Business Strategy Chapter Essay

In the specific instance of the car industry in the 1960s and 1970s, Western producers were operating with a relatively high cost base compared with Japanese entrants from what was then a low-cost producer nation. The result was that the Japanese did not face markedly higher quality competition, but they could readily compete on price. Trading up through routes 2 and 3, as the Japanese did, is an interesting phenomenon. Why did the market leaders not respond? Was this solely a function of the Japanese cost structure? Was it to do with the speed of innovation in Japanese firms? Or the inertia of existing market leaders? Entering through route 5 and moving elsewhere is discussed explicitly at the end of section 5. 3. 4. As is pointed out there, this entails a lowering of price, and therefore cost, while maintaining differentiating features. It also means moving from a focused approach to a less focused approach. Neither of these moves is easy, usually because the competences of the firm have become attuned to more focus and less emphasis on cost; but also because the market may well regard such a firm as segment specific and therefore be wary of such a move. Nissan was driven into position 8 from which it needed to re-position.. For example, if it tried to move to the hybrid position – differentiated but at lower prices (and, therefore, lower costs) – this requires the organisation to be very clear about the critical success factors with consumers, and the competences required to deliver these features. †¢ †¢ †¢ Illustration 5. 2 The ‘no frills’ strategy easyJet is a good example of a no frills strategy. The questions require students to consider the basis of such a strategy and also the extent to which it is imitable. Many of these are laid out in the illustration. Clearly easyJet’s strategy is not based on its being 78  © Pearson Education Limited 2005 Instructor’s Manual lowest cost in the marketplace if this is dependent on market share in the overall market for air travel. There are obviously other bigger players. The more relevant comparison, however, is by market segment. To what extent is the early entry of easyJet into the budget travel segment and its establishing of a substantial market share sufficient basis, in itself, to achieve lowest cost? Could actual and potential competitors, seeing the success of easyJet, imitate and overtake it in delivering such services? Does easyJet’s experience in all this, and its undoubted entrepreneurial culture, provide lasting advantage? Certainly British Airways found it uncomfortable to compete with its GO Operation, and decided this was better sold off. But other competitors such as Ryanair and BMIBaby had entered the market and engaged in fierce price competition on some routes. So the keys to success were skilful pricing between routes, when people book and capacity fill. And what if the most experienced low-cost operator of all, South West Airlines in the US, decided to enter Europe? Illustration 5. 3 Questionable bases of differentiation Question 1 challenges students to consider what would be appropriate bases of differentiation in the biscuit business. The principles outlined in (a), (b) and (c) may be applied: (a) Who is the most important customer in strategic terms? Of course the end consumer is important, but strategically the retailer is vital. (b) The question then becomes: What do retailers especially value in manufacturers of fast-moving consumer goods? Students may suggest, for example, branding, reliable and fast delivery of goods, advertising support, sharing of market and customer information, etc. If this is the case, then the differentiation strategy needs to be based around fulfilling such expectations. (c) The question then becomes whether there are bases of sustainability here. Again this would take the discussion into issues of underlying competences and resources. For example, a strong brand image is difficult to imitate, but a logistics system may be much easier. Advertising support is common amongst fastmoving consumer goods companies, but it may be more difficult to establish close and trusting working relationships between the retailer and the manufacturer. Question 2 asks students whether the Australian wine illustration (5. 5) overcomes the shortcomings illustrated here. Arguably: †¢ Value-for-money (a) has been correctly assessed in terms of the appropriate customers, since both the retailers and end users appreciate the benefits of Australian wine. 79  © Pearson Education Limited 2005 Instructor’s Manual †¢ †¢ We know little about the research (b) undertaken that the benefits seem to be real enough. The real question is whether the bases of advantage are sustainable (c). Comments on illustration 5. 5 address this. Illustration 5. 