Exploring Strategy
Gerry Johnson et al. 11th edition.
, Exploring Strategy by Gerry Johnson et al.
11th edition.
7. Business Strategy and Models
7.1 Introduction
Two fundamental questions:
1. What is a business strategy;
2. and what business model should a company, business unit or other organisation adopt in its
market?
A strategic business unit (SBU) supplies goods or services for a distinct domain of activity.
A business model is the relationship between value created for customers and the activities of the
organisation and how the organisation can capture value from this.
There can be three themes around business strategy be identified:
1. Generic competitive strategies, including cost leadership, differentiation, focus and hybrid
strategies.
2. Interactive strategies, building on the notion of generic strategies to consider interaction
with competitors, especially in hypercompetitive environments, and including both
cooperative strategies and game theory.
3. Business model, including the three basic components of value creation, value configuration
and value capture.
7.2 Generic competitive strategies
Competitive strategy is concerned with how a company, business unit or organisation achieves
competitive advantage in its domain of activity.
Competitive advantage is about how a company, business unit or organisation creates value for its
users which is both greater than the costs of supplying them and superior to that of rivals.
• Two important futures of competitive advantage
1. Customers must see sufficient value that they are prepared to pay more than the
costs of supply.
2. The organisation must be able to create greater value than competitors.
Porter identified two means to achieve competitive advantage:
1. Organisations have structurally lower costs than its competitors.
2. Products or services are differentiated from competitors’ products or services.
, Exploring Strategy by Gerry Johnson et al.
11th edition.
According to Porter, the scope of the target group can be narrowed down (segmentation) or broad.
7.2.1 Cost-leadership strategy
Cost-leadership strategy involves becoming the lower-cost organisation in a domain of activity.
There are four key cost drivers that help to deliver cost leadership:
• Input costs, through low labour costs countries.
• Economies of scale, reduces the average costs. Applicable to operations with high fixed costs.
• Experience, reduces unit costs.
• Product/ process design, efficient process design can reduce costs and recognize whole-life
costs: the costs to the customer not just of purchase but of subsequent use and
maintenance.
Porter underlines two tough requirements for cost-based strategies: lowest cost and quality. There
are two options here:
1. Parity/equivalence: cost leader charges same price as competitors but has higher
profit.
2. Proximity/closeness: competitors is close to competitors in terms of product
features.
, Exploring Strategy by Gerry Johnson et al.
11th edition.
7.2.2 Differentiation strategy
Differentiation strategy involves uniqueness along some dimension that is sufficiently valued by
customers to allow a price premium. There are three primary differentiation drivers:
1. Product and service attributes providing better and unique features.
2. Customer relationship through customer services and responsiveness, customisation or
marketing and reputation.
3. Complements which are linked to other products or services.
7.2.3 Focus strategy
A focus strategy targets a narrow segment or domain of activity and tailors its products or services to
the needs of that specific segment to the exclusion of others. There are two variations of focus
strategy:
1. Cost focus strategy. Cost focusers identify areas where broader cost-based strategies fail
because of the added costs of trying to satisfy a wide range of needs.
2. Differentiation focus strategy. Differentiation focusers look for specific needs that broader
differentiators do not serve so well.
Successful focus strategies depend on three factors:
- Distinct segment needs – if segment distinctiveness erodes, it becomes hard to defend the
segment from competitors.
- Distinct segment value chains – which are difficult and costly for rivals to construct.
- Viable segment economics – the segments can easily become too small to serve (changing
economies of scale).
7.2.4 Hybrid strategy
A hybrid strategy combines different generic strategies. Porter acknowledged some situations in
which strategies can be combined (become hybrid):
▪ Organisation separation – different strategic business units (SBUs) pursue different generic
strategies.
▪ Technological and managerial innovation – radical changes in technology and managerial
allow improvements in cost and quality and may require other strategy.
▪ Competitive failures – failures of others remove pressure for competitive advantage.
7.2.5 The strategy clock
The strategy clock helps to identify which generic strategy to adopt. The clock adopts two
perspectives: price and the perceived benefits. The clock identifies 4 zones:
1. Differentiation (zone 1). The perceived benefits is high and mostly a price premium is paid.
2. Low-price (zone 2). This zone involves low prices and low perceived benefits. A low-price
strategy can be adopted to gain market share.
3. Hybrid strategy (zone 3). Hybrid is about differentiation and low-price.
4. Non-competitive strategy (zone 4). High prices and low benefits are often rejected by
customers unless businesses have a strategic lock-in.
