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Strategy a View from the Top: Chapter 6. Formulating Business Unity Strategy. Introduction. Sometimes called, “competitive strategy” business unit strategy’s principal focus is on how a firm should compete in a given competitive setting

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strategy a view from the top chapter 6

Strategy a View from the Top:Chapter 6

Formulating Business Unity Strategy

introduction
Introduction

Sometimes called, “competitive strategy” business unit strategy’s principal focus is on how a firm should compete in a given competitive setting

In contrast, corporate strategy is identification of market arenas where a corporation can compete successfully and how to add value to Strategic Business Units (SBOs)

factors concerning business unit strategy
Factors Concerning Business Unit Strategy

Nature of the Industry

Company’s Mission, Goals and Objectives

Current position

Core competencies

Competitors’ strategic choices

foundations
Foundations
  • Firm success is explained by two factors:
    • Attractiveness of the industry in which a firm competes
    • Relative position

Why has FedEx enjoyed success?

-industry

-position

attractiveness of the industry
Attractiveness of the Industry

Industry directly accounted for 36% of the explained total variation in aggregate profitability.

Globalization has made the shipping industry a very attractive one

slide6

Potential Entrants

LOW to MODERATE

Industry Competitors

HIGH

- FedEx, UPS, DHL

  • Buyers’ Power
  • HIGH
    • large buyers
  • low switching cost

Supplier’s Power

LOW

Substitutes

LOW

Porter’s Five Forces-Shipping Industry

position
Position
  • Now that we’ve established the viability of the shipping industry as a whole, let’s consider how one achieves profitability in that industry
        • Competitive position
          • Ability to create a sustainable competitive advantage
        • Lowering cost
        • Differentiation
market share
Market Share

FedEx and UPS face a very fierce competition, bet they’re the only two firms vying in the global shipping market with large market share.

Large market share is both a reward for providing better value and a means of realizing lower costs

pims findings profit impact of market strategy
PIMS findings(Profit Impact of Market Strategy)

Market share is strongly correlated with ROI

Product quality is key to market leadership

ROI is positively correlated with market growth

High investment intensity tends to depress ROI, as do high inventory levels

Capacity use is critical for businesses with a high level of capital intensity.

slide11
PIMS

Project undertaken by Harvard Business School to ascertain profitability of different market strategies.

Study becoming less and less relevant due to dynamic, technology driven experiences of the last 20 years.

challenges in forming competitive strategy
Challenges in Forming Competitive Strategy
  • Analyzing the competitive environment.
  • Anticipating key competitors actions.
  • Generating strategic options.
  • Choosing among alternatives.
what is competitive advantage
What is Competitive Advantage?
  • Design and implement a value-creating strategy that competitors are not currently using.
    • Sustainable
    • Combination of Strengths
    • Manager Awareness
    • Keeping most valuable resource, Employees!
competitive advantage fedex
Competitive Advantage - FedEX
  • SQI – Service Quality Index
    • Sustainable
      • Unmatched by Competitors
    • Combines Strengths
      • Monitors all the strengths FedEx competes on.
    • Manager Awareness
      • Examined daily by managers at every level.
    • Employee Retention
      • Allows employees to see how there work is directly effecting the company as a whole.
value chain analysis
Value Chain Analysis
  • Value is a perceived benefit.
  • Value Chain
    • Begins with raw materials ends with sales.
  • Analysis provides value creating activities.
    • ABC Accounting
accounting for costs in abc

Product A

Direct Costs

Activity 1

Activity 2

Activity 3

Product B

Direct Costs

Indirect

Costs

Product C

Direct Costs

Accounting for costs in ABC

Indirect costs are assigned (traced & allocated) to various pools of activity costs.

The individual products are the final cost objects & direct costs are traced to the individual products.

Activity costs are allocated to products

what are activities and how are they identify
What are activities, and how are they identify?
  • Activity

Any type of task, or function performed by a firm to manufacture a product

  • Activity Identification
    • Tracking the use of resources
    • Using the cost hierarchy
example of activities in factories
Example of Activities in Factories
  • Process customer orders
  • Purchasing materials
  • Schedule production
  • Receiving and handling materials
  • Moving materials to the production floor
  • Setting up machines
  • Inspection of products
  • Maintain product information
  • Perform engineering changes
  • Expedite orders
  • Shipping finished products
  • Respond to customers
  • Introduce new products

Expenses on each activity are

assigned into a distinct cost pool

of overhead costs. Then, expenses

are allocated to products based on

their demand for the activities.

abc cost hierarchy
ABC Cost Hierarchy

ABC uses the following cost hierarchy to classify overhead costs among five main categories of activities:

  • Facility (organization)-sustaining activities
  • Customer-sustaining activities
  • Product-sustaining activities
  • Batch-level activities
  • Unit-level activities
two generic strategies
Two Generic Strategies

Low cost

Differentiation

Global application

With all the choices, which one do you choose?

identifying the specifics
Identifying the Specifics
  • Cost leadership
    • A constant battle
    • Focus
    • Targeting customers in the niche
    • Dell computers
      • Going too far…?
indentifying the specifics
Indentifying the Specifics
  • Differentiation
    • Trying to be unique, constantly.
    • Targeting customers in the niche
      • Yellow Tail
requirements for success
Requirements for Success
  • Cost leadership
    • Tenacious improvements
    • Tight controls
    • Discipline
requirements for success29
Requirements for Success
  • Differentiation
    • Adding value
    • Remaking the rules of the game
      • Still provide high value
    • Similar to Blue Ocean Strategy
      • Cirque du Soleil
    • Understanding where value is needed and not needed
the risks
The Risks
  • Cost leadership
    • A constant watch on technology
    • Vulnerable position
      • Remember, the world is flat.
    • Differentiation
      • Imitation
      • Very fickle customers
criticisms of porter
Criticisms of Porter
  • Industry norms
    • Low cost
    • Current PC industry
    • Comparing Apple computers
  • The real world
    • Mixture of strategies
    • Not mutually exclusive
takeaways
Takeaways

No strategy is associated with instant success

Firms have to maintain FLEXIBILITY!!

value disciplines
Value Disciplines

Strategic Focus

Competitive Drivers/Needs

product leadership
Product Leadership
  • Has four disciplines:

1). Encouragement of innovation.

2). A risk-oriented management style.

3). Recognition that the company’s current success and future prospects lie in its talented product design people.

4). Recognition of need to educate and lead the market regarding the use and benefits of new products.

operational excellence
Operational Excellence
  • Aimed at better production and delivery mechanisms.
  • Companies that pursue operational excellence:
    • Wal-Mart
    • FedEx
    • American Airlines
    • Starwood Hotels & Resorts
fedex and operational excellence
FedEx and Operational Excellence

Philosophy of leadership, teamwork, and problem solving resulting in continuous improvement, by focusing on the needs of the customer and empowering employees.

People-Service-Profits

starwood hotels and operational excellence
Starwood Hotels and Operational Excellence
  • Biggest changes to Sheraton hotel chain
    • “Did away with flowered bedspreads in favor of Ralph Lauren style”

- This revamping was immediately successful, 4 straight quarters following led Marriott & Hilton

- Increased operating income by 26%

customer intimacy
Customer Intimacy

Concentrates on building customer loyalty

Companies that provide customer intimacy:

designing a profitable business model a preview
Designing a Profitable Business Model(A Preview)

Product Pyramid Profit Model

Multi-component System Profit Model

Blockbuster Profit Model

Profit Multiplier model

summary
Summary
  • Chris
  • Competitive Advantage
    • The Value chain
      • ABC Accounting
  • Phil
  • Lindsey