4 The hybrid strategy The IKEA illustration shows how this business has successfully followed a hybrid strategy, not only by keeping its costs down but also by finding a different way of operating from other retailers. Students may point out that this is a more likely way of being able to follow a hybrid strategy than simply cutting costs. They might point to other examples to make the point. For example: †¢ Historically, supermarket retailing offered lower prices and a differentiated customer experience, but it was a fundamentally different way of retailing from that of traditional smaller high street shops. Arguably the more recent trend towards direct marketing of, for example, banking, insurance and travel (at least when it is done well) offers more convenience for customers, often at lower prices: but again this is a different way of trading than would have been traditional in such fields. †¢ Ask students to think of other examples of changes in ways of operating that allow for a hybrid strategy. A successful hybrid strategy also requires organisations to be clear about the competences underpinning their basis of differentiation, and then to reduce the costs in areas that do not critically underpin that basis of differentiation. By so doing they may be able to reduce cost below that of competitors without jeopardising their basis of differentiation. Illustration 5. 5 Differentiation This illustration provides the opportunity to bring together three different perspectives on differentiation: a customer-based perspective, a market gap perspective, and a competence/resource-based perspective. The illustration tends to emphasise the first two. It suggests that Australian wines are successful because customers are looking for simplicity and consistency, and find French wine, for example, neither simple to understand nor consistent in quality. Moreover, the traditional approach of French wine producers has exacerbated the problem and therefore provided a market gap. 80  © Pearson Education Limited 2005 Instructor’s Manual The example should promote discussion about whether there are any other reasons for the success of Australian wine. Arguably there are if a resource-based view is taken – a reason for success might be the application of more advanced scientific techniques in the Australian wine industry as a means of catching up with old world wine producers. The success of this is indicated by the fact that French producers are now trying to imitate Australian wine-producing techniques. Arguably this is capable of being copied or imitated by the French, therefore. However, the French industry remains very fragmented with traditional ways of doing things: so the question is to what extent new ways of wine production are likely to be adopted within such a traditional approach. Illustration 5. 6 Lock-in Using the criteria in sections 5. 4. 2 and 5. 4. 3, the table below summarises the ways in which Dolby and Visa attempt to sustain competitive advantage. Basis of sustainability †¢ Difficulties of imitation – Complexity – Causal ambiguity – Culturally embedded †¢ Imperfect mobility – Intangible assets – Switching costs – Co-specialisation †¢ Lock-in – Dominance – Early setting of standards – Self re-inforcing escalation – Rigorous preservation Dolby has a dominant position Set standards early Showed that this was possible Visa share dominant position with MasterCard Standards were set early Dominance built this way historically Dolby has well-established brand and reputation Dolby has established a reliance by users in its systems Brand is still strong Large penalties for retailer exit Complex bases of licensing and No longer complex patent protection Basis of relationship building in Most competitors have now networks imitated Dolby has long-established ‘ways of Possibly still an advantage doing things’ Dolby Visa Joint development with licences Joint development part of the system Rigorous policy of conformity to Large penalties for change in standards brand by retailer 81  © Pearson Education Limited 2005 Instructor’s Manual The comparison is a stark one. It should lead students to conclude that Visa is protecting its dominant position at any costs – the ‘market-based’ advantages are actually being eroded. In contrast Dolby’s dominant position is probably still based on a truly differentiated position from competitors. Illustration 5. 7 Competition and collaboration This illustration allows students to test out the issues from section 5. 6 and exhibit 5. 5. This uses the five-forces model to classify the various ways in which collaboration might improve competitiveness. This can be done for each of the stakeholders involved in a collaborative arrangement. For example, in illustration 5. 7 the potential benefits of collaboration to an individual (small) creative sector business are: †¢ †¢ †¢ †¢ †¢ Knowledge sharing with other businesses Knowledge transfer from universities Infrastructure, services and ‘business know-how’ support Funding Swapping/sharing professional/creative staff Against this needs to be weighed the risks: †¢ †¢ Commercial exclusivity (patents, copyright) Stifled creative process (conformity to get money/help ) Illustration 5. 8 Key Debate: To be different or the same? The emphasis on conformity in institutional theory (see also section 4. 5. 