1. Strategic Management BUSM 3200
These Lecture Slides summarize the key points covered in the respective chapters in your
recommended text; these slides do NOT substitute, at all, the required reading of the assigned
chapter from the text. These slides also may contain additional supplementary material extracted
from other texts and sources outside your text book.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-1
2. The importance of Business Strategy topic:
Is very important part of the group
assignment as Business Strategy is a key
aspect of the discussion in the report
Section 5 of the report asks you to discuss
the type of generic business strategy the
firm (or SBU) implements by examining its
strategy statement and/or its value chain
activities.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-2
3. Classifying Strategies
Strategies can be depicted in many ways and
hence use different models
How do we compete? Generic Strategies
Where are we going? Strategic Directions (Ansoff
Matrix)
Under what contexts or conditions do we develop
strategy?
Level of the business: corporate or SBU
Stage of Industry Maturity (Growth or Maturity)
Scope of operation (local or international?)
Scale of operation (SME- entrepreneurial strategy)
So there are many ways of describing ‘strategy’
BUSM 3200- Strategic Management (Jan 2013) GDS 5-3
4. The focus of part 2:
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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-4
5. Strategic choices
This is the subject matter for Part 2 of the text
Figure II.i Strategic choices
BUSM 3200- Strategic Management (Jan 2013) GDS 5-5
7. Before we go into the topic of Business Strategy….
It is important to see how strategy fits into the
total process of planning and strategic
management
We have just completed the sections on External
Analysis, Internal Analysis and Strategic Purpose
How does strategy link with those elements?
Remember that strategy is a “outcome” of
external and internal analysis
Therefore any strategy that is proposed or
analyzed must be mapped against the
implications of internal and external analysis
BUSM 3200- Strategic Management (Jan 2013) GDS 5-7
8. Linking Strategy…..
Implications for Strategy Formulation
External analysis – Strategies developed
PESTEL must be aligned to
Industry analysis taking advantage of
opportunities or
Strategy
overcoming threats.
Internal Resources Strategies developed but
Capabilities leverage on the internal
Competencies strengths of the firm.
Strategies developed
Strategic Purpose must be consistent with
Vision, Mission, the scope defined by the
Objectives mission; strategies will
be benchmarked by
specific objectives
BUSM 3200- Strategic Management (Jan 2013) GDS 5-8
13. Slide 6.13
Strategic Choices
6: Business Strategy
14. Learning outcomes for Chapter 6
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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-14
15. Business strategy
Figure 6.1 Business strategy
BUSM 3200- Strategic Management (Jan 2013) GDS 5-15
16. 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).
Capability based criteria (similar strategic capabilities).
BUSM 3200- Strategic Management (Jan 2013) GDS 5-16
17. 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 its own costs, revenues and
profits.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-17
18. Generic strategies
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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-18
22. 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 and design.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-22
25. Economies of scale and the experience curve
Figure 6.3 Economies of scale and the experience curve
BUSM 3200- Strategic Management (Jan 2013) GDS 5-25
27. Costs, prices and profits for generic strategies
Figure 6.4 Costs, prices and profits for generic strategies
BUSM 3200- Strategic Management (Jan 2013) GDS 5-27
28. Cost-Leadership Strategy
Advantages: Disadvantages:
Charge lower price Easy to lose sight
than competitors but of changes in
make the same level customers’ taste
of profit Competitors will
Withstand try to beat the cost
competition based on leader at its own
price game
5-28
31. 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.
See Illustration 6.2 – Volvo in India
BUSM 3200- Strategic Management (Jan 2013) GDS 5-31
34. Differentiation in the US airline industry
Figure 6.5 Mapping 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
BUSM 3200- Strategic Management (Jan 2013) GDS 5-34
35. Differentiation Strategy
Advantages: Disadvantages:
Customers develop Difficult to
brand loyalty for a maintain
product uniqueness in the
Differentiation customer’s eye
creates barriers to Threat of
entry for other substitute
companies products
5-35
38. Focus strategies (1)
A focus strategy targets a narrow segment of
domain of an 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. Ryanair).
differentiation focus strategy (e.g. Ecover).
BUSM 3200- Strategic Management (Jan 2013) GDS 5-38
40. 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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-40
41. Focus Strategy
Advantages: Disadvantages:
Customer loyalty Suppliers have
lessens the threat power over
of substitutes focused firms,
Power over buyers making the firms
because they vulnerable to
cannot get the changes
same product Vulnerable to
elsewhere attack, therefore
must define its
niche constantly
5-41
44. ‘Stuck in the middle’?
Porter’s 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’ i.e. doing no strategy well.
The argument for pure generic strategies is
controversial.
