Strategic Management

Strategic Actions: Strategy Formulation

Business-Level Strategy
 Business-Level Strategy

• Overview: Five content areas

– Defining business-level strategy
– Relationship between customers and strategy
– Differences in business-level strategies
– 5-Forces
– Risks of business-level strategies

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What Do We Mean By Strategy?
• What is our present situation?
– Business environment and industry conditions
– Firm’s financial and competitive capabilities
• Where do we want to go from here?
– Creating a vision for the firm’s future direction
• How are we going to get there?
– Crafting an action plan for heading the firm in the
intended direction, staking out a market position,
attracting customers, achieving the targeted financial
and market performance, and getting the firm where
it wants to go is its strategy.
 Crafting a Strategy
• Strategy Making:
– Addresses a series of strategic how’s.
• How to attract and please customers.
• How to compete against rivals.
• How to position the firm in the marketplace.
• How best to respond to changing economic and market conditions.
• How to capitalize on attractive opportunities to grow the business.
• How to achieve the firm’s performance targets.
– Requires choosing among strategic alternatives.
– Promotes actions to do things differently from competitors
rather than running with the herd.
– Is a collaborative team effort that involves managers in
various positions at all organizational levels.
 Strategy Making Involves Managers at All
Organizational Levels
• Chief Executive Officer (CEO)
– Has ultimate responsibility for leading the strategy-making
process as strategic visionary and as chief architect of
strategy.
• Senior Executives
– Fashion the major strategy components involving their areas
of responsibility.
• Managers of subsidiaries, divisions, geographic
regions, plants, and other operating units (and key
employees with specialized expertise)
– Utilize on-the-scene familiarity with their business units to
orchestrate their specific pieces of the strategy.
Strategy-making as a Collaborative Process

• In most companies, crafting and executing strategy is a

collaborative team effort in which every manager has a
role for the area he or she heads; it is rarely something
that only high-level managers do.

• The many complex strategic issues involved, and multiple

areas of expertise required can make the strategy-making
task too large for one person or a small executive group.
• When operations involve different products, industries and
geographic areas, strategy-making authority must be
delegated to functional and operating unit managers such
that all managers have a strategy-making role—ranging
from major to minor—for the area they head!
 Levels of Strategy

CORPORATE CORPORATE
STRATEGY HEAD OFFICE

BUSINESS
STRATEGY Division A Division B

R&D R&D
FUNCTIONAL Personnel Personnel
STRATEGIES
Finance Finance
Production Production
Marketing/Sales Marketing/Sales
 A FIRM’S STRATEGY-MAKING
HIERARCHY
Multibusiness Strategy—how to gain synergies from managing a
Corporate
portfolio of businesses together rather than as separate
Strategy
businesses

Two-Way Influence
• How to strengthen market position and gain competitive
Business advantage
Strategy • Actions to build competitive capabilities of single businesses
• Monitoring and aligning lower-level strategies
Two-Way Influence

Functional • Add relevant detail to the how’s of the business strategy

Area • Provide a game plan for managing a particular activity in ways
Strategies that support the business strategy

Two-Way Influence
• Add detail and completeness to business and functional
Operating strategies
Strategies • Provide a game plan for managing specific operating activities
with strategic significance
 Levels of Strategy
• Corporate strategy... defines the scope of the business in
terms of the industries and markets in which it competes.
– how to improve performance or gain competitive advantage
by managing a set of businesses simultaneously.
– includes decisions about diversification, vertical integration,
acquisitions, new ventures, divestments, allocation of scarce
resources between business units
• Business strategy... is concerned with how the firm
competes within a particular industry or market... to win a
business unit must adopt a strategy that establishes a
competitive advantage over its rivals.
– how to improve the performance or gain a competitive
advantage in a particular line of business.
• Functional strategy... the detailed deployment of resources
at the operational level
UNITING THE STRATEGY-MAKING
HIERARCHY A company’s strategy is at
full power only when its
many pieces are united.
Anything less than a
Corporate-level unified collection of
strategies weakens the
overall strategy and is
Business-level likely to impair company
performance.

Functional-level

Operational-
level
 Common Elements in Successful Strategy

Successful
Strategy

EFFECTIVE IMPLEMENTATION

Profound Objective
Long-term, simple
understanding of appraisal of
and agreed upon
the competitive resources
objectives
environment

$
A Strategic Vision + Objectives + Strategy =
A Strategic Plan

Elements of a Firm’s
Strategic Plan

Its strategic vision, business

mission, and core values

Its strategic and financial

objectives

Its chosen strategy

 Business Level Strategy

• Business level-strategy:
– Integrated and coordinated set of commitments and
actions the firm uses to gain a competitive advantage
by exploiting core competencies in specific product
markets.

