Strategy Formulation at the Business Unit Level

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Strategy Formulation at the Business Unit Level

• TIM 431 (3)
• Dan Spears, PhD

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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

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Business-level Strategy Formulation
Responsibilities

• Selection of Strategy
• Generic approach to competitioncost leadership,
  differentiation, focus or best value
• Strategic posturespecific strategies needed to
  carry out the generic strategy
• 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

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Generic Business-level Strategies
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Cost Leadership

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

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A Typical Learning Curve
unit cost
total cumulative output
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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

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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.

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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.

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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

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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
• 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"

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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.

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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.

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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.

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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)

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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

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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

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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

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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

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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.
• 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.
• 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).

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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.

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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.
• Avoid Direct Competition
• Find a niche in which no other organization has
  interest.
• Dont compete with the same intensity in the same
  geographical markets competitors.

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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
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Strategic Group Map of Restaurants and Specialty
Dining
Family Restaurants Economy
Family Restaurants Upscale
Wide Breadth of Menu Offerings Narrow
Casual Dining
Fine Dining
Dennys Waffle House IHOP Boston Market Bob Evans
Marie Callendars Perkins TGI Fridays Cracker
Barrel Picadilly Applebees
Charthouse Spagos
Steak and Ale Red Lobster Ruby Tuesday Bennigans
Fine Dining Specialized
Fast Food Family Menu
McDonalds Burger King Wendys Jack in the
Box Arbys
Ruths Chris Mortons
Casual Dining Limited Menu
Olive Garden Chevys P.F. Chang Bahama
Breeze Cheesecake Factory Belihana
Fast Food Limited Menu
Fast Casual Limited Menu
Taco Bell Del Taco Checkers Subway Papa Johns
Sbarro Chipotle Starbucks
Low
High
Pricing/Quality Image
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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
• 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

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Major Concepts in Chapter 5

• Focus strategies entail pursuit of a narrowly
  defined market segment through cost leadership,
  differentiation or best value
• Organizational dynamics is defined as the moves
  and countermoves of competitors
• 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