Gerry Johnson et al. 11th edition.
, Exploring Strategy by Gerry Johnson et al.
11th edition.
7. Business Strategy and Models
7.1 Introduction
Two fundamental questions:
1. What is a business strategy;
2. and what business model should a company, business unit or other organisation adopt in its
market?
A strategic business unit (SBU) supplies goods or services for a distinct domain of activity.
A business model is the relationship between value created for customers and the activities of the
organisation and how the organisation can capture value from this.
There can be three themes around business strategy be identified:
1. Generic competitive strategies, including cost leadership, differentiation, focus and hybrid
strategies.
2. Interactive strategies, building on the notion of generic strategies to consider interaction
with competitors, especially in hypercompetitive environments, and including both
cooperative strategies and game theory.
3. Business model, including the three basic components of value creation, value configuration
and value capture.
7.2 Generic competitive strategies
Competitive strategy is concerned with how a company, business unit or organisation achieves
competitive advantage in its domain of activity.
Competitive advantage is about how a company, business unit or organisation creates value for its
users which is both greater than the costs of supplying them and superior to that of rivals.
• Two important futures of competitive advantage
1. Customers must see sufficient value that they are prepared to pay more than the
costs of supply.
2. The organisation must be able to create greater value than competitors.
Porter identified two means to achieve competitive advantage:
1. Organisations have structurally lower costs than its competitors.
2. Products or services are differentiated from competitors’ products or services.
, Exploring Strategy by Gerry Johnson et al.
11th edition.
According to Porter, the scope of the target group can be narrowed down (segmentation) or broad.
7.2.1 Cost-leadership strategy
Cost-leadership strategy involves becoming the lower-cost organisation in a domain of activity.
There are four key cost drivers that help to deliver cost leadership:
• Input costs, through low labour costs countries.
• Economies of scale, reduces the average costs. Applicable to operations with high fixed costs.
• Experience, reduces unit costs.
• Product/ process design, efficient process design can reduce costs and recognize whole-life
costs: the costs to the customer not just of purchase but of subsequent use and
maintenance.
Porter underlines two tough requirements for cost-based strategies: lowest cost and quality. There
are two options here:
1. Parity/equivalence: cost leader charges same price as competitors but has higher
profit.
2. Proximity/closeness: competitors is close to competitors in terms of product
features.
, Exploring Strategy by Gerry Johnson et al.
11th edition.
7.2.2 Differentiation strategy
Differentiation strategy involves uniqueness along some dimension that is sufficiently valued by
customers to allow a price premium. There are three primary differentiation drivers:
1. Product and service attributes providing better and unique features.
2. Customer relationship through customer services and responsiveness, customisation or
marketing and reputation.
3. Complements which are linked to other products or services.
7.2.3 Focus strategy
A focus strategy targets a narrow segment or domain of activity and tailors its products or services to
the needs of that specific segment to the exclusion of others. There are two variations of focus
strategy:
1. Cost focus strategy. Cost focusers identify areas where broader cost-based strategies fail
because of the added costs of trying to satisfy a wide range of needs.
2. Differentiation focus strategy. Differentiation focusers look for specific needs that broader
differentiators do not serve so well.
Successful focus strategies depend on three factors:
- Distinct segment needs – if segment distinctiveness erodes, it becomes hard to defend the
segment from competitors.
- Distinct segment value chains – which are difficult and costly for rivals to construct.
- Viable segment economics – the segments can easily become too small to serve (changing
economies of scale).
7.2.4 Hybrid strategy
A hybrid strategy combines different generic strategies. Porter acknowledged some situations in
which strategies can be combined (become hybrid):
▪ Organisation separation – different strategic business units (SBUs) pursue different generic
strategies.
▪ Technological and managerial innovation – radical changes in technology and managerial
allow improvements in cost and quality and may require other strategy.
▪ Competitive failures – failures of others remove pressure for competitive advantage.
7.2.5 The strategy clock
The strategy clock helps to identify which generic strategy to adopt. The clock adopts two
perspectives: price and the perceived benefits. The clock identifies 4 zones:
1. Differentiation (zone 1). The perceived benefits is high and mostly a price premium is paid.
2. Low-price (zone 2). This zone involves low prices and low perceived benefits. A low-price
strategy can be adopted to gain market share.
3. Hybrid strategy (zone 3). Hybrid is about differentiation and low-price.
4. Non-competitive strategy (zone 4). High prices and low benefits are often rejected by
customers unless businesses have a strategic lock-in.
