STRATEGY AND DECISION MAKING

CHAPTER 5: BUSINESS LEVEL-

GENERIC STRATEGIES

• Lecturer: Phd. Duong Thi Hoai Nhung

• Faculty of Business Administration
• Foreign Trade University
• Email: [email protected]
• Mobile: 0985 867 488
 COURSE CONTENTS
Topics Sessions
PART 2: STRATEGY FORMULATION
BUSINESS LEVEL STRATEGY:
Chapter 5: Generic strategy 7
Chapter 7: Blue ocean strategy & Innovation strategy 8
CORPORATE LEVEL STRATEGY

Chapter 8: P1_Corporate strategy- Growth, Stability& Retrenchment 9

Chapter 8: P2_Corporate strategy- Strategic Alliance, M&A 10
Chapter 8: P3_Corporate strategy- Global strategy 11
Chapter 8: P4_Corporate strategy- Stability & Retrenchment 12
Submit Individual Assignment (100%) (Date: 5/10/2024)
FIGURE 3.1 Components of Internal Analysis Leading to
Competitive Advantage and Strategic
Competitiveness

VRIO
COMPETITIVE ADVANTAGE
Where to Find Differentiation Opportunities in
the Value Chain
• Purchasing and procurement activities
• Product R&D and product design activities
• Production process / technology-related activities
• Manufacturing / production activities
• Distribution-related activities
• Marketing, sales, and customer service activities

Activities,
Internally Costs,
Activities,
Performed & Margins of Buyer/User
Costs, &
Activities, Forward Value
Margins of
Costs, & Channel Chains
Suppliers
Margins Allies &
Strategic
Partners
 Value Chain
Organisation Infrastructure
Support Human Resource Management

M
ar
Activities Technology Development

gin
Procurement

Inbound Operations Outbound Marketing Service

gin
Logistics Logistics & Sales

ar
M
Primary Activities

Adapted from M E Porter “Competitive Advantage:

Creating and Sustaining Superior Performance”,
Free Press, 1985
 Competitive advantage
• Is the ability of an organisation to add more
value for its customers than its rivals and
therefore attain a position of relative advantage
• Is what gives a firm an edge over its rivals
• Arises from the selection of the generic
strategy that best fits the organisation’s
competitive environment
• The key drivers of competitive advantage are
cost leadership and differentiation of product
 GENERIC STRATEGIES

Prentice Hall, Inc. ©2012 6-8

 Porter’s competitive strategies

What do you think about statement: “Cost leadership

strategy means low price strategy?”

Prentice Hall, Inc. ©2009 6-9

 A misconception
• Cost leadership is often seen as a strategy that
aims to attract customers with low prices that are
made possible by low costs
• But cost leadership does not necessarily mean
selling at the lowest price
• It might mean selling at the industry average
price but enjoying above average profits through
low cost production
• The low costs result in high profit margins
 Cost leadership strategy
• How to minimize the costs in airline transportation?

https://www.youtube.com/watch?v=069y1MpOkQY
 Porter’s competitive strategies

Cost leadership strategy- the ability of a

company or a business unit to design, produce
and market a comparable product more
efficiently than its competitors.

Prentice Hall, Inc. ©2009 6-12

 Sources of cost leadership
• Size - economies of scale
• Greater labour efficiency and effectiveness
• Control of overheads
• Superior management
• Greater operating efficiency and effectiveness
• Low cost production
• Low cost labour
• Design for low cost production
• Use the latest technology to reduce costs and or
enhance productivity
• Relocation to low cost site
• Favourable access to low cost sources of supply
• Reduction in waste
 Firms that succeed in cost leadership

• Firms that succeed in cost leadership have the

following strengths:
– Access to the capital required to make significant
investment in fixed assets
– Design skills for efficient manufacture
– A high level of expertise in manufacturing process
engineering
– Efficient distribution channels
• Examples of cost leadership : Ryanair, Toyota,
Wal-Mart (parent company of Asda), Tesco
 Cost Leadership Strategy
Advantages and Disadvantages
Advantages of Cost Leadership Strategy Disadvantages of Cost Leadership
Strategy
Competitive Pricing: Attract price- Quality Trade-offs: Possible compromises
sensitive customers. in product quality or customer service.

