Lecture 5&6 Strategies For Competitive Advantage Methods of Strategic Development

Lecture 5&6
Strategies for competitive advantage

Methods of strategic development
Costin Ciora - Business Strategy & Analysis

2. Competitive strategy options. Generic
strategies
Porter identified 3 generic strategies through which an
organization could achieve competitive advantage
1. Cost leadership
2. Differentiation
3. Focus

The Aim
Cost
Differentiation Focus
Leadership
• To offer a
•To cut costs of product that
production/ can't be • Position the
•Purchasing/ matched by business in one
service and in rivals and particular niche
turn cut selling charge a in the market
prices premium for
this "difference"

How (examples)
Cost
Leadership
• economies of
scale • find a segment
• branding where the cost
• use of learning • quality & leader or
effects design differentiators
• large • innovation have little or no
production • knowledge presence and
management build business
•runs using here
cheaper labour

Benefits
Cost
Leadership
• high volumes • develops brand
• builds brand loyalty
• creates a loyalty and
barrier to entry repeat purchases • little
competition
• can operate in • higher margins
unattractive • reduction in • often a first
power of step towards the
segments other generic
customers
• win price wars strategies

Threats
Cost
Leadership
• perform badly in a
recession • low volumes
• no fallback position if
leadership is lost • often easily copied • if successful, it
in the long run attracts cost leaders
• larger rivals may enter
the market • need to constantly and differentiators
innovate • few barriers to
• strong currency
makes imports cheaper • needs much higher entry
marketing than cost
leadership

Suitability
Cost
Leadership
Small business
with
Large Innovative entrepreneurial
organizations companies with flair, strong
with economies large marketing market
of scale budgets knowledge and
a risk taking
attitude

2. Competitive strategy options.
The strategy clock
An alternative way of identifying strategies that
might lead to competitive advantage is to look at
‘market facing’ generic strategies

The strategy clock

The STRATEGY CLOCK
Type Description Example
1 = no frills Commodity-like RyanAir (a very
products and services. successful, no-frills
Very price-sensitive airline)
customers
2 = low price Aim for a low price Dell computers. Good

without sacrificing quality computers at
perceived quality or low prices
benefits
3 = hybrid strategy Achieves IKEA- Cheap furnishings,

differentiation, but also but smart design and
keeps prices down large range of
through high volumes inventories

The STRATEGY CLOCK
Type Description Example
4 = differentiation Offering better British Airways
products and services
at higher selling prices.
5 = focused Offering high perceived Business/first class on

differentiation benefits at high prices full service airlines
6, 7, 8 = failure Ordinary products and -

strategies services being sold at
high prices

Class discussion
Where on the strategy clock should the following
companies or products be placed?
(1) McDonalds
(2) Zara
(3) Apple i-Pods

2. Competitive strategy options
(1) McDonalds
Probably no-frills. Prices are low, products are standardized
and not perceived to be of huge value.

(2) Zara
Zara is a Spanish-based international clothing retailing
business. It specializes in the fast production of small runs
of very-up-to date fashions, sold at low prices. Probably a
hybrid approach

(3) Apple i-Pods
Very stylish MP3-type players. Relatively expensive

compared to many competitors’ products. Probably a
hybrid strategy

3. Further examples of competitive strategies
analysis. Cost efficiency
• Ansoff’s matrix
• Strategy evaluation

Ansoff’s matrix
• Ansoff’s matrix is a very useful tool and

can be used in nearly every scenario
• summarizes many of the strategic options

facing organizations

The matrix
Existing New
products Products
• Consolidation,
• Withdrawal
Existing markets • Efficiency gains Product development
• Market
penetration/growth
New Markets Market development Diversification

Strategy evaluation
Johnson, Scholes and Whittington argue that for a
strategy to be successful it must satisfy three criteria:
• Suitability – whether the options are adequate responses

to the firm’s assessment of its strategic position
• Acceptability – considers whether the options meet and

are consistent with the firm’s objectives and are acceptable
to the stakeholders
• Feasibility – assesses whether the organisation has the

resources it needs to carry out the strategy

Strategy evaluation
Suitable:
A company that depends on one supplier for an important

component, decides to take over that supplier.
Unsuitable:
A company with weak marketing abilities decides to expand

abroad.

