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Summary Literature week 6
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This is a summary of all the literature of week 6 of the course Governance and Strategy.
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Literature Week 6 – Governance and StrategyJohnson (2017) Business strategy and models.
Business strategies are about how to compete in a
marketplace – has to decide on different issues then. Strategy
business unit (SBU/divisions/profit centres): supplies goods or
services for a distinct domain of activity.
Public-sector organizations need to be ‘competitive’ against
comparable orgs in order to satisfy their stakeholders, secure funds and protect themselves
against alternative private suppliers. So also need a business strategy and model.
Three themes around business strategy:
- Generic competitive strategies – comp strategy looks at how an org achieves comp
advantage in its domain of activity. Issues: costs, product and service features,
branding. Comp adv: how an org creates value for its users which is greater than the
costs of supplying it and superior to the rivals’ value. To be competitive the customers
must see enough value in it that they want to pay > supply costs. Advantage: must
create greater value than competitors. Can do this by either setting low prices of
having better products than competitors. Scope of customers also possibly adds to
comp adv → Generic strategies: cost, differentiation and scope.
o Cost leadership: becoming the lowest-cost org in a domain. But also need to
meet market standards (quality). 2 options:
▪ Parity/equivalence: charging same price as average competitor and
getting cost adv through extra profit.
▪ Proximity/closeness: offering same-ish products as competitors, for
somewhat lower price.
4 key cost drivers that can help deliver cost leadership:
▪ Input costs: low labour costs
▪ Economies of scale: increasing scale reduces average costs of
operation, esp when there are high fixed costs.
▪ Experience: the amount of experience with each unit of output leads
to reduction in unit costs. More exp → more efficient: Labour
productivity goes up + Costs saved by efficient design or equipment.
Experience curve, three implications for business strategy:
• Early entrants in market → cost advantage
• Gain + hold market share
• Improvements continue over time
▪ Product/process design: can influence cost as efficiency can be
designed in at the outset. Can be designed to reduce whole-life costs,
e.g. needing less servicing over time.
o Differentiation: uniqueness along some dimension that is sufficiently valued
by customers to allow a price premium. But need to keep track of the costs.
Three differentiation drivers:
▪ Product and service attributes.
▪ Customer relationships: services + responsiveness, customization,
marketing + reputation (emotional and psych aspects).
1
, ▪ Complements: complementary services (2 products together).
o Focus: targets a narrow segment/domain and tailors its products to the needs
of this segment to the exclusion of others. Give better/cheaper products than
their competitors which have broader scope. Cost or differentiation focus. But
can have coordination + compromise problems or inflexibility. Successful focus
strategies depend on:
▪ Distinct segment needs.
▪ Distinct segment value chains: should have special
production/distribution processes which aren’t easy to copy.
▪ Viable segment economies: changing (larger) eco of scale + greater
competition can eliminate the need for focused/narrow strategy.
o Hybrid strategies: combines different generic strategies. But complex and can
get stuck in middle, and trade-offs can happen btwn cost + quali.
Circumstances for hybrid strategies (HS):
▪ Organizational separation: possible to create separate SBUs with diff
generic strategies + cost structures. Challenge: prevent negative spill-
over from one SBU to another.
▪ Technological or managerial innovation → improvement in cost + quali.
▪ Competitive failures: comp who are stuck in middle, less pressure to
adhere to 1 strategy. Also when you dominate the market.
The Strategy Clock: gives more scope for HS. Focuses on prices to customers
(more visible) and allows for full range of incremental adjustments than
Porter’s sharp distinctions btwn the generic strategies. Costs are imp though,
otherwise cannot sustain over time. 3 feasible zones, 1 ultimate failure zone:
▪ Zone 1: differentiation. 12 oclock is without price premium, so high
benefits moderate pricing, used to gain market share. Afterward can
move toward 1-2 oclock with high prices again. 2 oclock is focused diff
with higher pricing and reduced benefits, ok if lack of competition.
▪ Zone 2: low-price: 9 oclock is low prices with reasonable value = gain in
market share (but in combo w/smth to gain cost advantage to be
sustainable). 7 oclock is no-frill, low benefits and low prices.
▪ Zone 3: hybrid stategy: lower prices and higher benefits. Used for
aggressive bids for increased market share or entering new market.
▪ Zone 4: non-comp strategies: low benefits and high prices → failure.
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