Even Porter acknowledges that the strategies can
be combined (e.g. if being unique costs nothing).
BUSM 3200- Strategic Management (Jan 2013) GDS 5-44
45. 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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-45
49. Linking Business Strategy to other Porter
Frameworks on Strategy
The Generic Business Strategies discussed by
Professor Michael Porter is LINKED to the two
frameworks we learnt in earlier lectures- the Five
Forces Industry Model and the Value Chain
We need to ask two questions:
1. If a company pursues a given generic strategy,
how would it impact its configuration of its
“value chain”?
2. If a company pursues a given generic strategy,
how does it help to mitigate or reduce the impact
of threats as identified in the five forces model?
BUSM 3200- Strategic Management (Jan 2013) GDS 5-49
50. Linking Differentiation Strategy and Value Chain
Differentiation
Strategy impact
on the specific
activities within
the Value Chain
BUSM 3200- Strategic Management (Jan
2013) GDS
5- 50
53. So we know there are 3 generic strategies: how
then do you FIT this to the 5 Forces Model?
Cost
Leadership
Linkage? Strategy
Focus Differentiation
Strategy Strategy
4–53
54. How would Differentiation Strategy impact
on the Five Forces?
DIFF
Strategy
Focus CL
Strategy Strategy
4–54
55. Linking Differentiation Strategy and the Five Forces
Model
Differentiation
Strategy impact
on the Five
The strategies
Forces
used following
the
differentiation
approach
should help to
mitigate or
reduce the
impact of the
threats created
by the
respective
force
BUSM 3200- Strategic Management (Jan 5- 55
2013) GDS
56. Differentiation Strategy: Competitors
Rivalry with Defends against
Competitors
competitors because
Threat of brand loyalty to
new
entrants differentiated
Rivalry
among
competing
Bargaining
power of product offsets price
suppliers
firms
competition.
Threat of Bargaining
substitute power of
products buyers
4–56
57. Differentiation Strategy: Buyers
Bargaining Power Can mitigate buyers’
of Buyers
power because well
Threat of differentiated
new
Rivalry
entrants products reduce
among
competing
Bargaining
power of customer sensitivity
suppliers
firms
to price increases.
Threat of Bargaining
substitute power of
products buyers
5-57
5-57
58. Differentiation Strategy: Suppliers
Bargaining Power
Can mitigate suppliers’
of Suppliers power by:
Absorbing price
Threat of
new increases due to
entrants
Rivalry
Bargaining
higher margins.
among
competing power of
firms suppliers Passing along higher
Threat of Bargaining
supplier prices
substitute
products
power of
buyers
because buyers are
loyal to
differentiated brand.
5-58
5-58
59. Differentiation Strategy: New Entrants
The Threat of Can defend against new
Potential Entrants entrants because:
Threat of New products must
new
entrants surpass proven
Rivalry
among Bargaining
power of
products.
competing
firms suppliers
New products must be
Threat of
substitute
Bargaining
power of
at least equal to
products buyers performance of proven
products, but offered at
lower prices.
5-59
5-59
60. Differentiation Strategy: Substitutes
Product Well positioned
Substitutes relative to substitutes
because:
Threat of
Brand loyalty to a
new
entrants
Rivalry
among Bargaining differentiated
power of
competing
firms suppliers product tends to
reduce customers’
Threat of Bargaining
substitute power of testing of new
products buyers
products or switching
brands.
5-60
5-60
61. 5 - 61
Summary (differentiation strategy): Improving
Competitive Position vis-à-vis the Five Forces
• Differentiation
- Creates higher entry barriers due to customer
loyalty
- Provides higher margins that enable the firm to
deal with supplier power
- Reduces buyer power because buyers lack suitable
alternative
- Reduces supplier power due to prestige associated
with supplying to highly differentiated products
- Establishes customer loyalty and hence less threat
from substitutes
62. Linking Cost Leadership Strategy and Value Chain
Cost Leadership
Strategy impact
on the specific
activities within
the Value Chain
BUSM 3200- Strategic 62 5-62
65. How would Cost Leadership Strategy impact
on the Five Forces?
CL
Strategy
Focus DIFF
Strategy Strategy
4–65
66. Linking Cost Leadership Strategy and the Five
Forces Model
Cost Leadership
Strategy impact
on the Five
The strategies
Forces
used following
the cost
leadership
approach
should help to
mitigate or
reduce the
impact of the
threats created
by the
respective
force
BUSM 3200- Strategic 5- 66
67. Cost Leadership Strategy: Competitors
Rivalry with Due to cost leader’s
Existing Competitors
advantageous position:
Threat of
new
entrants
Rivals hesitate to
Rivalry
among Bargaining compete on basis of
power of
competing
firms suppliers price.
