COMP7880 E-Business Strategies
Week 5 – Strategy Formulation
Strategy options &
Sustaining a Competitive Advantage
Recap: The e-business strategy
framework
What we’ve learnt so far……
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Theories and Concepts
for Strategic Analysis
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The (Five-)Forces Model of
Competition
Recap:
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Recap:
Industry Rivalry
Cutthroat (Brutal)
Competitors engage in protracted price wars or employ other
aggressive tactics mutually destructive to profitability.
Fierce (Strong)
A vigorous market share battle reduces the profit margins of most
industry rivals to bare-bones levels.
Moderate (Normal)
Maneuvering among industry rivals, while lively and healthy, still
allows most rivals to earn acceptable profits.
Weak
Industry rivals satisfied with their sales growth and market share
rarely undertake offensives against their competitors.
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Recap:
Business Model
⚫ Business model
 Management’s produces a blueprint for delivering a valuable
product or service to customers that will yield an attractive
profit,
 includes the key structural and operational characteristics of
a firm—the profit formula and customer value proposition
⚫ A business model is usually composed:
 Who it serves
 What it provides
 How it makes money
 How it differentiates and sustains competitive advantage
 How it provides its product/service
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How Well Is the Company’s
Strategy Working?
Recap:
The two best indicators of how well a firm’s
strategy is working are:
Whether the firm is recording gains in
financial strength and profitability
Whether the firm’s competitive strength and
market standing is improving
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Recap:
Resource and Capability
What are the Company’s Competitively Important
Resources and Capabilities?
⚫ A resource is a competitive asset that is owned
or controlled by a firm; a capability is the
capacity of a firm to competently perform some
internal activity.
⚫ Capabilities are developed and enabled through
the deployment of a firm’s resources.
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Determining the Competitive Power of
a Company’s Resources and Capabilities
Recap:
VRIN Competitive Power Tests for sustainable
competitive advantage:
 Is the resource or capability competitively valuable?
 Is the resource or capability rare—something rivals
lack?
 Is the resource or capability inimitable or hard to
copy?
 Is the resource or capability vulnerable to
substitution from different types of resources and
capabilities?
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Recap:
Value Chain Analysis
Assessing the Competitiveness of Company’s Cost
Structure and Customer Value Proposition
⚫ Value chain segments include:
o Upstream
o Downstream
⚫ Center of gravity
the part of the chain that is most important to the
company and the point where its core competencies
lie
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Recap:
Competitive Intelligence
⚫ Competitive intelligence
o a formal program of gathering information on a
company’s competitors
o also called business intelligence
⚫ Sources of competitive intelligence:
 Information brokers
 Internet
 Industrial espionage
 Investigatory services
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Recap:
SWOT Analysis
SWOT represents the first letter in:
Strengths Weaknesses Opportunities Threats
A well-conceived strategy is:
• Matched to the firm’s resource strengths and
weaknesses
• Aimed at capturing the firm’s best market
opportunities
• Positioned to defend against external threats to its
well-being
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Situational Analysis Summary:
SWOT Approach
Source: D Chaffey, E-Business and E-Commerce Management, 2012
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Strategic Factor Analysis Summary
(SFAS) Matrix
Recap:
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Finding a Propitious Niche
⚫Propitious niche
so well-suited to the firm’s internal and external
environment that other corporations are not
likely to challenge or dislodge it
⚫Strategic window
a unique market opportunity that is available for
a particular time
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About your Term Project
…… what is expected!
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Recap:
Review of Mission and Objectives
⚫ A re-examination of an organization’s current
mission and objectives must be made before
alternative strategies can be generated and
evaluated.
⚫ Performance problems can derive from
inappropriate (narrow or too broad) mission
statements and objectives.
⚫ Evaluate the current “Strategy Fit”
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Our Focus …
⚫NOT how to implement EC / EB functions
⚫BUT to
ANALYZE the business requirements in the
perspective of strategic management
FORMULATE suitable business models &
strategies
CHOOSE suitable IT options (especially Webbased ones) to implement the strategies
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The Strategy Formulation, Strategy
Execution Process
Strategic Analysis
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What Is the Company’s Competitive Strength
Relative to Key Rivals?
Determining a company’s overall competitive
position requires answering two questions.
1. How does the company rank relative to competitors
on each of the important factors that determine
market success?
2. Does the company have a net competitive
advantage or disadvantage versus its major
competitors?
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What Strategic Issues and Problems Must Be
Addressed by Management?
The final and most important analytical step is to
focus management on crucial strategic issues.
o Precise pinpointing of problems sets the agenda for
actions to take next to improve the firm’s
performance and business outlook.
o Compiling a “worry list” of problems and issues
creates an agenda for managerial strategy making.
