Lec (6)- Bus. & Cor. Strategy

7/31/2019 Lec (6)- Bus. & Cor. Strategy

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BUSINESS and CORPORATE

LEVEL STRATEGY

Asst. Professor Mngt. Science (USA),

IMRAN HUSSAIN


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BUSINESS and CORPORATE LEVEL

STRATEGY

Business strategy... is concerned withhow the firm competes within a particular

industry or market... to win a business unitmust adopt a strategy that establishes acompetitive advantage over its rivals.


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BUSINESS and CORPORATE LEVEL

STRATEGY

Corporate Strategy.. defines thescope of the business in terms of the

industries and markets in which itcompetes.

includes decisions about diversification,vertical integration, acquisitions, newventures, divestments, allocation ofscarce resources between businessunits.


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Objectives

The Strategy Clock.

Sustainable Competitive Advantage.

Game Theory.

Strategic directions (Ansoff matrix).

Portfolio Matrix (BCG Matrix).


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5

Strategic Options

Product/market, resource/capability andimplementation method may be grouped toform strategic options

Small number

Combining top-down and bottom-up thinking

Strategic Options tested:

Aligned with strategic intent Feasible in terms of capabilities and resources

Acceptable to those who have to approve andimplement it


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6

Who should be involved with

strategic choice?

Political as much as logical process

Political reality revealed by asking:

Who stands to gain or lose?

How will existing coalitions be affected?

Who may be seen to have originated

choices? Board approval is one thing

Support from those who will make it happen

is also essential


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The Strategy Clock

Point No. 1


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Source: Based on the work of Cliff Bowman.

See C.Bowman and D.Faulkner. Competitive and Corporate Strategy, Irwin, 1996.

PRICE HighLow

DifferentiationFocuseddifferentiation

Low price/low added value

Strategiesdestined forultimate failure

PERCEIVEDADDED

VALUE

4

5

6

8

Hybrid

Lowprice

7

High

Low

1

2

3

Bowmans competitive strategy options


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1 Low price/low added value Likely to be segment specific.

2 Low price Risk of price war and low.margins/need to be cost leader.

3 Hybrid Low cost base and reinvestment inlow price and differentiation.

4 Differentiation

(a) Without price premium Perceived added value by user,yielding market share benefits.(b) With price premium Perceived added value sufficient to

bear price premium.5 Focused differentiation Perceived added value to a particular

segment, warranting price premium.

6 Increased price/standard Higher margins if competitors do notvalue follow/risk of losing market share.

7 Increased price/low value Only feasible in monopoly situation.8 Low value/standard price Loss of market share.

The strategy clock


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Low price strategies could be

successful if:

The competitor is the cost leader

... but is this sustainable?

All sources of cost advantages are exploited,

developing competences in low costmanagement

... but the danger is a low (perceived) valueproduct or service.

A competitor has cost advantage overcompetitors in a price sensitive markets segment

... but this may mean focusing on that marketsegment.


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The Success of Differentiation

Strategies depends on

Clear identification ofwho the customeris

Understanding what is valued by the customer

Clear identification ofwho the competitors areand the value they offer

Bases of differentiation which are difficult to

imitate

The recognition that bases of differentiation

may need to change


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Focused Differentiation

Global market developments increase the needfor focus.

Clear definition of market segments in terms ofcustomers needs is required.

Within a market segment choices of strategicdirection relate to competitors within thatsegment.

Multi-focused strategies may be possible in somemarkets.

New ventures started through focus strategiesmay be difficult to grow.

Differences between segments may be erodedmaking bases of focus redundant.


