Université Paris Ouest - Master 1 - Strategy Corporate Strategy Université Paris Ouest - Master 1 - Strategy

Université Paris Ouest - Master 1 - Strategy Corporate Strategy A diversified company has two levels of strategy: Business Unit (or competitive) Strategy Corporate (or Companywide) Strategy. Université Paris Ouest - Master 1 - Strategy

Université Paris Ouest - Master 1 - Strategy Corporate Strategy Competitive Strategy => How to create competitive advantage in each of the businesses in which a company competes? Corporate Strategy => What businesses the corporation should be in? How the corporate office should manage the array of business units? Université Paris Ouest - Master 1 - Strategy

Université Paris Ouest - Master 1 - Strategy Corporate Strategy Corporate-level Strategy Actions to be taken to gain a competitive advantage Select and manage a group of different businesses competing in different product markets Expected to help firm earn above - average returns Université Paris Ouest - Master 1 - Strategy

Université Paris Ouest - Master 1 - Strategy Corporate Strategy Competition Occurs at the Business Unit Level Diversified companies do not compete Only their business units do Corporate Strategy Goal = Ensure the success of each unit Université Paris Ouest - Master 1 - Strategy

Strategic Formulation Michael PORTER’S vision of Strategy Université Paris Ouest - Master 1 - Strategy

What Is Strategy? Strategic positioning means: Performing different activities from rivals’ Or performing similar activities in different ways.

Types of Competitive Advantage and Sustainability Three generic strategies to overcome the five forces and achieve competitive advantage Reminder: The five Forces Competitive Rivalry Supplier’s Bargaining Power Threat of Substitute Products Customer’s Bargaining Power Threat of new Entrants

Types of Competitive Advantage and Sustainability Overall cost leadership Differentiation Focus strategy

Types of Competitive Advantage and Sustainability Overall cost leadership Low-cost-position relative to a firm’s peers Manage relationships throughout the entire value chain

Types of Competitive Advantage and Sustainability Differentiation Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium

Types of Competitive Advantage and Sustainability Focus strategy Narrow product lines, Buyer segments Or targeted geographic markets Attain advantages either through differentiation or cost leadership

Three Generic Strategies Competitive Advantage Uniqueness Perceived by the Customer Low Cost Position Strategic Target Particular Segment Only Industrywide Source: Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press.

Overall Cost Leadership Integrated tactics Aggressive construction of efficient-scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts

Overall Cost Leadership Cost minimization in all activities in the firm’s value chain: R&D Service Sales force Advertising

Value-Chain Activities Shared purchasing operations with other business units Effective policy guidelines to ensure low cost raw materials (with acceptable quality levels) Expertise in process engineering to reduce manufacturing costs Effective use of automated technology to reduce scrappage rates Effective orientation and training programs to maximize employee productivity Minimize costs associated with employee turnover through effective policies Standardized accounting practices to minimize personnel required Few management layers to reduce overhead costs Effective layout of receiving dock operation Effective use of quality control inspectors to minimize rework on the final product Effective utilization of delivery fleets Purchase of media in large blocks Sales force utilization is maximized by territory management Thorough service repair guidelines to minimize repeat maintenance calls Use of single type of repair vehicle to minimize costs Inbound logistics Operations Outbound logistics Marketing and sales Service Firm infrastructure Human resource management Technology development Procurement

Overall Cost Leadership A firm following an overall cost leadership position Must attain parity on the basis of differentiation relative to competitors Parity on the basis of differentiation Permits a cost leader to translate cost advantages directly into higher profits than competitors Allows firm to earn above-average profits

Comparing Experience Curve Effects

Overall Cost Leadership An overall low-cost position: Protects a firm against rivalry from competitors Protects a firm against powerful buyers Provides more flexibility to cope with demands from powerful suppliers for input cost increases

Overall Cost Leadership Provides substantial entry barriers from economies of scale and cost advantages Puts the firm in a favorable position with respect to substitute products

Pitfalls of Overall Cost Leadership Strategies Too much focus on one or a few value-chain activities All rivals share a common input or raw material The strategy is initiated too easily A lack of parity on differentiation Erosion of cost advantages when the pricing information available to customers increases

Differentiation Differentiation can take many forms Prestige or brand image Technology Innovation Features Customer service Dealer network

Value-Chain Activities: Examples of Differentiation Facilities that promote firm image Superior MIS—To integrate value-creating activities to improve quality Widely respected CEO enhances firm reputation Provide training and incentives to ensure a strong customer service orientation Programs to attract talented engineers and scientists Excellent applications engineering support Superior material handling and sorting technology Use of most prestigious outlets Purchase of high-quality components to enhance product image Superior material handling operations to minimize damage Quick transfer of inputs to manufacturing process Flexibility and speed in responding to changes in manufacturing specs Low defect rates to improve quality Accurate and responsive order processing Effective product replenishment to reduce customer’s inventory Creative and innovative advertising programs Fostering of personal relation-ship with key customers Rapid response to customer service requests Complete inventory of replacement parts and supplies Firm infrastructure Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.

