STRATEGIC MANAGEMENT. Panel IV: Strategies on the business units level. (C) prof. dr hab. Aneta Zelek

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1 STRATEGIC MANAGEMENT Panel IV: Strategies on the business units level 1

2 Just to recall you The most important strategic goals: American business: RETURN ON INVESTMENT (ROI) Japanese business: MARKET SHARE 2

3 Return on Investment vs. Market share ROI return on investment Percentage of market share 3

4 The strange relationship U-shape Porter s curve ROI The declining ROI because the increasing investment for market share The company is trapped? Market share 4

5 U-shape Porter s curve and Competitive advantages ROI DIFFERENTIATION STRATEGY PRICE LEADER (LOW COSTS STRATEGY) Pitfall (trap) MARKET SHARE 5

6 The main types of Competitive Advantage Competitive advantage Similar product at lower cost Higher price Cost advantage for unique product Differentiation advantage 6

Avoid marginal customers Differentiation Quality Innovation Design

7 Features of competitive strategies Cost Leadership Efficient scale Standardization Design for low production cost Control of overheads and R&D Avoid marginal customers Differentiation Quality Innovation Design Credibility Brand name Reputation Environmental posture Customer service Integrated services 7

8 Competitive strategies by Porter Types of competitive advantage Low cost Differentiation Market Industry-wide Cost leadership Differentiation Niche Focus with low cost Focus with differentiation 8

9 Alternative strategic orientation on the world s market Mercedes Patek Harrods Sony High price High quality, technology Fiat Casio Netto, Makro Gold Star Low quality, technology Daewoo Kia Low price 9

10 Economies of scale as a source of the price leader success Average costs Firm C The level of price Firm B Firm A Experience curve (economies of scale) Output 10

11 Competitive strategies extending Porter Types of competitive advantage Industry-wide Low cost Cost Leadership Differentiation Differentiation Market Niche Focus with low cost Hybrid Strategy Focus with differentiation In-between there might be a successful strategy (Value for Money) Hybrid strategies can be more effective 11

12 Low costs strategy - characteristics The big (dominant) market share Enormous investment requirements Easy accesses to capital Well-developed distribution channels Sophisticated marketing skills Restrictive costs policy Organisational structure typical for a big companies 12

13 Differentiation Strategy - characteristics Lon tradition within the sector Well-known brand, good reputation Loyal customers Sophisticated marketing Innovations and high technology Well-developed R&D skills Perfect knowledge of the market needs Total Quality Management Optimal motivation system 13

14 Focus strategy... The decision on which the group and needs of customers the firm should serve has the fundamental meaning for the success of the strategy. But equally important is the decision about not serving another customers or needs". M. Porter, What Is Strategy? Harvard Business Review (11-12/1996) 14

15 Two crucial issues concerning the focus strategy (1) Choosing which industry segments to compete? (2) How to build the competitive advantage in the target segments? 15

16 Strategic orientation in MOBIL case study 1 Corporate strategy MOBIL Oil extraction Oil processing Oil distribution SBU Strategy Gasoline stations 16

17 MOBIL what s the problem? MOBIL works on the American market beyond 80 years, using prosperously the strategy of price leader(mobil uses the synergy effect as the syndicate mining and manufacturing). In the first half of 90ties., fuel stations by MOBIL occupied near 32% of American market. Since the year 1997 MOBIL loses the market share - in 1999 Mobil's participation came down to 25%. What strategy orientation should MOBIL use if...? 17

18 Mobil: Five target segments (1) ROAD WARRIORS (16% of total sale)- men middle-aged about the higher income which travel thousand km a year, buy the better quality of gasoline, paying with the credit card, buy sandwiches and drinks in shops on filling stations, often take advantage of the car-wash; (2) TRUE BLUES (16% of total sale)- women and men with average and high incomes, loyal in the face brand and even the concrete station, often buy the better quality of fuel and pay with the cash; (3) GENERATION F3 (27% of total sale)- F3 - Fuel, Food over Fast, moving men and women - rather below 25 years old, all the time they are on the move, a lot of drive, often take advantage of the good cooking on filling stations; (4) HOMEBODIES (21% of total sale)- usually working women at home which give a lift their children to school and take advantage of any filling station which is exactly on the way; (5) PRICE SHOPPERS (20% of total sale)- generally are not loyal for brands, nor the special filling station, seldom buy the better fuel, have often tense budgets, choose the station according to the criterion of the price. 18

19 Case study 2: IKEA IN THE WORLD 19

20 HISTORY Founded in Sweden in 1943 as a mail-order company. Headquarters located in Almahult First showroom opened 1953 International expansion was followed by three stages: First: Scandinavian market 1963 Second: West European market 1973 Third: North American market

21 THE IKEA CONCEPT TARGET MARKET: YOUNG PEOPLE WITH ALL AGES PRODUCT: FURNITURE WORLD-WIDE LOCATION: OUTSIDE THE CITY PRICING: LOW PRICE PROMOTION: CATALOGS,MEDIA 21

22 Characteristics Decisions are made in Sweden Franchise system - Inter IKEA Systems B.V. Location in low-cost nations Standardized products intended for the global market Company is rather not responding to local consumer tastes and preferences Company produce high quality products at a low cost An effective combination of low cost, standardization, technology, and quality Focusing on one particular target segment: young and low-tomiddle income families 22

23 Which strategy does IKEA adopt? 23

24 The strategy clock by Bowman

25 Strategy clock - description 1. Option one - low price/low added value. likely to be segment specific. 2. Option two - low price. risk of price war and low margins/need to be a 'cost leader'. 3. Option three - Hybrid. low cost base and reinvestment in low price and differentiation. 4. Option four - Differentiation. (a)without a price premium: perceived added value by user, yielding market share benefits. (b)with a price premium: perceived added value sufficient to to bear price premium. 5. Option five - focussed differentiation. perceived added value to a 'particular segment' warranting a premium price. 6. Option six - increased price/standard. higher margins if competitors do not value follow/risk of losing market share. 7. Option seven - increased price/low values. only feasible in a monopoly situation. 8. Option eight - low value/standard price. loss of market share. 25

26 Your homework You can choose one of the following case studies: Case study on Japanese autmobile page 244 (il.5.1) Case study on easyjet page 247 (il. 5.2) Case study on wine industry page 255 (il.5.5) 26

Strategic Management. Week 5 ( Chapter 5) Strategic Choices. Business Level Strategy

Strategic Management. Week 5 ( Chapter 5) Strategic Choices. Business Level Strategy Strategic Management Week 5 ( Chapter 5) Strategic Choices Business Level Strategy Learning Outcomes: After reading this lecture you should be able to understand: How to identify strategic business units