2) provides a useful counter to the perspectives favouring differentiation, as in this chapter and in the resource based view, introduced in chapter 3. It is worth pushing students to consider just how much ‘real’ differentiation companies actually use. Students may well vary in responding to the questions. With regard to universities, in the UK at least but to a large extent internationally as well, there does seem to be increasing homogeneity. Universities are converging in terms of degree length, subject matter, teaching methods and accommodation and student support. In the UK, this is attributable to government funding and regulation, but also relates both to students’ risk averseness with regard to a large, uncertain and hard-to-reverse investment and to their 82  © Pearson Education Limited 2005 Instructor’s Manual desire for international mobility during degrees and portability of qualifications afterwards (note European Union pressures). In the MBA market, the EQUIS and AMBA standards, and the Financial Times rankings, also provide strong pressures for conformity. All this conforms to institutionalist expectations. Car manufacturers do appear to be more differentiated, with a wide variety in brands and images. However, under the surface there are strong pressure too for conformity. These come from government safety and environmental regulators and suppliers of key components, as well as from the desire to reap economies of scale through sharing platforms. Assignment 5. 1 Understanding competitive strategies Assignment 5. 1 requires students to give examples of organisations according to the routes identified in exhibit 5. 2 in the text, and to explain reasons for doing this. For example: †¢ Route 1, the low price, low added value route is often overlooked. There are successful organisations following such a strategy. For example, the grocery retail outlet Netto is cited in the text, and easyJet is provided as an illustration of a no frills, low price service. As markets open up, new entrants may choose to follow this strategic route. Route 2 is the low price strategy. It is often followed by small businesses competing against larger companies. They use their lower cost base to provide products or services that are very similar to those of the large organisations, but at a lower price. Route 3: The Japanese in the car industry (illustration 5. 1) had used their cost advantages not only to deliver low price but also to re-invest in high quality and reliability. In many respects they were following route 3 or much of the 1980s and early 1990s. IKEA is another example (see illustration 5. 4) of an organisation successfully combining both low prices and perceived added value to the customer. Route 4 is a broad differentiation strategy: the sort of strategy followed by a company such as Kellogg’ s in seeking to provide quality in terms of product, delivery, service, brand image, market support and product development superior to those of competitors. Other organisations claim to be following a differentiation strategy, but the bases of differentiation in terms of added value to the customer may not be clear. Firms may claim to be different but on a spurious basis (see illustration 5. ), for example. Route 5 is focused differentiation: examples of this might be a focus on clear demographic groups. For example, Saga specialises in insurance and holidays for the over-50s (see illustration 2. 8); fashion retailers and manufacturers seek to 83  © Pearson Education Limited 2005 †¢ †¢ †¢ †¢ †¢ Instructor’s Manual identify customers with particular tastes in fashion; industrial product companies may focus on particular industries or particular process needs. Assignment 5. 2 Clarity of competitive strategy Assignment 5. 2 may raise questions about t he clarity of competitive strategies. The sort of issues which may be surfaced are these. For most of its existence M&S was successful because it provided a clearly differentiated offering for a mass market; and arguably this was also the basis of Barclaycard’s success. But both organisations now face competition that has eroded such advantages, and they are finding it difficult to recover a position of differentiation across a broad market. The difficulty they face is how they might reposition themselves in a more focused way (focused differentiation) without reducing their market potential. They are also reluctant to be associated with a strategy of reduced prices, not necessarily because of their inability to drive down costs but more, perhaps, because of their concern that it might damage their market image. This raises questions about the viability of hybrid strategy. Arguably it is easier to move to a hybrid strategy from a low price strategy than it is from a non-price-based differentiation strategy; the latter may be perceived as a reduction in quality. There may also be a useful debate here about whether cost reduction is a viable competitive strategy. Recall that this is a strategy advocated by Michael Porter. Many organisations claim to concentrate on cost reduction as a strategy. The problem is that cost levels are not, in themselves, visible in the marketplace. What matters is whether the cost base allows delivery of lower prices (which are visible) or the maintenance of higher profit margins than those of competitors. To do either, cost advantages have to be sustainable and sufficient to ensure that competitors cannot match them. This is no easy matter. It would not be for Marks & Spencer or for Barclaycard, for example. †¢ †¢ Assignment 5. 3 Differentiation The purpose of this assignment is to establish whether students are able to explain the concept of differentiation, not only in terms of ‘being different’ or by citing the importance of route 4 in exhibit 5. 