• Core Strategy- that the firm forms to describe

how it intends to compete in a product market.

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 Business Level Strategy (Cont’d)

• Customers are the foundation of successful

business strategies
– Who will be served by the firm
– What needs those target customers have that firm will satisfy
– How those needs will be satisfied by the firm

• Five generic business level strategies

– Generic = can be used in any organization competing in any
industry

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Customers: Their Relationship with Business-Level
Strategies

• Strategic competitiveness results when firm can

satisfy customers by using its competitive
advantages
• Returns earned from the relationships with the
customer are the lifeblood of the firm
• Most successful companies satisfy current
customers and/or meet needs of new customers
• Firms deliver superior value by Effectively
managing Strong interactive relationships with
its customers
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Customers: Their Relationship with Business-Level
Strategies (Cont’d)

• Dimensions of firm’s relationship with customer:

Reach, richness and affiliation
– Reach = Access and connection to customers
– Richness = Depth and detail of two-way flow of
information between firm and customer
– Affiliation = Facilitating useful interactions with
customers

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Customers: Their Relationship with Business-Level
Strategies (Cont’d)

• Who: Determining the customers to serve

– Market segmentation
• Dividing customers into identifiable homogenous
groups based on differences in needs
• For example, consumer and industrial markets

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Customers: Their Relationship with Business-Level
Strategies (Cont’d)

• What: Determining which customer needs to satisfy

– What = Needs
• Related to a product’s benefits and features
• Must anticipate and be prepared: (I.e., High-quality? Low price?)
– Translate into features and performance capabilities of
products
• How: Determining core competencies necessary to
satisfy customer needs
– How = core competencies
– Core competencies: resources and capabilities that serve
as source of competitive advantage for firm over its rivals
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 Purpose of Business-Level (BL) Strategies
• Purpose: To create differences between
position of a firm and its competitors
• Strategic positioning reflects choices a
company makes about the kind of value it
will create and how that value will be created
differently than rivals.
• Strategic positioning should translate into
one of two things: a premium price (because
of differentiation) or lower costs for the
company.
• It’s possible to compete on low cost and be
differentiated at the same time—but
companies that try to be all things to all
customers can wind up getting stuck in the
middle, a strategic mistake that Michael
Porter calls “the kiss of death.”
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 Purpose of Business-Level (BL) Strategies

• To position itself firm must make a deliberate choice

to
– Perform activities differently or
Essence of Business Level Strategy
– Perform different activities
• Activity map exemplifies a firm’s
– Activities
– How they are integrated
– Low Cost Airline’s activity map: Note the primary (N=6) and
secondary nodes/activities and the ‘connectedness’ or fit
– Fit is key to the sustainability of competitive advantage
• Positions built on system of activities are far more
sustainable than those built on individual choices.
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Low Cost Airlines’ Activity System

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 Five Business-Level Strategies

• Two types of competitive advantage firms must

choose between
– Cost (Are we LOWER than others?)
– Uniqueness (Are we DIFFERENT? CWP How?)
• Two types of ‘competitive scope’ firms must
choose between
– Broad target
– Narrow target
• These combine to yield 5 different BL strategies
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Five Business-Level Strategies

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 Types of Business-Level Strategies (N=5)

• Cost Leadership (CL)

– Competitive advantage: The low-cost leader operates with
margins greater than competitors
– Competitive scope: Broad
– Integrated set of actions designed to produce or deliver goods
or services with features that are acceptable to customers at
the lowest cost, relative to competitors
– No-frill, standardized goods to the industry’s most typical
customer
– Continuously reduce costs of value chain activities
• Inbound/outbound logistics account for significant cost
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 Types of Business-Level Strategies (N=5) (Cont’d)

• A valuable defense against rivals. Rivals hesitate to compete

on the basis of price
• Powerful customers can demand reduced prices
• Cost leaders are in a position to
– Absorb supplier price increases and relationship demands
– Force suppliers to hold down their prices
• Continuously improving levels of efficiency and cost reduction
– Can be difficult to replicate and
– serve as significant entry barriers to potential competitors
• Cost leaders hold an attractive position in terms of product
substitutes, with the flexibility to lower prices to retain
customers
• Examples: Big Bazar, Wal-Mart, Maruti, Bajaj Motorcycles

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 Examples of Value-Creating Activities
Associated with the Cost Leadership Strategy

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 Types of Business-Level Strategies (N=5) (Cont’d)

• Differentiation
– Competitive advantage: Differentiation (CWP )
– Competitive scope: Broad
– Integrated set of actions designed by a firm to produce or deliver goods or
services at an acceptable cost that customers perceive as being different
in ways that are important to them
– Target customers for whom value is created by the manner in
which firm’s product differ from competitors
– Customized products – differentiating on as many features as
possible
– Ex.: Apple, Royal Enfield, McKinsey & Co.

