Business Strategy
Ing. Šárka Zapletalová, Ph.D.
Department of Business Economics and Management
STRATEGIC MANAGEMENT

Outline of the lecture
1.Business strategy
2.
2.Competitive strategy
3.
3.Generic competitive strategies
4.
4.Cooperative strategies
5.
5.
5.
5.

Introduction
•Business strategy  is focused on improving the competitive position of a company’s or business
unit’s products or services within the specific industry or market segment that the company or
business unit serves.
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•Business strategy can be competitive (battling against all competitors for advantage) and/or
cooperative (working with one or more companies to gain advantage against other competitors).
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•Michael Porter proposes two “generic” competitive strategies for outperforming other corporations
in a particular industry: lower cost and differentiation.
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Business Strategy
•Business strategy usually occurs at the business unit or product level, and it emphasizes
improvement of the competitive position of a corporation’s products or services in the specific
industry or market segment served by that business unit.
•
• Business strategies may fit within the two overall categories, competitive and cooperative
strategies.
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•Cooperative strategy may thus be used to provide a competitive advantage.
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•For example, Intel, a manufacturer of computer microprocessors, uses its alliance (cooperative
strategy) with Microsoft to differentiate itself (competitive strategy) from AMD, its primary
competitor.
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Business Strategy
•Business strategy  is focused on improving the competitive position of a company’s or business
unit’s products or services within the specific industry or market segment that the company or
business unit serves.
•
•Business strategy is extremely important because research shows that business unit effects have
double the impact on overall company performance than do either corporate or industry effects.
•
•Business strategy can be competitive (battling against all competitors for advantage) and/or
cooperative (working with one or more companies to gain advantage against other competitors).
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•Just as corporate strategy asks what industry(ies) the company should be in, business strategy
asks how the company or its units should compete or cooperate in each industry.
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Competitive Strategy
Porter´s competitive strategy raises the following questions:
•Should we compete on the basis of lower cost (and thus price), or should we differentiate our
products or services on some basis other than cost, such as quality or service?
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•Should we compete head to head with our major competitors for the biggest but most sought-after
share of the market, or should we focus on a niche in which we can satisfy a less sought-after but
also profitable segment of the market?
•
•Michael Porter proposes two “generic” competitive strategies for outperforming other corporations
in a particular industry: lower cost and differentiation.
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•

Competitive Strategy
These strategies are called generic because they can be pursued by any type or size of business
firm, even by nonfor- profit organizations:
•Lower cost strategy is the ability of a company or a business unit to design, produce, and market
a comparable product more efficiently than its competitors.
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•Differentiation strategy is the ability of a company to provide unique and superior value to the
buyer in terms of product quality, special features, or after-sale service.
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•Porter further proposes that a firm’s competitive advantage in an industry is determined by its
competitive scope, that is, the breadth of the company’s or business unit’s target market.
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Competitive Strategy
•Before using one of the two generic competitive strategies (lower cost or differentiation), the
firm or unit must choose the range of product varieties it will produce, the distribution channels
it will employ, the types of buyers it will serve, the geographic areas in which it will sell, and
the array of related industries in which it will also compete.
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•Acompany or business unit can choose a broad target (that is, aim at the middle of the mass
market) or a narrow target (that is, aim at a market niche).
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•Combining these two types of target markets with the two competitive strategies results in the
four variations of generic strategies.
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Competitive Strategy
Porter’s Generic Competitive Strategies
•When the lower-cost and differentiation strategies have a broad mass-market target, they are
simply called cost leadership and differentiation.
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•When they are focused on a market niche (narrow target), however, they are called cost focus and
differentiation focus.
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Generic Competitive Strategies
Cost leadership
•Cost leadership is a lower-cost competitive strategy that aims at the broad mass market and
requires “aggressive construction of efficient-scale facilities, vigorous pursuit of cost
reductions from experience, tight cost and overhead control, avoidance of marginal customer
accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on.
•
•Because of its lower costs, the cost leader is able to charge a lower price for its products than
its competitors and still make a satisfactory profit. Although it may not necessarily have the
lowest costs in the industry, it has lower costs than its competitors.
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•Some companies successfully following this strategy are Wal-Mart (discount retailing), McDonald’s
(fast-food restaurants), Dell (computers), Alamo (rental cars), Aldi (grocery stores), Southwest
Airlines, and Timex (watches).
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Generic Competitive Strategies
•Having a lower-cost position also gives a company or business unit a defense against rivals.
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•Lower costs allow it to continue to earn profits during times of heavy competition. High market
share means that it will have high bargaining power relative to its suppliers (because it buys in
large quantities).
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•Low price will also serve as a barrier to entry because few new entrants will be able to match the
leader’s cost advantage. As a result, cost leaders are likely to earn above-average returns on
investment.
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Generic Competitive Strategies
Differentation strategy
•Differentiation is aimed at the broad mass market and involves the creation of a product or
service that is perceived throughout its industry as unique.
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•The company or business unit may then charge a premium for its product. This specialty can be
associated with design or brand image, technology, features, a dealer network, or customer service.
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•Differentiation is a viable strategy for earning above-average returns in a specific business
because the resulting brand loyalty lowers customers’ sensitivity to price. Increased costs can
usually be passed on to the buyers.
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Generic Competitive Strategies
•Buyer loyalty also serves as an entry barrier; new firms must develop their own distinctive
competence to differentiate their products in some way in order to compete successfully.
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•Examples of companies that successfully use a differentiation strategy are Walt Disney Productions
(entertainment), BMW (automobiles), Nike (athletic shoes), Apple Computer (computers and smart
phones), and Pacar (trucks).
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•Research does suggest that a differentiation strategy is more likely to generate higher profits
than does a low-cost strategy because differentiation creates a better entry barrier.
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•A low-cost strategy is more likely, however, to generate increases in market share.
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Generic Competitive Strategies
Cost focus
Cost focus is a low-cost competitive strategy that focuses on a particular buyer group or
geographic market and attempts to serve only this niche, to the exclusion of others.
•In using cost focus, the company or business unit seeks a cost advantage in its target segment.
•
Differentiation focus
Differentiation focus, like cost focus, concentrates on a particular buyer group, product line
segment, or geographic market.
•In using differentiation focus, a company or business unit seeks differentiation in a targeted
market segment.
•
•This strategy is valued by those who believe that a company or a unit that focuses its efforts is
better able to serve the special needs of a narrow strategic target more effectively than can its
competition.
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Prostor pro doplňující informace, poznámky
Blue Ocean Strategy
Blue ocean strategy
vs.
Stuck in the middle

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Prostor pro doplňující informace, poznámky
Blue Ocean Strategy
total perceived consumer benefits
value innovation

Generic Competitive Strategies
Requirements for Generic Competitive Strategies
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Generic Competitive Strategies
Risks in Competitive Strategies
•Each of the generic strategies has risks.
•For example, a company following a differentiation strategy must ensure that the higher price it
charges for its higher quality is not too far above the price of the competition; otherwise
customers will not see the extra quality as worth the extra cost. This is what is meant in by the
term cost proximity.
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Competitive Strategies
Issues in Competitive Strategies
•Porter argues that to be successful, a company or business unit must achieve one of the previously
mentioned generic competitive strategies.
•Otherwise, the company or business unit is stuck in the middle of the competitive marketplace with
no competitive advantage and is doomed to below-average performance.
•The Toyota and Honda auto companies are often presented as examples of successful firms able to
achieve both of these generic competitive strategies. Thanks to advances in technology, a company
may be able to design quality into a product or service in such a way that it can achieve both high
quality and high market share - thus lowering costs.
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Competitive Strategies
•Although there is generally room for only one company to successfully pursue the massmarket cost
leadership strategy (because it is so dependent on achieving dominant market share), there is room
for an almost unlimited number of differentiation and focus strategies (depending on the range of
possible desirable features and the number of identifiable market niches).
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•Quality, alone, has eight different dimensions each with the potential of providing a product with
a competitive advantage.
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•Most entrepreneurial ventures follow focus strategies. The successful ones differentiate their
product from those of other competitors in the areas of quality and service, and they focus the
product on customer needs in a segment of the market, thereby achieving a dominant share of that
part of the market.
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Competitive Strategies
Issues in Competitive Strategies: Quality
The Eight Dimensions of Quality
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Competitive Strategies
Industry Structure and Competitive Strategy
•In a fragmented industry, for example, where many small- and medium-sized local companies compete
for relatively small shares of the total market, focus strategies will likely predominate.
•Fragmented industries are typical for products in the early stages of their life cycles. If few
economies are to be gained through size, no large firms will emerge and entry barriers will be low
- allowing a stream of new entrants into the industry.
•Chinese restaurants, veterinary care, used-car sales, ethnic grocery stores, and funeral homes are
examples.
•If a company is able to overcome the limitations of a fragmented market, however, it can reap the
benefits of a broadly targeted cost-leadership or differentiation strategy.
•Until Pizza Hut was able to use advertising to differentiate itself from local competitors, the
pizza fastfood business was a fragmented industry composed primarily of locally owned pizza
parlors, each with its own distinctive product and service offering.
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Competitive Strategies
Industry Structure and Competitive Strategy
•As an industry matures, fragmentation is overcome, and the industry tends to become a consolidated
industry dominated by a few large companies.
•Although many industries start out being fragmented, battles for market share and creative
attempts to overcome local or niche market boundaries often increase the market share of a few
companies.
•After product standards become established for minimum quality and features, competition shifts to
a greater emphasis on cost and service.
•Slower growth, overcapacity, and knowledgeable buyers combine to put a premium on a firm’s ability
to achieve cost leadership or differentiation along the dimensions most desired by the market. R&D
shifts from product to process improvements. Overall product quality improves, and costs are
reduced significantly.
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Competitive Strategies
Industry Structure and Competitive Strategy
•The strategic rollup was developed in the mid-1990s as an efficient way to quickly consolidate a
fragmented industry.
•With the aid of money from venture capitalists, an entrepreneur acquires hundreds of
owner-operated small businesses.
•The resulting large firm creates economies of scale by building regional or national brands,
applies best practices across all aspects of marketing and operations, and hires more sophisticated
managers than the small businesses could previously afford.
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•Rollups differ from conventional mergers and acquisitions in three ways:
1.they involve large numbers of firms,
2.the acquired firms are typically owner operated,
3.the objective is not to gain incremental advantage, but to reinvent an entire industry.
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Competitive Strategies
Industry Structure and Competitive Strategy
•Once consolidated, an industry has become one in which cost leadership and differentiation tend to
be combined to various degrees, even though one competitive strategy may be primarily emphasized.
