direct basis

Slide1 : Direction Method Basis Strategic Development Strategic Development


Development Model : Development Model


Development Model : Development Model Strategic Direction


Strategic Direction : Strategic Direction Strategic Direction can be seen in terms of the Products and Markets the firm has developed, entered or left in the course of its strategic development: The Ansoff Matrix


The Ansoff Matrix : The Ansoff Matrix The Product/Market direction of the firm can be modeled around the Ansoff Matrix. It identifies four basic strategies business strategies for the firm: Market Penetration Market Development Product Development Diversification


The Ansoff Matrix : The Ansoff Matrix Market Present New Present New Product Market Penetration Product Consolidation Development Contraction Market Development Diversification


Market Penetration : Market Penetration Objective of this strategy is to increase market share. This is done in the following ways: Increase the number of users attract users from competitors convert non-users into users Increase the frequency of purchase Increase the volume of product purchased Marketing strategy


Product Development : Product Development This strategy is aimed at creating new products aimed at existing customers. Possibilities are: Product reformulation strategies Product quality improvement Product line extensions Product feature enhancements “New” product development


Market Development : Market Development The strategy here is to increase the sales of present products by tapping new markets: Two Approaches: Geographic market expansion Using new distribution channels to reach unserved customers


Market Development 2 : Market Development 2 Benefits and Risks of this strategy is a function of the similarity of the new markets to the present markets the firm operates in: High similarity - volume/scale advantages can significantly reduce costs of production Low similarity - product adaptation will be needed and this impacts on marketing investments


Diversification : Diversification The aim of this strategy is to reduce the dependence the firm has on one industry. Diversification involves investments into new: Products or services Customer segments Geographic markets New technologies


Diversification 2 - Motives : Diversification 2 - Motives General Motives: Improved growth Improved profitability Spreading of risk Specific Motives: Escape from ... lifecycle effects, cyclicity of demand, lack of growth etc.. Capitalise on NPD Use excess cash


Diversification 3 - Types : Diversification 3 - Types Two basic types of diversification can be identified: Concentric Diversification: diversification into related business areas Conglomerate Diversification: diversification into unrelated business areas Examples ....


Examples 1: : Examples 1: Marks & Spencer Plc: Nov 1997 £ 2bn expansion was announced Market Penetration - Always Product Development - Always Market Development geographic expansion in UK/Europe etc.. Diversification Related .... food, furnishing, mail-order(?) Unrelated ... financial services


Examples 2 : Examples 2 British American Tobacco Plc: Market Penetration - always Product Development - new brands etc. Market Development - overseas markets Related Diversification: Tobacco and allied industries - paper and board etc. Unrelated Diversification: catalogue shops, financial services, insurance


Examples 3 : Examples 3 Hanson Plc - A classic conglomerate Market Penetration - always Product and Market Development - followed at SBU level Diversification Related at the SBU level - “ bolt-on acquisitions” Unrelated - depends on ROI and cash flow forecasts Bricks, Vitamin pills, Coal, Tobacco, Electricity, Lumber, Gold, Chemicals, Golf clubs, Road stone etc ......


Slide17 : Diversification 4 From the examples we can see that : “ Diversification is a strategic move into a new product/market activity that requires the development of new competencies or the augmentation of existing ones. “ Rumelt (1974)


Integration: : Integration: Integration Strategy Backwards to sources of supply Forwards to the customer Used to increase firm power But many firms have abandoned such a strategy in favour of increased focus and now... de-integration. Vertical


Three Examples : Three Examples Hanson - broke up the company by de-mergers, public placings and trade sales Tomkins - in the process of de-merging RHM Foods valued at about £1.4 bn (July 1999) ICI - de-merged its pharmaceuticals by a public placing, sold or swapped other SBUs to transform itself in the late 1990s


Development Model : Development Model Strategic Basis - Competitive Advantage


Slide21 : Competitive Advantage Cost Advantage Differentiation Advantage Similar product at lower cost Price premium from uniqueness Sources of Competitive Advanatage Source Grant (1992)


Competitive Advantage : Competitive Advantage Unique resource deployments which distinguish this organisation from others The ability of an organisation to outperform rivals on its primary goal


Strategic Capability and Competitive Advantage : Strategic Capability and Competitive Advantage (Johnson & Scholes 1997)


Basis - Porterian View : Basis - Porterian View The strategic basis is the ‘generic’ strategy that underpins the competitive advantage of the corporate or SBU strategy of the firm. The strategic basis of the ‘generic strategy’: Differentiation Low cost Focus Porter’s generic strategies


Porter’s Generic Strategies : Porter’s Generic Strategies Differentiation Low Cost Focus Focus Differentiation Low Cost Scope of Advantage Differentiation Low Cost Competitive Scope Industry Wide Narrow Segment Source: Porter 1980


Generic Strategies : Generic Strategies Cost Leadership Investment in scale efficient plant Design of products for ease of manufacture Control of costs & overheads Avoidance of marginal customers Differentiation Emphasis on branding & brand advertising Design, service quality and other intangibles


