Management, Organizational Policies & Practices Lecture 24 Dr. Amna Yousaf PhD (HRM) University of Twente, the Netherlands

Recap Lecture 23 Explain what is meant by ethical behavior at work. Discuss important factors that shape ethical behavior at work. Describe at least four specific ways in which management can influence ethical behavior at work. Employ fair disciplinary practices. List at least four important factors in managing dismissals effectively. © 2007

Business level strategy CHAPTER THREE Business level strategy Lecture 24

LEARNING OUTCOMES Porter’s strategy clock Integration Strategies Diversification Strategies Intensive Strategies

IDENTIFYING STRATEGIC BUSINESS UNITS Distinct external market for goods or services that is different from another SBU. If each product and each geographical branch is considered to be an independent SBU such immense variety of competitive strategies for a single organization would create a lack of focus and inefficiency. The concept of the SBU is important in properly reflecting the diversity of products and markets that actually exist

IDENTIFYING STRATEGIC BUSINESS UNITS Following two broad criteria which can help in avoiding these two pitfalls External criteria Two parts of an organization should only be regarded as the same SBU if they are targeting the same customer types, through the same sorts of channels and facing similar competitors. Internal criteria Two parts of an organization should only be regarded as the same SBU if they have similar products/services built on similar technologies and sharing a similar set of strategic capability Kodak-film based and digital products

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’ Assuming that there are a number of providers customers will choose which offering to accept on their perception of value-for-money. This consists of the combination of price and customer-perceived product/service benefits of each offering.

The strategy clock: competitive strategy options

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’ 1. Price-based strategies (routes 1 and 2) Route 1 : A ‘no frills’ strategy combines a low price, low perceived product/service benefits. Customers do not value differences in the offering of different suppliers. So price becomes the key competitive issue. Emphasis on functionality over service or more aesthetic issues such as design or packaging focus on a price-sensitive market segment The customers have low switching costs so building customer loyalty is difficult.

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’ Route 2: A low-price strategy seeks to achieve a lower price than competitors whilst trying to maintain similar perceived product or service benefits to those offered by competitors Potential pitfalls when competing on price: Margin reduction Inability to reinvest In the long run, a low-price strategy cannot be pursued without a low-cost base.

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’ 2. Differentiation strategies (route 4) seek to provide products or services benefits that are different from those of competitors and that are widely valued by buyers. Success depends on: Has the organization clearly identified who is the strategic customer? What is valued ? It is important to be clear who are the competitors. Broad based market serving masses or narrow market? Automobile mass market – reliability key issue

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’ 3. The hybrid strategy (route 3) :seeks simultaneously to achieve differentiation and a price lower than that of competitors. The success of the strategy depends on the ability to deliver enhanced benefits to customers together with low prices whilst achieving sufficient margins for reinvestment to maintain and develop the bases of The hybrid strategy could be advantageous in the following circumstances: lf much greater volumes can be achieved than competitors then margins may still be better because of a low cost base If an organization is clear about the activities on which differentiation can be built (i.e. potential core competences) it may then be able to reduce costs on other activities.

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK’ As an entry strategy in a market with established competitors, to fill strategy gaps – poorly captured global markets The overall cost base is such that low margins can be sustained A clear follow-through strategy has been considered after entry has been achieved

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK 4. Focused differentiation (route 5) : seeks to provide high perceived product / service benefits justifying a substantial price premium, usually to a selected market segment (niche) Focused differentiation raises some important issues Pursuing a focus strategy may be difficult when it is only part of an organization's overall strategy The market situation may change such that differences between segments may be eroded, customers not for price premium

BASES OF COMPETITIVE ADVANTAGE: THE ‘STRATEGY CLOCK 5. Failure strategies (routes 6, 7 and 8) : that do not provide perceived value-for-money in terms of product features, price or both. Route 6 suggests increasing price without increasing product/service benefits to the customer – if competitors do not follow risk of loss in share Route 7 involves the reduction in product/service benefits whilst increasing relative price – Monopoly situations Route 8 is categorized by reduction in benefits whilst maintaining price, is also dangerous, though firms have tried to follow it – loss of share

SUSTAINING COMPETITIVE ADVANTAGE Price-based strategies Differentiation Sustainable competitive advantage Lock-in

SUSTAINING COMPETITIVE ADVANTAGE 1.Sustaining price based advantage Organization must accept reduced margin An organization may be prepared to sustain and win a price war with competitors from deep pockets to sustain short term losses or low cost base. An organization has cost advantages through organizationally specific capabilities driving down cost throughout the value chain. Low cost raw material Efficiency in processes Low cost labor locations Distribution cost advantages Low cost by outsourcing Innovation in cost reduction – Mcdonald’s and Easy jet

