CHAPTER 5 Strategy Formulation at the Business-Unit Level

1. CHAPTER 5 Strategy Formulation at the Business-Unit Level

2. Learning Objectives • Understand the responsibilities of a business-unit manager • Evaluate the effectiveness of a generic business-level strategy • Analyze an industry to determine its stage in the life cycle. Understand how that stage determines the appropriateness of various business strategies • Appreciate the competitive dynamics found in industries • Be able to select an appropriate competitive strategy based on the competitive environment

3. Business-level Strategy Formulation Responsibilities • Direction Setting • Establishment and communication of mission, vision, values, long-term goals of a single business unit • Creation and communication of shorter-term goals • Analysis of Business Situation • Compilation and assessment of information from stakeholders, broad environmental analysis and other sources • Internal resource analysis • Identification of strengths, weaknesses, opportunities, threats, sources of sustainable competitive advantage

4. Business-level Strategy Formulation Responsibilities • Selection of Strategy • Generic approach to competition—cost leadership, differentiation, focus or best value • Strategic posture—specific strategies needed to carry out the generic strategy

5. Business-level Strategy Formulation Responsibilities • Management of Resources • Acquisition of resources and/or development of competencies leading to sustainable competitive advantage • Ensure development of functional strategies and an appropriate organizational design (management structure) to support business strategy • Develop control systems to ensure that strategies remain relevant and that the business unit continues to progress toward its goals

6. Generic Business-level Strategies

7. Cost Leadership • High Capacity Utilization (combined with accurate demand forecasting) • Economies of Scale • Technological Advances • Outsourcing • Learning / Experience Effects

8. A Typical Learning Curve unit cost total cumulative output

9. Risks Associated With Cost Leadership Strategy • May not detect required product or marketing changes due to preoccupation with cost • Investments in plants and equipment may become obsolete due to technological breakthroughs • Large investments cause reluctance to change • Competitors may quickly imitate cost-saving strategies • May go too far in cutting costs, thus endangering customers or employees

10. Differentiation • Uniqueness may be achieved through many means. Examples are: • Product innovations • Superior quality • Superior service • Creative advertising • Better supplier relationships • The key to success is that customers must be willing to pay more for the uniqueness of the product or service than the firm paid to create it.

11. Risks Associated with a Differentiation Strategy • Customers may be willing to sacrifice special features due to a high price • Customers may no longer perceive an attribute as differentiating • A source of differentiation may be easy to imitate. Constant innovation is necessary.

12. Best Value Strategy • A combination of strategic elements from differentiation and low cost • Firms can increase sales of an attractive product or service. Sales increases may lead to efficiency and thus reduced costs • Consumers are coming to expect a combination of high quality and low price • Technological advances often allow a company to pursue differentiation and low cost at the same time • Many companies are pursuing best value through an emphasis on quality or speed

13. Principles of Total Quality Management • General • Get to know the next and final customer • Get to know the direct competition, and the world-class leaders (whether competitors or not) • Dedicate to continual, rapid improvement in quality, response time, flexibility, and cost • Achieve unified purpose via extensive sharing of information and involvement in planning and implementation of change

14. Principles of Total Quality Management • Design and Organization • Cut the number of components or operations and number of suppliers to a few good ones • Organize resources into chains of customers, each chain mostly self-contained and focused on a product or customer "family"

15. Principles of Total Quality Management • Operations • Cut flow time, distance, inventory, and space along the chain of customers • Cut setup, changeover, get-ready, and startup time • Operate at the customer's rate of use (or a smoothed representation of it) • Human Resource Development • Continually invest in human resources through cross-training (for mastery), education, job switching, and multi-year cross-career re-assignments; and improved health, safety, and security. • Develop operator-owners of products, processes, and outcomes via broadened owner-like reward and recognition.

16. Principles of Total Quality Management • Quality and Process Improvement • Make it easier to produce or provide the product without mishap or process variation. • Record and own quality, process, and mishap data at the workplace. • Ensure that front-line associates get first chance at process improvement--before staff experts. • Accounting and Control • Cut transactions and reporting; control causes and measure performance at the source, not via periodic cost reports.

17. Principles of Total Quality Management • Capacity • Maintain/improve present resources and human work before thinking about new equipment and automation • Automate incrementally when process variability cannot otherwise be reduced • Seek to have multiple work stations, machines, flow lines, cells for each product or customer family • Marketing and Sales • Market and sell your firm's increasing customer-oriented capabilities and competencies.