Strategy evaluation
Acceptable:
A company where most shareholders are pension funds

decides to expand using finance that does not cause
dividends to be cut.
Unacceptable:
A company with a very strong environment-friendly reputation

decides to use genetically modified crops.

Strategy evaluation
Feasible:
A company with strong cash balances acquires a competitor

for cash.
Non-feasible:
A company with a manufacturing base in Germany decides

to cut prices radically to match those of a producer based in
a low-cost economy.

Case study
Evaluate this strategy: McCafe to open a café & bookstore
&
Costin Ciora - Business Strategy & Analysis 23

Methods of strategic
development
Methods of strategic development
• Organic growth, acquisitions and alliances

• Portfolio analysis tools

1. Organic growth, acquisitions and
alliances
Advantages of acquisitions over organic
growth
• High-speed access to resources – example: acquisition
can provide a powerful brand name that could take
years to establish through internal growth
• Avoids barriers to entry – acquisition may be the only
way to enter a market where the competitive structure
would not admit a new member or the barriers to entry
were too high
• Less reaction from competitors – there is less likelihood
of retaliation because an acquisition does not alter the
capacity of the competitive arena
alliances
• It can block a competitor
• It can help restructure the operating environment –

some mergers of car companies were used to reduce
overcapacity
• Asset valuation – if the acquiring company believes the

potential acquisition’s assets are undervalued, it might
undertake an asset-stripping operation

alliances
Disadvantages of acquisitions growth
• May be more costly than internal growth because the

owners of the acquired company will have to be paid for
the risk already taken
• There is bound to be a cultural mismatch between the
organisations – a lack of ‘fit’ can be significant in
knowledge-based companies, where the value of the
business resides in individuals
• Differences in managers’ salaries – another example of
cultural mismatch that illustrates how managers are
valued in different countries

alliances
Disadvantages of acquisitions growth (cont.)
• Disposal of assets – companies may be forced to

dispose of assets they had before the acquisition
• Risk – of not knowing all there is to know about the
business it seeks to buy
• Reduction in return on capital employed – quite often an
acquisition adds to sales and profit volume without
adding to value creation

alliances
Joint venture
• A separate business entity whose shares are owned by
two or more business entities. Assets are formally
integrated and jointly owned
A very useful approach for:

• sharing cost
• sharing risk
• sharing expertise

alliances(6/13)
Strategic alliance
• can be defined as a co-operative business activity,
formed by two or more separate organisations for
strategic purposes, that allocates ownership, operational
responsibilities, financial risks, and rewards to each
member, while preserving their separate
identity/autonomy.

alliances(7/13)
Franchising
The purchase of the right to exploit a business brand in

return for a capital sum and a share of profits or turnover
• The franchisee pays the franchisor an initial capital sum

and thereafter the franchisee pays the franchisor a
share of profits or royalties
• The franchisor provides marketing, research and
development, advice and support
• The franchisor normally provides the goods for resale
• The franchisor imposes strict rules and control to
protect its brand and reputation
alliances
Licensing
The right to exploit an invention or resource in

return for a share of proceeds. Differs from
franchise because there will be little central
support

Group work
Which of licensing, joint venture, strategic alliance
and franchising might be the most suitable for the
following circumstances?
(1) A company has invented a uniquely good ice cream and

wants to set up an international chain of strongly branded
outlets
(2) Oil companies are under political pressure to develop

alternative, renewable energy sources
(3) A beer manufacturer wants to move from their existing

domestic market into international sales
alliances
(1) A company has invented a uniquely good ice cream and

wants to set up an international chain of strongly branded
outlets
Solution :
A franchise arrangement would work well here. There is

more than just manufacturing involved – there is the whole
retail offering, and entering into franchise agreements
would be a quick, effective way of expanding.

alliances
(2) Oil companies are under political pressure to develop
alternative, renewable energy sources.
Solution:
Unless the oil companies felt that, because of their size,

there was no need for joint research, development,
marketing and lobbying, a strategic alliance of some sort
could be useful. Research costs and findings could be
shared.
Alternatively, the new energy technology could be

developed within a joint venture organization.
alliances
(3) A beer manufacturer wants to move from their

existing domestic market into international sales.
Solution: Almost certainly, this company would

expand by licensing local brewing companies to
make and distribute its product.