2, but rather in terms of, for example: †¢ That differentiation means both providing products or services valued by customers/users, and doing this in ways that are difficult to imitate. 84  © Pearson Education Limited 2005 Instructor’s Manual †¢ This is likely to be achieved by building on core competences of the organisation. However, the more perceptive students may point out that this is difficult to achieve and difficult to manage. So organisations may not be able to create bases of nonimitability readily. For other organisations differentiation may be achieved by being flexible or faster to respond in markets than competitors, but that this, too, is a function of the culture of the organisation. Students should therefore be able to make linkages between the concepts and differentiation explained in chapter 5 and linkages in the value chain (chapter 4) and organisational culture (chapter 5). Overall, however, perhaps the most important basis of successful differentiation is the ability of an organisation to understand customer needs and what is valued by the customer better than competitors: that there is a danger that differentiation is driven on technical grounds rather than by an awareness of customer needs. †¢ Assignment 5. 4 Competitive strategies in the public sector Care needs to be taken around terminology here, particularly because an explicit price mechanism may not exist in some public services. So, referring to exhibit 5. 2 in the text, in public services price may equate to unit cost since performance will be judged against the input of resources to supply the service. Bearing this in mind, the routes can be described as follows: †¢ Route 1, low cost/low value: this is the outcome that many claim has been inevitable with public spending cuts leading to the unattractive positioning of many public services as a service of last resort. Route 2: this is the real challenge for many public services, i. e. the need to maintain quality while achieving progressive efficiency gains and lower unit costs. It is what governments expect public sector services to achieve: hence ‘best value’ initiatives and the extensive use of benchmarking. Routes 4 and 5 are an alternative for some parts of public services, and would be described as a centre of excellence strategy. Indeed in some parts of the NHS (e. g. specialist units in hospitals or some hospitals themselves) it is the strategy pursued by managers and clinicians as a way of retaining talent and increasing their resource base in the face of cuts in unit costs from government. †¢ †¢ Of course there is an argument from some critics that the reason why route 1 occurs rather than route 2 in mainstream public services is because routes 4 and 5 take away resources and funding to elite parts (or geographical locations) of the service and jeopardise the resource base of more standard services. This has been called the ‘twotier’ public service. 85  © Pearson Education Limited 2005 Instructor’s Manual Assignment 5. 5 Sustainability The students should be encouraged to use the same principles of sustainability as were described in the commentary on illustration 5. 6. To take the examples of the organisations cited here students may be able to identify the following: †¢ Ryanair is following a low price strategy: the extent to which this is sustainable is very dependent on the way in which the low cost base is culturally embedded and maintained over time through a complex set of cost minimisation programmes and strategies. In fact, on the face of it, this may not be difficult to understand; but the experience gained in so doing may make it difficult to imitate. Ryanair has also built a reputation amongst a loyal set of customers, and this may also be a sustainable benefit, provided it is nurtured and not eroded. Thorntons has followed a differentiation strategy based on product features (ingredients, recipes, freshness), strong branding and packaging and control of its own outlets. Students should be asked to rate these features against the criteria for sustainability applied in illustration 5. 6. For example, can consumers really discern and measure ‘freshness’? †¢ Students should be encouraged to search for other examples in which they can provide explanations of sustainability, but also to question whether what they identify are truly sustainable bases. Assignment 5. 6 The limits of hypercompetitive strategies This assignment invites students to consider the extent to which the principles described in section 5. 5 on hypercompetition are relevant to only a few industries, or not at all. The conventional argument would be that sustainable competitive advantage is achievable provided the sort of factors that determine sustainability can be met. So, again, students may wish to refer back to section 5. 4 for a discussion of the basis of sustainability. Students may readily identify some markets in which these factors do not appear to pertain. However, they may also identify others in which such factors apparently should pertain, yet in which hypercompetition seems to prevail. For example, presumably hightechnology companies could claim the benefits of complexity, perhaps causal ambiguity, and potentially embedded competences as intangible assets and cospecialisation. Yet the evidence is that hypercompetition prevails in such industries. Students may therefore recognise that the explanations given in section 5. 