ISM Week 6 & 8 Business Strategy and Corporate Strategy

Portfolio Manager

is a corporate parent acting as an agent on behalf of financial markets and shareholders

Parental Developer

is a corporate parent seeking to employe its own competences as a parent to add value to its businesses and build parenting skills that are appropriate for its portfolio of business units.

Synergy Manager

is a corporate parent seeking to enhance value across business units by managing synergies across business units.

Vertical integration

is backward or forward integration into adjacent activities in the value network

Definition: Competitive strategy

is concerned with the basis on which a business unit might achieve competitive advantage in its market.

Related diversification

is corporate development beyond current products and markets, but within the capabilities or value network of the organisation.

Forward integration

is development into activites which are concerned with a company's outputs

Backward integration

is development into activities concerned with the inputs into the company's current business.

Horizontal integration

is development into activities which are complementary to present activities.

Failure strategy

is one that does not provide perceived value for money in terms of product features, price or both

Focused differentiation

Strategy seeks to provide high perceived product/service benefits justifying a substantial price premium, usually to a selected market segment (niche)

3. Way of responding to competitive threat: change their own business model

- Become solutions provider: Many engineering firms have realised the higher-value potential of design and consultancy services rather than labour-based engineering operations that are easily undercut in price. - Become a low-price provider: most radical response would be to abandon the reliance on differentiation and learn to compete head-on with the low-price competitor.

How to respond to competitive threat?

- Build multiple bases of differentiation. E.g B&O: product design linked with product innovation - Ensure a meaningful basis of differentiation. Customers need to be able to discern a meaningful benefit. E.g Gillette could not convince customers to buy Duracell batteries - Minimise price differences for superior products or services. Reason why hybrid strategy can be so effective. - Focus less on price-sensitive market segments. E.g. BA has switched strategic focus on long-haul flights with a particular emphasis on business travellers.

Characteristics of successful hyper-competitive strategies

- Cannibalise bases of success: Sustaining old advantages distracts from developing new advantages - Attacking competitors weaknesses can be unwise as they learn to build their strategy accordingly - Smaller moves may be more effective than bigger ones because long-term direction is difficult predict. - Disruption of the status quo is strategic behaviour. The ability to constantly 'break the mould' could be core competence. - Be unpredictable. Otherwise competitors might predict a pattern. - Mislead the competition

Dangers of low-price strategy

- Competitors might be able to do the same - Customers start to associate low price with low product benefits - Cost reduction may result in inability to pursue a differentiation strategy

Ways of attempting advantage through differentiation

- Create difficulties of imitation - Imperfect mobility: >>intangible assets such as brand, image and reputation. >> High switching costs for buyers >> Co-specialisation: a whole element of the value chain for one org - Lower cost-positions

Problems with BCG Matrix

- Definitional vagueness: It can be hard to decide what high and low growth or share mean. Managers are often keen to define themselves as 'high share' by defining their market in a particularly narrow way. - Capital market assumptions: the notion that a corporate parent needs a balanced portfolio to finance investments from internal sources assumes that capital cannot be raised in external markets. - Unkind to animals. Treatment of dogs and cash cows can cause motivational problems, as managers in these units see little point in working hard for the sake of other businesses.

What are drivers for diversification?

- Economies of scope: Efficiency gains by applying the organisation's existing resources or capabilities to new markets and products or services. - Dominant logic - for value creation - Superior internal processes - Increasing market power - Synergy

How to respond to competitive threat if decided to set up low-price strategy

- Establish a separate brand for the low-price business to avoid confusion - Run the business separately and ensure it is well resources. Problem is that it is often seen as second class - Ensure benefits to the diffrentiated offering from the low-price alternative. E.g. banks charge lower fees for online transactions. - Allow the business to compete. Launching the low-price business purely defensively is unlikely to be effective. It has to be allowed as a viable separate SBU.

