Business-Level Strategy Chapter 5 Strategic Position Strategy into Action Strategic Choices Present By Group 4 Janaka Heenkenda Pgia07-6944 Vipula Jayakody Pgia07-6886 Dilupi Lihinipita Pgia07-6937 A. Krishnakumar Pgia07-6948

Brief Content Introduction Identify Strategic Business Units Bases of Competitive Advantage : the “Strategy clock” Sustaining Competitive Advantage Competitive Strategy in Hypercompetitive Conditions Competition and Collaboration Game Theory Price-base strategies Differentiation strategies The hybrid strategies Focused differentiation Failure strategies Sustaining price-based advantage Sustaining differentiation-based advantage The delta model and lock-in Repositioning Overcoming competitors’ market-based moves Overcoming competitors’ barriers Ingredients of successful hypercompetitive strategies Simultaneous games Sequential games Repeated games Changing the rule of the game Pg. X

5.1 Introduction SBU Strategies Ways to Achieving Competitive Advantage Sustainability Hyper competition Collaboration Game Theory Bases of Competition Price Differentiation Hybrid Focus More Detailed Choices (Chapter 7) Directions Methods Completive Advantage If gov. Underpin best value in service Pg.240

5.2 Strategic Business Unit (SBU) External Criteria : Target same customer types through same channel facing similar competitors. Individual SBU Internal Criteria : Strategic capability – Resources and Competences Similar products/ build in similar technology and share similar resources and competencies. Means cost structure of the ‘units’ is similar Each product and each geographical branch, Diversity of product SBU is part of an organization for which there is a distinct external market for goods or services that is different from another SBU. Pitfall Pg.241

5.3 Bases of Competitive Advantage: Strategy Clock 1: Likely to be segment specific. 2 : Risk of price war and low margins/need to be a 'cost leader'. 3 : Low cost base and reinvestment in low price and differentiation. 4: (a) Without a price premium: perceived added value by user, yielding market share benefits. (b)With a price premium: perceived added value sufficient to bear price premium. Perceived Product/ Service benefits Differentiation 5: Perceived added value to a 'particular segment' warranting a premium price. 6: Std Value/ Increased Price : Higher margins if competitors do not value follow/risk of losing market share. ‘No frills’ Likely Failure 7: Low Value/ Increased Price : Only feasible in a monopoly situation. Price 8: Low Value/ Std Price : Loss of market share. Pg.242

5.3.1 Price Based Strategies (Routes 1 & 2) P&S, Remarko, Fast food Route 1: ‘No Frills Strategy’ Combines a low price, low perceived product/ services benefits and a focus on a price sensitive market segment - Like Commodities Price Sensitive Customers Buyer have high power and/ low switching cost Small number of providers with similar market share Avoid Major competitors Route 2 : ‘Low Price Strategy’ Seeks to achieve a lower price than competitors whilst trying to maintain similar perceived product / service benefits to those offered by competitors - Margin Reduction Inability to reinvest Low cost base

5.3.2 Differentiation Strategies (Route 4) Anchor, Raththi, Nespray, Highland, Lukspray Route 4: ‘Differentiation Strategy’ Seeks to provide product or service benefits that are different from those of competitors and that are widely value by buyers - Who is the strategic customer ? What is valued ? Who are the competitors ?

5.3.3 The Hybrid Strategy (Route 3) IKEA Route 3: ‘Hybrid Strategy’ Seeks simultaneously to achieve differentiation and a price lower that of competitors Greater volumes than competitors Entry strategy with established competitors, Ensures overall low cost base Follow-through strategy

5.3.4 Focused Differentiation (Route 5) Jaguar, Mercedes, BMW Route 5: ‘Focus Differentiation Strategy’ Seeks to provide high perceived product/service benefits justifying a substantial price premium, usually to a selected market segment (niche) - Choice between focus or differentiation Difficult when it is part org org. st. May conflict with stakeholder expectation New ventures often starts focus way Market situation may change

5.3.5 Failure Strategies (Routes 6,7 & 8 ) Guess !! Route 6,7& 8 : ‘Failure Strategy’ That does not provide perceived value-for-money in terms of product features, price or both - Suggest withdrawal from the market 6 to increase the price without improving the product/ service 7 & 8 to increase price even when the product/ service value is low

5.4 Competitive Advantage Price Based Strategies Accept reduced margin Win a price war Reduce costs Focus on specific segments Differentiation Create Difficulties of imitation Achieve imperfect mobility (of resources/ competencies) Reinvest Margin Sustaining Competitive Advantage Lock In Achieve size/market dominance First-mover advantage Reinforcement Regional enforcement Pg.252

5.4.1 Sustaining Price Based Advantage Reduce margin Win a price war Cost advantage through organisationally specific capabilities – low cost producer in the industry Focusing on market segment where low price values – associate low price with low product/ service benefits (route 2 strategy slipping to route 1)

5.4.2 Sustaining Differentiation – based Advantage Create difficulties of imitating Imperfect mobility Intangible Assets Switching Co-specialization

5.4.3 The Delta Model and Lock-In E.g. : Microsoft, IBM, Intel, Bata Lock in is where an organisation achieves a proprietary position in its industry; it becomes an industry standard Size or market dominance Early in life cycles of markets Self-reinforcing Insistence on the preservation

5.5 Competitive Strategy in Hypercompetitive Conditions Repositioning Competing successfully Pre-empt competition (New Strategies) Do not attack competitors weaknesses Disrupt the market Be unproductive Mislead competitors A series of smaller moves Overcoming competitors‘ barriers Shorter life cycles Undermine strongholds Counter ‘deep pocket’ advantages Competitive strategies in hypercompetitive condition Overcoming competitors‘ Market-based moves Block first move advantage Imitate Product/ Market moves Pg.258

5.5.1 Repositioning Repositioning without changing price Position 1 or 2 move to Position 3

5.5.2 Overcoming Competitors'’ Market Based Moves Blocking first-mover advantage. Eliminate the market dominant of the competitor by Launching product with enhanced features (not to be an imitated product.) Attack a particular market segment Erode the market power of 1st mover Capture down markets first with a cheaper product and move into the main market of the 1st mover. (No frills) Imitate competitors' product/market moves. Competitors seek the advantages by developing new markets or new products. This can be easily imitated & competitor face problem of sustaining in the original product/market.

