CHAPTER 4 - STRATEGY FORMULATION AND BUSINESS-LEVEL STRATEGIC ACTION
Learning Objectives
1. Understand the importance of strategy formulation in achieving competitive advantage.
2. Identify and analyze customer segments to tailor strategic actions.
3. Explore various business-level strategies and their associated risks.
4. Integrate cost leadership and differentiation strategies effectively.
5. Utilize network linkages and information systems to support strategic actions.
1. Strategy Focus and Development
Importance
Strategy focus and development guide firms in allocating resources, aligning goals, and achieving competitive
advantage.
Steps in Strategy Development
1. Define Vision and Mission: Establish the firm's long-term goals and purpose.
A vision is an organization's desired future state, while a mission is how the organization plans to achieve that
vision. Both are important statements that help guide an organization's actions and strategies.
2. Conduct Situational Analysis: Use tools like SWOT to assess internal strengths and external
opportunities.
3. Set Strategic Objectives: Formulate clear, measurable goals.
4. Choose Strategic Actions: Select actions aligned with business-level strategies.
BUSINESS LEVEL STRATEGIES
These three approaches are examples of "generic strategies," because they can be applied to products or services in
all industries, and to organizations of all sizes.
Porter called the generic strategies "Cost Leadership" (no frills), "Differentiation" (creating uniquely desirable
products and services) and "Focus" (offering a specialized service in a niche market). He then subdivided the Focus
strategy into two parts: "Cost Focus" and "Differentiation Focus." These are shown in figure below.
The Cost Leadership Strategy
Porter's generic strategies are ways of gaining competitive advantage – in other words, developing the "edge" that
gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost
Leadership strategy:
Increasing profits by reducing costs, while charging industry-average prices.
Increasing market share by charging lower prices, while still making a reasonable profit on each sale
because you've reduced costs.
The Cost Leadership strategy is exactly that – it involves being the leader in terms of cost in your industry or
market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to
attack by other low-cost producers who may undercut your prices and therefore block your attempts to increase
market share.
You, therefore, need to be confident that you can achieve and maintain the number one position before choosing
the Cost Leadership route. Companies that are successful in achieving Cost Leadership usually have:
Access to the capital needed to invest in technology that will bring costs down.
Very efficient logistics.
A low-cost base (labor, materials, facilities), and a way of sustainably cutting costs below those of other
competitors.
The no-frills operators have opted to cut costs to a minimum and pass their savings on to customers in lower
prices. This helps them grab market share and ensure their planes are as full as possible, further driving down cost.
The luxury airlines, on the other hand, focus their efforts on making their service as wonderful as possible, and the
higher prices they can command as a result make up for their higher costs.
Meanwhile, smaller airlines try to make the most of their detailed knowledge of just a few routes to provide better
or cheaper services than their larger, international rivals.
The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to
you, and that other competitors copy your cost reduction strategies. This is why it's important to continuously find
ways of reducing every cost. One successful way of doing this is by adopting the Japanese Kaizen philosophy of
"continuous improvement."
The Differentiation Strategy
Differentiation involves making your products or services different from and more attractive than those of your
competitors. How you do this depends on the exact nature of your industry and of the products and services
themselves, but will typically involve features, functionality, durability, support, and also brand image that your
customers value.
To make a success of a Differentiation strategy, organizations need:
Good research, development and innovation.
The ability to deliver high-quality products or services.
Effective sales and marketing, so that the market understands the benefits
Large organizations pursuing a differentiation strategy need to stay agile with their new product development
processes. Otherwise, they risk attack on several fronts by competitors pursuing Focus Differentiation strategies in
different market segments.
The Focus Strategy
Companies that use Focus strategies concentrate on particular niche markets and, by understanding the dynamics
of that market and the unique needs of customers within it, develop uniquely low-cost or well-specified products
for the market. Because they serve customers in their market uniquely well, they tend to build strong brand loyalty
amongst their customers. This makes their particular market segment less attractive to competitors.
As with broad market strategies, it is still essential to decide whether you will pursue Cost Leadership or
Differentiation once you have selected a Focus strategy as your main approach: Focus is not normally enough on its
own.