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Recap:
Strategic Marketing Issues
⚫Market position
refers to the selection of specific areas for
marketing concentration and can be expressed
in terms of market, product and geographic
locations
⚫Marketing mix
the particular combination of key variables
under a corporation’s control that can be used
to affect demand and to gain competitive
advantage
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Marketing Mix Variables
Copyright © 2015 Pearson Education, Inc.
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Strategic Financial Issues
⚫Financial leverage
ratio of total debt to total assets
describes how debt is used to increase
earnings available to common shareholders
⚫Capital budgeting
the analyzing and ranking of possible
investments in fixed assets in terms of
additional outlays and receipts that will result
from each investment
Hurdle point
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Product Life Cycle
⚫ Product life cycle
a graph showing time
plotted against the
sales of a product as it
moves from
introduction through
growth and maturity to
decline
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Brand
⚫ Brand
a name given to a company’s product which identifies
that item in the mind of the consumer
⚫ Corporate brand
a type of brand in which the company’s name serves
as the brand
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Corporate Reputation
⚫ Corporate reputation
o a widely held perception of a company by the
general public,
o consists of two attributes:
1. Stakeholders’ perceptions of quality
2. Corporation’s prominence in the minds of
stakeholders
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R&D Mix
⚫ Basic R&D
focuses on theoretical problems
⚫ Product R&D
concentrates on marketing and is concerned with
product or product packaging improvements
⚫ Engineering R&D
concerned with engineering, concentrating on
quality control and the development of design
specifications and improved production equipment
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Increasing Use of Teams (1 of 2)
⚫ Autonomous (self-managed)
a group of people work together without a
supervisor to plan, coordinate and evaluate their
work
⚫ Cross-functional work teams
various disciplines are involved in a project from the
beginning
⚫ Concurrent engineering
specialists work side-by-side and compare notes
constantly to design cost-effective products with
features customers want
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Increasing Use of Teams (2 of 2)
⚫Virtual teams
groups of geographically and/or organizationally
dispersed co-workers that are assembled using
a combination of telecommunications and
information technologies to accomplish an
organizational task
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Quality of Work Life and Human
Diversity
Quality of work life includes improvements
in:
⚫ Introducing participative problem solving
⚫ Restructuring work
⚫ Introducing innovative reward systems
⚫ Improving the work environment
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Quality of Work Life and Human
Diversity
⚫Human diversity
the mix in the workplace of people from
different races, cultures and backgrounds
provides a competitive advantage
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Strategic Information Systems/
Technology Issues (1 of 3)
Information systems/technology contributions
to performance:
⚫ Automation of back office processes
⚫ Automation of individual tasks
⚫ Enhancement of key business functions
⚫ Development of a competitive advantage
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Strategic Information Systems/
Technology Issues (2 of 3)
⚫Web 2.0
the use of wikis, blogs, RSS (Really Simple
Syndication), social networks (e.g., LinkedIn
and Facebook), podcasts and mash-ups
through company Websites to forge tighter links
with customers and suppliers and to engage
employees more successfully
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Strategic Information Systems/
Technology Issues (3 of 3)
⚫Supply chain management
the forming of networks for sourcing raw
materials, manufacturing products or creating
services, storing and distributing the goods and
delivering them to customers and consumers
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What Does the Strategy-Making,
Strategy-Executing Process Entail?
Recap:
⚫ Develop a strategic vision.
⚫ Set objectives.
⚫ Craft a strategy.
⚫ Implement and execute the chosen strategy.
⚫ Evaluate and analyze the external environment
and the firm’s internal situation and performance.
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Stage 1: Developing a Strategic Vision, a
Mission, and Core Values
Strategic Vision
o Top management’s view of “where we are going”
• Firm’s direction and its future product-market-customertechnology focus to stakeholders
o Distinctive and specific to a particular organization
o Avoids use of generic, innocuous, and uninspiring
language that could apply to most any firm
o Definitively states how the company’s leaders intend
to position the firm beyond where it is today
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Characteristics of Effectively Worded
Vision Statements
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Common Shortcomings in Company
Vision Statements
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Expressing the Essence of the
Vision in a Slogan - Examples
Disney
To "create happiness by providing the finest in entertainment
for people of all ages, everywhere"
The Mayo Clinic
The best care to every patient every day
Greenpeace
To halt environmental abuse and promote environmental
solutions
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Strategic Vision versus Mission
Statement
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Linking the Strategic Vision and
Mission with Company Values
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Stage 2: Setting Objectives
Managerial Purpose in Setting Objectives
• To convert the strategic vision into specific performance
targets
• To create yardsticks to track progress and measure
performance
Managerially Valuable Objectives
• Are well-stated (clearly worded)
• Are challenging, yet achievable such that they stretch the
organization to perform at its full potential
• Are quantifiable (measurable)
• Contain a specific deadline for achievement
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Financial Objectives, and Strategic
Objectives
⚫ Objectives are an organization’s performance targets—
results management wants to achieve.
