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Competitive strategies
Book · December 2015
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Warsaw School of Economics
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1
COMPETITIVE STRATEGIES
Approaches to Business Strategies
Mikolaj Pindelski
Warsaw School of Economics (SGH) 2016
2
CONTENT |
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Introduction............................................................................................................................. |
5 |
1. Strategy and Competiton – General Information ................................................... |
7 |
1.1. Strategies according to Michael Porter ..................................................................... |
7 |
1.2. Strategies according to H. Igor Ansoff..................................................................... |
12 |
1.3. Strategies according to R.E. Miles and Ch. Snow.................................................. |
15 |
Questions and discussions ................................................................................................................................. |
18 |
Further readings ........................................................................................................................................................ |
20 |
Bibliography ............................................................................................................................................................. |
21 |
2. Company environment and its impact on managerial strategic choices.............. |
22 |
2.1. Macro Environment ............................................................................................................. |
27 |
2.2. Close Environment ............................................................................................................... |
33 |
2.3 Targeted environment......................................................................................................... |
36 |
2.4. Inside environment.............................................................................................................. |
36 |
2.5. Environment and decision making and planning ..................................................... |
37 |
Questions and discussions..................................................................................................................................... |
39 |
Further readings ........................................................................................................................................................ |
40 |
Bibliography ............................................................................................................................................................. |
41 |
3. Risk in strategic management and methods of its reduction. ................................. |
42 |
3.1. Certainty, risk, uncertainty ............................................................................................... |
43 |
3.2. Fighting against risk and uncertainty ........................................................................... |
45 |
Questions and discussions..................................................................................................................................... |
46 |
Further readings..................................................................................................................................................... |
50 |
Bibliography ............................................................................................................................................................. |
50 |
4. Company strategic segmentation methods....................................................... |
50 |
4.1. Strategic segmentation....................................................................................................... |
51 |
4.1.1. Segments........................................................................................................................................................ |
52 |
4.1.2. Segmentation principles ......................................................................................................................... |
57 |
4.1.3. Strategies based on segmentation...................................................................................................... |
59 |
Questions and discussions ................................................................................................................................. |
60 |
Further readings..................................................................................................................................................... |
64 |
4.2. Strategic Business Units ..................................................................................................... |
65 |
4.2.1. Matrix Methods of analysis ...................................................................................................................... |
66 |
4.2.2. BCG Method ................................................................................................................................................. |
67 |
4.2.2. Arthur D. Little method (ADL)............................................................................................................... |
69 |
Questions and discussions ................................................................................................................................. |
72 |
Further readings..................................................................................................................................................... |
77 |
Bibliography ............................................................................................................................................................. |
77 |
5. Methods of industry attractiveness analysis. ....................................................... |
78 |
5.1. Industry attractiveness........................................................................................................... |
79 |
5.2. SWOT as a tool for industry evaluation ............................................................................ |
80 |
5.3. Point method evaluation in industry analysis ........................................................... |
85 |
5.4. The industry life cycle analysis............................................................................................. |
88 |
Questions and discussions ................................................................................................................................. |
95 |
Further readings..................................................................................................................................................... |
98 |
Bibliography .............................................................................................................................................................. |
98 |
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6. Competitive analysis in industry. ......................................................................... |
98 |
6.1. Competition in industry ................................................................................................... |
100 |
6.2. Strategic groups analysis ................................................................................................. |
102 |
6.3. The map of competitors‘ groups ................................................................................... |
107 |
Questions and discussions .............................................................................................................................. |
111 |
Further readings.................................................................................................................................................. |
113 |
Bibliography ........................................................................................................................................................... |
113 |
7. Michael Porter’s Five Forces that shape any market. ..................................... |
114 |
7.1. Porter’s five forces - overview ....................................................................................... |