But whether you use Cost Focus or Differentiation Focus, the key to making a success of a generic Focus strategy is
to ensure that you are adding something extra as a result of serving only that market niche. It's simply not enough
to focus on only one market segment because your organization is too small to serve a broader market (if you do,
you risk competing against better-resourced broad market companies' offerings).
2. Identification of Customers
1. Segmentation: Divide the market based on demographics, behavior, and preferences.
2. Targeting: Identify and prioritize customer segments with the highest potential.
3. Positioning: Develop value propositions to meet customer needs effectively.
Tools for Customer Identification
Market Research: Surveys, focus groups, and data analytics.
Customer Persona Development: Create profiles representing target segments.
Illustration
Imagine a technology company identifying young professionals as a target segment for a productivity app. By
analyzing their behavior and needs, the company tailors features like task management and collaboration tools.
3. Customer Relationship Management (CRM)
Definition
CRM involves managing interactions with customers to build trust, loyalty, and long-term relationships.
Key Components
1. Customer Acquisition: Attracting new customers through effective marketing.
2. Customer Retention: Ensuring customer satisfaction and repeat business.
3. Customer Engagement: Enhancing interaction through personalized communication.
Benefits
Improved customer satisfaction.
Increased revenue and market share.
Better insights into customer behavior.
4. Types of Business-Level Strategy
Universal Strategies
1. Cost Leadership: Achieve competitive advantage by minimizing costs.
2. Differentiation: Offer unique products or services.
3. Focused Strategies: Target specific market segments.
4. Integrated Strategies: Combine cost leadership and differentiation.
5. Cost Leadership Strategy
Definition
Cost leadership involves producing goods or services at the lowest cost while maintaining acceptable quality.
Key Actions
Optimize production processes.
Utilize economies of scale.
Minimize overhead costs.
Risks
1. Price Wars: Competitors may lower prices, eroding margins.
2. Quality Perception: Customers may associate low cost with inferior quality.
6. Product Differentiation Strategy
Definition
Differentiation focuses on creating unique offerings that stand out in the market.
Key Actions
Invest in innovation and R&D.
Develop strong branding and marketing campaigns.
Focus on quality and customer experience.
Risks
1. High Costs: R&D and marketing expenses can reduce profitability.
2. Imitation by Competitors: Unique features may be copied.
Illustration
A luxury watch brand differentiates itself by emphasizing craftsmanship, heritage, and exclusivity, allowing it to
command premium prices.
7. Segmented Focus Strategy
Definition
A focus strategy targets a specific segment, offering tailored products or services.
Types
1. Cost Focus: Compete on price within a niche.
2. Differentiation Focus: Offer unique solutions for a specific segment.
Example
A health food company focuses on vegan consumers, developing specialized products like plant-based protein bars.
8. Integrated Cost Leadership and Differentiation Strategy
Definition
This strategy seeks to achieve both low costs and differentiation.
Benefits
Broader market appeal.
Increased flexibility in responding to market changes.
Risks
1. Stuck in the Middle: Failing to achieve either low costs or differentiation.
2. Resource Strain: Balancing both strategies can be resource-intensive.
9. Network Linkages and Information Systems
Importance
Network linkages and information systems facilitate coordination, efficiency, and innovation in strategy
implementation.
Examples
Supply Chain Integration: Real-time data sharing with suppliers to reduce lead times.
Customer Analytics: CRM systems analyze purchasing behavior to improve targeting.
Illustration
A retail chain uses a centralized inventory management system to track stock levels across stores, optimizing
replenishment and reducing waste.
Conclusion
Effective strategy formulation and business-level strategic actions require a clear focus, deep understanding of
customer needs, and the application of appropriate strategies. By integrating tools like CRM and leveraging
network linkages, firms can create sustainable competitive advantages.
Discussion Questions
1. What factors should a firm consider when choosing a business-level strategy?
2. How can CRM enhance the effectiveness of strategic actions?
3. What are the challenges of implementing an integrated cost leadership and differentiation strategy?
Suggested Readings
Marcelo, D. F., Jr. Strategic Management.
Porter, M. E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press.