5 – i. e. that firms are able to overcome traditional bases of competitive advantage – seem to hold true even when there may be apparent bases of sustainability. If this is so, to what extent 86  © Pearson Education Limited 2005 Instructor’s Manual does it potentially apply to all industries? This is the claim made by Richard D’Aveni: that we are moving into hypercompetitive times, and that the old principles of sustainability may not hold. Assignment 5. 7 Hypercompetition in context This assignment invites students to examine a particular industry that might not normally be associated with hypercompetition, to consider the extent to which the conditions of hypercompetition may be becoming more and more evident. Banking is given as an example here. Others could be accountancy, car manufacturing, insurance, etc. The main points that might be drawn out could include: †¢ †¢ †¢ the extent to which cycles of competition seem to be speeding up, with shorter and shorter life cycles of products and services the difficulties of sustaining bases of advantage on price or differentiation the difficulties of sustaining first mover advantage or first entry into new markets as competitors find ways of overcoming or circumventing scale and experience curve benefits the difficulties of holding on to strongholds or reliance ‘deep pockets’ in the face of strategies and tactics of erosion by competition the deliberate search by companies to attack the competitive position of competitors in markets that were once too ‘gentlemanly’ to do so. †¢ †¢ Assignment 5. 8 Cooperation rather than competition Students should draw on the general principles explained in section 5. , which point to the circumstances in which cooperative strategies make sense. For example: â⠂¬ ¢ †¢ †¢ Buyer-seller collaboration is a key element of Formula 1, where manufacturers see motor racing as a way of developing their own technologies. Collaboration of buyers of pharmaceutical goods to increase buying power. There are many examples of competitors who collaborate to increase their market or competitive power. Not least is this the case in lobbying governments for changes 87  © Pearson Education Limited 2005 Instructor’s Manual that facilitate entry and power in markets. This would be applicable within both the pharmaceutical and Formula 1 industries. Co-production with customers is beginning to happen in markets such as pharmaceuticals, where pharmaceutical firms faced with increased buying power are finding ways of working with government buying agencies and doctors to increase efficiency or reduce cost of treatment. Collaboration in Formula 1 also includes one team providing services for another (e. g. McLaren providing marketing services for T yrrell); collaboration over shared suppliers (Jaguar, Benetton and Williams all use Michelin tyres and share data); and engineers and mechanics all know each other and informally help each other out in particular circumstances. †¢ Assignment 5. 9 Game theory The purpose of this assignment is to encourage students to read more extensively on the principles of game theory (e. g. by reading Dixit and Nalebuff in the key readings). Students should be encouraged to think through how some of the examples and situations discussed in that book (or other books on game theory) could be applied to issues of competitive strategy of organisations. Specific references are made to sections of the Dixit and Nalebuff book in exhibits 5. 6 and 5. 7. Integrative assignment 5. 10 This assignment is designed to ensure that students see the connection between the issues of sustainable competitive advantage (sections 5. 4. 1 and 5. 4. 2) and the concept of core competences (section 3. 2. 3). It also makes a further connection with the impact of IT on core competences, and hence on sustainable competitive advantage, as discussed in section 9. 3. 1. For example: †¢ A low price strategy might be sustained by core competences in managing cost efficiency in the distribution chain. But this advantage could be destroyed by competitors who develop new IT-based business models selling directly to final consumers over the internet at much reduced prices (made possible by considerably lower costs). Similarly a differentiation strategy might be underpinned by core competences such as professional knowledge. But this is undermined as customers start to gain this knowledge themselves from the internet. So a new relationship needs to be forged with customers to take advantage of the professional knowledge. The relationship needs to ‘move up a gear’ so that the more knowledgeable customer starts to seek advice rather than just information. †¢ 88 Pearson Education Limited 2005 Instructor’s Manual Integrative assignment 5. 11 This assignment requires students to apply the key requirements for lock-in (exhibit 5. 3) to an international development strategy (section 6. 3). Specifically students need to understand how that particular basis for an inte rnational strategy would be achieved in terms of both directions and methods of development (sections 7. 2 and 7. 3). Here are some points against the four bullet points of exhibit 5. 