law of supply and demand.
Explicit - through direct negotiations, is
illegal in most countries
Tacit through informal system of signals
Cooperative Strategies
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Strategic alliance is a partnership of two ormore corporations orBU to achieve strategically
significant objectives that are mutually
beneficial.
Reasons:
To obtain technology and/or manufacturing
capabilities
To obtain access to specific markets
To reduce financial risks
To reduce political risk
To achieve or ensure competitive advantage
Cooperative Strategies