SUSTAINING COMPETITIVE ADVANTAGE 2. Sustaining differentiation-based advantage Conditions to sustain advantage through differentiation include the following Create difficulties of imitation Imperfect mobility of the resources and/or competences Brand and reputation Lower cost position - reinvest to sustain – kallog’s and Mars

SUSTAINING COMPETITIVE ADVANTAGE 3. The delta model and lock-in (Hax and Wilde): An organization becomes an industry standard The achievement of lock-in: Size or market dominance in the eyes of others first mover advantages Once this position is achieved, it may be self-reinforcing and escalating – more firms come on board Microsoft industry standard though not best product

COMPETITIVE STRATEGY IN HYPERCOMPETITIVE CONDITIONS Hypercompetitive environment :turbulent, fast-changing, uncertain business environments and increased levels of competition. In slower-moving environments competitive strategy may be primarily concerned with building and sustaining competitive advantages that are difficult to imitate. In hyper-competitive environments organizations advantage will be temporary.

Horizontal Integration Vertical Integration Strategies Forward Integration Backward Integration Horizontal Integration Vertical Integration Strategies

Integration Strategies Forward Integration Gaining ownership or increased control over distributors or retailers

Integration Strategies Guidelines for Forward Integration Present distributors are expensive, unreliable, or incapable of meeting firm’s needs Availability of quality distributors is limited When firm competes in an industry that is expected to grow markedly Organization has both capital and human resources needed to manage new business of distribution Advantages of stable production are high Present distributors have high profit margins

Integration Strategies Backward Integration Seeking ownership or increased control of a firm’s suppliers

Integration Strategies Guidelines for Backward Integration Suppliers are expensive Number of suppliers is small and number of competitors large High growth in industry sector Capital and human resources to manage new business Advantages of stable prices are important Present supplies have high profit margins

Integration Strategies Horizontal Integration Seeking ownership or increased control over competitors

Integration Strategies Guidelines for Horizontal Integration Firm can gain monopolistic characteristics without being challenged by federal government Competes in growing industry Increased economies of scale provide major competitive advantages

Intensive Strategies Market Penetration Market Development Product Development Intensive Strategies

Intensive Strategies Intensive strategies Require intensive efforts to improve a firm’s competitive position with existing /new products and markets

Intensive Strategies Build/Protect Consolidation Part of restructuring process Allows companies to reduce operations to meet lower consumer demand, liquidate certain operations that do generate sales or to avoid bankruptcy.

Intensive Strategies Guidelines for Market Penetration Seeking increased market share for present products or services in present markets through greater marketing efforts Guidelines for Market Penetration Current markets not saturated Usage rate of present customers Increased economies of scale provide major competitive advantages

Intensive Strategies Market Development Introducing present products or services into new geographic area

Intensive Strategies Guidelines for Market Development New channels of distribution that are reliable, inexpensive, and good quality Firm is very successful at what it does Untapped or unsaturated markets Capital and human resources necessary to manage expanded operations Basic industry rapidly becoming global

Intensive Strategies Product Development Seeking increased sales by improving present products or services or developing new ones

Intensive Strategies Guidelines for Product Development Products in maturity stage of life cycle Competes in industry characterized by rapid technological developments Major competitors offer better-quality products at comparable prices Compete in high-growth industry Strong research and development capabilities

Diversification Strategies Concentric Diversification Conglomerate Diversification Horizontal Diversification Diversification Strategies

Diversification Strategies Becoming less popular as organizations are finding it more difficult to manage diverse business activities

Diversification Strategies Related Diversification Adding new, but related, products or services P&G and Unilever range of consumer goods Forward and backward integration to diversify Diversify within strategic capabilities and value network Car manufacturers forward integrated to repairs and service but failed Synergies may be harder to identify – built around economies of scope

Diversification Strategies Ownership of more activities No guarantee of enhanced performance Good relationships with distributors and retailers may be more beneficial

Diversification Strategies Guidelines for Related Diversification Competes in no- or slow-growth industry Adding new & related products increases sales of current products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team

Diversification Strategies Unrelated Diversification Adding new, unrelated products or services

Diversification Strategies Guidelines for Conglomerate Diversification Declining annual sales and profits Capital and managerial talent to compete successfully in a new industry Exiting markets for present products are saturated