this is a lecture from open tuition to benefit from the lecture you should download the free lecture notes from open tuition com first thing how we can look out of the steps involved in strategic options and first there are what's there is the generic strategies think of generic as being fundamental really these are the strategies which kind of sit beneath or support other strategies and there are three cost leadership differentiation and focus which we'll see in the next slide second step is what's called strategic direction once you've got your fundamental strategy there are a number of different directions you can take maybe opening in a new market maybe developing a new product and so on and finally there is how we are going to achieve our strategic direction for example if you're opening in a new market perhaps abroad there are choices of where I can go out and I can set up my own factory distribution center in America say or what I could do is I could maybe buy an American company takeover merger or maybe I get into some sort of distribution or franchising arrangement with with people who are already in that country anyway first the generic strategies again it's Michael Porter you can nearly always refer to these in an answer to a strategy question because it someday is making profits they have adopted one of these strategies so they're making good profits do it well if they are doing badly then they haven't adopted either the cost leadership or the differentiation strategy let's start with this person in the middle here this person is somebody who's who's described as being stuck in the middle and what they're doing is they're making ordinary products not bad products just ordinary products and they're selling into an essentially competitive market are therefore because of selling ordinary products into a competitive market their prices are kept by competition thoroughly low they find it hard to increase prices because their products are so ordinary however they're not very efficient in manufacturing and their costs are really quite high here which means that the profit here is really quite small this people stuck the middle are gonna trapped behind a price they can't get up at a cost they can't get there they're made making this miserable little profit they're just about hanging on in there but they were going to find it difficult to survive in a long term because of this miserable little profit they can't produce new products they can do a certain development they can market themselves very well and one of the more successful companies can kind of just get rid of them like that to be successful there are two routes you can either keep making your ordinary product but what you do is you get your cost way down and that will open up the margin so this is the low cost or cost leader producer so the selling price stays where it is and the cost goes down opening the margin these people can make good profits if they're going to do this they need almost ferocious cost control the only trick they have in a book is keeping the costs down there's nothing they click lever about their product they will have very very careful costing systems variance analysis systems they will be making sure people clock in and out and repaid for the work they do and so on they'll be operating probably a very huge global scale because that is often the way in which you get your cost per unit down quite a fierce environment to work in the other thing you can do is to say well I'm not actually competing with with you lot who are making ordinary products I'm making a special probe a better product and this allows me to with my my price up so what I'm doing is I'm opening a margin now by raising my selling price something special about the product something doesn't mean it's better it might just be the brand but for some reason your customers are willing to spend a lot of it we can give examples of these two over here the cost leader might be a can of lenovo or may be accurate packard kind of desktop perfectly capable machines but you know very good value for money and a louver and you look picard cooperate in a huge huge scale very low costs over here we might characterize it by Apple machines something special about Apple machines people in a way pay more for them for the same kind of computing power you pay more for your phone really because of its style that's Luke's it's brand really they should pay a lot more there are physical is something to do with the operating system which many people prefer but hello Apple is very careful with its costs it is not quite beyond they'll handle there they primarily get high profits by having high selling prices and finally there was a third generic strategy which you may or may not remember called focus by large the low-cost strategy and the differentiation strategy tend to be a bit mutually exclusive some companies bring it off doing both of them Toyota for example its Toyota branded cars you could regard as maybe cost leaders but the Lexus branded cars have more luxury and you might regard as being a differentiated product but they're very careful to really keep those brands separate most businesses are low unknown to be either low cost or differentiation focus means you have on top of these choices the choice of do we focus on a narrow market segment or do we try to supply to everyone so you might have decide to focus because you're quite a small company and you can't produce a whole range of products so he just produced kind of one product for one segment of the market here and you can become a low-cost producer of that or what you do is you become a specialist supplier to one segment of the market and you differentiate holiday companies you can see in here a holiday company which focuses is in the UK it's called Crystal and it just focuses on this ski market ok but then within the ski market it has the opportunity am I going to top the cheap ski resorts giving my costs down how am I going to the more luxurious ski resorts better hotels and so which is maybe a differentiated product you can usually use this in as I said you can usually use this as scenario because if a company is is presently successful it is either cost leading or differentiating you can analyze that very often however it's it's not a successful company it's a company which is had a glorious history but now is facing hard times it's very often they're relatively small company and it is under great pressure from large new entrants to the market I have to advise that company what did you do to survive in the future and almost certainly what did you do is you down this route here you should become a focus differentiator it's a small company so focus your efforts in one particular market segment get to know that market segment really well and provided with goods which are just perfect for that market segment and you can sell at a high price for the more of this whole market segment the big mass producers may not be interested in it they leave you alone to survive in his little kind of crevice of the market if your small family type company tries to go down here and become a cost leader it's always doomed to failure how can a small local company compete with multinationals in terms of the buying power the huge economies of scale that they get from huge manufacturing plants their distribution