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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
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
  • 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

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

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

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
  • 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
  • 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
exploiting low cost leadership
Exploiting Low-Cost Leadership
  • 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
  • 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)
  • 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)
  • 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
differentiation strategy
Differentiation Strategy

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
  • 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)
  • 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)
  • 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
  • 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)
  • More product features
  • New, appealing product features
  • Product features tailored to individual customer preferences
  • Better product 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)
  • 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)
  • 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)
  • 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 Strategy (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
disadvantages of a differentiation strategy i
Disadvantages of a Differentiation Strategy (I)
  • 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)
  • 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
focus strategy
Focus Strategy
  • 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
  • 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
  • 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)
  • 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 negatives
Focus Strategy Negatives
  • 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
  • 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?
hybrid strategy stuck in the middle
Hybrid Strategy(“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

Cost

Leadership

Benefits

Differentiation

Benefits

Integrated Competitive Strategy
integrated competitive strategy1
Cost Leadership and DifferentiationIntegrated Competitive Strategy

Value-Added

Or

Integrated

Cost

Leadership

Benefits

Differentiation

Benefits

Combined

Benefits

hybrid strategy offering best value
Hybrid Strategy(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
  • 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
  • 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
  • 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)
  • 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)
  • 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)
  • Financial Resources
    • Availability of Investment Capital
    • Capital Structure and Creditworthiness
    • Financial Controls
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