STRATEGY:
A VIEW FROM THE TOP
CHAPTER 6
“FORMULATING BUSINESS UNIT
STRATEGY”
Ashley Campion
Wes Kincaid
Stephanie Lanter
Michael Riggen
John Hutchens
Nathan Frost
Claudia Martinez
FORMULATING BUSINESS UNIT
STRATEGY
Involves creating profitable competitive position
for a business within a specific industry
 Sometimes called competitive strategy
 Optimal strategies depend on factors like:
- nature of the industry
- mission, goals, and objectives
- current position & core competencies
- competitor’s strategic choices

FORMULATING BUSINESS UNIT
STRATEGY

Things to address:
- What determines relative profitability at the
business unit level?
- The importance of the industry in which a
company competes and the competitive position
of the firm within its industry
- The drivers that determine sustainable
competitive advantage
FORMULATING BUSINESS UNIT
STRATEGY
The logic behind strategic thinking at the
business unit level suggest a number of generic
strategic choices that depends on the specific
opportunities and challenges
 This chapter deals with:

How to asses a strategic challenge
- Techniques for generating and evaluating strategic
alternatives
- Issue if designing a profitable business model
-
FOUNDATIONS
How much does industry matter?
 Industry directly accounts for approx. 36% of
profitability


Begins to answer what principal factors lie behind a
business unit’s profitability
RELATIVE POSITION
•
•
Relative profitability depends on nature of their
competitive position
 This is their ability to create a sustainable
competitive advantage
Created either through low cost or
differentiation
 Advantage gained when company satisfies
customer desires at lowest cost
 Or, when it creates value that allow the
company to charge a premium
MARKET SHARE

Two schools of thought
1) Volume share – striving for as much market share
as possible
 2) Striving for as much profit as possible


Led to PIMS (Profit Impact of Market Strategy)
PIMS

Major findings
1) Absolute and relative market share correlate with
ROI
 2) Product quality is key to market leadership
 3) ROI is positively correlated with market growth

PIMS

Continued…
4) Vertical integration can help in product life cycle
 5) High investment intensity leads to less ROI
 6) Capacity use is critical with a high level of capital
intensity


PIMS being taught less frequently due to
changing technological workplace, leading
executives to continually update assumptions
FORMULATING A COMPETITIVE
STRATEGY

Key Challenges
Analyzing the competitive environment
 Anticipating competitors’ actions
 Generating strategic options
 Choosing among alternatives

FORMULATING A COMPETITIVE
STRATEGY
 Analyzing the competitive environment
 With whom will we compete, now and in the future?
 What relative strengths will we have as a basis for
creating a sustainable competitive advantage?
 Anticipating competitors’ actions
 How will competitors react to different strategic moves?
 Realize that industry leaders react differently then
challengers or followers.
 A detailed competitor analysis will help determine how
a competitor will react.
FORMULATING A COMPETITIVE
STRATEGY

Generating strategic options



Balance opportunities and constraints
Create strategic options that range from defensive to
preemptive
Choosing among alternatives


Analyze the long term impact of different strategy
options
Make a final choice
FORMULATING A COMPETITIVE
STRATEGY

What is a competitive advantage?




When a firm is able to create and implement a valuecreating strategy that competitors are not using.
A competitive advantage is sustainable if competitors
can not imitate
Created by combining strengths
Firm must exploit competencies and advantages
FORMULATING A COMPETITIVE
STRATEGY
 Southwest



15 minute turn around time
Able to offer more flights per day
Saves $175 million
 Taco


Airlines
Bell
Outsources food preparation functions
Can cut prices, reduce employees, and reduce
40% of kitchen space
FORMULATING A COMPETITIVE
STRATEGY

Important Issues
Executives must understand the nature and source of
competitive advantages
 They must make sure middle management
understand competitive advantages
 Building a competitive advantage involves
identifying, practicing, strengthening, and instilling
leadership traits

VALUE CHAIN ANALYSIS

Value – perceived benefit that a buyer is willing
to pay a firm for what a firm provides.


Customers value - product differentiation, product cost,
and the ability of the firm to meet their needs.
Value chain analysis – the study of costs and
elements of product or service differentiation
throughout the chain of activities and linkages to
determine present and potential sources of
competitive advantage.
Ex. Charles Schwab
- Primary activities that contribute to the physical creation of the product.
- Broad range of distribution channels for its brokerage services. ( primary)
- Support activities that assist the primary activities and each other.
- Hold extensive expertise in information technology and brokerage systems
(support)
VALUE CHAIN CONT.

How does a firm differentiate itself?
- When it can differentiate itself from its competitors when it
provides something unique that is valuable to buyers beyond a low
price.
Ex. Dell
- Dell’s ability to sell, build-to-order, and ship a computer to the
customer with a few days is a unique differentiator of its value
chain.
- Dell shares information about its customers with its suppliers.
Suppliers can forecast demand then.
Ex. Procter and Gamble
- Reorganized its product supply chain into a superfunctions unit by
combining formerly independent functions of purchasing,
engineering, and distribution. A product supply manager was
created for each division and the functions report to him. These
measures reduced flow time and inventories, and increased on-time
delivery and quality.
VALUE CHAIN CONT.


