chapter 5 strategy formulation at the

Learning ObjectivesLearning Objectives Understand the responsibilities of a business-unit managerUnderstand the responsibilities of a business-unit manager Evaluate the effectiveness of a generic business-level Evaluate the effectiveness of a generic business-level

strategystrategy Analyze an industry to determine its stage in the life cycle. Analyze an industry to determine its stage in the life cycle.

Understand how that stage determines the Understand how that stage determines the appropriateness of various business strategiesappropriateness of various business strategies

Appreciate the competitive dynamics found in industriesAppreciate the competitive dynamics found in industries Be able to select an appropriate competitive strategy Be able to select an appropriate competitive strategy

based on the competitive environmentbased on the competitive environment

Business-level Strategy Business-level Strategy Formulation ResponsibilitiesFormulation Responsibilities

Direction SettingDirection Setting Establishment and communication of mission, vision, values, Establishment and communication of mission, vision, values,

long-term goals of a single business unitlong-term goals of a single business unit Creation and communication of shorter-term goalsCreation and communication of shorter-term goals

Analysis of Business SituationAnalysis of Business Situation Compilation and assessment of information from stakeholders, Compilation and assessment of information from stakeholders,

broad environmental analysis and other sourcesbroad environmental analysis and other sources Internal resource analysisInternal resource analysis Identification of strengths, weaknesses, opportunities, threats, Identification of strengths, weaknesses, opportunities, threats,

sources of sustainable competitive advantagesources of sustainable competitive advantage


Selection of StrategySelection of Strategy Generic approach to competition—cost leadership, Generic approach to competition—cost leadership,

differentiation, focus or best valuedifferentiation, focus or best value Strategic posture—specific strategies needed to carry Strategic posture—specific strategies needed to carry

out the generic strategyout the generic strategy


Management of ResourcesManagement of Resources Acquisition of resources and/or development of Acquisition of resources and/or development of

competencies leading to sustainable competitive competencies leading to sustainable competitive advantageadvantage

Ensure development of functional strategies and an Ensure development of functional strategies and an appropriate organizational design (management appropriate organizational design (management structure) to support business strategystructure) to support business strategy

Develop control systems to ensure that strategies Develop control systems to ensure that strategies remain relevant and that the business unit continues remain relevant and that the business unit continues to progress toward its goalsto progress toward its goals

Generic Business-level Generic Business-level StrategiesStrategies

Strategy

Broad/Narrow Market

Source of Advantage

Low Cost Leadership

Broad Lowest Cost Production

Differentiation Broad Preferred Product or Service Best Value Broad Low Cost & Highly Desirable

Product or Service Focus through Low Cost Leadership

Narrow Lowest Cost Production

Focus through Differentiation

Narrow Preferred Product or Service

Focus through Best Value

Narrow Low Cost & Highly Desirable

Cost LeadershipCost Leadership

High Capacity Utilization (combined High Capacity Utilization (combined with accurate demand forecasting)with accurate demand forecasting)

Economies of ScaleEconomies of Scale Technological AdvancesTechnological Advances OutsourcingOutsourcing Learning / Experience EffectsLearning / Experience Effects

A Typical Learning CurveA Typical Learning Curve

unitcost

total cumulative output

May not detect required product or marketing May not detect required product or marketing changes due to preoccupation with costchanges due to preoccupation with cost

Investments in plants and equipment may Investments in plants and equipment may become obsolete due to technological become obsolete due to technological breakthroughsbreakthroughs

Large investments cause reluctance to changeLarge investments cause reluctance to change Competitors may quickly imitate cost-saving Competitors may quickly imitate cost-saving

strategiesstrategies May go too far in cutting costs, thus endangering May go too far in cutting costs, thus endangering

customers or employeescustomers or employees

Risks Associated With Cost Risks Associated With Cost Leadership StrategyLeadership Strategy

DifferentiationDifferentiation Uniqueness may be achieved through Uniqueness may be achieved through

many means. Examples are:many means. Examples are: Product innovationsProduct innovations Superior qualitySuperior quality Superior serviceSuperior service Creative advertisingCreative advertising Better supplier relationshipsBetter supplier relationships

The key to success is that customers must The key to success is that customers must be willing to pay more for the uniqueness be willing to pay more for the uniqueness of the product or service than the firm paid of the product or service than the firm paid to create it.to create it.

Risks Associated with a Risks Associated with a Differentiation StrategyDifferentiation Strategy

Customers may be willing to sacrifice Customers may be willing to sacrifice special features due to a high pricespecial features due to a high price

Customers may no longer perceive an Customers may no longer perceive an attribute as differentiatingattribute as differentiating

A source of differentiation may be easy A source of differentiation may be easy to imitate. Constant innovation is to imitate. Constant innovation is necessary.necessary.

Best Value StrategyBest Value Strategy A combination of strategic elements from A combination of strategic elements from

differentiation and low costdifferentiation and low cost Firms can increase sales of an attractive product or Firms can increase sales of an attractive product or

service. Sales increases may lead to efficiency and service. Sales increases may lead to efficiency and thus reduced coststhus reduced costs

Consumers are coming to expect a combination of Consumers are coming to expect a combination of high quality and low pricehigh quality and low price

Technological advances often allow a company to Technological advances often allow a company to pursue differentiation and low cost at the same timepursue differentiation and low cost at the same time

Many companies are pursuing best value through an Many companies are pursuing best value through an emphasis on quality or speedemphasis on quality or speed

Principles of Total Quality ManagementPrinciples of Total Quality Management

GeneralGeneral Get to know the next and final customerGet to know the next and final customer Get to know the direct competition, and the world-Get to know the direct competition, and the world-

class leaders (whether competitors or not)class leaders (whether competitors or not) Dedicate to continual, rapid improvement in quality, Dedicate to continual, rapid improvement in quality,

response time, flexibility, and costresponse time, flexibility, and cost Achieve unified purpose via extensive sharing of Achieve unified purpose via extensive sharing of

information and involvement in planning and information and involvement in planning and implementation of changeimplementation of change

Principles of Total Quality ManagementPrinciples of Total Quality Management

Design and OrganizationDesign and Organization Cut the number of components or operations and Cut the number of components or operations and

number of suppliers to a few good onesnumber of suppliers to a few good ones Organize resources into chains of customers, each Organize resources into chains of customers, each

chain mostly self-contained and focused on a product chain mostly self-contained and focused on a product or customer "family"or customer "family"

Principles of Total Quality ManagementPrinciples of Total Quality Management OperationsOperations

Cut flow time, distance, inventory, and space along the chain of customersCut flow time, distance, inventory, and space along the chain of customers Cut setup, changeover, get-ready, and startup timeCut setup, changeover, get-ready, and startup time Operate at the customer's rate of use (or a smoothed representation of it)Operate at the customer's rate of use (or a smoothed representation of it)

Human Resource DevelopmentHuman Resource Development Continually invest in human resources through cross-training (for mastery), Continually invest in human resources through cross-training (for mastery),

education, job switching, and multi-year cross-career re-assignments; and education, job switching, and multi-year cross-career re-assignments; and improved health, safety, and security.improved health, safety, and security.

Develop operator-owners of products, processes, and outcomes via Develop operator-owners of products, processes, and outcomes via broadened owner-like reward and recognition.broadened owner-like reward and recognition.

Principles of Total Quality ManagementPrinciples of Total Quality Management Quality and Process ImprovementQuality and Process Improvement

Make it easier to produce or provide the product Make it easier to produce or provide the product without mishap or process variation.without mishap or process variation.

Record and own quality, process, and mishap data at Record and own quality, process, and mishap data at the workplace.the workplace.

Ensure that front-line associates get first chance at Ensure that front-line associates get first chance at process improvement--before staff experts.process improvement--before staff experts.

Accounting and ControlAccounting and Control Cut transactions and reporting; control causes and Cut transactions and reporting; control causes and

measure performance at the source, not via periodic measure performance at the source, not via periodic cost reports.cost reports.

Principles of Total Quality ManagementPrinciples of Total Quality Management CapacityCapacity

Maintain/improve present resources and human work Maintain/improve present resources and human work before thinking about new equipment and automationbefore thinking about new equipment and automation

Automate incrementally when process variability cannot Automate incrementally when process variability cannot otherwise be reducedotherwise be reduced

Seek to have multiple work stations, machines, flow Seek to have multiple work stations, machines, flow lines, cells for each product or customer familylines, cells for each product or customer family

Marketing and SalesMarketing and Sales Market and sell your firm's increasing customer-oriented Market and sell your firm's increasing customer-oriented

capabilities and competencies.capabilities and competencies.