economies of scale are all over the place large companies are the easiest way to become cost leaders so you'd really have to be convinced that a small company could make it like I mean by becoming up costly probably safer them say for them to be come or attempt to become anyway a differentiator the strategic clock is just a bit of a development of the porters generic strategies it assesses maybe more intermediate points that you would have here and I sometimes illustrate this by using Airlines some of which you may or may not have heard of but we start off with a very low price and absolutely basic and kind of a service and probably we would regard that as Ryanair right now frequently beats ours on prices but but they you know you pay for everything else you pay for coffee luggage extra seat room checking in all sorts of things you know no frills definitely generally regard is maybe being is slightly better on the way maybe it hooks after people let's for the sake of argument let's say easyJet we might argue there there that more generous on cabin baggage for example they don't weigh it so they were certainly before on air they would allocate seats and to the like rather the free fall in Ryan it also being preferred to pay a little bit more a little bit better service next we've really clever strategy if you would bring it off a hybrid strategy where at one on the same time you can give a higher level of service but your prices are low and I must put you in a very kind of safe position the example I'll use here it's an American airline called JetBlue I came across it when my son was traveling from South America to New York I think and the flight took off about an hour late but it didn't think much of it but then he was delighted and on the flight there was endless cups of coffee tea on shoes water whereas a many cheap flights you have to pay for those and this would have been a cheap flight he would have gone on the internet and found the cheapest way of getting to New York and then it had arrived in New York about an hour late and when he got up the next morning it was message in his email apologizing from JetBlue apologizing for being late and giving him a $25 voucher as kind of compensation that is remarkable trying to get compensation from any airline even you know when they're at fault is remarkably difficult here JetBlue was volunteering this $25 voucher for being an hour late and they have still a high reputation in America though there are some thoughts that maybe is beginning to crumble a little bit they're beginning to make people pay for luggage and and so on kind of joining me maybe more than the mainstream airlines but they're still right by differentiation where you get a better service but you pay all for it it's give a business class so business loss definitely better definitely not more money no problems then finally focus differentiation very high price but very high levels of service what about in here if we put private jet as well as lecturing this and I said for the class has anyone here ever being in a private jet and one student could have a SAN said yes I have that we all looked at him with amazement said where have you been in the private jet and he said in my dreams the other strategies down here were there's a relatively high price but a relatively low level of service you might you might try those suppliers once but you weren't trying again and this is really kind of doomed to failure high price and low service at the same time won't wash so that is the fundamental or generic strategies let's look now at the unsourced matrix which gives us the strategic direction think that what so many profit organizations want to do is to get their profits up I think that's what that's kind of what drives them and this sets add we can stay with our present products we'll go for new products we can stay with our present Marc words that go into new markets that's the choice and this this matrix is remarkable because it gives you really all the things a company can do to try to increase profits all they're kind of in one diagram so it's really quite powerful and the first thing we could think of doing maybe is efficiency gains efficiency gains is the kind of politically correct way of saying cost-cutting if you're in to your organization say right we're going to have cost-cutting people get frightened because their job is a cost their wages are cost they get worried but if you go in and say we're going to have efficiency similarly things that's quite good second you try to achieve higher market share penetration going from 20% to maybe 22 percent of the market don't think you're going to go from 20 percent to 40 percent you know the the competitors will retaliate their fight back and companies over a period of the year winning an extra two percent or maybe they started about 25 percent they're really happy with that similarly efficiency gains you know can be able to kind of cut costs by 50% or anything of that sort if you're going to be keeping roughly the same level of operation consolidation is basically merger joining with other people becoming bigger more efficient and so on and finally withdrawal from some markets there might be obviously loss making markets or they might just be markets which was so small the 30 cent uses to stay in and will be far better just getting out and concentrating our resources somewhere else this stop left hand quadrant could be characterized pretty much as low risk low return modest improvements but fully controllable not usually investing a lot up front which is in jeopardy second place we could look at to try and get profits is either market development or product development so maybe what you do in your market development here is decide I've conquered Europe am I going to the USA or what you do live in your product development maybe you have conquered the world with vacuum cleaners maybe you go into maybe washing machines or some other kitchen device obviously if the USA works for you as a market you you can be greatly increasing your revenue could bring huge increases in profit but obviously there's a real big risk you less a lot trying to get into this new market and they don't like you and certainly the the American mark has been a bit of a graveyard for retail organizations in United Kingdom so our biggest ones have tried to get into our mark and they just get something wrong and it's not for want of spending money or investing in the market but it just just doesn't work these don't understand quite properly what Americans consumers want and like so it's higher higher risk higher return and then this product development you spend a lot of R&D developing new product you launch it maybe people don't like it gets bad reviews and then some and again you're not guaranteed that you're gonna get the high returns that you wanted so these two here both of these here I would regard as higher risk higher risk and return and the final place we would look is diversification and we have both related and unrelated diversification this one here I think will be explaining next should to be really cautious about but this means that potentially you are changing the nature of your business quite radically different mark and different product at the same time and you are kind of in an area that you might not understand very well and quite high risks