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Key Questions in Strategic Choice

Strategic choices need to take account of theenvironmentand build on core competences

Strategic choices need to take account of the

expectations and influence ofstakeholders Strategic direction and methods should build

on broad strategic choices

Resources and competences should bedeveloped to deliver and sustain the chosenstrategies


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Sustainable Competitive

Advantage

Point No. 2


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Sustainable Competitive

Advantage

Having a competitive advantage is necessaryfor a firm to compete in the market

But what is more important is whether thecompetitive advantage is sustainable

A firm must identify its position relative to thecompetition in the market

By knowing if it is a leader, challenger,follower or nicher, it can adopt appropriatestrategies to compete


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Continued

A good strategist seeks not only to win the

hill, but hold on to it. (Subash Jain)

Sustaining competitive advantage requires

erecting barriers against the competition

Aakers suggested looking at the following:

How you compete

Basis of competition

Where you compete

Whom you are competing against


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Examples of SCA

For many years, Singapore Airlines were riding on itsSCA of having the best in-flight service

As more airlines improved their service andnarrowed the gap, SIA sought other competitiveadvantages among which are

The most modern fleet

Outstanding Service on the Ground

A super entertainment system in its cabins Comfort in its First Class cabins at an unparallel

level

Discuss whether the later initiatives had been

sustainable


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Continued

1. Sustaining Price-Based Strategy.

2. Sustaining Differentiation-Based Strategy.

3. Strategy Lock-in.


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1- Sustaining Price-Based Strategy

Lower margin operations.

Unique cost structure.

Organization specific capabilities.

Focus on market segments.

Drawbacks:

Competitors same approach.

Customers association. Inability to pursue differentiation strategy.


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2- Sustaining Differentiation-Based

Strategy

Create difficulties of imitation.

Imperfect mobility.

Lower-cost position.


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3- Strategy Lock-in

Size and market dominance.

First mover dominance.

Self-reinforcing commitment.

Insistence on the preservation.


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Game Theory

Point No.3


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An example:

Big Monkey and Little Monkey

Monkeys usually eat ground-level fruit

Occasionally climb a tree to get a coconut (1per tree)

A Coconut yields 10 Calories

Big Monkey expends 2 Calories climbing thetree.

Little Monkey expends 0 Calories climbing thetree.


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If BM climbs the tree BM gets 6 C, LM gets 4 C

LM eats some before BM gets down

If LM climbs the tree BM gets 9 C, LM gets 1 C

BM eats almost all before LM gets down

If both climb the tree BM gets 7 C, LM gets 3 C

BM hogs coconut

How should the monkeys each act so as to maximizetheir own calorie gain?

Continued


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Assume BM decides first

Two choices: wait or climb

LM has four choices:Always wait, always climb, same as BM,

opposite of BM.

These choices are called actionsA sequence of actions is called a strategy

Continued


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Continued

Big monkey w

ww

c

cc

0,0

Little monkey

9,1 6-2,4 7-2,3

What should Big Monkey do?

If BM waits, LM will climb BM gets 9

If BM climbs, LM will wait BM gets 4 BM should wait.

What about LM?

Opposite of BM (even though well never get to the right side

of the tree)


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These strategies (w and cw) are called best

responses.

Given what the other guy is doing, this is the best

thing to do. A solution where everyone is playing a best response

is called a Nash equilibrium.

No one can unilaterally change and improve

things.

This representation of a game is called extensive

form.

Continued


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What if the monkeys have to decide

simultaneously?

Continued

Big monkey w

ww

c

cc

0,0

Little monkey

9,1 6-2,4 7-2,3

Now Little Monkey has to choose before he sees Big Monkey move

Two Nash equilibria (c,w), (w,c)

Also a third Nash equilibrium: Big Monkey chooses between c & w

with probability 0.5 (mixed strategy)


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It can often be easier to analyze a game

through a different representation, called

normal form

Continued

c

c v

v

5,3 4,4

0,09,1

Little Monkey

Big Monkey


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Continued

In the simultaneous game, its harder to seewhat each monkey should do

Mixed strategy is optimal.

Trick: How can a monkey maximize its payoff,given that it knows the other monkeys willplay a Nash strategy?

Oftentimes, other techniques can be used toprune the number of possible actions.


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Eliminating Dominated Strategies

The first step is to eliminate actions that are

worse than another action, no matter what.