Higher Market Share: Capture a larger Dependence on Scale: Requires high

portion of the market. production volume, disadvantaging smaller
businesses.
Barriers to New Entrants: Deter Imitation by Competitors: Successful
competitors from matching low prices. strategies can be replicated by rivals.
Economies of Scale: Benefit from lower Limited Price Flexibility: Difficulty in
per-unit costs as production scales up. raising prices when necessary.
Operational Efficiency: Streamline Risk of Stagnation: Focus on cost-cutting
processes and enhance overall efficiency. may hinder innovation and adaptation.
 Five forces analysis
• Porter developed the five forces model as a framework
for the analysis of profitability of the industry
• The five forces are:
– Suppliers power: powerful suppliers can push up the cost of
inputs
– Buyers’ power: powerful buyers can negotiate low prices
– The threat of substitutes: where there is a strong threat firms
need to remain very competitive
– The ease or otherwise of entry to the market: low barriers raise
the prospect new firms pushing down prices
– The intensity of rivalry in the market: intense competition forces
firms to keep prices down
• The five forces model can be used to analyse each of
the generic strategies
Five forces and cost leadership
The five forces The cost leader is ………….

Entry barriers ………….

Buyer power ………….

Supplier power ……………

Threat of ………………
substitution
Rivalry ………………….
 Competitive strategies
 Differentiation strategy
- Differentiation strategy- the ability of a company or
a business unit to provide a unique or superior
value to the buyer in terms of:

• Product quality • Technical superiority

• Service quality • Distribution channels
• Brand name • Breath of product lines
• Product features
 Differentiation advantage

User Experience
Market Penetration

Differentiation
80% Customer Service
Differentiation
60%
Product
Differentiation
40%
Price/Quality
Differentiation
20%
Technology
Differentiation
0%
Market Maturity
Extra costs and premium prices
• Differentiation adds costs in order to add value
• The extra costs can only be recouped if the
market is willing to pay a premium price
• Problems occur if the extra costs incurred
outweigh the additional revenue generated by
higher prices
• For a successful differentiation strategy it is
insufficient merely to add value - customers
must recognise and appreciate the difference
• Extra costs should be added only in areas that
customers perceive to be important
 Sources of differentiation
• Creation of strong brand
• Superior performance
• High quality
• Additional features offered
• Innovation in packaging
• Speed of distribution
• Higher service levels
• Greater flexibility
• Delivery
• Quality of the materials
 Firms that succeed in a differentiation
strategy
• Firms that succeed in a differentiation strategy
have:
– Have access to leading scientific research
– A strong creative product development team
– Strong sales team with the ability to successfully
communicate the strengths of the product
– Reputation for quality and innovation
• Examples:
– BMW
– Miele - high quality domestic appliances
– James Purdey – rifles
– Bang and Olufsen- high quality hi-fi
– Mercedes
 Differentiation Strategy Advantages
and Disadvantages
Advantages of Differentiation Strategy Disadvantages of Differentiation Strategy
Brand Loyalty: Unique features and experiences High Costs: Investments in innovation, quality,
foster strong customer loyalty. and branding can lead to elevated production and
operational costs.
Premium Pricing: Differentiation allows Imitation Risk: Competitors may try to replicate
companies to charge premium prices. successful differentiating features, potentially
diluting uniqueness over time.
Reduced Price Sensitivity: Customers valuing Niche Market Focus: Targeting a specialized
distinct attributes are less price-sensitive. market may limit the potential customer base.

Market Resilience: Unique offerings provide Continuous Innovation Pressure: Sustaining

stability during economic downturns. differentiation demands ongoing innovation
efforts and resource allocation.
Barriers to Entry: Substantial investment deters Educating Customers: Unconventional offerings
new entrants from replicating the differentiation. may require customer education about their
unique value proposition.
Enhanced Brand Image: Differentiation often Price Pressure: Intense competition may compel
leads to an elevated brand reputation. companies to reduce prices, challenging premium
positioning.