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Examples of Value-Creating Activities Associated with
the Differentiation Strategy

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 Types of Business-Level Strategies (N=5) (Cont’d)

• In relationship to the 5 Forces:

– Rivalry against existing competitors
• Customers are loyal purchasers of differentiated products I.e., Bose
– Bargaining Power of Buyers (Customers)
• Inverse relationship between loyalty/product: As loyalty increases, price
sensitivity decreases
• I.e., Callaway golf clubs
– Bargaining Power of Suppliers
• Provide high quality components, driving up firm’s costs
• Cost may be passed on to customer
– Potential Entrants
• Substantial barriers (see above) and would require significant resource
investment
– Product Substitutes
• Customer loyalty effectively positions firm against product substitutes
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 Types of Business-Level Strategies (N=5) (Cont’d)

• “Focus” strategies - There are two (# 3 and #4)

– Integrated set of actions taken to produce goods or services that
serves the needs of a particular buyer group.
– Buyer groups (Youths/senior citizens); Product line segments
(Professional painter groups); Geographic markets (North vs. South)
– In general, the firms’ core competencies used to serve the need of a
particular industry segment or niche to the exclusion of others.
• May lack resources to compete in the broader market
• May be able to more effectively serve a narrow market segment
than larger industry-wide competitors
• Firms may direct resources to certain value chain activities to
build competitive advantage
– Large firms may overlook small niches 30
 Types of Business-Level Strategies (N=5) (Cont’d)

• 3. Focused Cost Leadership (competing based on price to

target a narrow market)
– Competitive advantage: Low-cost
– Competitive scope: Narrow industry segment
• I.e., IKEA: Good design (furniture) at low prices
– NOTE: Also has some differentiated features (I.e.,
furniture design) with its low-cost products
• 4. Focused Differentiation (offering unique features that fulfill
the demands of a narrow market)
– Competitive advantage: Differentiation
– Competitive scope: Narrow industry segment
• I.e., IKEA: Good design (furniture) at low prices
– NOTE: Also has some differentiated features (I.e.,
Furniture design) with its low-cost products
– I.e., Casket furniture (products that can also be converted into caskets)
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 Types of Business-Level Strategies (N=5) (Cont’d)

• Risk of using “Focus” strategies

– A competitor may be able to focus on a more
narrowly defined competitive segment and
"outfocus” the focuser
– A company competing on an industry-wide basis may
decide that the market segment served by the focus
strategy firm is attractive and worthy of competitive
pursuit
– Customer needs within a narrow competitive
segment may become more similar to those of
industry-wide customers as a whole 32
 Types of Business-Level Strategies (N=5) (Cont’d)

• 5. Integrated CL/Differentiation
– Efficiently produce products with differentiated attributes
• Efficiency: Sources of low cost
• Differentiation: Source of unique value
– Can adapt to new technology and rapid changes in external
environment
– Simultaneously concentrate on TWO sources of competitive
advantage: cost and differentiation – consequently…
• …must be competent in many of the primary and support activities
– Three sources of flexibility useful for this strategy

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 Types of Business-Level Strategies (N=5) (Cont’d)

• Three flexible sources include

– Flexible manufacturing systems (FMS)
• Computer controlled process used to produce a variety of products in
moderate, flexible quantities with a minimum of manual intervention
• Goal: eliminate ‘low cost vs. product variety, tradeoff inherent in
traditional manufacturing technologies
– Information networks
• Using technology to link suppliers, distributors and customers
– Total Quality Management (TQM) systems
• Emphasizes firm’s total commitment to the customer and continuous
improvement of every process through data-driven, problem-solving
approaches based on empowering employees
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 Types of Business-Level Strategies (N=5) (Cont’d)

• Competitive Risks of Integrated Strategies

– Although becoming more popular the RISK is getting ‘stuck in
the middle’
• Cost structure is not low enough for attractive pricing of products and
products not sufficiently differentiated to create value for target
customer – therefore, fail to successfully implement either low cost or
differentiation strategy
• Result: Don’t earn above-average returns