Emphasis on SpeedEmphasis on Speed Reducing Time to Provide Good or Reducing Time to Provide Good or

ServiceService Reduces costsReduces costs Customers happier because they are satisfied Customers happier because they are satisfied

more quicklymore quickly May be accompanied by a flexible May be accompanied by a flexible

manufacturing system (FMS) or a manufacturing system (FMS) or a simultaneous manufacturing system (such simultaneous manufacturing system (such as C3M at Michelin)as C3M at Michelin)

Risks Associated with a Best Risks Associated with a Best Value StrategyValue Strategy

A Tradeoff Between Risks of Cost A Tradeoff Between Risks of Cost Leadership and DifferentiationLeadership and Differentiation Technological breakthroughs can make the Technological breakthroughs can make the

strategy obsoletestrategy obsolete Risk of imitationRisk of imitation However,However,

• Unlikely to become preoccupied with cost or Unlikely to become preoccupied with cost or differentiationdifferentiation

• Unlikely to take cost cutting too farUnlikely to take cost cutting too far• Increases likelihood of being able to recover Increases likelihood of being able to recover

additional costs associated with differentiationadditional costs associated with differentiation

Focus StrategyFocus Strategy

Can be based on differentiation, lowest Can be based on differentiation, lowest cost or best valuecost or best value

Key is to provide a product or service that Key is to provide a product or service that caters to a particular market segment.caters to a particular market segment. Must identify segmentMust identify segment Must assess and meet the needs of the Must assess and meet the needs of the

segment better than competitors (target segment better than competitors (target marketing)marketing)

May also be called a “niche” strategyMay also be called a “niche” strategy

Risks Associated with a Focus StrategyRisks Associated with a Focus Strategy

Risks depend on whether the strategy is Risks depend on whether the strategy is being pursued through differentiation, being pursued through differentiation, lowest cost or best value lowest cost or best value as well as:as well as: The desires of the target market can become The desires of the target market can become

similar to the desires of the whole market, thus similar to the desires of the whole market, thus eliminating advantage in catering to the target eliminating advantage in catering to the target marketmarket

A competitor may focus on an even more A competitor may focus on an even more narrowly defined segment of the marketnarrowly defined segment of the market

The Industry Life CycleThe Industry Life Cycle

A

B

C

Introduction

Growth

Maturity

Commodity or Decline

Time

Unit Sales

Volume

Industry Life CycleIndustry Life Cycle Understanding the life cycle can help firms Understanding the life cycle can help firms

anticipate demand and formulate strategiesanticipate demand and formulate strategies IntroductionIntroduction

• Gradual increase in demandGradual increase in demand• Turbulent environment. Survival is keyTurbulent environment. Survival is key

Growth StageGrowth Stage• Rapid increase in demandRapid increase in demand• Strategies fragmented. Begin to see differentiation Strategies fragmented. Begin to see differentiation

and size economies.and size economies.• Price becomes a major factor during the late stagesPrice becomes a major factor during the late stages• Weaker competitors will begin to drop out Weaker competitors will begin to drop out

(“competitive shakeout”)(“competitive shakeout”)

Industry Life CycleIndustry Life Cycle

Maturity StageMaturity Stage• Demand levels offDemand levels off• Efficient, high volume production tends to be Efficient, high volume production tends to be

important, based on a dominant designimportant, based on a dominant design• Product differentiation becomes increasingly Product differentiation becomes increasingly

difficultdifficult

Industry Life CycleIndustry Life Cycle

Commodity or decline stageCommodity or decline stage• Individual product demand my decline, while markets Individual product demand my decline, while markets

and industries tend to follow more of a pattern of and industries tend to follow more of a pattern of leveling off demand (commodity) or a slight increase leveling off demand (commodity) or a slight increase over a number of years.over a number of years.

• Price is still very important in competitionPrice is still very important in competition• Tight cost controls and efficiency are essentialTight cost controls and efficiency are essential• Competition is intense; more competitors drop outCompetition is intense; more competitors drop out• Some competitors find niches that are still growing or Some competitors find niches that are still growing or

profitableprofitable

Breaking Out of the Breaking Out of the ProductProduct Life CycleLife Cycle

Time

Unit Sales

Volume

Competitive DynamicsCompetitive Dynamics

Competitive action and reactionCompetitive action and reaction Creative destructionCreative destruction

The inevitable decline of leading firms due to The inevitable decline of leading firms due to competitive moves and countermovescompetitive moves and countermoves

Competition has been increasing in most Competition has been increasing in most global industriesglobal industries

Strategies that Reflect Competitive Strategies that Reflect Competitive DynamicsDynamics

Aggressive CompetitionAggressive Competition Exploit ownership of superior resources. Exploit ownership of superior resources. Overwhelm competitors through a Overwhelm competitors through a

combination of factors that could include combination of factors that could include the best products or services, superior the best products or services, superior advertising, the lowest production cost, advertising, the lowest production cost, superior design, the lowest price or the superior design, the lowest price or the strongest brand name.strongest brand name.


