Ikea low cost leadership strategy

Exploring Business Strategy (247SAM)

Lecture 6 Business Strategy

*

Update

Where are we now?

Intended learning outcomes

Identify strategic business units (SBUs) in organisations
Assess business strategy in terms of the generic strategies of cost leadership, differentiation and focus
Identify business strategies suited to hypercompetitive conditions
Assess the benefit of cooperation in business strategy
Strategic Business Unit

A strategic Business Unit (SBU) supplies goods or services for a distinct domain of activity.
Distinct businesses within a large diversified corporation
SBUs boundaries is often complex
Competitive strategy

Competitive strategy is concerned with how an SBU strategy achieves competitive advantage in its domain of activity.
Competitive advantage is about how an SBU creates value for its users both greater than the cost of supplying them and superior to that of rival SBUS
*

Generic vs. Interactive Strategies

Porter’s generic strategies

Advantage
Low Cost Differentiation
Target scope Broad target (Industry Wide) Cost Leadership Strategy Differentiation Strategy
Narrow target (Market Segment) (Cost) focus Strategy (Differentiation) focus Strategy
The historic William Morris building, dates from 1916. Car entrepreneur William Morris bought it in 1923 to produce car engines. It was acquired by the university in 1992.

*

Cost leadership strategy

Cost-leadership strategy “involves becoming the lowest-cost organisation in a domain of activity” (Johnson et al. 2012:200)
Figure 5.3 Economies of scale and the experience curve

Cost leadership strategy

Apart from economies of scale and experience, what else could influence cost? E.g. product/process design?

What about quality when taking cost as a priority?

Can charge extra with the same cost but providing product or services valued by customers?

Can charge lower than competitor for a product with similar cost? By doing so, the company can sell more and achieve larger market share?

*

Differentiation strategy

Differentiation “involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium” (Johnson et al. 2012:203)
Differentiation gives customers a reason to prefer one product over another
Within each market businesses may differentiate along different dimensions
Examples of differentiation strategy

Nokia is interested in the high-end Smartphone market, but they are also selling to the price-sensitive demographic and have an even bigger target in their sight. They want to become the biggest entertainment media network in the world[2]. They are going to accomplish this through R&D with 10 labs throughout the world and by pursuing a comprehensive differentiation strategy with phone prices ranging from $10 to $700 (see Figure 2). Nokia offers devices to satisfy every budget and they are trying to make their products and services indispensable.

Google’s generic strategy, based on Porter’s model, is differentiation. This generic strategy involves a broad market scope. Google offers is products to practically everyone around the world. However, the generic strategy of differentiation also involves developing certain unique capabilities that make the business competitive. Google sets itself apart from competitors through the uniqueness of its products. This uniqueness is achieved because Google is a highly innovative company. The increasing variety of its products, inclusive of Google Search, Google Fiber and Google Glass, is a manifestation of this innovation under the differentiation generic strategy.

Toyota differentiation: design and quality, hybrid car, dominant market share in north America.

*

Differentiation strategy

Two key factors that require clarity before choosing attributes to differentiate on:

The strategic customer
Key competitors
Focus Strategies

Focus strategy “targets a narrow segment of domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others” (Johnson et al. 2012:205)
Focuser achieves CA by dedicating itself to serving target segments better than others which are trying to cover a wide range of segments
There are two categories of focus strategies: cost focus and differentiation focus.
E.g.: Differentiation in the Airline Industry

Figure 6.5 Mapping differentiation in the US airline industry

Source: Simplified from Figure 1, in D. Gursoy, M. Chen and H. Kim (2005), ‘The US airlines relative positioning’, Tourism Management, 26, 5, 57–67: p. 62

*

Differentiation focus

Which one is…

MaxMara?

Burberry?

H&M?

