University of Southampton

MANG3023 - Management 2
Second Assignment

Title: Explain the following management concepts, focusing specically upon how they might encourage managers to strive for an eective business performance: 1. The Strategy Clock 2. The Value Chain 3. Porters Five Forces

Christophe Dormenval - cnd1g10@soton.ac.uk

April 15, 2013

The Strategy Clock

The strategy clock is a competitive strategy concept based on the assumption that in a competitive situation where numerous brands of similar products are available, customers choose a product based on its perceived value for money. (Bowman and Faulkner, 1997) The strategy clock presents eight market positions based on the price of a product (or service) and how it is perceived by potential customers (see gure 1): (1) No frills strategy: A combination of low price and Low perceived product/service benets. This market segment corresponds to the price-sensitive customers and is driven by cost. (2) Low price strategy: Oering lower prices than direct competitors but maintaining the same perceived value which may lead to price wars. Possible negative outcomes include margin reductions and the inability to reinvest in product development. (3) The hybrid strategy: Aim: to achieve both dierentiation and low price compared to competitors. This goal is reached by providing benets to customers whilst maintaining low prices. However sucient margins need to be obtained to reinvest into developing and maintaining the bases of dierentiation. (4-5) Dierentiation & focused dierentiation: High perceived product or service benets which justify a price premium to a niche market (in the case of focus dierentiation) (6-7-8) Failure strategies: Low perceived value for money in its product features, price or even both: increasing price but maintaining perceived value increasing price whilst reducing product service or benets reducing the latter whilst maintaining price. The three strategies could lead to failure unless in a position of monopoly or protection.

Figure 1: The Strategy Clock, Competitive Strategy Options (Johnson et al., 2008)

The strategy clock can be used by managers to quickly identify their segment market and positions compared to competitors. Strategic options can then be discussed to sustain a competitive advantage, which could either be price-based (1-2) or dierentiation-based (4-5). (Johnson et al., 2008) A price-based advantage is sustained by maintaining competitive prices by: 1. Developing an ecient production cost to minimize costs. 2. Lowering margins, capable of greater sales volumes or through cross-subsidies. 3. Accessing low-cost distribution channels (e.g. cheaper raw materials), leading to lower production costs. 4. Cutting cost through Porters value chain. Dierentiation-based advantage can be sustained by developing: 1. Its R&D department and creating diculties to imitate 2. An imperfect mobility through intangible assests

The Value Chain

Porters value chain concept was rst introduced in 1985. The systematic approach used to analyze an organisations activities makes it an essential tool to identify the latters competitive advantage (either price or dierentation based) and providing solutions to improve it. (Porter, 1985) V alue Chain = V alue Activities(1) + V alue M argin(2)
(1) (2)

(1)

Cost of every physical and technological activities performed Dierence between the total value of a product (or service) and the overall cost value activitites

V alue Activities = P rimary Activities + Support Activities

(2)

A rm is divided into four discrete activities which are put into place to support ve primary activities (see gure 2). This is used to identify potential sources of dierentiation as well as the value activities and margin of a product(equations 1 and 2). Identifying the value activities could lead to a price-lead strategy. These are therefore considered to be the foundations of any competitive advantage and will help determine the relative value of a product compared to rival companies. The competitive advantage of a rm will be exposed by comparing its value chain to aspiring rivals. However the value chain described in gure 2 is a generic model and a value chain specic to a particular industry needs to be designed to fully identify a companys competitive advantage (e.g. manufacturing or marketing branches which should be subdivided into various activities). Increasing the number of subdivision will result in better precision in determining the former. It is also easy to understand how following a product, order or paper ow will facilitate this task. Therefore using the value chain is a useful tool to identify a companys competitive advantage but the process also enables a company to identify deciencies in a business plan. The value chain enables managers to rapidly identify the strength and weaknesses of an organisation along with the next business strategy to maintain its advantage. Ultimately, the operational eectiveness (when a company peforms similar activities better than its rivals) refers to a number of practices and should therefore include an organisations management. (Porter, 1996)

Figure 2: The Value Chain, Building Strategic Capability (Stainton, 2013)

Porters Five Forces

In 1979, Porter introduced a framework for businesses to identify potential threats to the sustainability of their long term prots. Porters Paradigm is used to: 1. Identify sources of competition. 2. Assess factors which inuence competitiveness (strength, weaknesses, opportunities, threats and competitive advantage) 3. Indentify an industrys attractiveness (or its protability) Managers must be capable of identifying and coping with competition. Indeed, long term protability is based on making sure that the threats identied remain weak. Porters framework is also a useful tool to identify attractive (which will generate prot) or unattractive industries where strong forces drive the protability down (Stainton, 2013). Threats to a companys protability are often associated with direct competition from rival rms only. However potential threats can also grow from other forces: customers, suppliers, potential entrants and product substitutes (see gure 3).

Figure 3: Porters Five Force (Porter, 2008)

Although two companies may oer very dierent products, the underlying drivers for protability are identical. However to understand the competition and success of an industry, the latters structure must be analysed in terms of the ve forces. Indeed, the competitive forces and underlying causes within a structure can be used to justify a companys protability: industries where strong forces exist generate almost no return, whereas companies with weak forces make a prot. Therefore an industrys structure is the reason behind its competitiveness and protability. It is also what generates prot in the long run. Competitive forces can provide a framework for anticipating and inuencing competition over time. Eective strategic positioning can only be achieved if the industrys structure has been fully understood. Within a companys corporate strategy, it is indeed necessary to incorporate defense strategies against competitive forces. The ultimate goal for businesses would be to use these threats to their advantage. The strongest competitive forces determine the protability of an industry and is therefore very important when outlining its strategy. However the strength of each competitive force is determined by the current economic and technical situation, and outlines the industrys structure. (Porter, 2008)

References
C. Bowman and D. Faulkner. Competitive and Corporate Strategy. Irwin, 1997. G. Johnson, K. Scholes, and R. Whittington. Exploring Corporate Strategy. Pearson Education Limited, 2008. M.E. Porter. Competitive Advantage: creating and sustaining superior performance. Collier Macmillan, 1985. M.E. Porter. What is Strategy? Harvard Business Review, November 1996. M.E. Porter. The Five Competitive Forces that Shape Strategy. Harvard Business Review, January 2008. A. Stainton. MANG 3023 Lecture Notes. University of Southampton, March 2013.