Generic Competitive Strategies

- cost leadership - differentiation - cost focus - differentiation focus

Generic competitive strategies: cost leadership

- input costs - economies of scale - experience - product/process design example: Ryanair

Generic competitive strategies: Differentiation

- offer uniqueness that is valued by customers to allow a price premium Requires: - focus on strategic customers - key competitors (crucial otherwise impossible strategy)

Three types of corporate parenting roles

-Portfolio managers (main emphasis: downard, investing and intervening - offices small - Backstone Group) -synergy managers (main emphasis: across, facilitating cooperation - offices large - Daimler) -parental managers (main emphasis: downward, providing parental capabilities - offices large - Virgin)

Strategic choices

...

Strategy clock: competitive strategy options / Different bases of competitive strategy:

1. No frills 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 in low price and differentiation 4. Differentiation (without price premium) Perceived added value by user, yielding market share benefits (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 value Higher margins if competitors do not 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

Advantage of directional policy matrix over BCG matrix

1. The nine cells of the directional matrix acknowledge the possibility of a difficult middle ground. Here managers have to be carefully selective. In this sense, the directional policy matrix is less mechanistic than BCG. 2. The two axes of the directional policy matrix are not based on single measures (that is market share and market growth). Business strength can derive from many other factors and industry attractiveness does not limit

Sustaining competitive advantage

An organisation pursuing competitive advantage through low price might be able to sustain this in a number of ways: - Operation with lower margins - Unique cost structure - Organisationally specific capabilities

Strategic directions (Ansoff matrix)

An organisation typically starts in Box A with its existing products and existing markets. According to matrix org has a choice between developing new products for existing markets or brining its existing products into new markets; most radical step diversification

Why do companies have a number of SBUs?

Because they compete in different markets or market segments.

Competition and collaboration

Competitiveness might be improved by collaboration to achieve: - increased selling power - increased buying power - Increased barriers to entry - decreased risk of substitution - entry to new markets - shared work with customers - stakeholder expectations

Strategic directions and corporate-level strategy

Corporate parenting - portfolio management - diversification - penetration consolidation development Summarizes the key themes of strategic direction and corporate level strategy. After reviewing Ansoff strategic directions, focus on diversification. Diversification in turn raises the two related topics of the role of the corporate parent and the use of business portfolio matrices.

Strategy clock: competitive strategy options (model)

Customers at 1 & 2 are primarily focused with price, but only if the product benefits meet their threshold requirements. Customers at 5 require a customised product/service for which they are willing to pay a price premium.

Integration

Definition Vertical - forward - backward Horizontal

Portfolio matrices

Financial investment or divestment - balance of the portfolio e.g. In relation to its markets and the needs of the corporation - attractiveness of the business units in terms of how strong they are individually and how profitable their markets or industries are likely to be - the fit that the business unites have with each other in terms of potential synergies or the extent to which the corporate parent will be good at looking after them

Generic competitive strategies: focus strategies

Focusers seek out weak spots of broad cost-leaders and differentiators - district segment needs - distinct segment value chains - viable segment of economics Cost focuser - Iceland foods concentrates on frozen and chilled foods - Ryanair focuses on price-conscious holiday travellers Differentiation focuser - ARM holdings - mobile phone chips

The parenting matrix: the ashridge portfolio display (Michael Goold and Andrew Campbell)

Introduces parental fit as an important criterion for including businesses in the portfolio. Businesses may be attractive in terms of the BCG or directional policy matrices, but if the parent cannot add value, then the parent ought to be cautious about acquiring or retaining them. > A corporate parent should avoid running businesses that it has no feel for and should avoid it if no benefit.

Strategy guidelines based on the directional policy matrix

It suggests that the business with the highest growth potential and the greatest strength are those in which to invest for growth.

Bowman's: Strategy clock

It was developed by Cliff Bowman and David Faulkner as an elaboration of the three Porter generic strategies. As with Porter's Generic Strategies, Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. Bowman's Strategy Clock represents eight possible strategies in four quadrants defined by the axes of price and perceived added value. The resulting star shape is reminiscent of a clock face, giving this tool its name.

