Session 5

Business Level Strategy or

Completive Strategies / Generic Strategies

Nottingham University Business School (NUBS) Malaysia campus

MBA Programme N14M07 Strategic Management
Slide 5.1

Generic (Business Level) Strategies

Specimen Question
Porter identifies two basic types of strategic advantage a firm can
pursue: low cost or differentiation. Discuss with examples from the
course and your own research.

Today's Agenda
Porters Generic Strategies
Treacy & Wirsemas 3 Value Disciplines
Being Best of Both or stuck in the middle ?
Blue Ocean Strategy
Miles and Snow Strategy Typology
Slide 5.2

 Through External Analysis we analyse the environment / industry /

competitive factors that can affect a firms profits
In Internal Analysis we disucssed firm-specific factors that impact
on a firms profits
and now we further analyse firm specific factors vis--vis rivals

So we are concerned with where

companies position themselves relative
to rivals in order to obtain competitive
advantage

Slide 5.3

Here we are looking at Competitive advantage coming cost and

benefit advantages

External

Are you in an attractive market? ie

one where average player makes an
economic profit

Internal

Have you got a

competitive advantage?
Slide 5.4

But before that What is Business Level ?

SBU becomes the focal point
A strategic business unit is a part of an organisation
for which there is a distinct external market for
goods or services that is different from another SBU
External

Internal

Same customer types

Similar products/services

Same channels

Similar technologies

Similar competitors

Similar resources and

competences
Slide 5.5

also a Quick View of Porters Value Chain

Firm Infrastructure

Service

Outbound
Logistics

Marketing
& Sales

Operations

Inbound
Logistics

Human Resource Management

Technology Development
Procurement

Primary
activities
Slide 5.6

The Value Chain

Separates the firms activities into a sequential chain: the
building blocks of customer value
Displays total value comprising value activities & margins
Divided into primary and support activities
Useful framework for analysing opportunities for
Resource allocation
Differentiation
Cost reductions
Value chain for the firm and value chain for the industry

Slide 5.7

Porters
Business-Level
Generic
Strategies

Stuck in
the Middle ?

SOURCE: Adapted with the

permission of The Free Press, an
imprint of Simon & Schuster Adult
Publishing Group, from Competitive
Advantage: Creating and Sustaining
Superior Performance, by Michael E.
Porter, 12. Copyright 1985, 1998
by Michael E. Porter.

Figure 4.1

Slide 5.8

Generic Strategy Choices (Porter 1985)

Cost-leadership strategy
the firm strives to be the lowest-cost supplier and thus
achieve superior profitability from an above-average
pricecost margin.

(Product) differentiation strategy

the firm strives to differentiate its product (or service)
from rivals products, such that it can raise price more
than the cost of differentiating and thereby achieve
superior profitability.

Focus strategy
the firm concentrates on a particular segment of the
market and applies either a cost-leadership or a
differentiation strategy.
Slide 5.9

Cost Leadership: low cost relative to

competitors
Can still earn returns when rivals have
competed away profits
Buyers can only bargain down to level of next
most efficient competitor
Have flexibility to cope with price increases
from suppliers
Scale economies deter new entrants and
make substitutes less attractive

Slide 5.10

Cost strategy is more attractive when:

Economies of scale and learning effects are potentially
significant, but no firm seems to be exploiting them
provided the opportunity for Walmart and Dell then.

Opportunities for enhancing the products perceived

benefit are limited by the nature of the product
(commodities --- garments sector in Malaysia was getting
commoditised during/post asian crisis even a brand like British
India was selling at RM 20/unit)

Consumers are relatively price sensitive and are

unwilling to pay much of a premium for enhanced
product attributes
(eg. selling to government - In the food-retailing in Malaysia
Jusco is also forced to ???

