Strategy a View from the Top:
Chapter 6
Formulating Business Unity Strategy
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)
Factors Concerning Business Unit
Strategy





Nature of the Industry
Company’s Mission, Goals and Objectives
Current position
Core competencies
Competitors’ strategic choices
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
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
Porter’s Five Forces-Shipping Industry
Potential Entrants
LOW to MODERATE
Supplier’s Power
Industry Competitors
Buyers’ Power
HIGH
LOW
HIGH
- FedEx, UPS, DHL
Substitutes
LOW
-large buyers
-low switching cost
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
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
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.
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.
Formulating a Competitive
Strategy
Challenges in Forming Competitive
Strategy




Analyzing the competitive environment.
Anticipating key competitors actions.
Generating strategic options.
Choosing among alternatives.
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!
Competitive Advantage - FedEX

SQI – Service Quality Index
–
Sustainable

–
Combines Strengths

–
Monitors all the strengths FedEx competes on.
Manager Awareness

–
Unmatched by Competitors
Examined daily by managers at every level.
Employee Retention

Allows employees to see how there work is directly
effecting the company as a whole.
INDICATOR
WEIGHT
1. Damaged Packages
10
2. Lost Packages
10
3. Missed Pickups
10
4. Complaints Reopened
5
5. Overgoods (lost and found)
5
6. Wrong-day late deliveries
5
7. Abandoned Calls
1
8. International
1
9. Invoice Adjustments Requested
1
10. Missing Proofs of Delivery
1
11. Right-day late deliveries
1
12. Traces
1
Value Chain Analysis


Value is a perceived benefit.
Value Chain
–

Begins with raw materials ends with sales.
Analysis provides value creating activities.
–
ABC Accounting
Accounting for costs in ABC
Activity 1
Indirect
Costs
Activity 2
Activity 3
Indirect costs are
assigned (traced &
allocated) to various
pools of activity costs.
Product A
Direct Costs
Product B
Direct Costs
Product C
Direct Costs
Activity costs are
allocated to
products
The individual products
are the final cost objects
& direct costs are traced
to the individual products.
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
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.
ABC Cost Hierarchy
ABC uses the following cost hierarchy to classify overhead
costs among five main categories of activities:
1. Facility (organization)-sustaining activities
2. Customer-sustaining activities
3. Product-sustaining activities
4. Batch-level activities
5. Unit-level activities
Porter and his Generic Business
Unit Strategies
Two Generic Strategies




Low cost
Differentiation
Global application
With all the choices, which one do you
choose?
Identifying the Specifics

Cost leadership
–
–
–
–
A constant battle
Focus
Targeting customers in the niche
Dell computers

Going too far…?
Indentifying the Specifics

Differentiation
–
–
Trying to be unique, constantly.
Targeting customers in the niche

Yellow Tail
Requirements for Success

Cost leadership
–
–
–
Tenacious improvements
Tight controls
Discipline
Requirements for Success

Differentiation
–
–
Adding value
Remaking the rules of the game

–
Similar to Blue Ocean Strategy

–
Still provide high value
Cirque du Soleil
Understanding where value is needed and not
needed
The Risks

Cost leadership
–
–
A constant watch on technology
Vulnerable position

–
Remember, the world is flat.
Differentiation


Imitation
Very fickle customers
Criticisms of Porter

Industry norms
–
–
–

Low cost
Current PC industry
Comparing Apple computers
The real world
–
–
Mixture of strategies
Not mutually exclusive
Takeaways


No strategy is associated with instant
success
Firms have to maintain FLEXIBILITY!!
Value Disciplines
Strategic Focus
Competitive Drivers/Needs
Product
Leadership
• Search for new
products/markets/techniques
• Experiment with trends
• Initiate change to which competitors
must respond
Operational
Effectiveness
• Narrow product line
• Higher expertise in area of focus
• Moderate change in technology or
structure
• Focus on cost, efficiency/volume
Customer
Intimacy
• Strong customer focus
• Relationship driven
• Two competitive requirements
• Quick movement in developing markets
• Efficient operations as markets mature
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.
Companies that use Product
Leadership
Operational Excellence


Aimed at better production and delivery
mechanisms.
Companies that pursue operational
excellence:
–
–
–
–
Wal-Mart
FedEx
American Airlines
Starwood Hotels & Resorts
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
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%
Customer Intimacy

Concentrates on building customer loyalty

Companies that provide customer intimacy:
Different Value Disciplines Call for
Different Competencies
Strategic Focus
Work Environment
Employee Competencies
Customer Intimacy
Values-driven, dynamic,
challenging, informal,
service-oriented,
qualitative, employee as
customer, “whatever it
takes”
Relationship-building,
listening, rapid problemsolving, independent
action, initiative
collaboration, qualityfocused
Operational excellence
Predictable, measurable,
hierarchical, costconscious, team-based,
formal
Process control,
continuous improvement,
teamwork, analysis,
financial/operational
understanding
Product leadership
Experimental, learningfocused, technical,
informal, fast-paced,
resource-rich
Information sharing,
creativity, group problem
solving, breakthrough
thinking, artistic, visionary
Designing a Profitable Business Model
(A Preview)

Product Pyramid Profit Model
High price,
low volume
Low price, high
volume



Multi-component System Profit Model
Blockbuster Profit Model
Profit Multiplier model
Summary


Chris
Competitive Advantage
–
The Value chain



ABC Accounting
Phil
Lindsey