115 |
7.2. Entry and exit barriers. .................................................................................................... |
117 |
Questions and discussions .............................................................................................................................. |
124 |
7.3. Analysis of substitutes. ..................................................................................................... |
126 |
Questions and discussions .............................................................................................................................. |
130 |
7.4. Analysis of industry suppliers and buyers. ............................................................... |
134 |
Questions and discussions .............................................................................................................................. |
141 |
Further readings.................................................................................................................................................. |
143 |
Bibliography .......................................................................................................................................................... |
143 |
8. Assessment of a firm's competitive position. .................................................... |
144 |
8.1 Key Success Factors............................................................................................................. |
145 |
8.2 Value Chain ............................................................................................................................ |
152 |
8.3 Balanced Scorecard (BSC)................................................................................................. |
154 |
8.4 Value Dynamics Model....................................................................................................... |
161 |
Questions and discussions .............................................................................................................................. |
165 |
Further readings.................................................................................................................................................. |
171 |
Bibliography .......................................................................................................................................................... |
172 |
9. Business models vs. competitive strategies....................................................... |
172 |
9.1. Business Model.................................................................................................................... |
173 |
9.2 Construction of a Business Model.................................................................................. |
177 |
9.3 Types of business models (Strategies of Business Model Development)........ |
185 |
Questions and discussions:............................................................................................................................. |
189 |
Further readings:................................................................................................................................................. |
192 |
Bibliography .......................................................................................................................................................... |
193 |
10. Strategic Control....................................................................................................... |
194 |
10.1. Control – the definition .................................................................................................. |
195 |
10.2. The Control Process ........................................................................................................ |
199 |
10.3. Types of control ................................................................................................................ |
202 |
10.4. Functions and objectives of control ................................................................................ |
209 |
10.5. Strategic Control and Balanced Scorecard.............................................................. |
215 |
Questions and discussions:............................................................................................................................. |
225 |
Further readings.................................................................................................................................................. |
229 |
Bibliography .......................................................................................................................................................... |
230 |
List of Tables...................................................................................................................... |
232 |
List of Cases ........................................................................................................................ |
233 |
List of Exercises................................................................................................................. |
234 |
Some hints and answers to exercisses...................................................................... |
235 |
Vocabulary.......................................................................................................................... |
237 |
4
Introduction
Competition, strategies, advantages, strengths, products, markets, industry etc. are only a few terms connected to managing a company. The management but is not a main problem. The market success but is the factor which causes a headache in boards of managers. What does “success” mean to the firm is the question we can pose ourselves. Is it a fat income or defeating competitors ? Having an impressive market share or making profit ? This book has not been written to solve that problem. It could be assumed that success is a long term presence on the market. We can also say that it could be a long term competitive advantage. Unfortunately, the advantage that lasts for a long time does not exist. The moment it is achieved is the best time to create a new in order to replace the existing one.
The whole text is to guide you through some ideas that may be helpful in creating the advantages and strategies based on them. It is a mix of some methods of analysis, approaches to strategy creation and competing on the market more or less known. It is not to present all of them as this would not make sense. We can assume that competitors and customers influence the company but we can also act as if all of them were absent. Just imagine the firm that does what it can best and develops all its products and services without even noticing the outer world. It could be a breakthrough innovation as well as a monumental case of failure. Nevertheless we can probably easily imagine the autistic company. Just think about early Apple or BMW. There was a time both seemed to be convinced about their right to do things without customers or competition being taken into account. Apple was creating products that many ridiculed and did not want to even invest a penny on a stake that the company would survive. Some analysts pointed out that the ideas would not be accepted by the audience. What could Apple get from analysing competitors ? The faster, more equipped, more black and more ugly looking computers that could make geeks more happy. As a matter of fact, the geeks only. BMW for a long time did not hold dialogues with customers. They did not make bargains nor were they responsive to market needs and they created products priced the double of all the alternative solutions. Both of the companies mentioned were fully successful in the many dimensions that the market success can be measured.
You could ask why all the analysis should be made. Why companies should follow the rules of different strategy types ? The answer is simple. In order to diminish the risk of failure. It is much easier to fight in a market battles knowing little bit more about it. It can
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not be assumed that implementing the strategy unaware of its strengths and weaknesses can lead to the set goal. If you are not Steve Jobs then better to go through it and even if you decide not to use it be aware of what you are not using.