(Bezanko 2000)
Slide 5.11

Using the Value Chain to Reduce Costs

Disaggregate the firms value chain into
separate activities (processes)
Establish the relative importance of
different activities in the total cost of the
product
Compare the costs by activity
Identify the cost drivers
Identify linkages: how costs in one activity
influence costs in another
Identify opportunities for reducing costs
(increase volume, reduce labour costs,
outsource)
Slide 5.12

Differentiation Strategy
An integrated set of actions taken to
produce goods or services (at an acceptable
cost) that customers perceive as being
different in ways that are important to them
Nonstandardized products
Customers value differentiated features more
than they value low cost

Slide 5.13

Differentiation: creating something that is

perceived by market as being unique
Brand loyalty means buyers are less price
sensitive and therefore less likely to move to
lower cost rivals or substitutes
Customer loyalty and uniqueness create
entry barriers
Higher margins provide protection against
powerful suppliers

Slide 5.14

Differentiation creates lines of defence

1. Raises the firm above intense price competition
rivalry
2. Uniqueness and customer loyalty act as a barrier
to entry
3. Able to ward off threat of substitutes.
Genetic cures vs Conventional Drugs ?
4. Reduces bargaining power of buyers.
5. Increases bargaining power with suppliers

Slide 5.15

Using the value chain to identify

differential potential
Inbound Logistics: quality of components &
materials
Operations: defect free products (6 sigma)
Outbound logistics: fast delivery
Marketing & sales: building brand reputation
Service: consumer credit

(What are your classic examples?)

Slide 5.16

Using the value chain to identify differential

potential
Firm Infrastructure: eg. GE strategic planning
processes
HRM: Training to support customer service
excellence: eg. IBM
Technology Development: Fast NPD eg. Sony

Slide 5.17

Bottom of the Pyramid Market

As an extension of Cost
Leadership ?

Fortune at the Bottom of the Pyramid - Prahlad

Slide 5.18

But are Porters Generic Strategies the only ways to competitive

position?
Treacy & Wiersema Three Value Disciplines

Operational Excellence

Best total cost

Product Leadership

Best product

Customer Intimacy

Best total solution

Slide 5.19

Operational Excellence
Providing reliable products and services at
competitive prices with minimal difficulty and
inconvenience (Similar to Cost ?)
Eg Dell,
GE White goods business (direct connect vs
loaded-dealer)

Slide 5.20

Customer Intimacy
Segmenting and targeting precisely and
then tailoring offerings to match exactly the
demand of those niches. Combine detailed
customer knowledge with operational
flexibility.
Lifetime profit vs single transaction
Eg Nordstrom, Home Depot, Ritz Carleton

Slide 5.21

Product/Service Leadership
Offering customers leading-edge products
and services that consistently enhance the
customers use or application of the product,
thereby making rival's goods obsolete
Speed to market
Eg Nike, Sony, 3M

Slide 5.22

Focus on one,
have to meet the threshold in all

Or become the master in two!

Eg Toyota: operational excellence + product leadership

Slide 5.23

And strategy encompasses the whole organisation

(strategising and organising)
Leading companies align

their entire operating

model that is the
companys culture,
business processes,Orgnal
DNA aand
la McD
management systems
computer platforms to
serve one value discipline
Eg Sears: Initiatives lacked
a central theme
Everyday low cost
Brand central
Celebrity endorsement

Companies that pursue the

same value disciplines
have remarkable
similarities regardless of
their industries

Federal Express, Wal-Mart

American airlines,
vs
Johnson & Johnson, Nike

This links to Porters view:

Slide 5.24

Value Chain
Implications of competitive positioning for functional area strategies
Its the overall strategy that counts
Competitive
Cost Advantage
Product & Marketing

Standardise products

Production

Mass-production
Inventory control

Engineering & design

Design for ease of

manufacture

R&D

Process innovations

HR

Transactional
leadership

Position
Benefit Advantage
Customise products

Make to order
Anticipate demand
Create customer
benefits
Product innovation

Transformational
leadership
Slide 5.25

Best of Both/ Best of All

or Stuck in the Middle?
(Whether Porters or T&W)

Slide 5.26

Stuck in the Middle

A firm that engages in both cost+diff. but fails to achieve
either of them is stuck in the middle

The worst strategic error is to be stuck in

the middle or to try simultaneously to
pursue all the strategies.
This is a recipe for strategic mediocrity and
below-average performance, because
pursuing all strategies simultaneously
means that a firm is not able to achieve
any of them because of their inherent
contradictions. (Porter, 1990, p.40).

Slide 5.27

Best of Both or Stuck in the Middle?