Threat of
substitute
Bargaining
power of
Lack of price
products buyers
competition leads to
greater profits.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-67 5-67
68. Cost Leadership Strategy: Buyers
Bargaining Power Can mitigate buyers’
of Buyers
power by:
Threat of Driving prices far
new
Rivalry
entrants
below competitors,
Bargaining
among
competing power of
suppliers
causing them to
firms
exit, thus shifting
Threat of
substitute
Bargaining
power of power with buyers
products buyers
back to the firm.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-68 5-68
69. Cost Leadership Strategy: Suppliers
Bargaining Power Can mitigate suppliers’
of Suppliers power by:
Threat of Being able to absorb
new
entrants cost increases due to
Rivalry
among Bargaining low cost position.
competing power of
firms suppliers
Being able to make
Threat of Bargaining very large purchases,
substitute power of
products buyers reducing chance of
supplier using power.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-69 5-69
70. Cost Leadership Strategy: Substitutes
Product
Cost leader is well
Substitutes positioned to:
Make investments to be
Threat of
new first to create
entrants
Rivalry
Bargaining
substitutes.
among
competing power of
firms suppliers Buy patents developed
Threat of Bargaining
by potential substitutes.
substitute power of
products buyers Lower prices in order to
maintain value position.
5-70
5-70
71. Cost Leadership Strategy: New Entrants
The Threat of Can frighten off new
Potential Entrants entrants due to:
Threat of Their need to enter
new
Rivalry
entrants on a large scale in
Bargaining
among
competing power of order to be cost
suppliers
firms
competitive.
Threat of Bargaining
substitute
products
power of
buyers
The time it takes to
move down the
learning curve.
5-71
5-71
72. 5 - 72
Summary (cost leadership strategy): Improving
Competitive Position vis-à-vis the Five Forces
• An overall low-cost position
- Protects a firm against rivalry from competitors
- Protects a firm against powerful buyers
- Provides more flexibility to cope with demands
from powerful suppliers for input cost increases
- Provides substantial entry barriers from economies
of scale and cost advantages
- Puts the firm in a favorable position with respect to
substitute products
73. The Strategy Clock
Provides another way of approaching the generic
strategies
The Strategy Clock has two distinctive features:
1. More Market- focused: focuses on price to
customers rather than costs to organization
2. The circular design of the clock allows for more
continuous choices rather than the discrete
options offered in the Porter model; there is a
full range of incremental adjustments that can be
made
BUSM 3200- Strategic Management (Jan 2013) GDS 5-73
74. Strategy clock
Figure 6.6 The Strategy Clock
Source: Adapted from D. Faulkner and C. Bowman, The Essence of Competitive Strategy, Prentice Hall, 1995
BUSM 3200- Strategic Management (Jan 2013) GDS 5-74
75. Strategy clock - differentiation
Strategies in this zone seeks to provide
products that offer 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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-75
76. Strategy clock – low price
Low price combined with:
low perceived product benefits focusing on
price sensitive market segments – a ‘no frills’
strategy typified by low cost airlines like
Ryanair.
lower price than competitors while offering
similar product benefits – aimed at increasing
market share typified by Asda /Walmart in
grocery retailing.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-76
77. Strategy clock - hybrid
Seeks to simultaneously achieve
differentiation and low price relative to
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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-77
78. Strategy clock – non-competitive
Increased prices without increasing
service/product benefits.
In competitive markets such strategies will
be doomed to failure.
Only feasible where there is strategic ‘lock-
in’ or a near monopoly position.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-78
79. 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.
E.g. Cheap razors that only work with one type of
blade.
Creating a proprietary industry standard. E.g.
Microsoft with its Windows operating system.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-79
80. Establishing strategic lock-in
Size or market First-mover
dominance dominance
Insistence on
Self-reinforcing
preservation
commitment
of position
BUSM 3200- Strategic 80 5-80
81. INTERACTIVE STRATEGIES
Generic strategies are chosen and
implemented
But what happens when a strategy
interacts with those of its competitors?
Need to study ‘competitor moves’ – what
if?
Two areas to study:
Theory of Hyper-competition
Theory of Gaming
BUSM 3200- Strategic Management (Jan 2013) GDS 5-81 5-81
82. Interactive price and quality relationships
See Figure 6.7 and read page 211
Shows how different organizations compete by
emphasizing either low prices or high quality
To plot the competitors moves and counter-
moves
Also study Figure 6.8 : Responding to low cost
rivals
And – read the case illustration 6.3: “McCafes
challenges Starbucks” – page 213
BUSM 3200- Strategic Management (Jan 2013) GDS 5-82
83. Hypercompetition
Hypercompetition describes markets with
continuous disequilibrium and change e.g.
popular music or consumer electronics.
