Slide 6.1
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Part II:
Strategic Choices
Slide 6.2
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
The focus of part II:
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.
Slide 6.3
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategic choices
Slide 6.4
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategic Choices
7: Business Strategy
Slide 6.5
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.6
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Business strategy
Slide 6.7
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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)
– Capabilities-based criteria (similar strategic capabilities).
Slide 6.8
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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 the success or failure of its own
strategy.
Slide 6.9
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Generic Competitive strategies
Michael 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.
Slide 6.10
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.11
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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 design.
Slide 6.12
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Economies of scale and the
experience curve
Slide 6.13
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Costs, prices and profits for generic
strategies
Slide 6.14
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.15
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.16
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Focus strategies (1)
A focus strategy targets a narrow segment or
domain of 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. Iceland Foods)
• Differentiation focus strategy (e.g. ARM
Holdings for mobile phone chips).
Slide 6.17
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.18
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
‘Stuck in the middle’?
Porter 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’ – doing no strategy well.
• The argument for pure generic strategies is
controversial. Porter acknowledges that the
strategies can be combined (e.g. if being
unique costs nothing).
Slide 6.19
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.20
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategy clock (1)
The strategy clock provides an alternative
approach to generic strategy which gives more
scope for hybrid strategies.
It has two distinct features:
• It is focused on the prices to customers rather
than the costs to organisations.
• The circular design allows for incremental
adjustments in strategy rather than stark choices.
Slide 6.21
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategy clock (2)
Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995.
Slide 6.22
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategy clock – differentiation
• Strategies in this zone seeks to provide products that
offer perceived 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.
Slide 6.23
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategy clock – low price
Low price combined with low perceived value.
• A standard low price strategy (9 o
’clock)
Low prices combined with similar quality to
competitors aimed at increasing market
share. Needs a cost advantage (such as
economies of scale) to be sustainable, e.g.
Asda/Walmart in grocery retailing.
• A ‘
no frills’ strategy (7 o
’clock)
Focusing on price sensitive market
segments – typified by low-cost airlines like
Ryanair.
Slide 6.24
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategy clock – hybrid
Seeks to simultaneously achieve higher
benefits and lower prices relative to those of
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.
A classic example is IKEA.
Slide 6.25
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Strategy clock – non-competitive
strategies
Increased prices with low perceived product
or service benefits.
• In competitive markets such strategies will be
doomed to failure.
• Only feasible where there is strategic ‘lockin’
or a near monopoly position.
Slide 6.26
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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. An example is razors that only work
with one type of blade.
• Creating a proprietary industry standard.
Microsoft with its Windows operating system.
Slide 6.27
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Interactive strategies
Business strategy choices depend on what
competitors do (they are interactive).
• Richard D’Aveni gives an example of how
competitors may interact in terms of
competitive moves in price and perceived
quality. See Figure 7.6..
• Kumar gives an example of how firms
might respond to the entry of a low price
rival. See Figure 7.7.
Slide 6.28
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Interactive price and quality
strategies
Note: axes are not necessarily to linear scales.
Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetition: Managing the Dynamics of Strategic Maneuvering by
Richard D’Aveni with Robert Gunther. Copyright © 1994 by Richard D’Aveni. All rights reserved.
Slide 6.29
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Responding to low cost rivals
Source: Reprinted by permission of Harvard Business Review. Exhibit from ‘A framework for responding to low-cost rivals’ by N. Kumar, December 2006. Copyright © 2006 by the
Harvard Business School Publishing Corporation. All rights reserved.
Slide 6.30
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Hypercompetition
Hypercompetition describes markets with
continuous disequilibrium and change, e.g. popular
music or consumer electronics.
• It may be impossible to plan for long-term
sustainable competitive advantage.
• Planning may actually destroy competitive advantage
by slowing down responses.
• Successful hypercompetition demands speed and
initiative rather than defensiveness.
Slide 6.31
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Interactive strategies in
hypercompetition
Four key principles:
• Cannibalise bases of success
• Series of small moves rather than big
moves
• Be unpredictable
• Mislead the competition.
Slide 6.32
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Cooperative Strategy
Cooperating with rivals
Source: Adapted from Competitive Strategy: Techniques for Analysing Industries and Competitors, The Free Press, by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.
All rights reserved.
Slide 6.33
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Game theory
Game theory encourages an organisation to consider
competitors’ likely moves and the implications of these
moves for its own strategy.
• Game theory is particularly important where
competitors are interdependent.
• In these circumstances it is important to:
– get in the mind of competitors
– think forwards and reason backwards.
Slide 6.34
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Prisoner’s dilemma
Slide 6.35
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Business Models
• Value Creation, Configuration and Capture
Example: Uber’s ubiquitous business model
• Business Model Patterns
Slide 6.36
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Slide 6.37
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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).
• Porter’s framework and the Strategy Clock define various
generic strategies, including cost-leadership, differentiation,
focus and hybrid strategies.
• 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.
Slide 6.38
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
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.
Sample Solution