Porter argues that a strategy of differentiation
advantage is usually incompatible with the
pursuit of cost advantage because higher
quality or better performance products cost
more to produce:

e.g. more expensive components

e.g. better trained or more highly skilled labour
e.g. higher advertising and promotion costs
Therefore if firms pursue best of they are likely
to lose out to cost leaders and and top end
competitors;
also suffer from a blurred corporate image
Slide 5.28

Productivity Frontier
sum of all existing best practices at any given time or the
maximum value that a company can create at a given cost,
using the best available technologies, skills, management
techniques, and purchased inputs.
When an orgn improves its operational effectiveness, it
moves toward the frontier.
Hnece the frontier is constantly shifting outward
Whenever new technologies and management approaches are
developed and as new inputs become available.
to keep up with the continuous shifts in the productivity frontier,
managers have adopted techniques like continuous improvement,
empowerment, learning organization, etc.
Slide 5.29

Ritz Carlton
Sheraton

Travelodge

(Porter 1996)
Slide 5.30

Productivity Frontier
The argument is that though organisations improve on
multiple dimensions of performance at the same time as
they move towards the frontier,
They mae fail to compete successfully on the basis of operational
effectiveness over an extended periods as competitors are quickly
able to imitate best practices like management techniques, new
technologies, input improvements, etc.

Thus competition based on OR shifts the frontier outward

and effectively raises the bar for everyone.
produces absolute improvement in operational
effectiveness
no relative improvement for anyone and can be
mutually destructive
Slide 5.31

Counter Argument: in practice a firms advantage

is rarely based entirely on lower cost or superior
benefits
Why?
High quality products drives market share which gives
scale and learning benefits and reduces average costs
The rate at which accumulated experience reduces costs is
greater for higher quality products
Inefficiencies muddy the relation between cost position and
differentiation position: Porter may have been observing
inefficient firms, not a true trade-off between quality and
cost
Do Consumers think in terms of polar opposites?
Think of a trade-off in terms of value for money
e.g. Hotels ?! Airlines ?!

Slide 5.32

Generic StrategiesReconceptualisation by Parnell (2006)

Slide 5.33

Blue Ocean Strategy

How to create uncontested market space and make the
competition irrelevant
W.C. Kim and R. Mauborgne

The Imperative for BOS

supply exceeds demand

globalization
accelerated commoditization of products and services
increasing price wars
shrinking profit margins
brands are becoming more similar
select based on price

Slide 5.34

Two worlds

Slide 5.35

Two worlds

Red Ocean Strategy

Blue Ocean Strategy

Compete in existing market

space.

Create uncontested market

space.

Beat the competition.

Make the competition

irrelevant.

Exploit existing demand.

Create and capture new

demand.

Make the value-cost trade-off.

Break the value-cost trade-off.

Align the whole system of a

strategic firm's activities with
its choice of differentiation or
low cost.

Align the whole system of a

firm's activities in pursuit of
differentiation and low cost.
VALUE INNOVATION
Slide 5.36

BOS Logic: The Core Principles

Reconstruct Market
Boundaries
overcome beliefs.
Reach beyond
existing Demand
go for uncontested space.
Get the strategic
sequence right
value [innovation] first.

COST
VI
VI

VALUE
Slide 5.37

BOS Logic: Reconstruct market boundaries

Boundaries of
Competition
Industry

Strategic Group

Buyer Group

Head-to-Head
Competition
Focuses on rivals within its
industry

Looks across alternative

industries

Focuses on competitive position

within strategic group

Looks across strategic groups

within its industry

Focuses on better serving the

buyer group

Redefines the buyer group of the

industry

Focuses on maximizing the value

Scope of Product and
of product and service offerings
Service Offerings
within the bounds of its industry
Functional-emotional
Orientation of an
Industry
Time/Trends

Creating
New Market Space

Focuses on improving priceperformance with the functionalemotional orientation of this

industry
Focuses on adapting to external
trends as they occur

Looks across to complementary

product and service offerings that
go beyond the bounds of its
industry
Rethinks the functional-emotional
orientation of its industry

Participation in shaping external

trends over time
Slide 5.38

BOS Logic: Reach beyond existing demand

Core Customer

Noncostumer

Soon-to- Refusing Customer

be-NC
Slide 5.39

BOS Logic: Get the Strategic Sequence right

Buyer utility
Is there exceptional buyer
utility in your business idea?

