Strategy: A View from the Top Chapter 6 “Formulating Business Unit Strategy”

1. Strategy:A View from the TopChapter 6 “Formulating Business Unit Strategy” Ashley Campion Wes Kincaid Stephanie Lanter Michael Riggen John Hutchens Nathan Frost Claudia Martinez

2. Formulating Business Unit Strategy • Involves creating profitable competitive position for a business within a specific industry • Sometimes called competitive strategy • Optimal strategies depend on factors like: - nature of the industry - mission, goals, and objectives - current position & core competencies - competitor’s strategic choices

3. Formulating Business Unit Strategy • Things to address: - What determines relative profitability at the business unit level? - The importance of the industry in which a company competes and the competitive position of the firm within its industry - The drivers that determine sustainable competitive advantage

4. Formulating Business Unit Strategy • The logic behind strategic thinking at the business unit level suggest a number of generic strategic choices that depends on the specific opportunities and challenges • This chapter deals with: • How to asses a strategic challenge • Techniques for generating and evaluating strategic alternatives • Issue if designing a profitable business model

5. Foundations • How much does industry matter? • Industry directly accounts for approx. 36% of profitability • Begins to answer what principal factors lie behind a business unit’s profitability

6. Relative Position • Relative profitability depends on nature of their competitive position • This is their ability to create a sustainable competitive advantage • Created either through low cost or differentiation • Advantage gained when company satisfies customer desires at lowest cost • Or, when it creates value that allow the company to charge a premium

7. Market Share • Two schools of thought • 1) Volume share – striving for as much market share as possible • 2) Striving for as much profit as possible • Led to PIMS (Profit Impact of Market Strategy)

8. PIMS • Major findings • 1) Absolute and relative market share correlate with ROI • 2) Product quality is key to market leadership • 3) ROI is positively correlated with market growth

9. PIMS • Continued… • 4) Vertical integration can help in product life cycle • 5) High investment intensity leads to less ROI • 6) Capacity use is critical with a high level of capital intensity • PIMS being taught less frequently due to changing technological workplace, leading executives to continually update assumptions

10. Formulating a Competitive Strategy • Key Challenges • Analyzing the competitive environment • Anticipating competitors’ actions • Generating strategic options • Choosing among alternatives

11. Formulating a Competitive Strategy • Analyzing the competitive environment • With whom will we compete, now and in the future? • What relative strengths will we have as a basis for creating a sustainable competitive advantage? • Anticipating competitors’ actions • How will competitors react to different strategic moves? • Realize that industry leaders react differently then challengers or followers. • A detailed competitor analysis will help determine how a competitor will react.

12. Formulating a Competitive Strategy • Generating strategic options • Balance opportunities and constraints • Create strategic options that range from defensive to preemptive • Choosing among alternatives • Analyze the long term impact of different strategy options • Make a final choice

13. Formulating a Competitive Strategy • What is a competitive advantage? • When a firm is able to create and implement a value-creating strategy that competitors are not using. • A competitive advantage is sustainable if competitors can not imitate • Created by combining strengths • Firm must exploit competencies and advantages

14. Formulating a Competitive Strategy • Southwest Airlines • 15 minute turn around time • Able to offer more flights per day • Saves $175 million • Taco Bell • Outsources food preparation functions • Can cut prices, reduce employees, and reduce 40% of kitchen space

15. Formulating a Competitive Strategy • Important Issues • Executives must understand the nature and source of competitive advantages • They must make sure middle management understand competitive advantages • Building a competitive advantage involves identifying, practicing, strengthening, and instilling leadership traits

16. Value Chain Analysis • Value – perceived benefit that a buyer is willing to pay a firm for what a firm provides. • Customers value - product differentiation, product cost, and the ability of the firm to meet their needs. • Value chain analysis – the study of costs and elements of product or service differentiation throughout the chain of activities and linkages to determine present and potential sources of competitive advantage.

17. Ex. Charles Schwab • Primary activities that contribute to the physical creation of the product. • - Broad range of distribution channels for its brokerage services. ( primary) • Support activities that assist the primary activities and each other. • - Hold extensive expertise in information technology and brokerage systems (support)

18. Value Chain cont. • How does a firm differentiate itself? - When it can differentiate itself from its competitors when it provides something unique that is valuable to buyers beyond a low price. Ex. Dell • Dell’s ability to sell, build-to-order, and ship a computer to the customer with a few days is a unique differentiator of its value chain. - Dell shares information about its customers with its suppliers. Suppliers can forecast demand then. Ex. Procter and Gamble - Reorganized its product supply chain into a superfunctions unit by combining formerly independent functions of purchasing, engineering, and distribution. A product supply manager was created for each division and the functions report to him. These measures reduced flow time and inventories, and increased on-time delivery and quality.

19. Value Chain cont. • Different segments of the value chain represent potential sources of profit, known as profit pools. Value that activities contribute beyond their costs. • Ex. Millennium Pharmaceuticals • - Did a value chain analysis and opted to shift from drug research in the upstream portion of the industry to drug manufacturing downstream, to improve its profitability. The firm’s strategy came from the understanding of the entire pharmaceutical value chain and how it could better exploit different profit pools.

20. Value Chain cont. • Ex. Home Depot and General Electric • Alliance between their value chains that reduces direct and indirect costs for each firm. • A web application links Home Depot’s point-of-purchase data to GE’s e-business system and enables Home Depot to ship directly to its customers from GE. • The value chain to value chain connection enables Home Depot to sell more GE products and to reduce the inventory in its own warehouses. • GE can use the real-time demand information from Home Depot to adjust the production rate of appliances.

21. Porter’s Generic Business Unit Strategies • Differentiation • Low Cost • The relative attractiveness of different generic strategies is related to choice about competitive scope.

22. Low Cost • Aimed at cost leadership. • Low expenditures on R&D, marketing, and overhead. • Low prices serve as an entry barrier to potential competitors.

23. Low Cost • With a more narrow scope, a low cost strategy is based on cost focus. • Example: Southwest Airlines

24. Differentiation • