Chapter 8 Business level strategy Compiled by Jess Co Chapter 11: Strategic Leadership
Chapter contents • • Learning outcomes Introduction The business level strategies Models for aiding strategy selection Reflecting on business level strategy Discussion questions Closing case study: Cost-cutting alone is not a winning strategy Chapter 8: Business level strategy
Learning outcomes After reading this chapter, you should be able to: • distinguish the five competitive strategies • justify the conditions that determine each competitive strategy will be appropriate • demonstrate the ability to complete a Strategic Position and Action Evaluation (SPACE) Matrix • demonstrate grasp of theories discussed in this chapter by providing appropriate practical examples to illustrate any strategic management principle or concept • provide a strategic management solution related to any of the above outcomes. Chapter 8: Business level strategy
8. 1 Introduction • An organization’s competitive strategy deals entirely with its plans for competing successfully: – its specific efforts to please customers – its offensive and defensive moves to counter the actions of rivals – its replies to existing market conditions, and – its schemes to strengthen its market position. Chapter 8: Business level strategy
8. 1 Introduction (cont. ) • An organization has competitive advantage whenever it has an edge over rivals in attracting buyers and coping with competitive forces. Chapter 8: Business level strategy
8. 2 Business level strategies • Because each organization’s strategic approach consists partly of customdesigned actions to fit its own circumstances and industry environment, there are countless variations in the competitive strategies that organizations employ. Chapter 8: Business level strategy
8. 2 Business level strategies (cont. ) – Assuming that products or services of businesses are more or less equally available, customers may choose to purchase from one source rather than another because either • the price of the product or service is lower than a competitors or • the product or service is perceived by the customer to provide better ‘added value’ or benefits than that available elsewhere. Chapter 8: Business level strategy
8. 2. 1 ‘No frills’ strategy (route 1) Figure 8. 1: Business level strategies: the strategy clock Source: Adapted from Bowman, C. & Faulkner, D. , 1996. Chapter 8: Business level strategy
8. 2. 1 “No frills” strategy (route 1) (cont. ) – This strategy combines a low price, low perceived added value and a focus on a price-sensitive market segment. – It can be viable because there may well be a segment of the market which, while recognizing that the quality of the product or service might be low, cannot or chooses not to afford to buy better-quality goods. Chapter 8: Business level strategy
8. 2. 2 Low price strategy (route 2) • This strategy, seeks to achieve a lower price than competitors whilst trying to maintain similar value product or service to that offered by competitors. • An organization achieves competitive advantage through a low price strategy by either: – identifying and focusing on a market segment which is unattractive to competitors to avoid competitive pressures to erode price below levels which would achieve acceptable returns – reducing prices Chapter 8: Business level strategy
8. 2. 3 Hybrid strategy (route 3) • This strategy seeks simultaneously to achieve differentiation and a price lower than that of competitors. • The success of the strategy depends on: – the ability to understand to deliver enhanced value in terms of customer needs, and – having a cost base that permits low prices and is sufficient for reinvestment to maintain and develop bases of differentiation. Chapter 8: Business level strategy
8. 2. 4 Added value or differentiation strategies (route 4) • This strategy seeks to provide products or services unique or different from those of competitors in terms of dimensions widely valued by buyers. • The aim is to achieve higher market share than competitors (which, in turn, could yield cost benefits) by offering better products or services at the same price; or enhanced margins by pricing slightly higher. Chapter 8: Business level strategy
8. 2. 4 Added value or differentiation strategies (route 4) (cont. ) • This strategy may be achieved through the following: – uniqueness or improvements in products – marketing-based approach – competence-based approaches Chapter 8: Business level strategy
8. 2. 5 Focused differentiation strategy (route 5) • A focused strategy based on differentiation aims at securing a competitive advantage by offering niche members a product they perceive as well suited to their own unique tastes and preferences. • Successful use of a focused differentiation strategy depends on the existence of a buyer segment that is looking for special product attributes or seller capabilities and on an organization’s ability to stand apart from rivals competing in the same target market niche. Chapter 8: Business level strategy
8. 2. 6 Failure strategies (routes 6, 7 & 8) • Route 6 suggests increasing price without increasing value to the customer. This is, of course, the very strategy that monopoly organizations are accused of following. However, unless the organization is protected by legislation, or high economic barriers to entry, competition is likely to erode the market share. • Route 7 is an even more disastrous extension of route 6, involving the reduction in value of a product or service, while increasing the relative price. • Route 8, reduction in value while maintaining price, is also dangerous. There is a high risk that competitors will increase their share substantially. Chapter 8: Business level strategy
8. 3 The strategic position and action evaluation (SPACE) matrix: an aid to strategy selection • Its four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization. • The axes of the SPACE Matrix represent two internal dimensions (financial strength [FS] and competitive advantage [CA]) and two external dimensions (environmental stability [ES] and industry strength [IS]). • These four factors are the most important determinants of an organization’s overall strategic position. Chapter 8: Business level strategy
8. 3 The strategic position and action evaluation (SPACE) matrix: an aid to strategy selection (cont. ) Figure 8. 2: The SPACE matrix Source: Adapted from Rowe, Mason & Dickel, 1982: 155 Chapter 8: Business level strategy
8. 3 The strategic position and action evaluation (SPACE) matrix: an aid to strategy selection (cont. ) Table 8. 2: Example factors that make up the SPACE matrix axes Internal Strategic Position External Strategic Position Financial Strength (FS) Environmental Stability (ES) Return on investment Technological changes Leverage Rate of inflation Liquidity Demand variability Working capital Price range of competing products Cash flow Barriers to entry into market Ease of exit from market Competitive pressure Risk involved in business Price elasticity of demand Competitive Advantage (CA) Industry Strength (IS) Market share Growth potential Product quality Profit potential Product life cycle Financial stability Customer loyalty Technological know-how Competition's capacity utilization Resource utilization Technological know-how Capital intensity Control over suppliers and distributors Ease of entry into market Productivity, capacity utilization Source: Adapted from Rowe, Mason & Dickel, 1982: 155 Chapter 8: Business level strategy
8. 3 The strategic position and action evaluation (SPACE) matrix: an aid to strategy selection (cont. ) Steps in developing a SPACE Matrix: 1. Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES) and industry strength (IS). 2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that make up the FS and IS dimensions. Assign a numerical value ranging from – 1 (best) to – 6 (worst) to each of the variables that make up the ES and CA dimensions. 3. Compute an average score for FS, CA, IS and ES by summing the values given to the variables of each dimension and then by dividing by the number of variables included in the respective dimension. 4. Plot the average scores for FS, IS, CA and ES on the appropriate axis in the SPACE Matrix. 5. Add the two scores on the x-axis and plot the resultant point on X. add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. Chapter 8: Business level strategy
8. 3 The strategic position and action evaluation (SPACE) matrix: an aid to strategy selection (cont. ) Steps in developing a SPACE Matrix (cont. ): 6. Draw a directional vector from the origin of the SPACE Matrix through the new intersection point. The vector reveals the type of strategies recommended for the organization: aggressive, competitive, defensive, or conservative. Some examples of strategy profiles that can emerge from a SPACE analysis are shown in Figure 8. 3. The directional vector associated with each profile suggests the type of strategies to pursue: aggressive, conservative, competitive, and defensive. When an organization’s directional vector is located in the aggressive quadrant (upper right quadrant) of the SPACE Matrix, an organization is in an excellent position to use its internal strengths to (1) take advantage of external opportunities, (2) overcome internal weaknesses, and (3) avoid external threats. Therefore, market penetration, market development, product development, backward integration, forward integration, horizontal integration, conglomerate diversification, horizontal diversification, or a combination strategy can all be feasible. Chapter 8: Business level strategy
8. 3 The strategic position and action evaluation (SPACE) matrix: an aid to strategy selection (cont. ) Figure 8. 3: Example of strategy profiles using the SPACE Matrix Chapter 8: Business level strategy Source: Adapted from Rowe, Mason & Dickel, 1982: 155
8. 5 Reflecting on business level strategy Figure 8. 1: Business level strategies: the strategy clock Source: Adapted from Bowman, C. & Faulkner, D. , 1996. Chapter 8: Business level strategy
Discussion questions 1. 2. 3. Why does each strategy require a different set of product/market/ distinctive competency choices? How can organizations pursuing a cost-leadership, differentiation or focus strategy become stuck in the middle? In what ways can they regain their competitive advantage? Give examples of organizations pursuing overall cost leadership, broad differentiation, focused lowcost strategy, focused differentiation and best cost provider strategy. In your opinion, are they successful in implementing their strategies? Justify your answer. Chapter 8: Business level strategy
Discussion questions (cont. ) 4. Upon what sources of competitive advantage may differentiation strategies be based? Give some illustrative examples. 5. Why is it not advisable to pursue too many strategies at once? Chapter 8: Business level strategy
Closing case study: Cost-cutting alone is not a winning strategy 1. Is cost leadership always the best strategy to adapt? Explain your answer. 2. What happens when organizations select the wrong strategy? Give an example to illustrate your point. 3. Explain what is meant by the statement ‘Strategy is a product of insight, imagination and implementation. ’ Chapter 8: Business level strategy
Suggested websites • African Bank http: //www. africanbank. co. za/presentations/ strategy_presentation. ppt • Cosira Group International http: //www. cosira. com/P_industry. htm • Cyber Pitstop http: //www. cyberpitstop. co. za/ • Kwa. Zulu-Natal Tourism Authority Development Strategy http: //www. kzn. org. za/invest/devstratweb/devstrat. htm • Professional Management Review http: //www. pmrinet. com • Transtel http: //www. transtel. co. za/transtel_role. shtml Chapter 8: Business level strategy
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