Prentice Hall, Inc. ©2012 6-23

 The five forces and differentiation

Five forces A firm pursuing a differentiation strategy…

Entry barriers …………………….

Buyer power …………………….

Supplier power ………………….

Threat of ………………….
substitution
Rivalry ……………….
Exercise: Identify the types of competitive strategies
these firms applied
 GENERIC STRATEGIES

Prentice Hall, Inc. 6-26

 Focus / Niche Strategies
• Involve concentrated attention on a narrow
piece of the total market
Objective
Serve niche buyers better than rivals
Keys to Success
• Choose a market niche where buyers have
distinctive preferences, special requirements, or
unique needs
• Develop unique capabilities to serve needs of
target buyer segment
 Focus strategy
• In a focus strategy the firm concentrates on one (or at most a
limited number of) segments of the market
• The premise behind this strategy is that the needs of the
group can be bettered served by focussing entirely on it
• The firm might feel more secure in the niche with greater
insulation from competition
• A focus strategy means that the firm’s efforts are not spread
too thinly
• Focus strategies are
– Cost focus: cost leader in a particular segment
– Focus differentiation: differentiation in the chosen segment
 Requirements of a focus
strategy
• A focus strategy requires…
• The identification of a suitable target customer
group
• Identification of the specific needs of that group
• Confirmation that the market is sufficiently large
to sustain the business
• Estimation of the extent of competition within the
segment
• Production of products to meet the specific
needs of that group
• A decision on whether to opt for cost leadership
or differentiation within the segment
 Focus Strategy Advantages and
Disadvantages
Advantages of Differentiation Strategy Disadvantages of Differentiation Strategy

Brand Loyalty: Unique features and High Costs: Investments in innovation, quality,
experiences foster strong customer loyalty. and branding can lead to elevated production
and operational costs.
Premium Pricing: Differentiation allows Imitation Risk: Competitors may try to
companies to charge premium prices. replicate successful differentiating features,
potentially diluting uniqueness over time.
Reduced Price Sensitivity: Customers valuing Niche Market Focus: Targeting a specialized
distinct attributes are less price-sensitive. market may limit the potential customer base.
Market Resilience: Unique offerings provide Continuous Innovation Pressure: Sustaining
stability during economic downturns. differentiation demands ongoing innovation
efforts and resource allocation.
Barriers to Entry: Substantial investment Educating Customers: Unconventional
deters new entrants from replicating the offerings may require customer education about
differentiation. their unique value proposition.
Enhanced Brand Image: Differentiation often Price Pressure: Intense competition may
leads to an elevated brand reputation. compel companies to reduce prices, challenging
premium positioning.
 The five forces and a focus strategy
The five forces A firm pursuing a focus strategy…
Entry barriers ………………

Buyer power ………………..

Supplier power …………………..

Threat of substitution …………………

Rivalry ……………………..
 Issues in Competitive Strategies
Is it possible for a company or business unit to integrate a
cost leadership and differentiation strategy?
Why? Why not?
 GENERIC STRATEGIES

Prentice Hall, Inc. 6-33

 Stuck in the middle
• Porter argued that a firm must make a conscious
choice about the competitive advantage it seeks
to develop
• If it fails to choose one of these strategies,it risks
being “stuck in the middle”,trying to be all things
to all people,and ends up with no competitive
strategy at all
• Being stuck in the middle leads to low profitability
• Competitors with a clear strategy outperform
those whose strategy is unclear or attempt a
combination of strategies
Exercise: Identify the types of competitive strategies
these firms applied
 Generic strategies: summary
• Cost leadership
– Being the lowest cost producer in the industry as a
whole
• Differentiation
– The exploitation of a product or service which is
believed to be unique
• Focus
– Restricting activities to only part of the market
through:
– Providing goods or services at lower cost to that
segment (cost focus)
– Providing a differentiated product or service to that
segment (differentiation focus)