Cost focus

https://www.youtube.com/watch?v=069y1MpOkQY

Reviewing generic strategies:
Cost, price and profits

Figure 5.4 Costs, prices and profits for generic strategies

Reviewing generic strategies:
Combining generic strategies

A company can create separate strategic business units each pursuing different generic strategies and with different cost structures.
Technological or managerial innovations where both cost efficiency and quality are improved.
Competitive failures – if rivals are similarly ‘stuck in the middle’ or if there is no significant competition then ‘middle’ strategies may be OK.
Reviewing generic strategies:
“Stuck in the middle”

Porter’s argues:

It is best to choose which generic strategy to adopt and then stick rigorously to it.
Failure to do this leads to a danger of being ‘stuck in the middle’ i.e. doing no strategy well.
The argument for pure generic strategies is controversial. Even Porter acknowledges that the strategies can be combined (e.g. if being unique costs nothing).
Interactive strategies
(student self-guided study)

Generic strategies to be chosen and adjusted based on competitors’ strategies.
The business strategy choices interact with those of competitors
Two interactive strategies: cooperative strategy and game theory, particularly in a hypercompetitive context.
Hypercompetitive situation

Hypercompetition describes markets with continuous disequilibrium and change, e.g. popular music or consumer electronics
Successful competitive interaction in hypercompetition demands speed and initiative rather than defensiveness.
Cooperation strategy: Cooperating with rivals

Figure 5.8 Cooperating with rivals

Source : Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press (Michael E. Porter 1998) with the permission of The Free Press,
a Division of Simon & Schuster, Inc. Copyright © 1980, 1998 by The Free Press. All rights reserved

Game theory

Game theory encourages an organisation to consider competitors’ likely moves and the implications of these moves for its own strategy.
Game theory is particularly applicable in an interdependent market situation.
One company’s strategic decision will be made on the base of anticipating competitor counter-moves.
Summary (1)

Business strategy is concerned with seeking competitive advantage in markets at the business rather than corporate level.
Business strategy needs to be considered and defined in terms of strategic business units (SBUs).
Different generic strategies can be defined in terms of cost-leadership, differentiation and focus.
Summary (2)

In hypercompetitive conditions sustainable competitive advantage is difficult to achieve.
Competitors need to be able to cannibalise, make small moves, be unpredictable and mislead their rivals.
Cooperative strategies may offer alternatives to competitive strategies or may run in parallel.
FURTHER READING

CHAPTER 6 OF CORE TEXT
Seminar case study: IKEA

Identify where (in its value network) and how IKEA has achieved cost leadership.
Identify how IKEA has achieved differentiation from its competitors.
Explain how IKEA tries to ensure that its ‘Hybrid’ strategy remains sustainable and does not become ‘stuck-in-the-middle’.
What are the lessons from China about IKEA’s approach?
*

Update

The historic William Morris building, dates from 1916. Car entrepreneur William Morris bought it in 1923 to produce car engines. It was acquired by the university in 1992.

*

Apart from economies of scale and experience, what else could influence cost? E.g. product/process design?

What about quality when taking cost as a priority?

Can charge extra with the same cost but providing product or services valued by customers?

Can charge lower than competitor for a product with similar cost? By doing so, the company can sell more and achieve larger market share?

*

Nokia is interested in the high-end Smartphone market, but they are also selling to the price-sensitive demographic and have an even bigger target in their sight. They want to become the biggest entertainment media network in the world[2]. They are going to accomplish this through R&D with 10 labs throughout the world and by pursuing a comprehensive differentiation strategy with phone prices ranging from $10 to $700 (see Figure 2). Nokia offers devices to satisfy every budget and they are trying to make their products and services indispensable.

Google’s generic strategy, based on Porter’s model, is differentiation. This generic strategy involves a broad market scope. Google offers is products to practically everyone around the world. However, the generic strategy of differentiation also involves developing certain unique capabilities that make the business competitive. Google sets itself apart from competitors through the uniqueness of its products. This uniqueness is achieved because Google is a highly innovative company. The increasing variety of its products, inclusive of Google Search, Google Fiber and Google Glass, is a manifestation of this innovation under the differentiation generic strategy.

Toyota differentiation: design and quality, hybrid car, dominant market share in north America.