⚫ Financial objectives relate to the financial performance
targets management has established for the organization
to achieve.
⚫ Strategic objectives relate to target outcomes that
indicate a company is strengthening its market standing,
competitive vitality, and future business prospects.
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Balanced Scorecard
⚫ The balanced scorecard is a widely used
method for combining the use of both strategic
and financial objectives, tracking their
achievement, and giving management a more
complete and balanced view of how well an
organization is performing.
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The Balanced Scorecard Approach to
Performance Measurement
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Short-Term and Long-Term Objectives
⚫ Short-term Objectives
 Are targets to be achieved soon
 Represent milestones or stair steps for
reaching long-range performance
⚫ Long-term Objectives
 Are targets to be achieved within 3 to 5 years
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Stage 3: Crafting a Strategy
Crafting a strategy means asking:
How to attract and please customers?
How to compete against rivals?
How to position the firm in the marketplace and
capitalize on attractive opportunities to grow the
business?
How best to respond to changing economic and market
conditions?
How to manage each functional piece of the business?
How to achieve the firm’s performance targets?
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Strategy Formulation Involves
Managers at All Organizational Levels
⚫ In most firms, crafting strategy is a collaborative
team effort that includes managers in various
positions and at various organizational levels.
⚫ A company’s overall strategy is a collection of
strategic initiatives and actions devised by
managers up and down the whole organizational
hierarchy.
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Corporate Strategy and Business
Strategy
⚫ Corporate strategy establishes an overall
game plan for managing a set of businesses in a
diversified, multibusiness company.
⚫ Business strategy is primarily concerned with
strengthening the company’s market position
and building competitive advantage in a single
business company or a single business unit of a
diversified multibusiness corporation.
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A Company’s Strategy-Making
Hierarchy
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Stage 4: Implementing and Executing the
Chosen Strategy
Managing the strategy execution process involves:
• Staffing the organization to provide needed skills and expertise
• Allocating ample resources to activities critical to good strategy
execution
• Ensuring that policies and procedures facilitate rather than
impede effective execution
• Installing information and operating systems that enable
personnel to perform essential activities
• Pushing for continuous improvement in how value chain
activities are performed
• Exerting the internal leadership needed to propel
implementation forward
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Evaluating Performance
⚫ Deciding if there is a need for change:
o Monitoring for disruptive developments
o Evaluating the firm’s recent performance
o Making corrective adjustments to strategy
⚫ Strategy execution−an ongoing process of organizational
learning
o A firm’s vision, objectives, strategy, and approach to
strategy execution are never final.
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Corporate Governance: The Board of
Directors
The Role of the Board of Directors in the StrategyFormulation, Strategy-Execution Process:
o Oversee the firm’s financial accounting and reporting practices.
o Diligently critique and oversee the company’s direction,
strategy, and business approaches.
o Evaluate the caliber of senior executives’ strategy-making and
strategy-executing skills.
o Institute a compensation plan for top executives that rewards
them for actions and results that serve shareholder interests.
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Recap: The e-business strategy
framework
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Strategy Formulation
Outline
⚫Understand the fundamentals of
competitive advantage in e-business.
⚫Explain the generic approaches to strategy
formulation.
⚫Appreciate the meaning of an ‘outpacing’
strategy.
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Business Strategies
⚫ Business strategy
 focuses 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
 competitive, cooperative
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Relationship between e-business
strategy and other strategies
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Source: D Chaffey, E-Business and E-Commerce Management, 2012
Dynamic e-business strategy
model
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Source: Adapted from description in Kalakota and Robinson (2000)
The strategic triangle
- main drivers of competitive advantage
2
Customer
1
Price/
benefit
Price/
benefit
4
Company
Competitors
Cost
Cost
3
Source: Adapted from H. Hungenberg (2006), p. 185.
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The goal of the strategic triangle
1 Is the price/benefit ratio (also called value for money) that we offer better than the
price/benefit ratio of our best competitor?
• 2 Is the value that we offer to our customers perceivable and important to them?
•
•
• 3 Are our costs for making the product (or service) lower than the costs that we incur?