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•A firm can no longer gain and keep high market share simply through low price.
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•The buyers are more sophisticated and demand a certain minimum level of quality for price paid.
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•Even Mc-Donald’s, long the leader in low-cost fast-food restaurants, has been forced to add
healthier and more upscale food items, such as Asian chicken salad, comfortable chairs, and Wi-Fi
Internet access in order to keep its increasingly sophisticated customer base.
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Cooperative Strategies
Collusion
•Collusion is the active cooperation of firms within an industry to reduce output and raise prices
in order to get around the normal economic law of supply and demand.
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•Collusion may be explicit, in which case firms cooperate through direct communication and
negotiation, or tacit, in which case firms cooperate indirectly through an informal system of
signals.
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•Explicit collusion is illegal in most countries and in a number of regional trade associations,
such as the European Union.
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Cooperative Strategies
Strategic Alliances
•A strategic alliance is a long-term cooperative arrangement between two or more independent firms
or business units that engage in business activities for mutual economic gain.
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•Alliances between companies or business units have become a fact of life in modern business.
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•Some alliances are very short term, only lasting long enough for one partner to establish a
beachhead in a new market.
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•Many alliances do increase profitability of the members and have a positive effect on firm value.
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Cooperative Strategies
Mutual Service Consortia
•A mutual service consortium is a partnership of similar companies in similar industries that pool
their resources to gain a benefit that is too expensive to develop alone, such as access to
advanced technology.
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•The mutual service consortia is a fairly weak and distant alliance - appropriate for partners that
wish to work together but not share their core competencies. There is very little interaction or
communication among the partners.
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Cooperative Strategies
Joint Venture
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•A joint venture is a cooperative business activity, formed by two or more separate organizations
for strategic purposes, that creates an independent business entity and allocates ownership,
operational responsibilities, and financial risks and rewards to each member, while preserving
their separate identity/autonomy.
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•Joint ventures are the most popular form of strategic alliance. They often occur because the
companies involved do not want to or cannot legally merge permanently.
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•Joint ventures provide a way to temporarily combine the different strengths of partners to achieve
an outcome of value to all.
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Cooperative Strategies
Joint Venture
•Extremely popular in international undertakings because of financial and political–legal
constraints, forming joint ventures is a convenient way for corporations to work together without
losing their independence.
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•Disadvantages of joint ventures include loss of control, lower profits, probability of conflicts
with partners, and the likely transfer of technological advantage to the partner.
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•Joint ventures are often meant to be temporary, especially by some companies that may view them as
a way to rectify a competitive weakness until they can achieve long-term dominance in the
partnership.
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Cooperative Strategies
Licensing Arrangements
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•A licensing arrangement is an agreement in which the licensing firm grants rights to another firm
in another country or market to produce and/or sell a product.
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•The licensee pays compensation to the licensing firm in return for technical expertise.
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•Licensing is an especially useful strategy if the trademark or brand name is well known but the
MNC does not have sufficient funds to finance its entering the country directly.
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Cooperative Strategies
Value-Chain Partnerships
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•A value-chain partnership is a strong and close alliance in which one company or unit forms a
long-term arrangement with a key supplier or distributor for mutual advantage.
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•To improve the quality of parts it purchases, companies in the U.S. auto industry, for example,
have decided to work more closely with fewer suppliers and to involve them more in product design
decisions.
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•Activities that had previously been done internally by an automaker are being outsourced to
suppliers specializing in those activities.
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