Differentiation Firms may differentiate along several dimensions at once Firms achieve and sustain differentiation and above-average profits when price premiums exceed extra costs of being unique Successful differentiation requires integration with all parts of a firm’s value chain An important aspect of differentiation is speed or quick response

Differentiation Creates higher entry barriers due to customer loyalty Provides higher margins that enable the firm to deal with supplier power Reduces buyer power because buyers lack suitable alternative Reduces supplier power due to prestige associated with supplying to highly differentiated products Establishes customer loyalty and hence less threat from substitutes

Types of Strategies Level of strategies Prof. Dr. Majed El-Farra 2009

Corporate Strategy hierarchy Growth strategy Stability strategy Retrenchment strategy Prof. Dr. Majed El-Farra 2009

Université Paris Ouest - Master 1 - Strategy Growth Strategy An organization aims to improve its overall performance 2 types of Growth Strategies: Internal External Université Paris Ouest - Master 1 - Strategy

Growth strategies Result increase in: Sales Market share Profit. Prof. Dr. Majed El-Farra 2009

Growth strategies Increase internal capacity of organization without acquiring other firms. Conglomerate Diversification: Acquiring unrelated business. Merger: Two roughly similar size firms combine into one. To benefit of synergy. Strategic alliance: Temporary partnerships Prof. Dr. Majed El-Farra 2009

So what did you get? Reasons for starting a business? Marketing strategies? Niche Vs Mass? Diversification? Which leads on to Ansoff and his matrix…

Université Paris Ouest - Master 1 - Strategy The Ansoff Matrix "The Ansoff growth matrix assists organizations to map strategic product market growth“. Université Paris Ouest - Master 1 - Strategy

What is it? A tool to help a business decide their product and growth strategy N.B. It will not make the decision for you!

2 sets of categories = 4 options Look at either new or existing products and New or existing markets Give a name to each of the 4 options.

Ansoff’s Matrix…

Market Penetration Market existing products to existing customers. This means increasing revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and we do not seek any new customers. Often a low risk, low return option.

Market Penetration Low risk growth strategy Focus on selling existing goods in existing markets Business focuses on products and markets it is familiar with Market research is therefore minimized Reaction time of competitors is quick

Market Development Market our existing product range in a new market. This means that the product remains the same, but it is marketed to a new audience. Exporting the product, or marketing it in a new region, are examples of market development. Medium risk/return

Market Development Medium risk growth strategy Selling existing products in new markets Using new distribution channels; changing the price; appealing packaging The success of a product in one country does not necessarily guarantee success in another

Product Development New product to be marketed to existing customers. Develop and innovate new product offerings to replace existing ones. Such products are then marketed to existing customers. This often happens with the cars where existing models are updated or replaced and then marketed to existing customers. Medium risk/return

Product Development Medium risk strategy Selling new products in existing market Apple iPhone and McDonalds are two companies (products) that use this method Product extension strategies and new product development Products may have reached the end of their useful life Reasons to acquire other companies

Diversification Market completely new products to new customers. This can be broken down into two further subsets

Diversification: related Related diversification means that the firm remains in a market or industry with which is familiar. For example, a soup manufacturer diversifies into cake manufacture (i.e. the food industry). The most risky option

Diversification Unrelated Unrelated diversification is there is no previous industry nor market experience. For example a music company invests in the rail business.

Diversification High risk growth strategy that involves marketing new products in new markets Risk is spread over several products Virgin Group Development of larger controlling companies (parent company) Time Warner Business is usually not familiar with the product’s success in different markets

How would you use it? It helps companies put the options in the right box and then focus on what is the best for them Try not to look at it as 4 categories, but as scale.

Université Paris Ouest - Master 1 - Strategy

Risks of Generic Strategies Risks of Cost Leadership Cost leadership is not sustained: • Competitors imitate. • Technology changes. • Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Differentiation Differentiation is not sustained: • Competitors imitate. • Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • The advantages of a broad line increase. New focusers subsegment the industry. Risks of Differentiation Differentiation is not sustained: • Competitors imitate. • Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Cost Leadership Cost leadership is not sustained: • Competitors imitate. • Technology changes. • Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • The advantages of a broad line increase. New focusers subsegment the industry. Prof. Dr. Majed El-Farra 2009 Prentice Hall 2006