Generic Strategies 2 : Generic Strategies 2 Focus Not a winning strategy on its own Implies that the market has segmentation possibilities and that segments are sizable and profitable Focus implies a narrow segmentation approach Niche markets Let’s consider each in detail


Cost Leadership : Cost Leadership A source of advantage which enables the firm to produce at a lower average cost than its competitors This cost advantage must be difficult to imitate Pricing must be comparable with other standard products The cost leader must achieve parity on the bases of differentiation relative to its competitors Must be the cost leader not one of many vying for the position


Sources of cost advantage : Sources of cost advantage Economies of Scale Experience Product/Process design Input costs Capacity Utilisation NB Efficiency


Generic Value Chain : Generic Value Chain Profitability or Margin that a firm enjoys is a function of how it configures its Value Chain and manages its Cost Drivers


Slide31 : Generic Value Chain


Slide32 : Information Technology Permeates the Value Chain


Value chain and cost advantage(1) : Value chain and cost advantage(1) Desegregate firm into activities Establish the relative importance of those activities in the total cost of the product Identify the cost drivers Identify linkages Examine scope for reducing costs


Value chain and cost advantage (2) : Value chain and cost advantage (2) Identify factors which determine costs of performing each activity Why the firm has different costs than competitors Which activities are performed efficiently/inefficiently Examine how cots in one area affect costs in another Which activities can be undertaken by firm and which contracted out


Risks of Cost Leadership Strategy : Risks of Cost Leadership Strategy Inability to sustain when technology changes or competition imitates If in driving costs down the product / service offered falls below an acceptable standard of quality Strategy is emulated by cost focusers


Low price strategies could be successful if: : Low price strategies could be successful if: The competitor is the cost leader ... but is this sustainable? All sources of cost advantages are exploited, developing competencies in low cost management ... but the danger is a low (perceived) value product or service A competitor has cost advantage over competitors in a price sensitive markets segment ... but this may mean focusing on that market segment


Differentiation : Differentiation Competition on the basis of uniqueness Drivers include product features service e.g. delivery, credit after-sales service e.g.. warranties, Caterpillar speed e.g. Pizza location durability e.g. Duracell technology e.g. scanners at Safeway


Differentiation : Differentiation The product/service must be unique or different from that offered by competitors Extra value must be created for customer Customers reward company for differentiation by payment of premium price or increased market share or both The cost of achieving differentiation is lower than benefits achieved


The Success of Differentiation Strategies depends on : The Success of Differentiation Strategies depends on Clear identification of who the customer is Understanding what is valued by the customer Clear identification of who the competitors are and the value they offer Bases of differentiation which are difficult to imitate The recognition that bases of differentiation may need to change


Risks of Differentiation : Risks of Differentiation Unable to sustain as competitors imitate or basis of differentiation becomes less important to customers Cost proximity is lost Differentiation focusers achieve greater success in major segments


Focus : Focus Used when markets can be easily segmented or certain needs are overlooked by existing product offerings Where firms may lack resources to operate across market “We tailor our products to meet your needs” Risk-further segmentation-Kwik Save v Aldi etc. attack from broader target competitors e.g. Somerfield


Focused Differentiation : Focused Differentiation Global market developments increase the need for focus Clear definition of market segments in terms of customers needs is required Within a market segment choices of strategic direction relate to competitors within that segment Multi-focused strategies may be possible in some markets New ventures started through focus strategies may be difficult to grow Differences between segments may be eroded making bases of focus redundant


Stuck in the middle : Stuck in the middle No competitive advantage Open to attack from all sides Possibly successful if industry structure is favourable or other competitors are also stuck in middle Frequently a manifestation of the firm’s ability to make choices on how to compete e.g. Gateway


Slide44 : Source: Based on the work of Cliff Bowman. See C.Bowman and D.Faulkner. Competitive and Corporate Strategy, Irwin, 1996. PRICE High Low Differentiation Focused differentiation Low price/ low added value Strategies destined for ultimate failure PERCEIVED ADDED VALUE 4 5 6 8 Hybrid Low price 7 High Low 1 2 3 The strategy clock: Bowman’s competitive strategy options


Slide45 : 1 Low price/low added value Likely to be segment specific 2 Low price Risk of price war and low margins/need to be cost leader 3 Hybrid Low cost base and reinvestment in low price and differentiation 4 Differentiation (a) Without price premium Perceived added value by user, yielding market share benefits (b) With price premium Perceived added value sufficient to bear price premium 5 Focused differentiation Perceived added value to a particular segment, warranting price premium 6 Increased price/standard Higher margins if competitors do not value follow/risk of losing market share 7 Increased price/low value Only feasible in monopoly situation 8 Low value/standard price Loss of market share The strategy clock: Bowman’s competitive strategy options


Slide46 : BCG 2 Industry Matrix Fragmented Specialist Stalemate Volume Size of Competitive Advantage Low High Degree of Product Segmentation Advantage High Low


Generic Strategies - Finally : Generic Strategies - Finally While Porter (1980) argues that the generic strategies of Differentiation and Low Cost are mutually exclusive, the modern view rejects this and firms can pursue both strategies at the same time. In many markets where increasing fragmentation is evident, a Focus strategy is becoming a popular approach for many firms