First-mover AdvantageFirst-mover Advantage Invest significantly more time and Invest significantly more time and

resources to creating state-of-the-art resources to creating state-of-the-art products and services than competitors products and services than competitors to protect leadership position.to protect leadership position.

Organizational learning capacity is Organizational learning capacity is important.important.


CollaborationCollaboration Partnerships and alliances with Partnerships and alliances with

stakeholders to offset the influence of a stakeholders to offset the influence of a powerful rival (defensive strategy). powerful rival (defensive strategy).

Or, if a company is the largest rival, Or, if a company is the largest rival, create partnerships and alliances that create partnerships and alliances that will block new competition or hurt will block new competition or hurt existing competitors (offensive strategy).existing competitors (offensive strategy).


Threat of RetaliationThreat of Retaliation Make it very clear to competitors that a firm will retaliate against any Make it very clear to competitors that a firm will retaliate against any

action that will upset the balance in the industry. action that will upset the balance in the industry. The threat must be believable. The threat must be believable. Firms may compete simultaneously in multiple industries (multi-market Firms may compete simultaneously in multiple industries (multi-market

competition). Therefore, a firm could retaliate in another industry.competition). Therefore, a firm could retaliate in another industry. Government InterventionGovernment Intervention

A political strategy in which the firm hires lobbyists and creates strong A political strategy in which the firm hires lobbyists and creates strong relationships with political leaders or parties in an effort to influence the relationships with political leaders or parties in an effort to influence the “rules of the game”.“rules of the game”.

Create Barriers to ImitationCreate Barriers to Imitation Many potential barriers exist, including economies of scale, patents, Many potential barriers exist, including economies of scale, patents,

special relationships with stakeholders (pre-emptive collaboration), or special relationships with stakeholders (pre-emptive collaboration), or private information.private information.


Strategic FlexibilityStrategic Flexibility An organization limits investments in An organization limits investments in

fixed capital and forms joint ventures or fixed capital and forms joint ventures or subcontracting agreements to provide subcontracting agreements to provide a lot of what it needs so that it is in a a lot of what it needs so that it is in a position to quickly move in and out of position to quickly move in and out of markets.markets.


Avoid Direct CompetitionAvoid Direct Competition Find a niche in which no other Find a niche in which no other

organization has interest. organization has interest. Don’t compete with the same intensity Don’t compete with the same intensity

in the same geographical markets in the same geographical markets competitors.competitors.

Resources, Industry Structure Resources, Industry Structure and Competitive Actionsand Competitive Actions

TimeTime

Firm AFirm AActionAction

Firm BFirm BReactionReaction

Firm CFirm CReactionReaction

Change in Change in Firm AFirm A

ResourcesResources

New IndustryNew Industry StructureStructure

Change in Change in Firm BFirm B

ResourcesResources

Change in Change in Firm CFirm C

ResourcesResources

Firm AFirm AResourcesResources

Firm BFirm BResourcesResources

Firm CFirm CResourcesResources

IndustryIndustry StructureStructure

MoreMore

ActionsActions

andand

ReactionsReactions

Strategic Group Map of Department Store and Strategic Group Map of Department Store and Specialty RetailingSpecialty Retailing

High

Low

Few ManyNumber of Product Categories

SpecialtyStores

SpecialtyWarehouseStores

EliteDepartmentStores

GeneralMerchandisers

DiscountDepartmentStores

WarehouseClubs

The responsibilities of business-level The responsibilities of business-level managers include establishing strategic managers include establishing strategic direction for the unit, ongoing analysis of direction for the unit, ongoing analysis of the business situation, selecting a generic the business situation, selecting a generic strategy and posture, and acquiring and strategy and posture, and acquiring and managing resources.managing resources.

Cost leadership entails producing products Cost leadership entails producing products and services at the lowest possible costand services at the lowest possible cost

Major Concepts in Chapter 5Major Concepts in Chapter 5

Differentiation means attempting to Differentiation means attempting to distinguish products or services so distinguish products or services so that they have greater value to that they have greater value to consumersconsumers

Best-value strategies combine Best-value strategies combine elements of low cost and elements of low cost and differentiationdifferentiation


Focus strategies entail pursuit of a Focus strategies entail pursuit of a narrowly defined market segment through narrowly defined market segment through cost leadership, differentiation or best cost leadership, differentiation or best valuevalue

Understanding the industry life cycle helps Understanding the industry life cycle helps firms anticipate demand and devise firms anticipate demand and devise strategystrategy

Organizational dynamics is defined as the Organizational dynamics is defined as the moves and countermoves of competitorsmoves and countermoves of competitors


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


chapter 5 strategy formulation at the

Documents

low cost

quickly move

major concepts

generic business

target market

strategy

customers

focus