3: †¢ Size and market dominance. If this is to be achieved internationally it is necessary to understand the nature of the market in terms of the degree of globalisation that exists. So for globalised markets (like computer software) Microsoft has had to create coverage in all major markets of the world. In contrast, in less globalised markets lock-in could be achieved region-by-region. In these circumstances decisions on the sequence of market entry would need to be guided by the issues discussed in section 6. 3. A requirement for dominance would favour internal development of new markets and/or ruthless acquisition of competitors to gain sufficient market share. First mover advantages. This clearly dictates the need for product development internally to be ahead of competitors. Alternatively if partners are used the relationships will need to be exclusive – to deny competitors access. Reinforcement. The creation of an industry standard needs conditions to be created where it is in the interests of all competitors to adopt the standard rather than compete with it. Strategies of heavily funded product development may do this as competitors become unable to match the R&D spend. For international development it is clearly important to establish an international standard – undermining regional differences. So the development method must reinforce the standard – for example by creating ‘registered users’. Rigorous enforcement. This would have a strong influence on the choice of markets – favouring those where legal protections of intellectual property are strong and respected. Similarly choice of partners is absolutely crucial – again the idea of ‘registered users’ might apply. †¢ †¢ †¢ Case example Madonna: The reign of the queen of pop (notes prepared by Phyl Johnson, University of Strathclyde) This case study was chosen as a way of getting students to explore the principles of both sustainability and hypercompetition. It is useful to focus initially on the question of her sustained high profile and success as a performer over so many years. However, her recent success is questionable; this allows for a focus on the long-term sustainability of strategies themselves and a debate as to viability hypercompetitive strategies. 89  © Pearson Education Limited 2005 Instructor’s Manual The main points that might be emphasised are these in terms of the questions asked: Question 1 The strategy pursued by Madonna can be explained both in terms of a generic competitive strategy and in terms of principles of hypercompetitive strategies. Clearly she has sought to differentiate herself throughout her career. This has taken different forms, as the case explains, but there has been an underlying theme of the ‘independent woman’ throughout. What has varied has been the different personas within this. Students could debate whether or not these have been pitched at particular ‘market segments’ and in this sense represent focused differentiation; or the extent to which they are simply tactical bases of differentiating herself from imitators and followers. Another interpretation would fit with explanations of hypercompetitive strategies. Many of the principles outlined in section 5. 5. 4 seem to apply. Each persona is temporary; each one is very different from the last; she seems to move on to a different image even while being successful in her last one; they are not predictable changes; they can be surprising, even shocking. Her latest persona as children’s author and spiritual follower challenges this in that it has in fact been sustained over a period and is far from shocking. At one stage in the press (June 2004) it was even reported she was changing her name to Esther as part of her Kabbalah faith. †¢ The Madonna case therefore illustrates that the idea of hypercompetition is not necessarily contradictory to the idea of generic basis of competition. It might be possible to be differentiated in a hypercompetitive way. Think about links to questions 2 and 3 here, that is, the most recent events allow for the questioning of the long-term sustainability of hypercompetition itself. Question 2 This question invites students to consider the basis of sustainability in this context. Students might wish to ask which principles of sustainability hold. They should see that a number do: †¢ †¢ Madonna appears to have capabilities and competences (intangible assets) of innovation and flexibility. The pop industry has learned to work with her, and in this sense they have developed a mutual co-specialised dependence; so it looks to promote her interests given her track record. Certainly it is difficult to predict where she will move next, or how she is successful (causal ambiguity). †¢ 90  © Pearson Education Limited 2005 Instructor’s Manual Question 3 This question invites students to question these bases of sustainability. The strategy does not seem to be vulnerable to others imitating it since it is difficult for them to understand or predict what they would be imitating. But students might argue that it is surely a risky strategy as she seeks to second-guess the nature of the market and make so many changes to her image. They are likely to argue that the risk is market acceptance. If so, how would they explain the continued success given so many changes over so many years? Has the formula for success run out of steam? And if so why? 91  © Pearson Education Limited 2005