No Rethink
YES
Price
Is your price easily accessible to
the mass of buyers?

No Rethink

YES
Cost
Can you attain your cost target to
profit at your strategic price?

No Rethink

YES
Adoption
What are the adoption hurdles in
actualizing your business idea?
Are you addressing them up
front?

No Rethink

YES

A commercially viable Blue Ocean Strategy

Slide 5.40

The case of Accor's Formule 1

The value curve of Formule 1 in the French Low Budget Hotel Industry

Slide 5.41

References
W. Chan Kim, Rene Mauborgne, Blue Ocean Strategy, 2005,
Havard Business School Press.
http://www.blueoceanstrategy.com
http://www.hotelformule1.com

Slide 5.42

Miles and Snow

Strategy Typologies

Slide 5.43

Miles and Snow (1978) Strategy Categories

Prospector

Operates in a Broad Market Domain

Values being a First Mover
Responds Rapidly to Signals of Opportunity
Competes by Stimulating and Meeting New Market
Opportunities

Defender

Attempt to Find Secure and Stable Markets

Offers Limited Range of Products
Compete with Low Prices, High Quality or Better Service
Not in the Forefront of R&D or New Product Development

Analyser

An In-between/Intermediary Type
Limited Line of Products but also has a few Products that
follow promising Markets
Second/Third Entrant - with Lower Cost & Higher Quality

Reactor

Lacks any well defined Strategy

No Consistent Product Market Orientation
Not Willing to assume Risk of New Product Introductions
Responds Primarily to Environmental Pushes

Slide 5.44

 Miles and Snow Classification based the

4 types of business strategies on
the business's intended rate of productmarket development ie.
its approach to penetrations of new markets
and its approaches to new product development /
R&D

AND
this can be combined with the generic
business strategies of Cost-leadership
and Differentiation to get more categories.
Slide 5.45

When is which Strategy Appropriate

Appropriate Conditions for a Prospector
Suited for unstable and rapidly changing environment resulting from new
technologies, changing customer needs.
Have good R&D and Marketing Capabilities - Need to keep them Up

Appropriate Conditions for a Defender

This is a Hybrid, With Low Cost or differentiation in quality or service
Useful for well developed Industries Eg. Cash Cows
Where there is a chance of some changing technology & customer needs
Eg. Aircraft Industry (Boeing)

Appropriate Conditions for a Analyser

Works Best in Industries where the basic technology is not complex or
where technology is well developed and unlikely to change dramatically.
Different Defenders and Low Cost Defenders
Slide 5.46

And so far we have

only been talking
about strategies of
differentiation
Mintzberg provides a wider
framework

Luckily we wont bother you

with this for examination

Slide 5.47

Mintzbergs Families of Generic

Strategies
Almost every serious author concerned with
content issues in strategic management
has their own list of strategies
The problem is that[they] either focus
narrowly on special types of strategies or
else aggregate arbitrarily across all varieties
of them with no real order.

Slide 5.48

Mintzbergs families of strategies

1.

2.
3.
4.
5.

Locating the core business

A business can be thought to exist at a junction in a network of
industries that take raw materials and through selling to and
buying from each other produce various finished products or
services.
Distinguishing the core business
(Porter: generic strategies and value chain)
Elaborating the core business

(Ansoffs growth matrix (done in session 7)

Extending the core business
Strategies of Integration (Aquisions, Mergers), Diversification
Reconceiving the core business
1. Redefining Business ie. The way is conducted Old eg.Poloroid
New Eg. Starbucks not just a coffee shop an ISP ? Music
Retailor?
2. Business Re-combination Strategies
3. Core Relocations Eg. P&G from Soaps to Personal Care
Slide 5.49

Key Points
Business level strategy
Competing better/providing best value
Strategy development for each SBU

Generic strategies for competitive advantage

No frills, low price, differentiation, hybrid,
focused differentiation

Sustainable competitive advantage requires

Linked competences, difficult to imitate
Ability to achieve lock-in as industry standard

Hypercompetition
Need speed, flexibility, innovation and change
Slide 5.50