Week 4 – STRATEGIC OPTIONS – BUSINESS LEVEL STRATEGIES
Chapter 7 of the module book
Business strategies are about how to compete in a marketplace
SBU – A strategic business unit (SBU) supplies goods or services for a distinct domain of activity (sometimes these SBUs are called ‘divisions’ or ‘profit centres’)
Another important choice is to identify the relationship between the value created for customers and other participants, the organisational activities that create this value and how the organisation and other participants can capture value from this – a business model.
Business strategy and business models are not just relevant to the private business sector. Charities and public-sector organisations also compete and have business models
Generic competitive strategies
Competitive strategy is concerned with how a company, business unit or organisation achieves competitive advantage in its domain of activity.
Competitive advantage is about how a company, business unit or organisation creates value for its users both greater than the costs of supplying them and superior to that of rivals
Przewaga konkurencyjna polega na tym, jak firma, biznes jednostka lub organizacja tworzy wartość dla swoich użytkowników, zarówno większą niż koszty ich dostarczania, jak i wyższą od konkurentów
Competitive advantages should underpin competitive strategies. There are two important features of competitive advantage. To be competitive at all, an organisation must ensure that customers see sufficient value that they are prepared to pay more than the costs of supply. To have an advantage, the organisation must be able to create greater value than competitors. In the absence of a competitive advantage, an organisation’s competitive strategy is always vulnerable to competitors with better products or offering lower prices.
There are two fundamental means of achieving competitive advantage. An organisation can have structurally lower costs than its competitors. Or it can have products or services that are differentiated from competitors’ products or services in ways that are so valued by customers that it can charge higher prices that cover the additional costs of the differentiation. Porter adds new dimension: based on the scope of customers that the business chooses to serve. Businesses can choose to focus on narrow customer segments, for example a particular demographic group such as the youth market. Alternatively, they can adopt a broad scope, targeting customers across a range of characteristics such as age, wealth, or geography.
Cost leadership example – ASDA – seeks to use huge economics of scale and extremely tight cost discipline to achieve systematically lower costs compared to competitors.
Differentiation example – Waitrose – offers range on quality, fresh and env. Friendly products focused on upper market with relatively higher prices.
Re: 3a 3b for above: delicatessen target is a narrow group of higher end customers. They (ASDA, Waitrose) get higher prices through their differentiation focus strategy. On the other hand, ICELAND has cost focus strategy concentrated on frozen and chilled food that reduces costs comparing to competitors with higher products range.
Cost leadership strategy
Cost-leadership strategy involves becoming the systematically lowest-cost organisation in a domain of activity. Example: Ryanair – saves costs nearly every aspect of its operation – purchasing same type of aircraft , selling tickets primary online (90% sales) to low employee costs (second lowest in Europe).
4 key cost drivers that can help deliver cost leadership:
- Input costs – (ex: labour, raw materials etc) –
- Economies of scale – increasing scale reduces costs . Fixed costs are those costs needed for a level of output. Example: pharmaceutical company must do extensive R&D before it produces 1 pill. Economies of scale come from spreading these fixed costs over high levels of output. Ec.of.Scales in purchasing can also reduce costs.
Large airlines can negotiate aircrafts prices.
This also have limitations – minimum efficient scale . Diseconomies of scale are possible – large qty requite employee payments, machine maintenance etc.
- Experience – can be a key source of cost efficiency. The experience curve implies that the cumulative experience gained by an organisation with each unit of output leads to reductions in unit costs.
1) learning curve effect – experienced teams know how to reduce costs
2) Second, costs are saved through more efficient designs or equipment as experience shows what works best
- Product/process design also influences cost – For example, engineers can choose to build a product from cheap standard components rather than expensive specialised components. Organisations can choose to interact with customers exclusively through cheap web-based methods, rather than via telephone or stores. Organisations can also tailor their offerings in order to meet the most important customer needs, saving money by ignoring others.
There are two tough requirements for cost-based strategies
- the principle of competitive advantage indicates that a business’s cost structure needs to be systematically lowest cost. Having the second-lowest cost structure implies a competitive disadvantage against somebody.
- low cost should not be pursued in total disregard for quality. 2 options
- Parity (in other words, equivalence) with competitors in product or service features valued by customers. Parity allows the cost-leader to charge the same prices as the average competitor in the marketplace, while translating its cost advantage wholly into extra profit. Brazilian steel producer CSN uses its cheap iron-ore sources. Charges average price and takes cost difference as greater profit.
- Proximity (closeness) to competitors in terms of features. Where a competitor is sufficiently close to competitors in terms of product or service features, customers may only require small cuts in prices to compensate for the slightly lower quality.
Alternative to cost leadership.
Differentiation strategy involves uniqueness along some dimension that is su.ciently valued by customers to allow a price premium.
Where there are many alternative dimensions that are valued by customers, it is possible to have many different types of differentiation strategy in a market.