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 Applying the Value Chain to Cost Analysis:
The Case of Automobile Manufacture

STAGE 1. IDENTIFY THE PRINCIPLE ACTIVITIES

R&D TESTING, GOODS SALES DEALER &

PARTS DISTRI-
PURCH- DESIGN COMPONENT ASSEMBLY QUALITY INVEN- & CUSTOMER
INVEN- BUTION
ASING ENGNRNG MFR CONTROL TORIES MKITG SUPPORT
TORIES

STAGE 2. ALLOCATE TOTAL COSTS

 Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture (continued)

--Plant scale for each component -- Level of quality targets -- No. of dealers
STAGE 3. -- Process technology -- Frequency of defects -- Sales / dealer
IDENTIFY -- Run length -- Level of dealer support
COST -- Plant location -- Capacity utilization
-- Frequency of defects
DRIVERS
under warranty

PARTS R&D TESTING, GOODS

PURCH- COMPONENT SALES
INVEN- DESIGN ASSEMBLY QUALITY INVEN- DISTRI- DEALER &
ASING MFR &
TORIES ENGNRNG CONTROL TORIES BUTION CUSTOMER
MKITG SUPPORT

Prices paid --Size of commitment -- Plant scale --Cyclicality &

depend on: --Productivity of -- Flexibility of production predictability of sales
-- Order size R&D/design -- No. of models per plant --Customers’
--Purchases per --No. & frequency of new -- Degree of automation willingness to wait
supplier models models -- Sales / model
-- Bargaining power -- Wage levels
-- Supplier location -- Capacity utilization
 Applying the Value Chain to Cost Analysis: The Case of
Automobile Manufacture (continued)

STAGE 4. IDENTIFY LINKAGES

Designing different models around

Consolidation of orders to increase common components and platforms
discounts, increases inventories reduces manufacturing costs

PRCHSNG PARTS R&D COMPONENT ASSEM- TESTING GOODS SALES DSTRBTN DLR
INVNTRS DESIGN MFR BLY QUALITY INV MKTG CTMR

Higher quality parts and materials Higher quality in manufacturing

reduces costs of defects reduces warranty costs
at later stages

STAGE 5. RECCOMENDATIONS FOR COST REDUCTION

 The Nature of Differentiation

DEFINITION: “Providing something unique that is valuable to the

buyer beyond simply offering a low price.” (M. Porter)
THE KEY IS TO CREATE VALUE FOR THE CUSTOMER

TANGIBLE DIFFERENTATION INTANGIBLE DIFFERENTATION

Observable product characteristics: Unobservable and subjective
• size, color, materials, etc. characteristics that appeal to
• performance customer’s image, status, identity, and
• packaging desire for exclusivity
• complementary services

TOTAL CUSTOMER RESPONSIVENESS

Differentiation not just about the product, it embraces the whole
relationship between the supplier and the customer.
 Identifying Differentiation Potential:
The Demand Side

THE PRODUCT What needs does What are key

it satisfy? attributes? FORMULATE
DIFFERENTIATION
Relate patterns of STRATEGY
customer
preferences to • Select product
By what criteria
product attributes positioning in relation
do they
to product attributes
choose?
THE • Select target
CUSTOMER What price premiums
customer group
do product attributes
command? • Ensure customer /
product compatibility
What What are demographic, • Evaluate costs and
motivates sociological, benefits of
them? psychological correlates differentiation
of customer behavior?
 Using the Value Chain to Identify
Differentiation Potential on the Supply Side
MIS that supports fast Training to support Unique product features.
response capabilities customer service Fast new product
excellence development

FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES
Customer technical
support. Consumer
credit. Availability of
Quality of Defect free Fast delivery. Building brand spares
components & products. Wide Efficient order reputation
materials variety processing
 Identifying Differentiation Opportunities through
Linking the Value Chains of the Firm and its
Customers: Can Manufacture

1
5
2 3 4
Purchasing
Inventory holding
Design Engineering
Manufacturing
Inventory holding
Distribution
Sales
support
Service & technical
& aluminum
Supplies of steel

Purchasing
Inventory holding
Processing
Canning
Marketing
Distribution
CAN MAKER CANNER

1. Distinctive can design can assist canners’ marketing activities.

2. High manufacturing tolerances can avoid breakdowns in customer’s canning lines.

3. Frequent, reliable delivery can permit canner to adopt JIT can supply.
4. Efficient order processing system can reduce customers’ ordering costs.
5. Competent technical support can increase canner’s efficiency of plant utilization.