Strategy: Chapter 6
Formulating Business
Unit Strategy
Overview
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Porter’s generic business strategy
Value Chain analysis
Value Discipline
Business Models
 Business unit strategy involves creating a
profitable competitive position for a
business within a specific industry or
market segment.
Strategic Logic at the Business Unit
Level
 The attractiveness of different strategic
options depends on the competitive
situation.
 Michael Porter articulated a “strategic
logic” that guides much of our strategic
thinking at the business level.
 Firm success is explained by two factors:
attractiveness of the industry and it
relative position.
How much does industry
matter?
 Industry
 Industry Segment
 Corporate Parent
32%
4%
19%
Relative Position
 What is the nature of the competitive
position?
 Either lower delivered cost or
differentiation.
 Also depends on scope.
Importance of Market
Share
 Profitability vs. Market Share
 A&P and Intel are high market share
failures
 Managing for volume growth or value
growth?
Formulating A Competitive
Advantage
 Key Challenges
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Analyzing the competitive environment
Anticipating key competitors actions
Generating strategic options
Choosing among alternatives
 Competitive Advantage (e.g., Southwest)
 Sustainability (VRIN)
Value Chain Analysis
Porter’s Generic Business
Unit Strategies
 Differentiation or Low Cost
Low Cost
 Broad Market vs. Cost Focus
 Broad Market
 Example: Wal-Mart
 Company chooses broad target market
 Economies of Scale, Experience effects in
purchasing and manufacturing
 Cost Focus
 Example: Southwest Airlines
 Well defined market niche – short roots &
secondary airports
 All activities focused on serving that niche
Differentiation
 To provide something of value to the
customer other than low price
 Use more than 1 source of differentiation
 higher quality raw materials, unique product design,
more reliable manufacture, superior marketing and
distribution
 Requires thorough understanding of what
customers value
Critique of Porter’s
Generic Strategy
 Not always viable
 Low cost not effective when low cost is industry
norm
 Not Mutually Exclusive
 Total Quality Management
Value Disciplines (Treacy
& Wiersema, 1993)
 Product leadership
 Produce a continuous stream of state-of-theart products and services
 Based on four principles
 1) encouragement of innovation
 2) risk-oriented management style
 3) talented product design people
 4) educate and lead the market
Here is an example:
Value Disciplines
 Operational Excellence
 Strategic approach aimed at better
production and delivery mechanisms
 Wal-Mart, American Airlines, Fed-Ex
Value Disciplines
 Customer Intimacy
 Concentrates on building customer loyalty
 Can be expensive, but the long-term
benefits of a loyal clientele can pay off
Employee Competencies
 Product leadership – info. sharing, creativity,
group-problem solving, visionary
 Operational Excellence – process control,
continuous improvement, teamwork
 Customer Intimacy – relationship building,
listening, initiative, quality-focused
What is a business model?
 Business Model
 A firm’s business model is its plan or diagram for
how it competes, uses its resources, structures its
relationships, interfaces with customers, and
creates value to sustain itself on the basis of the
profits it generates.
 The term “business model” is used to include all
the activities that define how a firm competes in
the marketplace.
Dell as an example
Designing a Profitable
Business Model
 Designing a profitable business model is
a critical part of formulating a business
unit strategy
 How can we earn sustainable profits?
 Where will we be able to make profits?
 How should the business model be designed
so that we will be profitable?
1. Customer Development/Solutions
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Find ways to improve customers’ economics
and processes
Ex: Priceline.com
2. Product Pyramid
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Variety of products, most profitable on top,
bottom serves as a barrier to entry
Ex: Marriott
3. Multicomponent System
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Focus on components that generate
substantially higher profits
Ex: Room rentals vs. bar operations for
hotels, Casinos
4. Switchboard
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Connect multiple sellers to multiple buyers
Low costs for both, in exchange for a fee
Ex: banks
5. Time
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First-mover advantage
Requires constant innovation
Ex: Apple
6. Blockbuster
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Profitability driven by a few great products
Ex: Movie studios or pharmaceutical
companies
7. Profit Multiplier
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Reaps gains repeatedly from same products,
services…etc.
Works well with strong consumer brands
Ex: Michael Jordan, Disney
8. Entrepreneurial
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Take advantage of other companies’ lack of
closeness to customers
Works for small companies
9. Specialization
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Growth through sequenced specialization
Ex: Consulting companies
10. Installed Base
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Customers buy consumables or follow-on
products
Ex: software & upgrades
11. De Facto Standard
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When the Installed Base has become the
industry standard that governs competitive
behavior
Ex: Oracle, Microsoft