Big monkeyw

ww

c

cc

0,0

Little monkey

9,1 6-2,4 7-2,3

Little Monkey will

Never choose this path.

Or this one

w c

9,1 4,4

We can see that BigMonkey will always choose

w.

So the tree reduces to:

9,1


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Continued

We can also use this technique in normal-form games:

a

a b

b 5,3

4,4

0,0

9,1

Row

Column


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Continued


a

a b

b 5,3

4,4

0,0

9,1

For any column action, row will prefer a.


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Continued


a

a b

b 5,3

4,4

0,0

9,1

Given that row will pick a, column will pick b.

(a,b) is the unique Nash equilibrium.


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Prisoners Dilemma

Each player can cooperate or defect

cooperate defect

defect 0,-10

-10,0

-8,-8

-1,-1

Row

Column

cooperate


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Continued


cooperate defect

defect 0,-10

-10,0

-8,-8

-1,-1

Row

Column

cooperate

Defecting is a dominant strategy for row


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Continued


cooperate defect

defect 0,-10

-10,0

-8,-8

-1,-1

Row

Column

cooperate

Defecting is also a dominant strategy for column


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Continued

Even though both players would be better off

cooperating, mutual defection is the dominant

strategy.

What drives this?

One-shot game

Inability to trust your opponent

Perfect rationality


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Continued

Relevant to:

Arms negotiations

Online Payment

Product descriptions Workplace relations

How do players escape this dilemma?

Play repeatedly

Find a way to guarantee cooperation

Change payment structure


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Tragedy of the Commons

Game theory can be used to explain overuse ofshared resources.

Extend the Prisoners Dilemma to more than two

players.

A cow costs a dollars and can be grazed on common

land.

The value of milk produced (f(c) ) depends on the

number of cows on the common land. Per cow:f(c) / c


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Continued

To maximize total wealth of the entire village:maxf(c) ac.

Maximized when marginal product = a

Adding another cow is exactly equal to the cost of

the cow.

What if each villager gets to decide whetherto add a cow?

Each villager will add a cow as long as the costof adding that cow to that villager isoutweighed by the gain in milk.


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Continued

When a villager adds a cow: Output goes fromf(c) /c to f(c+1) / (c+1)

Cost is a

Notice: change in output to each farmeris less than global

change in output.

Each villager will add cows until output- cost = 0.

Problem: each villager is making a localdecision (will I

gain by adding cows), but creating a net globaleffect(everyone suffers)


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Continued

Problem: cost of maintenance is externalized Farmers dont adequately pay for their impact.

Resources are overused due to inaccurate

estimates of cost.

Relevant to:

IT budgeting

Bandwidth and resource usage, spam

Shared communication channels

Environmental laws, overfishing, whaling,

pollution, etc.


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Avoiding Tragedy of the Commons

Private ownership Prevents TOC, but may have other negative effects.

Social rules/norms, external control

Nice if they can be enforced.

Taxation

Try to internalize costs; accounting system needed.

Solutions require changing the rules of the game

Change individual payoffs

Mechanism design


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Ansoff Matrix

Point No. 4


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Background

Long-term business strategy is dependant on

planning for their introduction.

Ansoff Matrix represents the different options

open to a marketing manager when

considering new opportunities for sales

growth.

i bl i h i


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Variables in the matrix

Two variables in Strategic marketing

Decisions:

The market in which the firm was going to operate

The product intended for sale

In terms of the market, managers had two options:

Remain in the existing market

Enter new ones


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Continued

In terms of the product, the two options are:

selling existing products

developing new ones


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Existing PRODUCTS New

INCREASING RISK

INCRE

ASINGRISK

Existing

MARKETS

New

MARKET

PENETRATION

Sell more in existing

Markets

MARKET EXTENSION

Achieve higher

sales/market share

of existing products

in new markets

PRODUCT DEVELOPMENT

Sell new products in

existing markets

DIVERSIFICATION

Sell new products in new

markets

E i ti PRODUCTS N


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INCREASING RISK

INCREASIN

GRISK

Existing

MARKETS

New

MARKET

PENETRATION


Markets


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1- MARKET PENETRATION

This is the objective of higher market share in

existing markets.