5.5.3 Overcoming Competitors’ Barriers Build competitive barriers to prevent other organizations entering their domains By short life cycles Competitive advantage through strengthof their resources & competences. Rapid outdating of technological advance & knowledge advantage. Undermining competitors' strongholds Economics of scale e.g. Promotions Countering competitors' deep pockets Surplus resources (deep pockets). Recourses to preserve the interest of the company or to tackle the competition.

5.5.4 Ingredients of Successful Hypercompetitive Strategies Pre-empt imitation by others Sustaining in old advantages is a distraction for developing new strategies. Do not attack competitors' weaknesses Competitor learn strengths & weaknesses Disrupt the market A series of smaller moves More effective than a bigger one-off change Flexibility and gives a series of temporary advantages. Be unpredictable Current behavior would help to predict the next move. It'll let them to imitate or outflank the organization. Mislead competitors This is the strategy of “Game Theory”.

5.6 Competition and Collaboration Increased selling power Increased baying power Stakeholder expectation Competitiveness might be improved by collaboration to achieve Increased barrier to enter Shared work with customer Decreased risk of substitution Entry to new market Pg.261

5.6 Competition and Collaboration Increased selling power – Manufacture build close link with customers. Eg: Aerospace Industry – High level of product quality Increased baying power - Tying suppliers to into their “Enterprise Resource Planning”. Eg: Collaboration with doctors & Government. Increased barrier to enter of substitution- – Threatened entry or substitute products. Eg: Trade associations promoting industry's generic features like safety standards/technical specifications. Entry to new market – When developing beyond their traditional boundaries they need collaboration. Eg: Entering to a new segment Shared work with customer- When comes to public services like assessment like income taxes, to gain cost efficiency/quality & reliability need the corporation. Stakeholder expectation- To raise overall standards or to address public issue like drugs or community safety

5.7 Game Theory Is concerned with the interrelationships between moves of a set of competitors Source: http://girlwithbigeyes.blogspot.com/ Game theory is concerned with interrelationships between the competitive move of a set of competitors. Game theory more popular because the application have been developed for situations in which competing players are business organization, teams, political candidates , armies, and contract bidders. The central idea is that the strategist has to anticipate the reaction of competitors. Pg.264

5.7.1 Simultaneous Games A Prisoner’s Dilemma Competitor A Heavy Marketing spent Low Marketing Heavy Marketing spent Low Marketing B=5 A=5 L/U B=12 A=2 R/U B=2 A=12 L/L B=9 A=9 R/L Competitor B Competitors don’t know each others strategy in a competitive move R/L- both spending low-get mutual benefit R/U & L/L- one take advantage over the other by spending more L/U- both spend more but return is less

5.7.1 Simultaneous Games A dominant strategy is one that outperforms all strategies whatever rivals choose A dominated Strategy is a competitive strategy that, pursued by the competitors, is bound to outperform the company. Equilibrium is a situation where each competitor contrives to get the best possible strategic situation for themselves given the response from the other.

5.7.1 A Simultaneous move game DOLLA investment Low High Low A DOLLA=3 INNOVA=4 B DOLLA=4 INNOVA=2 C DOLLA =2 INNOVA=3 D DOLLA=1 INNOV=1 INNOVA investment High A- Innova dominant strategy – low investment  pay- off more B- Dolla- dominated strategy – pay-off more Innova- equilibrium

5.7.2 Sequential Games Guiding Principle: -Thing forwards and then reason backwards. -Start by trying to think through the sequence of moves that competitors might make based on reasonable assumption about what that competitors desires as the outcome. The key strategic component to be considered when making assumption : -Identifying dominant and Dominated strategies. -The timing in strategic moves. -The careful weighing of risk, -Establishing credibility and commitment

5.7.2 Sequential Games Pay off INNVA DOLLA 1 3 2 4 A High DOLLA Low B INNOVA High C Low DOLLA Low -Innova’s dominant strategy is RD -Dolla’s Dominated strategy is Finnance D

5.7.3 Repeated Games Competitors interact repeatedly and the equilibrium outcome is much more likely to favor cooperation/ accommodation of both parties’ best interest Experience Implicit cooperation depends on Number of competitions Size of the competitors Substantial differences Transparency

5.7.4 Changing the Rule of the Game Competitor might find difficult to compete with in the rules of the game Go for alternatives e.g – instead of heavy marketing expenditure/ investment Base differentiation Making price more transparent Incentive for customer loyalty

Learning Outcomes How to identify Strategic Business Units (SBUs) in organisations. Different bases of achieving competitive advantage in terms of ‘routes’ on the strategy clock: price-based strategies; differentiation strategies; hybrid and focus strategies. The factors influencing the sustainability of competitive advantage. The relationship between competition and collaboration. The principles of game theory in relation to competitive strategy.

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