STRATEGY A VIEW FROM THE TOP

Chapter 6 : Formulating Business Unit Strategy

Team 6

Business Unit Strategy Involves creating a profitable competitive

position for a business within a specific industry or market segment

Often referred to as a competitive strategy

Optimal strategies depend on many factors, including the nature of the industry; the company’s mission, goals, and objectives; its current position and core competencies; and major competitors’ strategic choices.

Strategic Logic at the Business Unit Level

Success is explained by two factors Attractiveness of the industry

Industry characteristics are an important determinant of profit potential

Good to Great argues that “a company does not need to be in a great industry to become a great company. Each good-to-great company built a fabulous economic engine, regardless of the industry.”

Relative Position Two forms of sustainable competitive positioning

are competitive advantage based on lower delivered cost and the ability to differentiate products or services.

The Profit Impact of Market Strategy Project

A study by the Harvard Business school to research relative profitability of different market strategies found the following:

Market share is strongly related with ROI Product quality is key to market leadership Vertical integration can be beneficial later in the

product life cycle ROI is positively correlated with market growth High investment and inventory levels tend to

depress ROI Capacity use is critical for businesses with a high

level of capital intensity

Four Challenges to Formulating a Competitive Strategy

1) Analyzing the competitive environment With whom will we compete? What relative strengths do we have as a basis for

creating a sustainable competitive advantage? 2) Anticipating key competitors’ actions

Understanding how competitors will react to our competitive strategy

3) Generating strategic options Balancing opportunities and constraints to create

options 4) Choosing among the alternatives

Analysis of the long-term impact of different strategy options

Competitive Advantage Competitive advantage is sustainable

when current or new competitors are not able to imitate or supplant the advantage

Often created by combining strengths

Building competitive advantage is rooted in identifying, practicing, strengthening, and instilling leadership traits throughout the organization

Value Chain Analysis Value- perceived benefit that a buyer is willing to pay a

firm for what the firm provides

Value Chain- A model of the business process Divides the firm’s business process into component activities

that add value

Once a firm’s primary, support, and activity types are defined, Value Chain analysis assigns assets and operating costs to all value-creating activities

Analyzing the value chains of competitors, customers, and suppliers can help a firm add value

The Value Chain

Firm Infrastructure

Human Resource Management

Technology DevelopmentProcurement

SupportActivities

Operations Outbound Logistics

Marketing and Sales

Service

MarginInbound

Logistics

Primary Activities

Margin

Value Chain It is important to identify the value that individual

primary and support activities contribute beyond their costs

The value chain can be used to shape responses to changing upstream and downstream market conditions through collaboration

Physical value chain- represents the use of raw materials and labor to deliver a tangible product

Virtual value chain- information flows underlying the physical activities evident within a firm

Differentiation or Low Cost Generic competitive strategic postures that apply to

any business in any industry according to Porter

Cost leaders charge less for goods and services and aim for a substantial share of the market Cost focus- only activities directly relevant to serving the

well-defined market niche are undertaken

A differentiation strategy is aimed at a broad, mass market and seeks to create uniqueness on an industry-wide basis Achieved through product design, brand image, technology,

distribution, service, or a combination of these elements

Generic Strategy Choices

Focus

Industry-wide Overall Cost LeadershipDifferentiation

Particularsegment only

Stra

tegi

c Ta

rget

Uniqueness perceivedby the customer Low-cost position

Strategic Advantage

Generic Strategies Cost Leadership

Ruthless devotion to minimizing costs through continuous improvement in manufacturing, process engineering, and other cost-reducing strategies

Tight control of the organizational structure is essential

Differentiation The company offers something unique that is valuable

Offers a value other than low price Most successful differentiation strategies involve

multiple sources of differentiation

Risks Cost leaders

Technological change that can nullify past investments in scale economies

New entrants from other parts of the world can take advantage of even lower factor costs