E.g. in 2000, Mitsubishi announced a 10%

reduction in prices in the UK in order to

encourage purchases


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Continued

Retaliation from competitors.

Legal constraints.

Defending market share.

Downsizing or divestment.



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INCREASING RISK

INCREASIN

GRISK

Existing

MARKETS

New

MARKET

PENETRATION


Markets

MARKET EXTENSION

Achieve higher

sales/market shareof existing products

in new markets


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2- MARKET EXTENSION

This is the strategy of selling an existing

product to new markets. This could involve

selling to an overseas market, or a new market

segment.

Nintendo are making hand held games

consoles (e.g. DS) appeal to the adult/grey

market by introducing games such as BrainTrain.


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Continued

New segments.

New users.

New geographies.


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INCREASING RISK

INCREASINGRISK

Existing

MARKETS

New

MARKETPENETRATION


Markets

MARKET EXTENSION

Achieve highersales/market share


in new markets

PRODUCT DEVELOPMENT


existing markets


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3- PRODUCT DEVELOPMENT

Where an organization deliver modified or

new products to existing markets.

Least risky of all four strategies.

E.g. Coca-Cola. This has been developed tohave vanilla, lime, cherry and diet varieties(amongst others) in the SOFT DRINKS

market.


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Continued

New strategic capabilities.

Project management risk.


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INCREASING RISK

INCRE

ASINGRISK

Existing

MARKETS

New

MARKET

PENETRATION


Markets

MARKET EXTENSION

Achieve higher

sales/market share


in new markets

PRODUCT DEVELOPMENT


existing markets

DIVERSIFICATION

Sell new products in new

markets


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4- DIVERSIFICATION

This is the process of selling different,unrelated goods or services in unrelatedmarkets

This is the most risky of all four strategies.E.g. the Virgin group


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Summary

Risks involved differ substantially

The matrix identifies different strategic areasin which a business COULD expand

Managers need to then asses the costs,potential gains and risks associated with theother options


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Portfolio Matrix

Point No. 5


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The Boston Matrix

A means of analysing the product portfolio

and informing decision making about

possible marketing strategies.

Developed by the Boston Consulting Group a business strategy and marketing

consultancy in 1968.

Links growth rate, market share and cashflow.


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1- Stars

Products in markets experiencing high growth

rates with a high or increasing share of the

market.

- Potential for high revenue growth.


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2- Cash Cows

High market share

Low growth

markets maturitystage of PLC

Low cost support

High cash revenue

positive cash

flows


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3- Dogs

Products in a low

growth market.

Have low or declining

market share (declinestage of PLC).

Associated with

negative cash flow.

May require largesums of money to

support.

Is your product starting toembarrass your company?


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4- Problem Child

- Products having a low marketshare in a high growthmarket.

- Need money spent to develop

them.- May produce negative cash

flow.

- Potential for the future?

Problem children worth spendinggood money on?


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The Boston Matrix

Problem Children Stars

Dogs Cash Cows

Market Growth

Market Share

High

Low High


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The Boston Matrix

Implications:

Dogs:

Are they worth persevering with?

How much are they costing? Could they be revived in some way?

How much would it cost to continue

to support such products?

How much would it cost to removefrom the market?


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The Boston Matrix

Implications:

Problem Children:

What are the chances of these products securing a

hold in the market?

How much will it cost to promote them to a

stronger position?

Is it worth it?


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The Boston Matrix

Implications:

Stars:

Huge potential

May have been expensive to develop

Worth spending money to promote

Consider the extent of their product life cycle in

decision making


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The Boston Matrix

Implications:

Cash Cows:

Cheap to promote

Generate large amounts of cash

use for further R&D?

Costs of developing and promotinghave largely gone

Need to monitor their performance

the long term? At the maturity stage of the PLC?


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THANK YOU

Lec (6)- Bus. & Cor. Strategy

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