Strategic options

Market penetration: increasing share if current markets with current product range - companies may face retaliation or legal constraints Product development: deliver modified or new products to existing markets - forces to develop new strategic capabilities - risk factors Market development: offering existing products to new markets - new user and new geographies Diversification - related diversification - diversifying into products/services with relationship to the existing business - conglomerate (unrelated) diversification - diversifying into products/services with no relationship to existing businesses

Criteria's that help in identifying appropriate SBUs

Market-based criteria: Different parts of an organisation might be regarded as the same SBU if they are targeting the same customer types, through the same sorts of channels and facing similar competitors. Capabilities-based criteria: Parts of an organisation should only be regarded as the same SBU if they have similar strategic capabilities. For for manufacturer branded products and own-brand products should be different SBU.

E.g. Vision and Mission

McDonalds: Our mission is to be our customers' favourite place and way to eat. Amazon: to be earth's most customer-centric company where people can find and discover anything they want to buy online Virgin: Space matters!

Competitive strategies in hyper competitive conditions

Overcoming bases of competitive advantage by: - Imitation: One competitor may seek to achieve advantage by developing new products or entering new market -> easy to imitate - Strategic Repositioning: e.g. low-price strategy against differentiated competitor. - Blocking first mover advantage: one competitor may try to achieve advantage as a first-mover. Key> not allow that competitor establishes a dominant position before a response is made - Overcoming Barriers to Entry: Characteristics of successful hypercompetitive strategies: - cannibalise bases of success - smaller moves more effective - disruption of status quo - be unpredictable - mislead competition

Directional policy (GE-McKinsey) matrix

Positions SBUs according to (i) how attractive the relevant market is in which they are operating, an (ii) the competitive strength of the SBU in that market. Attractiveness can be defined with PESTEL/five forces

Definition SBU

SBU is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU

What is key in hypercompetitive environment

Speed, flexibility, innovation and the willingness to change successful strategies are an important bases.

Growth share BCG matrix

Star: a business unit which has a high market share in a growing market ?: is a business unit in a growing market, but without a high market share Cash cow: is a business unit with a high market share in a mature market Dogs: are business units with a low share in static or declining markets

Strategic business units (SBUs)

Strategic business unit supplies goods or services for a distinct domain of activities SBU effects within the organization: - decentralization - vary strategies according to different needs of markets that they service - accountability SBU boundaries - market-based criteria - capabilities-based criteria

Strategy @Daimler

We aim to achieve our goals through four strategic growth areas: - further strengthen our core business - grow in new markets - take lead with green technology - lead the way with the development if new mobility concepts and services

'No-frills' strategy

combines a low price, low perceived product/service benefits and a focus on a price-sensitive market segment

Strategic lock-in

is where an organisation achieves a proprietary position in its industry; it becomes an industry standard. Achievement of lock-in is likely to be dependent on: - size or market dominance - First-mover dominance - Self-reinforcing commitment - Insistence on the preservation of the lock-in position

Synergy

refers to the benefits that are gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts.

Corporate parent

refers to the levels of management above that of the business units, and therefore without direct interaction with buyers and competitors.

Hybrid Strategy

seeks simultaneously to achieve differentiation and a price lower than that of competitors

Low-Price strategy

seeks to achieve a lower price than competitors whilst trying to maintain similar perceived product or services benefits to those offered by competitors

Differentiation Strategy

seeks to provide products or services that offer benefits that are different from those of competitors and that are widely valued by buyers

Alien business

units are clear misfits. They offer little opportunity to add value and the parent does not understand them anyway. Exit is definitely the best strategy.

Value trap business

units are dangerous. They appear attractive because there are opportunities to add value but they are deceptively attractive, because the parent's lacks of feel will result in more harm than good. The parent will need to acquire new capabilities if it is to be able to move value trap businesses into the heartland. It might be easier to divest to another corporate parent who could add value, and will pay well for the chance.

Ballast business

units are ones the parent understands well but can do little for. They would probably be at least as successful as independent companies. If not divested, they should be spared as much corporate bureaucracy as possible.

Heartland Business

units are ones which the parent understands well and can continue to add value to. They should be at the core of future strategy