Fundamentals of Strategy

Session 4: Business Strategy

Dr. Wim VAN LENT

[email protected]
Course overview

Modules Topics Sessions

1 Introduction What is strategy Session 1

External Analysis Session 2

2 Analysis
Internal Analysis Session 3

Business Strategy Session 4

3 Formulation Business Models Session 5

Corporate Strategy Session 6

Final Presentations Session 7

2
SWOT

Resource-based View
VRIN
Capabilities

Institution-based View
PESTEL

Industry Based-View
Five Forces

SWOT can be used to synthesize insights from internal and external

analyses and to generate strategic options and assess future courses of
action
Strategic SWOT Questions

• How can the firm use strengths to exploit opportunities?

• How can the firm use strengths to reduce the likelihood and
impact of threats?

• How can the firm overcome/mitigate weaknesses that prevent the

firm from leveraging opportunities?

• How can the firm overcome/mitigate weaknesses to reduce

threats?
Leveraging competitive advantage:
Generic business strategies
Michael Porter sees three ways in which a firm can gain a competitive
advantage: cost leadership, differentiation, or focus

DIFFERENTIATION
COST LEADERSHIP or
or
BROAD MARKET figuring out how to make
bettering yourself at the
yourself different from the
same ‘game’
others

COST FOCUS DIFFERENTIATION

FOCUS
NARROW MARKET Offering a relatively
low price to a narrow Satisfying a particular
market demand
Cost leadership strategy

Low-cost advantage:

A firm’s cumulative costs for its overall value chain must be lower than
its rival’s cumulative costs

How to achieve cost leadership?

1. Perform value chain activities more cost-effectively
2. Eliminate or bypass cost-producing activities

6
Dell Example: Streamlining the value chain

7
Cost leadership strategy (2)

Characteristics
• Use knowledge gained from past production to lower production costs
• Low level of differentiation
• Aim for average customer
• Few new product features

Advantages
• Gain market share using low prices
• Cost advantage can protect from new entrants by allowing for further
price reduction
Typical cost drivers

• Economies of scale, experience, scope

• Input costs and procurement process
• Capacity utilization
• Supply chain efficiencies (e.g., Just In Time)
• Product design
• Outsourcing or vertical integration
• Innovation, technology development
• Communication systems, information systems
• Incentive systems, culture
Typical cost drivers

• Economies of scale, experience, scope

• Input costs and procurement process
• Capacity utilization
• Supply chain efficiencies (e.g., Just In Time)
• Product design
• Outsourcing or vertical integration
• Innovation, technology development
• Communication systems, information systems
• Incentive systems, culture
Common pitfalls in cost leadership

• No cost management program

• Poor implementation of cost management

• Misunderstanding of cost drivers

• Focus exclusively on operation ignoring competitive behavior

– e.g. Competitors may imitate or leapfrog your technology nullifying
your cost advantage
Differentiation strategy

• Meet customer needs in a unique way and charge premium prices

• Selectively add costs

• Different types of differentiation may co-exist in one industry

(e.g., BMW – “sporty”; Mercedes – performance; Volvo –
robustness)

• Attributes need to be chosen carefully, keeping in mind the:

– Strategic (targeted) customer: based on segmentation
– Key competitors
Sources of differentiation

• (Perceived) product quality: product features / performance, timely

delivery, after sales service, etc.
• Input quality
• Innovation, design, technology
• Breadth of product line
• Customization
• Geography
• Marketing: Brand, reputation
• Employee skill, training

13
Sources of differentiation

• (Perceived) product quality: product features / performance, timely

delivery, after sales service, etc.
• Input quality
• Innovation, design, technology
• Breadth of product line
• Customization
• Geography
• Marketing: Brand, reputation
• Employee skill, training

14
Advantages of differentiation

• Perceived quality and brand loyalty differentiation reduces threat from

all of Porter’s five forces:

• Brand loyalty protects against substitutes, new entrants and direct

competition

• Reduced buyer power, because buyers have only one source of supply

• Price increases from powerful suppliers can be passed on to customers

who are willing to pay
Common pitfalls in differentiation

• Failing to recognize buyer segments that want differentiated offering

• Creating differentiation that buyers do not value

– E.g., LG produced smartphones with innovative but irrelevant features

• Over-fulfilling buyer needs

– E.g., wood/leather interior of luxury cars

• Charging an excessive price premium

• Failing to understand costs of differentiation

• Creating differentiation that competitors can imitate quickly or cheaply
Focus strategies

• A Focused Strategy involves tailoring products or services to the needs of a specific

market segment

• Cost Focus: Targets a specific market segment that seeks a low price

• Differentiation Focus: Looks for specific needs that broader differentiators do not
serve well

17
Focus strategies

• A Focused Strategy involves tailoring products or services to the needs of a specific

market segment

• Cost Focus: Targets a specific market segment that seeks a low price
– E.g., Corner stores – the cheapest option at a walking distance
– E.g., Cheap jewellery for teenage girls

• Differentiation Focus: Looks for specific needs that broader differentiators do not
serve well
– E.g., luxury retirement homes
– Large / small sized handcrafted clothes

18
Focus strategy – pros and cons

Advantages Risks
• Easier to stay close to buyer • May be at mercy of powerful
• Customer loyalty: low threat suppliers
of entry • Small volume means higher
• Power over buyers production costs
• Little substitutability • Consumer tastes may change
Technology may change
• Cost leaders or big differentiators
may offer similar products
Mixing low cost and differentiation

Price ($)

Cost ($)

Industry Successful Successful Competitor with

average differentiated low-cost dual advantage
competitor competitor competitor
Being “Stuck in the Middle”

Price ($)

Cost ($)

Industry Successful Successful Competitor stuck in

average differentiated low-cost the middle
competitor competitor competitor
Strategy involves trade-offs ... choices!

Differentiator Cost Leadership

Achieving focus /
determining scope:

What to do?
What NOT
to do?
Stuck in the middle
“Stuck” vs. “build” in the middle

• Depending on market segments, there might be opportunities to be

successful “in the middle”:
“Stuck” vs. “build” in the middle

• Depending on market segments, there might be opportunities to be

successful “in the middle”:
Case: Blackberry

1. Assess the industry that Blackberry originally competed in

2. What was the basis for Blackberry’s competitive advantage?
3. Why was Blackberry unable to sustain its advantage?

26
Combining the generic strategies?

“Blue ocean” strategy: “breaking” the V-C trade-off?

Blue vs. red oceans
The essence of blue ocean strategies

Source: Boss by StratetX

Blue ocean strategy  dual advantage?

ERRC Model
Differentiation (V ↑) AND Low Cost (C ↓)
The ERRC framework
Blue Ocean Canvas

High

Low
Price Important Factors that raise
value or/and lower cost
Case: André Rieu

André Rieu … the biggest star you’ve never heard about!

• Premier Prix from the Royal Conservatory of Brussels

• One of the biggest male touring artists in the world
• The only classical artist to enter Pollstar’s top 10
• Stayed on Billboard Top 25 for two decades
• Once sold out more stadiums than Bruce Springsteen, just after
Madonna, Tina Turner, and Britney Spears
• Sold over 40 million CDs and DVDs worldwide
• Won 485 Platinum and 270 Gold awards
Case: André Rieu (2)

With your group, apply the ERRC Framework and

draw the strategy canvas

○ Red line = Classical Orchestras

○ Blue line = André Rieu
André Rieu: Basic positioning

Source: Boss by StratetX

André Rieu: ERRC framework

Source: Boss by StratetX

André Rieu: Strategy canvas

Source: Boss by StratetX

The competitive advantage of your firm

1. Assess your firm’s competitive advantage: what are the firm’s main
strengths and weaknesses? How does the firm compare to direct
competitors?

2. Does your firm conform to any of Porter’s basic strategies? How is it

similar / different?

3. Can you identify possible “Blue Oceans” for your firm? If yes, how
should your firm attract those non-customers?