18. Emphasis on Speed • Reducing Time to Provide Good or Service • Reduces costs • Customers happier because they are satisfied more quickly • May be accompanied by a flexible manufacturing system (FMS) or a simultaneous manufacturing system (such as C3M at Michelin)

19. Risks Associated with a Best Value Strategy • A Tradeoff Between Risks of Cost Leadership and Differentiation • Technological breakthroughs can make the strategy obsolete • Risk of imitation • However, • Unlikely to become preoccupied with cost or differentiation • Unlikely to take cost cutting too far • Increases likelihood of being able to recover additional costs associated with differentiation

20. Focus Strategy • Can be based on differentiation, lowest cost or best value • Key is to provide a product or service that caters to a particular market segment. • Must identify segment • Must assess and meet the needs of the segment better than competitors (target marketing) • May also be called a “niche” strategy

21. Risks Associated with a Focus Strategy • Risks depend on whether the strategy is being pursued through differentiation, lowest cost or best value as well as: • The desires of the target market can become similar to the desires of the whole market, thus eliminating advantage in catering to the target market • A competitor may focus on an even more narrowly defined segment of the market

22. The Industry Life Cycle A Growth B Unit Sales Volume Maturity C Commodity or Decline Introduction Time

23. Industry Life Cycle • Understanding the life cycle can help firms anticipate demand and formulate strategies • Introduction • Gradual increase in demand • Turbulent environment. Survival is key • Growth Stage • Rapid increase in demand • Strategies fragmented. Begin to see differentiation and size economies. • Price becomes a major factor during the late stages • Weaker competitors will begin to drop out (“competitive shakeout”)

24. Industry Life Cycle • Maturity Stage • Demand levels off • Efficient, high volume production tends to be important, based on a dominant design • Product differentiation becomes increasingly difficult

25. Industry Life Cycle • Commodity or decline stage • Individual product demand my decline, while markets and industries tend to follow more of a pattern of leveling off demand (commodity) or a slight increase over a number of years. • Price is still very important in competition • Tight cost controls and efficiency are essential • Competition is intense; more competitors drop out • Some competitors find niches that are still growing or profitable

26. Breaking Out of the Product Life Cycle Unit Sales Volume Time

27. Competitive Dynamics • Competitive action and reaction • Creative destruction • The inevitable decline of leading firms due to competitive moves and countermoves • Competition has been increasing in most global industries

28. Strategies that Reflect Competitive Dynamics • Aggressive Competition • Exploit ownership of superior resources. • Overwhelm competitors through a combination of factors that could include the best products or services, superior advertising, the lowest production cost, superior design, the lowest price or the strongest brand name.

29. Strategies that Reflect Competitive Dynamics • First-mover Advantage • Invest significantly more time and resources to creating state-of-the-art products and services than competitors to protect leadership position. • Organizational learning capacity is important.

30. Strategies that Reflect Competitive Dynamics • Collaboration • Partnerships and alliances with stakeholders to offset the influence of a powerful rival (defensive strategy). • Or, if a company is the largest rival, create partnerships and alliances that will block new competition or hurt existing competitors (offensive strategy).

31. Strategies that Reflect Competitive Dynamics • Threat of Retaliation • Make it very clear to competitors that a firm will retaliate against any action that will upset the balance in the industry. • The threat must be believable. • Firms may compete simultaneously in multiple industries (multi-market competition). Therefore, a firm could retaliate in another industry. • Government Intervention • A political strategy in which the firm hires lobbyists and creates strong relationships with political leaders or parties in an effort to influence the “rules of the game”. • Create Barriers to Imitation • Many potential barriers exist, including economies of scale, patents, special relationships with stakeholders (pre-emptive collaboration), or private information.

32. Strategies that Reflect Competitive Dynamics • Strategic Flexibility • An organization limits investments in fixed capital and forms joint ventures or subcontracting agreements to provide a lot of what it needs so that it is in a position to quickly move in and out of markets.

33. Strategies that Reflect Competitive Dynamics • Avoid Direct Competition • Find a niche in which no other organization has interest. • Don’t compete with the same intensity in the same geographical markets competitors.

34. Resources, Industry Structure and Competitive Actions Change in Firm A Resources Firm A Resources Firm A Action More Actions and Reactions New Industry Structure Industry Structure Firm B Reaction Change in Firm B Resources Firm B Resources Firm C Reaction Change in Firm C Resources Firm C Resources Time

35. Strategic Group Map of Department Store and Specialty Retailing High Low Specialty Stores Elite Department Stores General Merchandisers Specialty Warehouse Stores Discount Department Stores Warehouse Clubs Few Many Number of Product Categories

36. Major Concepts in Chapter 5 • The responsibilities of business-level managers include establishing strategic direction for the unit, ongoing analysis of the business situation, selecting a generic strategy and posture, and acquiring and managing resources. • Cost leadership entails producing products and services at the lowest possible cost

37. Major Concepts in Chapter 5 • Differentiation means attempting to distinguish products or services so that they have greater value to consumers • Best-value strategies combine elements of low cost and differentiation

38. Major Concepts in Chapter 5 • Focus strategies entail pursuit of a narrowly defined market segment through cost leadership, differentiation or best value • Understanding the industry life cycle helps firms anticipate demand and devise strategy • Organizational dynamics is defined as the moves and countermoves of competitors

39. Major Concepts in Chapter 5 • Strategies that reflect competitive dynamics include aggressive competition, seeking a first-mover advantage, collaborative agreements with stakeholders, threats of retaliation, seeking government intervention, erecting barriers to imitation, remaining flexible enough to quickly move in or out of markets, and avoiding direct competition