Strategy Formulation

HCAD 5390

Managerial Scope of SBU vs Corporate Executives

Managerial responsibilities and decision-making concerns at corporate and SBU levels

At SBU level, trade-off between operational and strategic responsibilities

Within SBUs, strategic role of functional areas Consolidation trend in health care means more

multi-SBU corporations New freestanding ventures constantly emerging

Strategies Duties of SBU Management (I)

Define strategic direction Conduct internal/external environmental

assessments Negotiate strategy with corporate parent Adopt a generic strategy Formulate action strategies

Strategies Duties of SBU Management (II)

Develop needed resources and competencies Negotiate with functional area managers for

strategy implementation Appoint and evaluate functional area managers Monitor and control strategy implementation

Role of Corporate Center in SBU Strategy

Hold SBU managers to strategic standards, goals and criteria

Support SBU strategic initiatives with financial and other resources

Facilitate sharing of knowledge and other resources among SBUs

Formulating Strategy in SBUs

Broad strategic objectives of SBUs andindependent businesses:

I. Grow revenues and profits as rapidly as possible

II. Build a sustainable competitive advantage

Ways to Grow Revenues and Profits

Sell more units to existing customers Sell more units to new customers Sell same number of units at higher prices,

leading to higher revenues and perhaps profits Sell same number of units at same price, with

lower production costs, leading to higher profits

Building Sustainable Competitive Advantage

Competition in most markets is a zero-sum game One business grows at the expense of another It does that by positioning itself more positively and

distinctively to its customers When it does that, it has a competitive advantage When it does that for a long time, it has a

sustainable competitive advantage

Thinking About Generic Business Strategies – á la Michael Porter

Businesses gain competitive advantage by givingtheir customers value unavailable from theircompetitors. There are three variables in pursuingthis goal: Cost of producing the goods/services to be sold Features of the goods/services to be sold Range of customers to whom the

goods/services are marketed

Types of Business-Level Strategies

Business-level strategies are intended to create differences between the firm’s position relative to those of its rivals

To position itself, the firm must decide whether it intends to perform activities differently or to perform different activities as compared to its rivals

Porter’s Generic Business Strategies

Combine the three variables into four genericbusiness strategies: Full market low-cost leadership Full market differentiation Segment low-cost leadership Segment differentiation

Five Generic StrategiesCompetitive AdvantageCompetitive Advantage

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CostCost UniquenessUniqueness

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Cost Cost LeadershipLeadership

DifferentiationDifferentiation

Focused Cost Focused Cost LeadershipLeadership

Focused Focused DifferentiationDifferentiation

Integrated CostIntegrated CostLeadership/Leadership/

DifferentiationDifferentiation

Cost Leadership Strategy

An integrated set of actions designed to produce or deliver goods or services at the lowest cost, relative to competitors with features that are acceptable to customers

– relatively standardized products– features acceptable to many customers– lowest competitive price

Low-Cost Leadership Strategy

Goal is to have the lowest production costs of any competitor in the market

Not just “lower” costs, but “lowest” costs Does the business have the resources and

competencies to create goods and services at very low costs?

Achieving Low-Cost Leadership

Define and analyze the internal value chain Look for points where modifications might produce cost

savings Fully utilize fixed cost resources Expand volume to achieve economies of scale Utilize new cost-saving production technologies Perform every chain activity at optimal location –

insourcing vs outsourcing Take advantage of learning and experience curves

Exploiting Low-Cost Leadership

Lower prices to reflect lower costs – leading to increased sales and revenues

Leave prices at same level – earn higher profits

Leave prices at same level – use greater margin to add differentiating features

Downside to Low-Cost Leadership

In fixation on costs, business may ignore changing customer value preferences

New preferences may require different production technologies and cost structure

Competitors may be able to imitate the cost-cutting innovations

If preferences do not change and innovations cannot be imitated --- sustainable competitive advantage results

Keys to Success of a Low-Cost Leadership Strategy (I)

Start with sufficient working capital to survive until low-cost leadership achieved

Possess the resources and competencies to carry out necessary value chain modifications

Exercise tight control of all processes and personnel

Keys to Success of a Low-Cost Leadership Strategy (II)

Align performance incentives with a low-cost operational strategy

Leaders experienced in managing low-cost operations

Corporate culture that is comfortable with a low-cost operating model

Differentiation Strategy

An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them

– price for product can exceed what the firm’s target customers are willing to pay

– nonstandardized products– customers value differentiated features more than they

value low cost

Differentiation Strategy

Value provided by unique features and value characteristics

Command premium price High customer service Superior quality Prestige or exclusivity Rapid innovation

Differentiation Strategy (I)

Sell products with added value that customers want and competitors do not offer

Added value justifies a higher price Higher price covers cost of creating the value

(or the business will lose money creating it) Higher price is not more than the customer is

willing to pay for the added value (or the customer will not buy it)

Differentiation Strategy (II)

Create differentiation as economically as possible, while …

Also keeping other costs as low as possible What kinds of differentiation should be

created?