Differentiation The biggest challenge is imitators Imitation narrows actual and perceived value

Dell Created a sustainable competitive advantage by

committing to its low-cost, speed based business model combined with new principles

Stuck to its business model of making PCs cheap and never countered the innovative and aggressive moves of its competitors

The cost-leadership strategy produced great sales when market demand was high, but it kept Dell from maintaining its growth path when sufficient sales could only be found in new product market segments where differentiation was demanded

Critique of Porter’s Generic Strategies

Generic strategies aren’t always viable, but strategies that combine the elements of cost leadership, differentiation, and flexibility are better able to meet customer needs

It is argued that differentiation and low-cost are not mutually exclusive; they can exist within the total quality management As discussed in Blue Ocean Strategy, “Value innovation is

created in the region where a company’s actions favorably affect its cost structure and its value proposition to buyers.”

The pursuit of a pure generic strategy will not sustain a competitive advantage in hypercompetitive environments

Value Disciplines Different ways companies can create

value for customers. Specifically three generic strategies:

Product Leadership

Operational Excellence

Customer Intimacy

Product Leadership Produce a continuous stream of state-of-the-art

products and services

Encourage innovation

Have a risk-oriented management style

Recognition that the company’s success lies in its talented design people and those who support them

Recognition of the need to educate and lead the market regarding the use and benefits of new products

Operational Excellence Approach aimed at better production and

delivery mechanisms

Example: Starwood Hotel and Resorts Decided to stylishly renovate its underperforming

hotels and focus on doing and presenting everything it already did much better

Restored a reputation for reliability, value, and consistency

With a focus on operational excellence, Starwood led Marriott and Hilton in North American revenue per available room.

Customer Intimacy Concentrates on building customer loyalty

Example: Home Depot Changed daily operations to provide a more

shopper-friendly store atmosphere Allows employees to focus on customer service

and sales The second initiative involves home improvement

classes taught at its stores Customer intimacy is enhanced when professionals

teach customers how to buy and install the proper material and construction equipment

Different Value Disciplines Call for Different Competencies

Strategic Focus Work Environment Employee Competencies

Customer intimacy Values-driven, dynamic, challenging, informal, service-oriented, qualitative, employee as customer, “whatever it takes”

Relationship-building, listening, rapid problem-solving, independent action, initiative, collaboration, quality-focused

Operational excellence Predictable, measurable, hierarchical, cost-conscious, team-based, formal

Process control, continuous improvement, teamwork, analysis, financial/operational understanding

Product leadership Experimental, learning-focused, technical, informal, fast-paced, resource-rich

Information sharing, creativity, group problem solving, breakthrough thinking, artistic, visionary

Designing a Profitable Business Model

Adrian Slywotzky and David Morrison have identified business models/designs that generate profits in a unique way:

Customer development/Customer solutions profit model Finds ways to improve their customers’ economics

and ways to improve customers’ processes Product pyramid profit model

Company offers a number of variations including low-priced, high-volume products and high-priced, low volume products

Designing a Profitable Business Model (continued)

Multicomponent System profit model Businesses that are characterized by a system

that consists of component that generate substantially different levels of profitability

Switchboard profit model Creates a high-value intermediary that

concentrates the multiple connection pathways through one point, reducing costs

Time profit model Speed is the key to profitability and constant

innovation is essential

Designing a Profitable Business Model (continued)

Blockbuster profit model Profitability is driven by a few great product

successes Invest in a few projects rather than in a variety

Profit multiplier profit model For businesses with strong consumer brands

Entrepreneurial profit model Stresses that diseconomies of scale can exist Small can be beautiful

Designing a Profitable Business Model (continued)

Specialization profit model Stresses growth through sequenced

specialization Installed base profit model

Established user base subsequently buys the company’s brand of consumables or follow-on products

De Facto standard profit model When the instilled base model becomes the

de facto standard that governs competitive behavior in the industry