Chapter 6 : Formulating Business Unit
Strategy
Team 6



Involves creating a profitable competitive
position for a business within a specific
industry or market segment
Often referred to as a competitive strategy
Optimal strategies depend on many factors,
including the nature of the industry; the
company’s mission, goals, and objectives; its
current position and core competencies; and
major competitors’ strategic choices.

Success is explained by two factors

Attractiveness of the industry
 Industry characteristics are an important determinant
of profit potential
 Good to Great argues that “a company does not need to
be in a great industry to become a great company. Each
good-to-great company built a fabulous economic
engine, regardless of the industry.”

Relative Position
 Two forms of sustainable competitive positioning are
competitive advantage based on lower delivered cost
and the ability to differentiate products or services.

A study by the Harvard Business school to
research relative profitability of different
market strategies found the following:
 Market share is strongly related with ROI
 Product quality is key to market leadership
 Vertical integration can be beneficial later in the
product life cycle
 ROI is positively correlated with market growth
 High investment and inventory levels tend to depress
ROI
 Capacity use is critical for businesses with a high level
of capital intensity

1) Analyzing the competitive environment
 With whom will we compete?
 What relative strengths do we have as a basis for creating a
sustainable competitive advantage?

2) Anticipating key competitors’ actions
 Understanding how competitors will react to our competitive
strategy

3) Generating strategic options
 Balancing opportunities and constraints to create options

4) Choosing among the alternatives
 Analysis of the long-term impact of different strategy options



Competitive advantage is sustainable when
current or new competitors are not able to
imitate or supplant the advantage
Often created by combining strengths
Building competitive advantage is rooted in
identifying, practicing, strengthening, and
instilling leadership traits throughout the
organization


Value- perceived benefit that a buyer is willing to
pay a firm for what the firm provides
Value Chain- A model of the business process



Divides the firm’s business process into component
activities that add value
Once a firm’s primary, support, and activity types
are defined, Value Chain analysis assigns assets
and operating costs to all value-creating activities
Analyzing the value chains of competitors,
customers, and suppliers can help a firm add value
Firm Infrastructure
Support
Activities
Human Resource Management
Technology Development
Procurement
Inbound Operations Outbound Marketing
Logistics
Logistics and Sales
Primary Activities
Service




It is important to identify the value that individual
primary and support activities contribute beyond
their costs
The value chain can be used to shape responses to
changing upstream and downstream market
conditions through collaboration
Physical value chain- represents the use of raw
materials and labor to deliver a tangible product
Virtual value chain- information flows underlying
the physical activities evident within a firm


Generic competitive strategic postures that apply
to any business in any industry according to Porter
Cost leaders charge less for goods and services and
aim for a substantial share of the market


Cost focus- only activities directly relevant to serving the
well-defined market niche are undertaken
A differentiation strategy is aimed at a broad, mass
market and seeks to create uniqueness on an
industry-wide basis

Achieved through product design, brand image,
technology, distribution, service, or a combination of
these elements
Strategic Advantage
Strategic Target
Uniqueness perceived
Low-cost position
by the customer
Industry-wide
Particular
segment only
Differentiation
Overall
Cost Leadership
Focus

Cost Leadership
Ruthless devotion to minimizing costs through
continuous improvement in manufacturing, process
engineering, and other cost-reducing strategies
 Tight control of the organizational structure is essential


Differentiation

The company offers something unique that is valuable
 Offers a value other than low price

Most successful differentiation strategies involve multiple
sources of differentiation

Cost leaders



Technological change that can nullify past
investments in scale economies
New entrants from other parts of the world can take
advantage of even lower factor costs
Differentiation


The biggest challenge is imitators
Imitation narrows actual and perceived value



Created a sustainable competitive advantage by
committing to its low-cost, speed based business
model combined with new principles
Stuck to its business model of making PCs cheap
and never countered the innovative and aggressive
moves of its competitors
The cost-leadership strategy produced great sales
when market demand was high, but it kept Dell
from maintaining its growth path when sufficient
sales could only be found in new product market
segments where differentiation was demanded


Generic strategies aren’t always viable, but strategies
that combine the elements of cost leadership,
differentiation, and flexibility are better able to meet
customer needs
It is argued that differentiation and low-cost are not
mutually exclusive; they can exist within the total
quality management


As discussed in Blue Ocean Strategy, “Value innovation is
created in the region where a company’s actions favorably
affect its cost structure and its value proposition to buyers.”
The pursuit of a pure generic strategy will not sustain a
competitive advantage in hypercompetitive
environments

Different ways companies can create value for
customers. Specifically three generic strategies:

Product Leadership

Operational Excellence

Customer Intimacy

Produce a continuous stream of state-of-the-art
products and services

Encourage innovation

Have a risk-oriented management style


Recognition that the company’s success lies in its
talented design people and those who support them
Recognition of the need to educate and lead the market
regarding the use and benefits of new products


Approach aimed at better production and
delivery mechanisms
Example: Starwood Hotel and Resorts



Decided to stylishly renovate its underperforming
hotels and focus on doing and presenting everything
it already did much better
Restored a reputation for reliability, value, and
consistency
With a focus on operational excellence, Starwood led
Marriott and Hilton in North American revenue per
available room.

Concentrates on building customer loyalty

Example: Home Depot



Changed daily operations to provide a more
shopper-friendly store atmosphere
Allows employees to focus on customer service and
sales
The second initiative involves home improvement
classes taught at its stores
 Customer intimacy is enhanced when professionals
teach customers how to buy and install the proper
material and construction equipment
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,
quality-focused
Operational excellence
Predictable, measurable,
hierarchical, cost-conscious,
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


Adrian Slywotzky and David Morrison have
identified business models/designs that generate
profits in a unique way:
Customer development/Customer solutions profit
model


Finds ways to improve their customers’ economics and
ways to improve customers’ processes
Product pyramid profit model

Company offers a number of variations including lowpriced, high-volume products and high-priced, low
volume products

Multicomponent System profit model


Switchboard profit model


Businesses that are characterized by a system that
consists of component that generate substantially
different levels of profitability
Creates a high-value intermediary that concentrates
the multiple connection pathways through one
point, reducing costs
Time profit model

Speed is the key to profitability and constant
innovation is essential

Blockbuster profit model

Profitability is driven by a few great product
successes
 Invest in a few projects rather than in a variety

Profit multiplier profit model


For businesses with strong consumer brands
Entrepreneurial profit model


Stresses that diseconomies of scale can exist
Small can be beautiful

Specialization profit model


Installed base profit model


Stresses growth through sequenced specialization
Established user base subsequently buys the
company’s brand of consumables or follow-on
products
De Facto standard profit model

When the instilled base model becomes the de facto
standard that governs competitive behavior in the
industry