2. Portfolio analysis tools
The BCG growth share matrix
• The two-by-two matrix classifies businesses, or products

according to the present market share and the future
growth of that market
• Growth is seen as the best measure of market
attractiveness
• Market share is seen to be a good indicator of
competitive strength

Balanced portfolio:
• cash cows of sufficient size and/or number that can support

other products in the portfolio
• stars of sufficient size and/or number which will provide
sufficient cash generation when the current cash cows can
no longer do so
• problem children that have reasonable prospects of
becoming future stars
• no dogs or – if there are any – there would need to be good
reasons for retaining them.
The Ashridge portfolio display (parenting matrix)
• Focuses on the benefits that corporate parents can bring to

business units and whether they are likely to add or destroy
value
• How good is the match between perceived parenting
opportunities and the parent’s skills?
• How good is the match between the CSFs of the business
units and the skills and resources that the parent can bring?

Heartland business units
• High degree of match and the parent company has the

capabilities and experience to add value by providing the
support required by the business unit
• These businesses should be central to future strategy

Edge of heartland business units
• There is a good fit in some areas where the parent can

bring particular skills that add value to the business unit,
but not in others, where the parent may destroy value
• However, if the parent develops sufficient understanding

of the business to avoid this, then the business may
move into the heartland
Ballast businesses
• The parent understands the business well but there are

limited opportunities to offer help, sometimes because
the business has been owned for a long time and has no
further support needs.
• These businesses would do better if left alone or indeed

divested

Value trap businesses
• Many parenting opportunities but there is a poor fit with

the critical success factors of the business
• Good potential but in practice because of the lack of fit

with the strategy there is a high possibility of destruction
of value

Alien businesses
• These are those where there is a complete mismatch.
• These should not remain part of the corporate portfolio

Case study
Apple – portfolio analysis

References
• ACCA P3 – Business Analysis, Kaplan Publishing, 2012
• Vaughan Evans – Key strategy tools, Pearson Publishing, 2013
• Martin Reeves, Knut Haanaes, Janmejaya Sinha - Your strategy

needs a strategy. How to Choose and Execute the Right
Approach. Harvard Business Review Press, 2015

Thank you for your attention
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Lecture 5&6

Strategies for competitive advantage

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

2 = low price Aim for a low price Dell computers. Good

3 = hybrid strategy Achieves IKEA- Cheap furnishings,

Costin Ciora - Business Strategy & Analysis

5 = focused Offering high perceived Business/first class on

6, 7, 8 = failure Ordinary products and -

Costin Ciora - Business Strategy & Analysis

(3) Apple i-Pods

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

Very stylish MP3-type players. Relatively expensive

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

• Ansoff’s matrix is a very useful tool and

• summarizes many of the strategic options

Costin Ciora - Business Strategy & Analysis

New Markets Market development Diversification

Costin Ciora - Business Strategy & Analysis

• Suitability – whether the options are adequate responses

• Acceptability – considers whether the options meet and

• Feasibility – assesses whether the organisation has the

Costin Ciora - Business Strategy & Analysis

A company that depends on one supplier for an important

A company with weak marketing abilities decides to expand

Costin Ciora - Business Strategy & Analysis

A company where most shareholders are pension funds

A company with a very strong environment-friendly reputation

Costin Ciora - Business Strategy & Analysis

A company with strong cash balances acquires a competitor

A company with a manufacturing base in Germany decides

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis 23

• Organic growth, acquisitions and alliances

Costin Ciora - Business Strategy & Analysis

• It can help restructure the operating environment –

• Asset valuation – if the acquiring company believes the

Costin Ciora - Business Strategy & Analysis

• May be more costly than internal growth because the

Costin Ciora - Business Strategy & Analysis

Disadvantages of acquisitions growth (cont.)

• Disposal of assets – companies may be forced to

Costin Ciora - Business Strategy & Analysis

A very useful approach for:

Costin Ciora - Business Strategy & Analysis

Costin Ciora - Business Strategy & Analysis

The purchase of the right to exploit a business brand in

• The franchisee pays the franchisor an initial capital sum

The right to exploit an invention or resource in