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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

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Managerial scope of sbu vs corporate executives
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
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
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
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
Formulating Strategy in SBUs

Broad strategic objectives of SBUs and

independent businesses:

  • Grow revenues and profits as rapidly as possible

  • Build a sustainable competitive advantage


Ways to grow revenues and profits
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


Types of sbu growth strategies
Types of SBU Growth Strategies

  • Increase market share

  • Enter new markets

  • Identify new uses

  • Create new products

  • Acquire new businesses

  • Collaborate with others


Building sustainable competitive advantage
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 la michael porter
Thinking About Generic Business Strategies – á la Michael Porter

Businesses gain competitive advantage by giving

their customers value unavailable from their

competitors. There are three variables in pursuing

this 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
Types of Business-Level Strategies Porter

  • 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
Porter’s Generic Business Strategies Porter

Combine the three variables into four generic

business strategies:

  • Full market low-cost leadership

  • Full market differentiation

  • Segment low-cost leadership

  • Segment differentiation


Five generic strategies
Five Generic Strategies Porter

Competitive Advantage

Cost

Uniqueness

Cost Leadership

Differentiation

Broad target

Integrated Cost

Leadership/

Differentiation

Competitive Scope

Narrow target

Focused Cost Leadership

Focused Differentiation


Cost leadership strategy
Cost Leadership Strategy Porter

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
Low-Cost Leadership Strategy Porter

  • 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
Achieving Low-Cost Leadership Porter

  • 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


Internal value chain modifications
Internal Value Chain Modifications Porter

  • Current chain configuration is not the only one possible:

    • Existing activities could be performed better

    • Activity sequence could be rearranged

    • Activities could be moved or performed simultaneously

    • Interface between activities could be improved

    • In-house activities could be outsourced


Exploiting low cost leadership
Exploiting Low-Cost Leadership Porter

  • 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
Downside to Low-Cost Leadership Porter

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

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

  • 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


Cost leadership strategy and the five forces of competition

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

  • Rivalry Among Competing Firms

    Can use cost leadership strategy to advantage since:

    • competitors avoid price wars with cost leaders, creating higher profits for the entire industry


Cost leadership strategy and the five forces of competition1

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

  • Bargaining Power of Buyers

    Can mitigate buyers’ power by:

    • driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm


Cost leadership strategy and the five forces of competition2

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

  • Bargaining Power of Suppliers

    Can mitigate suppliers’ power by:

    • being able to absorb cost increases due to low cost position

    • being able to make very large purchases, reducing chance of supplier using power


Cost leadership strategy and the five forces of competition3

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

  • Threat of New Entrants

    Can frighten off new entrants due to:

    • their need to enter on a large scale in order to be cost competitive

    • the time it takes to move down the learning curve


Cost leadership strategy and the five forces of competition4

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Cost Leadership Strategy and the Five Forces of Competition

  • Threat of Substitute Products

    Cost leader is well positioned to:

    • make investments to be first to create substitutes

    • buy patents developed by potential substitutes

    • lower prices in order to maintain value position


Differentiation strategy
Differentiation Strategy Porter

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 strategy1
Differentiation Strategy Porter

  • Value provided by unique features and value characteristics

  • Command premium price

  • High customer service

  • Superior quality

  • Prestige or exclusivity

  • Rapid innovation


Differentiation strategy i
Differentiation Strategy (I) Porter

  • 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
Differentiation Strategy (II) Porter

  • 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
Bases for Creating Differentiation Porter

  • 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
Generic Forms of Differentiation (I) Porter

  • More product features

  • New, appealing product features

  • Product features tailored to individual customer preferences

  • Better produce 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
Generic Forms of Differentiation (II) Porter

  • 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
Criteria for Choosing a Differentiation Feature (I) Porter

  • 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
Criteria for Choosing a Differentiation Feature (II) Porter

  • 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
Benefits of a Differentiation PorterStrategy (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


Benefits of a differentiation strategy ii
Benefits of a Differentiation PorterStrategy (II)

  • Attraction of the feature engenders customer loyalty leading to automatic repeat purchases

  • That customer loyalty makes it harder for new competitors to enter the market


Disadvantages of a differentiation strategy i
Disadvantages of a Differentiation Strategy (I) Porter

  • 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
Disadvantages of a Differentiation Strategy (II) Porter

  • 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


Differentiation strategy and the five forces of competition

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Differentiation Strategy and the Five Forces of Competition

  • Rivalry Among Competing Firms

    Can defend against competition because:

    • brand loyalty to differentiated product offsets price competition


Differentiation strategy and the five forces of competition1

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Differentiation Strategy and the Five Forces of Competition

  • Bargaining Power of Buyers

    Can mitigate buyer power because:

    • well differentiated products reduce customer sensitivity to price increases


Differentiation strategy and the five forces of competition2

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Differentiation Strategy and the Five Forces of Competition

  • Bargaining Power of Suppliers

    Can mitigate suppliers’ power by:

    • absorbing price increases due to higher margins

    • passing along higher supplier prices because buyers are loyal to differentiated brand


Differentiation strategy and the five forces of competition3

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Differentiation Strategy and the Five Forces of Competition

  • Threat of New Entrants

    Can defend against new entrants because:

    • new products must surpass proven products or,

    • new products must be at least equal to performance of proven products, but offered at lower prices


Differentiation strategy and the five forces of competition4

Five Forces of Porter

Competition

Rivalry Among Competing Firms

Threat of

Substitute Products

Threat of New Entrants

Bargaining Power of Buyers

Bargaining Power of Suppliers

Differentiation Strategy and the Five Forces of Competition

  • Threat of Substitute Products

    Well positioned relative to substitutes because:

    • brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands


Focus strategy
Focus Strategy Porter

  • 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
Focus Strategy Principles Porter

  • 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
When Focus Strategy Makes Sense Porter

  • 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
Focus Strategy Success Factors (I) Porter

  • 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 success factors ii
Focus Strategy Success Factors (II) Porter

  • Capable of manufacturing such a product

  • Customers willing to pay a price that allows business to earn an acceptable profit

  • Low enough competitive intensity that business can establish a competitive advantage

  • Resist impulse to broaden the segment served or to serve more segments to increase revenues


Focus strategy negatives
Focus Strategy Negatives Porter

  • 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
“Stuck-in-the-Middle” Strategy Porter

  • 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?


Choosing a generic business level strategy
Choosing a Generic Business-Level Strategy Porter

MY FIRM HAS

A COMPETITIVE

ADVANTAGE

MY FIRM HAS

A COMPETITIVE

ADVANTAGE

STUCK

IN THE

MIDDLE


Hybrid strategy stuck in the middle
Hybrid Strategy Porter(“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 Porter

Cost

Leadership

Benefits

Differentiation

Benefits

Integrated Competitive Strategy


Integrated competitive strategy1

Cost Leadership and Differentiation Porter

Integrated Competitive Strategy

Value-Added

Or

Integrated

Cost

Leadership

Benefits

Differentiation

Benefits

Combined

Benefits


Hybrid strategy offering best value
Hybrid Strategy Porter(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
Benefits of Integrated Strategy Porter

  • 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
Major Risks of Integrated Strategy Porter

  • 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
Functional Area Strategies Porter

  • 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
Examples of Functional Area Strategic Activities (I) Porter

  • 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
Examples of Functional Area Strategic Activities (II) Porter

  • 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
Examples of Functional Area Strategic Activities (III) Porter

  • Financial Resources

    • Availability of Investment Capital

    • Capital Structure and Creditworthiness

    • Financial Controls


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