4 Is this advantageous position sustainable into the future?
Source: H. Hungenberg (2006).
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Threshold features and critical
success factors on consumer benefit
Consumer benefit
Critical success factors
Threshold features
Performance
Source: Adapted from H. Hungenberg (2006), p. 185.
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Strategy and the Value Proposition
Competing to successfully gain a competitive
advantage involves giving buyers what they
perceive as superior value proposition by
offering:
• A good product at a lower price
• A superior product that is worth paying more for
• A best-value product that represents an attractive
combination of price, features, quality, service, and
other appealing attributes
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Differentiation and Price
Strategies
Competitive Strategies and Market
Positioning
Competitive Strategy
• Securing a particular competitive advantage over
rivals that offers superior value to customers,
strengthens its market position
• The two principal factors that distinguish one
competitive strategy from another are:
1. Whether a firm’s market target is broad or narrow
2. Whether the firm is pursuing a competitive
advantage linked to lower costs or differentiation
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Porter’s Competitive Strategies (1)
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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Porter’s Competitive Strategies (2)
⚫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?
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Strategy options
Porter‘s Competitive Strategy to achieve a competitive advantage
Unique product
with price
premium
Performance
advantage
Goal of the company
Business strategy
Provide something
unique that is valuable
to buyers
'Differentiation‘
Provide a product
with lowest price
'Cost leadership‘
Become the cost
leader in the industry
(Cost/price leadership)
Competitive
advantage
Price
advantage
Similar product
with lower
price
Source: Adapted from H. Hungenberg (2006), p. 189.
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Porter’s Competitive Strategies
⚫Cost leadership
ability of a company or a business unit to
design, produce and market a comparable
product more efficiently than its competitors
⚫Differentiation
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’s Competitive Strategies
⚫Focus
ability of a company to provide unique and
superior value to a particular buyer group,
segment of the market line or geographic
market
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Porter’s Competitive Strategies
⚫ Cost leadership
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”
Provides a defense against rivals
Provides a barrier to entry
Generates increased market share
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Several levers help a firm to achieve
a cost leadership position
Economies of scale
Economies of scope
Factor costs
Learning effects
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The basic concept of economies of scale is that as a firm increases its
product output, it decreases its unit production cost.
While economies of scale can be realised by increasing the production of
one product type, economies of scope result from expanding the variety
of products sold using the same assets.
Factor costs represent a crucial cost driver, especially for retailing
companies that act as intermediaries. The ability to bargain down input
prices, for instance, through bulk purchasing can be an effective lever
for lowering costs.
Learning effects can lower costs as a firm improves its efficiency over
time, thereby reducing slack and wasteful activities.
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Economies of scale
Price per unit
As the cumulated production
quantity increases, costs per unit
decrease.
Eventually, costs go up
again when production
capacities reach their
constraints
Average costs
Economies of
scale
Dis-economies of
scale
Source: Adapted from Jelassi and Enders (2014), P109
Quantity
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Low-Cost Provider Strategies
A powerful competitive approach with pricesensitive buyers when a firm’s offering:
• Has meaningfully lower costs than rivals—but not
necessarily the absolutely lowest possible cost
• Includes features and services that buyers consider
essential
• Is viewed by buyers as offering equivalent or higher
value even if priced lower than competing products
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Low-Cost Provider Strategies:
An Example – 759 Store
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The Two Major Avenues for
Achieving Low-Cost Leadership
1. Performing essential value chain activities more
cost-effectively than rivals
o Use a lower-cost edge to underprice competitors
and attract price-sensitive buyers in great enough
numbers to increase total profits
2. Revamping the firm’s overall value chain to
eliminate or bypass some cost-producing activities
altogether
o Maintain present price, be content with present
market share, and use lower-cost edge to earn a
higher profit margin on each unit sold
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Cost-Efficient Management of Value
Chain Activities
⚫ Striving to capture all available
economies of scale.
⚫ Taking full advantage of experience
and learning curve effects.
⚫ Trying to operate facilities at full
capacity.
⚫ Substituting lower-cost inputs
whenever there is little or no sacrifice
in product quality or product
performance.
⚫ Using communication systems and
information technology to achieve
operating efficiencies.
⚫ Using the company’s bargaining power
vis-à-vis suppliers to gain concessions.
⚫ Being alert to the cost advantages of
outsourcing and vertical integration.
⚫ Pursuing ways to boost labor
productivity and lower overall
compensation costs.
⚫ Employing advanced production
technology and process design to
improve overall efficiency.
