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Unit 10 lecture (An enterprises business trategied seek toe nsure that the…
Unit 10 lecture
An enterprises business trategied seek toe nsure that the individual business units allocate their resources in such a way that it can better serve the customers than any other business
What is business level strategy@
Goal directed actions that manager take in their quest for comp advantage.
- How an org competes
Relevant for standalone businesses - SMEs and SBUs
Business strat is relevant for charities and public sector orgs. Charities compete for funding, universities for students. Need to be competitive to secure funding.
Business strategy and customers:
Who
What - customer needs and desires will we satisfy
Why
How? Will we satisfy needs?
BLS and comp advantage:
Firm level performance determined by value cost relative to competitors
- Determines strat position in a pod market
- see a valuable strat position allowing firms to meet needs whilst creating as large a gap as possible between value and costs
- Strat trade off - choices between cost of value position
- Business strat more liely to lead to comp adv if it allows the firm to 1) perform similar activities differently and 2) perform different activities from rivals that generate more value.
Key Question:
Is business level strategy something that should develp from the outside in or inside out?
In other words should companies develop their strat primarily in response to the conditions of the exrernal environment or from internal resources an capabilities?
Prof Michael Porter arued 3 strat options for all:
1) Cost leadership
2) Differenatiation
3) Focus or niche- inc focussed cost leadership or focussed diff
Every business needs to choose
Cost leadership:
Generic business strategy which seeks to create the same or similar value for customers delivering products or services to customers as competitors.Cost leader - built and maintains plants, equipment etc that deliver the lowest cost in the industry
- Optimise value chain to achieve a low cost position
- Sell standard or no frills products that are still of acceptable value
- Porter - need to be the lowest ost, but if second lowest cost have a competitve advantage but should not totally disregard quality
Example: Ryanair
Cost drivers:
Input costs - access to lower cost input factors, eg labour, capital, raw materials etcExamples - service centres in India etcEconomies of scale - Decrease in cost per unit as output increases:
- Spread fixed costs over large output - market share to drive down costs.
- employ specialised systems and equip
- Physical properties - big box retail stores are cheaper to run
- economies of scale in purchasing - eg negotiate a discount with supliers
Diseconmies of scale - as companies get too big, complexity of management and coordination increases costs. May also be inflexible and slow to change
Experience effects:
Experience is a key source of cost efficiency
- The more experienced, the more efficient one gets in doing something
- Experience curve - cumulative expereince gained by an organisation leads to reductions in costs
- Learning - gains in labour productivity as staff learn to do things faster, better and more cheaply
- Costs saved through more efficient design or equipment experience
Benefits and risks
- In a price war, the leader will be the last man standing
- Likely to have a large market share reducing the threat of new entry
- Insulated from the threat of powerful suppliers - for example Walmart is fairly well protected from threats.
Risks:
- Substitute may emerge due to innovation - example Amazon against trad retail
- Competitors may imitate and overtake
- Ensure value proposition remains at acceptable level
Differentiation strategy
Generic business strat which seeks to create higher value for customers tby delivering products with unique features whilst keeping cost structures at same or similar levels
The perception of the value of goods increases and custmers will be willing to accept a higher price.
Example - whole foods market
Product features - adding unique features can increase peceived value - strong R&D may be required. BMW is an example
Customer services
Complements - Virgin and TiVo, Samsung and Android
Benefits:
Differentiation likely based on unique features and intagible resources. This is costly to imitate
- less threatened by supplier price increases
- Creates customer loyalty
Risks:
- Focus of competition may switch to price. Example - iPhone was highly differentiated in 2007 but now?
- Ensure costs of additional features do not rise above the willingness of customers to pay
Focus or Niche strategies:
A focus strat is when an org focuses on specific niche in the market and aims products at that niche
Sometimes low cost or diff is not feasible so focus is adopted
Cost focus - firm seeks cost advantage in a particular market segment only
Diff focus - firm seeks differentiation is a particular segment only
Advantages:
Strength/dominance of profitable group
- customer needs matched to comp resources
- concentrate on smaller area to be more effective
Consumer products: geography, demograph, income, economic etcIndustrial products - area of country, end use, market served etcCost focus example - IcelandDiff focus example - Tesla
Stuck in the middle:
Firm has neither a clear diff, cost leader or focus profile. Doing no strategy well
The firm then competes at a disadvantage because cost leaders, diffs or focussers will be better positioned to compete
However if other rivals are similarly stuck in the middle, this might be ok
Firms may create different SBUs to pursue different strats
Porter's generic strats:
Criticism against combining the generic strats reflects the western cultural perception for binaries. Eastern cultures seek synthesis and balance
- Low cost leadership is limited in fast changing high tech markets
Differentiation may not lead to higher prices
Outside in:
- external environment imposes pressires and constraints tha determine strats
- Most firms competing in an industry control similar resources and pursue similar strats
- Resources used to implement strats are highly mobile
In a nutshell the industry structure sets limits
Inside out:
The key argument is that it is internal characteristics that determine success or failure and that firms should build their stratson internal strengths.
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