Strategy a View from the Top: Chapter 6

1. Strategy a View from the Top:Chapter 6 Formulating Business Unity Strategy

2. Introduction Sometimes called, “competitive strategy” business unit strategy’s principal focus is on how a firm should compete in a given competitive setting In contrast, corporate strategy is identification of market arenas where a corporation can compete successfully and how to add value to Strategic Business Units (SBOs)

3. Factors Concerning Business Unit Strategy Nature of the Industry Company’s Mission, Goals and Objectives Current position Core competencies Competitors’ strategic choices

4. Foundations • Firm success is explained by two factors: • Attractiveness of the industry in which a firm competes • Relative position Why has FedEx enjoyed success? -industry -position

5. Attractiveness of the Industry Industry directly accounted for 36% of the explained total variation in aggregate profitability. Globalization has made the shipping industry a very attractive one

6. Potential Entrants LOW to MODERATE Industry Competitors HIGH - FedEx, UPS, DHL • Buyers’ Power • HIGH • large buyers • low switching cost Supplier’s Power LOW Substitutes LOW Porter’s Five Forces-Shipping Industry

8. Position • Now that we’ve established the viability of the shipping industry as a whole, let’s consider how one achieves profitability in that industry • Competitive position • Ability to create a sustainable competitive advantage • Lowering cost • Differentiation

9. Market Share FedEx and UPS face a very fierce competition, bet they’re the only two firms vying in the global shipping market with large market share. Large market share is both a reward for providing better value and a means of realizing lower costs

10. PIMS findings(Profit Impact of Market Strategy) Market share is strongly correlated with ROI Product quality is key to market leadership ROI is positively correlated with market growth High investment intensity tends to depress ROI, as do high inventory levels Capacity use is critical for businesses with a high level of capital intensity.

11. PIMS Project undertaken by Harvard Business School to ascertain profitability of different market strategies. Study becoming less and less relevant due to dynamic, technology driven experiences of the last 20 years.

12. Formulating a Competitive Strategy

13. Challenges in Forming Competitive Strategy • Analyzing the competitive environment. • Anticipating key competitors actions. • Generating strategic options. • Choosing among alternatives.

14. What is Competitive Advantage? • Design and implement a value-creating strategy that competitors are not currently using. • Sustainable • Combination of Strengths • Manager Awareness • Keeping most valuable resource, Employees!

15. Competitive Advantage - FedEX • SQI – Service Quality Index • Sustainable • Unmatched by Competitors • Combines Strengths • Monitors all the strengths FedEx competes on. • Manager Awareness • Examined daily by managers at every level. • Employee Retention • Allows employees to see how there work is directly effecting the company as a whole.

17. Value Chain Analysis • Value is a perceived benefit. • Value Chain • Begins with raw materials ends with sales. • Analysis provides value creating activities. • ABC Accounting

19. Product A Direct Costs Activity 1 Activity 2 Activity 3 Product B Direct Costs Indirect Costs Product C Direct Costs Accounting for costs in ABC Indirect costs are assigned (traced & allocated) to various pools of activity costs. The individual products are the final cost objects & direct costs are traced to the individual products. Activity costs are allocated to products

20. What are activities, and how are they identify? • Activity Any type of task, or function performed by a firm to manufacture a product • Activity Identification • Tracking the use of resources • Using the cost hierarchy

21. Example of Activities in Factories • Process customer orders • Purchasing materials • Schedule production • Receiving and handling materials • Moving materials to the production floor • Setting up machines • Inspection of products • Maintain product information • Perform engineering changes • Expedite orders • Shipping finished products • Respond to customers • Introduce new products Expenses on each activity are assigned into a distinct cost pool of overhead costs. Then, expenses are allocated to products based on their demand for the activities.

22. ABC Cost Hierarchy ABC uses the following cost hierarchy to classify overhead costs among five main categories of activities: • Facility (organization)-sustaining activities • Customer-sustaining activities • Product-sustaining activities • Batch-level activities • Unit-level activities

23. Porter and his Generic Business Unit Strategies

24. Two Generic Strategies Low cost Differentiation Global application With all the choices, which one do you choose?

25. Identifying the Specifics • Cost leadership • A constant battle • Focus • Targeting customers in the niche • Dell computers • Going too far…?

26. Indentifying the Specifics • Differentiation • Trying to be unique, constantly. • Targeting customers in the niche • Yellow Tail

28. Requirements for Success • Cost leadership • Tenacious improvements • Tight controls • Discipline

29. Requirements for Success • Differentiation • Adding value • Remaking the rules of the game • Still provide high value • Similar to Blue Ocean Strategy • Cirque du Soleil • Understanding where value is needed and not needed

30. The Risks • Cost leadership • A constant watch on technology • Vulnerable position • Remember, the world is flat. • Differentiation • Imitation • Very fickle customers

31. Criticisms of Porter • Industry norms • Low cost • Current PC industry • Comparing Apple computers • The real world • Mixture of strategies • Not mutually exclusive

32. Takeaways No strategy is associated with instant success Firms have to maintain FLEXIBILITY!!

33. Value Disciplines Strategic Focus Competitive Drivers/Needs

34. Product Leadership • Has four disciplines: 1). Encouragement of innovation. 2). A risk-oriented management style. 3). Recognition that the company’s current success and future prospects lie in its talented product design people. 4). Recognition of need to educate and lead the market regarding the use and benefits of new products.

35. Companies that use Product Leadership

36. Operational Excellence • Aimed at better production and delivery mechanisms. • Companies that pursue operational excellence: • Wal-Mart • FedEx • American Airlines • Starwood Hotels & Resorts

37. FedEx and Operational Excellence Philosophy of leadership, teamwork, and problem solving resulting in continuous improvement, by focusing on the needs of the customer and empowering employees. People-Service-Profits

38. Starwood Hotels and Operational Excellence • Biggest changes to Sheraton hotel chain • “Did away with flowered bedspreads in favor of Ralph Lauren style” - This revamping was immediately successful, 4 straight quarters following led Marriott & Hilton - Increased operating income by 26%

39. Customer Intimacy Concentrates on building customer loyalty Companies that provide customer intimacy:

40. Different Value Disciplines Call for Different Competencies

41. Designing a Profitable Business Model(A Preview) Product Pyramid Profit Model Multi-component System Profit Model Blockbuster Profit Model Profit Multiplier model

42. Summary • Chris • Competitive Advantage • The Value chain • ABC Accounting • Phil • Lindsey