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Important Cost Drivers in a Firm’s
Value Chain
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Revamping the Value Chain
Reengineering the firm’s value chain by:
• Selling directly to consumers and cutting out the
activities and costs of distributors and dealers
• Streamlining operations by eliminating low valueadded or unnecessary work steps and activities
• Collaborating with suppliers to improve supply chain
efficiency by reducing materials handling, shipping
and inventory costs
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When a Low-Cost Strategy Works
Best
⚫ Price competition among rival sellers is especially vigorous.
⚫ The products of rival sellers are essentially identical and are
readily available from several sellers.
⚫ There are few ways to achieve product differentiation that
have value to buyers.
⚫ Buyers incur low costs in switching their purchases from one
seller to another.
⚫ The majority of industry sales are made to a few, largevolume buyers.
⚫ Industry newcomers use introductory low prices to attract
buyers and build a customer base.
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Pitfalls to Avoid in Pursuing a
Low-Cost Provider Strategy
⚫ Overly Aggressive Price Cutting
Price cutting results in lower margins, no increase in
sales volume and lower profitability.
⚫ Becoming too fixated on cost reduction
Buyer interest in additional features might be ignored.
Declining buyer sensitivity to price might be
overlooked.
Technological breakthroughs might nullify cost
advantages.
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Porter’s Competitive Strategies
⚫ Differentiation
 involves the creation of a product or service that is
perceived throughout the industry as unique.
 can be associated with design, brand image,
technology, features, dealer network or customer
service
⚫ Lowers customers sensitivity to price
⚫ Increases buyer loyalty
⚫ Can generate higher profits
⚫ TWG
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TWG Tea
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Differentiation Examples
Companies pursuing differentiation:
•
•
•
•
•
•
•
•
•
•
•
•
Unique taste: Red Bull, Doritos
Multiple features: Microsoft Office, Apple iPhone
Wide selection and one-stop shopping: Home Depot, Amazon.com
Superior service: Ritz-Carlton, Nordstrom
Spare parts availability: Caterpillar
Engineering design and performance: Mercedes-Benz, BMW
Luxury and prestige: Rolex, Gucci, Chanel
Product reliability: Whirlpool and Bosch
Quality manufacture: Michelin, Toyota
Technological leadership: 3M Corporation
Full range of services: Charles Schwab in stock brokerage
Complete line of products: Campbell soups, Frito-Lay snack foods
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Tangible and intangible sources of
differentiation
Quality
Customisation
Convenience
Tangible
sources
Speed of
delivery
Sources of
differentiation
Product
range
Brand
Intangible
sources
Source: Adapted from Jelassi and Enders (2014), P112
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Reputation
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Benefits of Successful Differentiation
Successful execution of a differentiation strategy
allows a firm to:
• Command a premium price.
• Increase its unit sales.
• Gain buyer loyalty to its brand.
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Managing the Value Chain in Ways
That Enhance Differentiation
⚫ Activities That Enhance Differentiation
 Seeking out high-quality inputs
 Striving for innovation and technological advances
 Creating superior product features, design, and
performance
 Production-related research and development activities
 Pursuing continuous quality improvement
 Emphasizing human resource management activities
 Emphasizing marketing and brand-building activities
 Improving customer service or adding additional services
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Revamping the Value Chain System
to Increase Differentiation
⚫ Approaches to enhancing differentiation through
changes in the value chain system
Coordinating with downstream channel allies to
enhance customer value
Coordinating with upstream suppliers to better
address customer needs
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When a Differentiation Strategy
Works Best
⚫ Buyer needs and uses of the product are
diverse.
⚫ There are many ways to differentiate the product
or service that have value to buyers.
⚫ Few rival firms are following a similar
differentiation approach.
⚫ Technological change is fast-paced and
competition revolves around rapidly evolving
product features.
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Pitfalls to Avoid in Pursuing a
Differentiation Strategy
⚫ Pursuing a differentiation strategy keyed to product or
service attributes that are easily and quickly copied
⚫ Offering product features or unique attributes in which
buyers see little value or are easily copied by rivals
⚫ Overspending on efforts to differentiate that erode
profitability
⚫ Not establishing meaningful gaps in quality or service or
performance features over the products of rivals
⚫ Over-differentiating so that product quality or service
levels exceed buyers’ needs
⚫ Trying to charge too high a price premium
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In class exercise
⚫What are Porter's generic strategies? How
it works?
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Readings
⚫ J.E. Gamble, M.A. Peteraf, and A.A. Thompson,
Jr. “Essentials of Strategic Management”,
Chapter 3-5
⚫ T. Jelassi, A. Enders, and F.J. Martinez-Lopez,
“Strategies for E-Business”, Chapter 2-5
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