Successful hypercompetition demands speed
and initiative rather than defensiveness.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-83
87. Interactive strategies in hyper-competition
Four key principles:
Cannibalise bases of success.
A series of small moves rather than big
moves.
Be unpredictable.
Mislead the competition.
See page 214
BUSM 3200- Strategic Management (Jan 2013) GDS 5-87
88. Cooperative Strategy
Competition may be zero-sum or negative returns
Better to collaborate between organizations
Leverage on their strengths and their competences
Create win-win outcomes
Grow the total market (‘pie’) instead of fighting for
share of the pie
Use M Porter Five Forces Model (key benefits of
cooperation with each force)
See page 215
See Figure 6.9
In a later lecture we will cover ‘strategic alliances’
BUSM 3200- Strategic Management (Jan 2013) GDS 5-88 5-88
90. Game theory
Game theory encourages an organisation to
consider competitors’ likely moves and the
implications of these moves for its own
strategy.
Interdependence exists where the choices made
by one competitor is dependent on the choices
made by other competitors
Anticipate the ‘probabilities’ and expected
outcomes of moves and counter-moves
BUSM 3200- Strategic Management (Jan 2013) GDS 5-90
91. Prisoner’s dilemma
Figure 6.10 Prisoner‘s dilemma game in aircraft manufacture
BUSM 3200- Strategic Management (Jan 2013) GDS 5-91
92. 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.
Read page 221
Signalling.
Deterrence.
Commitment.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-92
93. 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).
Different generic strategies can be defined in
terms of cost-leadership, differentiation and
focus.
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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-93
94. 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.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-94
95. PRACTICE ESSAY QUESTIONS
IMPORTANT NOTE: →
These questions are provided for your reference only – they are only
INDICATIVE of the standard of questions you might expect in the final exam.
DO NOT use these questions to “spot”
The RMIT examiner will post advice on the exam on the Learning Hub closer
to the exam; you are required to pay attention to that advise
The questions here show the range of topics that could be tested from this
lecture; they are NOT exhaustive
To score a high grade it is important to LINK the theory to applications and
examples. Where from?
You have been assigned specific cases to read from the text. Each case
study will show you the kinds of strategic decisions the case company
needs to make. You can draw from these examples.
You have selected a case company for your project; you may use
examples from there.
You are supposed to read widely from the business press about local,
regional and international companies strategies. You can use examples
from there as well.
BUSM 3200- Strategic Management (Jan 2013) GDS 6-95
96. Sample essay questions
1. Discuss, with examples, how the two main
business level strategies differ in fast cycle and
slow cycle markets.
2. Explain how the Porter's Five Forces model or
the Value Chain model could be used in the
formulation of business level strategy.
Illustrate your answer with examples from the ___
cases that you have studied for.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-96
97. Sample essay questions
3. Examine the advantages and disadvantages for a
firm to reply on the value chain to achieve
sustainable competitive advantage with a cost
leadership strategy.
Use examples from the ___ case to illustrate
your answer.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-97
98. Sample essay question
4. Briefly discuss each of Porter’s three generic
strategies. In your opinion, how can cost-based
advantages be sustained? Give examples to
support your arguments.
Note: the student should read this question and also consider that it is
possible that in future any of the other TWO strategies could be tested.
That is how would you answer this question if we substituted focus or
differentiation strategy instead?
BUSM 3200- Strategic Management (Jan 2013) GDS 5-98
99. Sample essay question
5. Strategy of an enterprise is defined by answers
to two questions
a) Where does the firm compete? (Domain selection)
b) How does it compete (Domain navigation)
Explain this statement from the perspective of
corporate and business level strategy with
examples.
Note: this question covers a wide range of topics that also includes the next topic
on Corporate Strategy. In this question you need to discuss Ansoff Matrix, Porter
3 Generic Strategies framework and the topic on Corporate Strategy that includes
the concept of Diversification.
BUSM 3200- Strategic Management (Jan 2013) GDS 5-99
100. Sample essay question
6. Singapore Airline has implemented its differentiation
strategy since its establishment. In doing so, it has
offered a high quality of customer services, maintained a
very good safety record, and procured new aircrafts,
including Airbus 380. At the same time, it attempts to
reduce its overall costs through lowering its back-office
costs and administrative overhead. Do you think these
activities are contradictory or complementary in
implementing Singapore Airline’s differentiation
strategy? Why? (Hint: You can address these issues based
on your understanding of the concept of value, value
chain analysis, and business strategy).
BUSM 3200- Strategic Management (Jan 2013) GDS 5-100