Bases for Creating Differentiation

Depends on what the business is capable of creating and delivering

Scrutinize the value chain to see what activities can be performed differently to add new value

Differentiation opportunities can be found at almost any point in the chain

Generic Forms of Differentiation (I)

More product features New, appealing product features Product features tailored to individual

customer preferences Better product performance Easier to use and operate Costs the customer less to use and operate More reliable, durable, and long-lasting

Generic Forms of Differentiation (II)

More attractive in appearance More convenient purchase locations Speedier delivery Friendlier customer service at all stages More prompt after-purchase repair and maintenance

service Heightened reputation and image In any way at all, the customer perceives added value

Criteria for Choosing a Differentiation Feature (I)

Customer will notice it and want it more than a product without the feature

Customer will pay more for a product with the feature than it cost to create it

Criteria for Choosing a Differentiation Feature (II)

Business is capable of creating the product at a cost less than the price the customer willing to pay for it

It is impossible for a competitor to create a product with the same feature at the same cost in the near future

Benefits of a Differentiation Strategy (I)

As long as it sustains the differentiation, the business is insulated from competition in its market

It effectively defines a new product in a new market segment where it is the only competitor

Once hooked on the differentiating feature, many customers will accept higher prices to keep enjoying it

Disadvantages of a Differentiation Strategy (I)

Competitor could differentiate the product even further

Competitors could carve out other narrower segments of the market

Customers may be confused by numerous differentiating products from many competitors

Customers eventually may lose interest in the differentiating features

Disadvantages of a Differentiation Strategy (II)

Differentiating features often required specialized, expensive processes and equipment that may be obsoleted by lower-cost competitive versions

If enough competitors copy the differentiating features, customers may take them for granted and view the product as a commodity

To stay ahead of imitative competitors, a business must continuously create new innovative differentiating features

Focus Strategy

Not selling to the entire potential market, but … Selling to a subset of customers, or Operating in a particular section of the

industrial value chain, or Selling only a few of all product possible in the

market or industry, or Selling to a narrow geographic market

Focus Strategy Principles

Goal is to earn greater profits while accepting lower sales revenues

Identify a subset of customers with more specific preferences that are not being met

Might pay a premium to have them satisfied Business has resources and competencies to

create the desired products At a cost that returns it above-average profits

When Focus Strategy Makes Sense

Total market composed of numerous segments with distinctive feature preferences that can be satisfied profitably - YES

Homogenous total market – NO Segment differences too subtle – NO Too few customers in the segments – NO Competitor operating in the segment – NO

Focus Strategy Success Factors (I)

At least one definable segment of total market Product or value preferences are substantially

different Enough customers to generate sales/profits

worth trying to serve them Clear understanding of unique product

features the customers seek

Focus Strategy Negatives

If successful, competitors will be attracted to the segment

Full market competitors may tweak their products to appeal to the segment as well

Competitors may focus on even narrower sub-segments

Segment customer preferences may shift, making the strategy irrelevant

“Stuck-in-the-Middle” Strategy

Combination of low-cost leadership and differentiation

Differentiating features add cost, therefore … Cost disadvantage to competitor pursuing a

low-cost leadership strategy Feature disadvantage to competitor pursuing a

multi-feature differentiation strategy This is a strategy to be avoided … or is it?

Hybrid Strategy(“Stuck-in-the-Middle”)

Businesses lacking strategic discipline may wind up with products not different enough to attract discriminating customers or low enough in cost to attract price-sensitive customers

They are in a dead zone between these two distinct strategic extremes … and they suffer competitively and financially

That was the traditional thinking

Integrated Competitive Strategy

Cost Leadership and Differentiation

CostCostLeadershipLeadership

BenefitsBenefitsDifferentiationDifferentiation

BenefitsBenefits

Integrated Competitive Strategy Cost Leadership and Differentiation

CostCostLeadershipLeadership

BenefitsBenefitsDifferentiationDifferentiation

BenefitsBenefits

Value-AddedValue-AddedOrOr

IntegratedIntegrated

CombinedCombinedBenefitsBenefits

Hybrid Strategy(Offering “Best Value”)

Artful combinations of low cost and differentiation

Providing “best value” to the customer Not the lowest price, but a reasonable one, not

excessive Not elaborate multiple features, but something a

little extra and distinctive Difficult balance to establish and maintain

Benefits of Integrated Strategy

Successful firms using this strategy have above-average returns

Firm offers two types of values to customers– some differentiated features (but less than a true

differentiated firm)– relatively low cost (but now as low as the cost

leader’s price)

Major Risks of Integrated Strategy

An integrated cost/differentiation business level strategy often involves compromises (neither the lowest cost nor the most differentiated firm)

The firm may become “stuck in the middle” lacking the strong commitment and expertise that accompanies firms following either a cost leadership or a differentiated strategy

Functional Area Strategies

In support of the SBU strategies Integrated with other functional area

strategies Consistent with current operational activities Means by which SBU strategies are

implemented

Examples of Functional Area Strategic Activities (I)

Clinical Operations– Capacity– Location– Organizational Structure– Quality Assurance and Improvement– Reporting and Control

Marketing and Promotion– Market Research– Advertising and Promotion– Product and Service offerings

Examples of Functional Area Strategic Activities (II)

Human Resources– Staffing– Motivation and Incentives– Culture and Working Conditions– Employee Development

Information and Clinical Technologies– Information Systems– Communication Systems– Clinical Medical Technologies

Examples of Functional Area Strategic Activities (III)

Financial Resources– Availability of Investment Capital– Capital Structure and Creditworthiness– Financial Controls