The first chapter has the intention of presenting general approaches to strategy types according to Michel Porter, Igor Ansoff, R. Miles and Ch. Snow. The second chapter consists of the description of environment layers and their influence on managerial decision making. The third chapter adresses the risk and fuzziness in management. The fourth chapter presents market segmentation methods and matrix approaches to strategic business units analysis. The fifth chapter aims to show some of the industry attractiveness analysis methods. The sixth chapter depicts competitive analysis in the industry particularly analysing the strategic group analysis. The seventh chpter presents
M.E.Porter’s five forces that drive markets and industries.
All of the chapters are enriched by short case studies that may help to understand the idea of the topics presented. It is also recommended to read the pre-readings and further reading publications which might help to prepare the broadening of the reader’s point of view. Some of the questions the chapters contain are to rethink the text and find some other use of the ideas described.
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1. Strategy and Competition – General Information
1.1.Strategies according to Michael Porter1
Michael E. Porter is one of the most remarkable contemporary authors of publications about competitive tactics of corporations and their strategies. He distinguishes two different sources of competitive advantage:
• The ability to maintain low operating costs and their further reduction
• The ability to differentiate offers and markets in which the company operates
Based on this assumption, he developed three basic competitive strategies:
•cost leadership
•differentiation
•focus
While in the case of the first two, their scope is due to prior information and their names, the third includes the focus on aspects such as market or target and niche audience, etc.
Cost leadership
Cost leadership is one of the conceptually simplest strategies used by companies. Both, assumptions and results, can be relatively easily verified. This does not mean, however, that its implementation is easy.
Sources of cost advantage can be very different, depending on the industry and the nature of the business. Very often, the cost leaders benefit from economies of scale. Other factors that can give cost advantage can be: advanced technology, access to lower-priced sources, the effect of learning, etc. Companies producing at low costs, usually offer standard products aimed at mass audiences.
The use of this strategy, which is to produce and sell at the lowest cost may, however, be extremely short-lived. In the future, competition will almost certainly fail to produce cheaper, and the immediate consequence of this is the loss of the only competitive advantage.
1The chapter is based on: Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980, and Porter, M.E. (1985) Competitive Advantage, Free Press, New York, 1985.
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Case Study 1.
Phablets, Tablets, netbooks, smartphones and others
This strategy may be extremely complicated. An example here would be some products that are given away almost for free, while effectively influencing the disappearance of the competitors who want to offer them cheap, but not free. Network hardware stores now complain that the phablets, cell phones, tablets, netbooks and notebooks are given away for free by the mobile network with a client's purchase of Internet or telephone + internet access plans. Not only are the products, that on regular basis cost at least several hundred USD, added for nearly free to the basic mobile services, but also the competitor appears suddenly and from outside the industry. The high tech retail market has been attacked by mobile services providers. Mobile industry is not very familiar with selling products, it sells services and makes money on that. Pays not much attention to revenue from items. The heads of electronics stores seem to be helpless against such practices.
Discussion questions:
1.What strategies are carried out by stores with electronic goods?
2.Why are they threatened by competition from outside the industry?
3.Why can the competitors outside the industry offer the goods for almost free?
Differentiation
The second strategy identified by M. Porter, is differentiation. Its essence is to develop a company’s uniqueness to the most important in customer areas. Individuals competing in this way usually choose one or a few features that the buyers considered crucial in the selection and the purchasing decision. By developing these features in the products or services offered, they are trying to be significantly differentiated from all other competitors. This applies mainly to the level of the product, but it also affects all other aspects of business activity. Porter emphasizes here the physical and the symbolic differentiation.
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•Physical differentiation relates to the physical characteristics of products and services such as design, implementation method, channel distribution, weight, colour, size, smell, etc.
•Symbolic differentiation refers to feelings and emotions, and includes, for example, brand, image, perception, promotion, etc.
Figure 1. The development of differentiation strategies according to the market situation
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Source: on the basis of Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980, and Porter, M.E. (1985) Competitive Advantage, Free Press, New York, 1985.
Describing fig. 1 it is vivisble, that following strategies‘ types are limited to followig
situations:
Improvement – is about the existing offer and respond to the situation when value and
price increase above the average (standard) market offer, the offer is appreciated and
noticed by the entire market and at the same time the differentiation leads to positive
results and the difference is noticed and appreciated.
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