Different segments of the value chain represent
potential sources of profit, known as profit pools.
Value that activities contribute beyond their costs.
Ex. Millennium Pharmaceuticals

- Did a value chain analysis and opted to shift from drug
research in the upstream portion of the industry to drug
manufacturing downstream, to improve its profitability.
The firm’s strategy came from the understanding of the
entire pharmaceutical value chain and how it could better
exploit different profit pools.
VALUE CHAIN CONT.

-
-
-
-
Ex. Home Depot and General Electric
Alliance between their value chains that reduces direct and
indirect costs for each firm.
A web application links Home Depot’s point-of-purchase
data to GE’s e-business system and enables Home Depot to
ship directly to its customers from GE.
The value chain to value chain connection enables Home
Depot to sell more GE products and to reduce the inventory
in its own warehouses.
GE can use the real-time demand information from Home
Depot to adjust the production rate of appliances.
PORTER’S GENERIC BUSINESS UNIT
STRATEGIES

Differentiation

Low Cost

The relative attractiveness of different generic
strategies is related to choice about competitive
scope.
LOW COST



Aimed at cost leadership.
Low expenditures on R&D, marketing, and
overhead.
Low prices serve as an entry barrier to potential
competitors.
LOW COST


With a more narrow scope, a low cost strategy is
based on cost focus.
Example: Southwest Airlines
DIFFERENTIATION


Aimed at a broad, mass market seeking to create
uniqueness on an industry wide basis.
Examples: Nike and Disney
REQUIREMENTS FOR SUCCESS

Low Cost

Minimizing cost through continuous improvement in
manufacturing, process engineering, and other cost
reducing strategies.

Achieving and sustaining tight control and an
organizational structure and incentive system
supportive of a cost focused discipline.
REQUIREMENTS FOR SUCCESS

Differentiation

Redefine the rules by which customers arrive at their
purchase decisions by offering something unique that
is valuable.

Most successful is involving multiple sources of
differentiation.
RISK


Cost leaders must concern themselves with the
technological change that can nullify past
investments in scale economics or accumulated
learning.
Differentiation must be concerned with imitation.
THE SAGA OF DELL


Turned a low margin mail order operation into a
high profit, high service business by challenging
every aspect of PC selling and manufacturing.
After absence his company had fallen victim to
complacency, believing that it is highly successful
business model would remain defensible and
productive.
CRITIQUE OF PORTER’S GENERIC
STRATEGIES


Low cost production and differentiation are not
mutually exclusive and that when they can exist
together in a firm’s strategy, they result in
sustained profitability.
Evidence that the pursuit of a pure generic
strategy will not sustain a competitive advantage
in hypercompetitive environments.
VALUE DISCIPLINES



Def: different ways a company can create value
for customers
Choosing a value discipline and focusing on it
sharpens a company’s strategic focus
Three Different Value Discipline Strategies
Product Leadership
 Operation Excellence
 Customer Intimacy

PRODUCT LEADERSHIP
Consistently producing state-of-the-art products
and services
 Innovation driven
 Raise the bar by offering more value and better
solutions


Examples: Apple, Nike, Amazon.com
 All Ranked in Business Week’s World’s 50 Most
Innovative Companies
PRODUCT LEADERSHIP- NIKE
 Encourage

Innovation
Shoes, Apparel, Customization, Accessories
 Risk-Oriented

Risks and rewards when it comes to
innovation
 Recognition


of People
Research and Design people are reason for
current and future success
 Recognition

Management Style
of need to educate
Promotes empowerment of women
Healthy youth program emphasizing active
lifestyles
OPERATIONAL EXCELLENCE
 Def:
strategic approach aimed at better
production and delivery mechanisms
 Value reputation of reliability, value,
and consistency
 Example:
Starwood Suites & Resorts
Worldwide
OPERATIONAL EXCELLENCESHERATON
•
•
•
•
•
Starwood Hotels and Resorts
• Underperforming Hotels: Sheraton and
Four Points brand
Sheraton had $750 million renovation
80% of original hotel torn down
All rooms redecorated and many
different amenities added
Focus on operational excellence
immediately successful
CUSTOMER INTIMACY
Companies focusing on customer intimacy focus
on customer loyalty
 Customer friendly atmosphere
 Tailor products and services to customer needs
 Pursuing customer intimacy can be expensive,
but pays off in long term


Example: Home Depot, Lifetime Fitness,
Nordstrom
CUSTOMER INTIMACY- LIFETIME
FITNESS


Want people to spend multiple hours there
◦ Open 24 hours a day
◦ Latest fitness equipment
◦ Indoor & Outdoor Pools with Slides, Hot tubs
◦ Kid Center
◦ Salon
◦ Life Café (healthy food served)
Create environment of having fun, working out,
and being healthy
DESIGNING A PROFITABLE BUSINESS
MODEL
 It
is a critical part of formulating a
business unit strategy
 Creating
an effective model requires a
clear understanding of how the firm will
generate profits and the strategic actions
it must take to succeed over the long term
BUSINESS MODELS
 Adrian
Slwotzky and David Morrison
have identified 22 business models
They present these models as examples
 Authors also confirm that in some
instances profitability depends on the
relationship of two or more models

BUSINESS MODELS


The two most productive questions asked of
executives
 1. What is our business model?
 2. How do we make a profit?
Classic strategy rule suggests
 “Gain market share and profits will follow”
 Because of globalization and rapid
technological advancements, this once highly
regarded belief of the correlation between
market share and profitability has collapsed
some industries
HOW CAN BUSINESS EARN SUSTAINABLE
PROFITS?
 Analyze


the following questions:
Where will the firm be able to make a profit in
this industry?
How should the business model be designed so
that the firm will be profitable?
 Slwotzky
and Morrison give 11 profitability
business models as a way to answer these
questions
PROFITABILITY MODELS
 Customer
Development/Customer
Solutions Profit Model

Companies use this model make money by
discovering ways to improve their customers’
economic economics and investing in ways for
them to improve their processes

Ex: Discover Credit Card
PROFITABILITY MODELS
 Product


Pyramid Profit Models
Effective in markets where customers have
strong preferences for product characteristics
By offering a number of variations, companies
build “product pyramids”
Profits are concentrated at the top
High –priced, low
volume products
Low-priced, high
volume products
Strategic firewall- deters
competitive entry, protecting
margins at the top
• Ex: Car companies
and consumer goods
PROFITABILITY MODELS
 Multicomponent


Some businesses are characterized by a
production/marketing system that consists of components
that generate substantially different levels of profitability
In such cases it is useful to maximize the profitability of
the whole system

Ex:
 Switchboard

System Profit Model
Profit Model
Creates a high-value intermediary that connects multiple
sellers and multiple buyers through one point, or
“switchboard”, and reduces costs for both parties for a
price.

Ex: Ebay, Amazon
PROFITABILITY MODELS
 Time



Profit Model
Speed is sometimes the key to profitability
Model follows the first-mover advantage
Constant innovation is essential to sustain this model

Ex: Software, technology, cell phones
 Blockbuster



Profit Model
In some industries profitability is driven by a few great
product successes
In this business environment, there are high R&D and
launch costs and finite product cycles
It pays to concentrate resource investments in a few
projects rather than take positions in a variety of
products.

Ex: Movie Studios, Pharmaceutical firms
PROFITABILITY MODELS

Profit Multiplier Model
Reaps gains from the same product, character, trademark,
capability, or service
 This model can be a powerful engine for business with
strong consumer brands



Ex: Disney and Mickey Mouse
Entrepreneurial Model
Model stresses that diseconomies of scale can exist in
companies
 They attack other companies who have become comfortable
with their profit levels and bureaucratic systems that are
remote from customers
 As their expenses grow and attention steers away from
customers, the entrepreneurs who are in direct contact
with customers, step in

PROFITABILITY MODELS

Specialization Profit Model

Stresses growth through sequenced specialization


Ex: Consulting companies
Installed Base Profit Model
Company that pursues this model profits because
its established user base subsequently buys the
company’s brand of consumables or follow-on
products
 Installed base profits provide a protected annuity
stream


Ex: Razors and blades, swiffer and refill wipes, plug in air
fresheners
PROFITABILITY MODELS
 De


Facto Standard Profit Model
Variant of the installed base model
This model is appropriate when the Installed
Base Model becomes the de facto standard that
governs competitive behavior in the industry
TAKEAWAYS
FOUNDATIONS
Firm success is explained by two factors:
- attractiveness of the industry in which the firm
competes
- relative position with in that industry
 Two generic forms of competitive positioning are
a competitive advantage based on:
- lower delivered cost
- differentiate products/services

TAKEAWAYS
VALUE CHAIN
ANALYSIS
Involves the study of cost and elements of product
or service differentiation throughout the chain of
activities and linkages to determine present and
potential sources of competitive advantage
TAKEAWAYS
PORTER’S GENERIC BUSINESS UNIT
STRATEGIES
Uniqueness perceived
by the customer
Industrywide
Particular
segmentonly
Differentiation
Low-cost position
Overall cost
leadership
Focus
TAKEAWAYS
VALUE DISCIPLINES
Strategic Focus
Product
Leadership
Operational
Effectivenes
s
Customer
Intimacy
Competitive
Drivers/Needs
•Search for new products/markets
•Experiment with trends
•Initiate change to which
competitors must respond
•Narrow product lines
•High expertise in chosen areas
of focus
•Moderate change in
technology/structure
•Focus on cost, efficiency/volume
•Strong customer focus
•Relationship driven
•Two competitive requirements
TAKEAWAYS
DESIGNING A PROFITABLE BUSINESS
MODEL
Critical part of formulating a business unit
strategy
 Clear understanding of how the firm will
generate profits over the long-term
 Two most productive questions:
- What is our business model?
- How do we make a profit?
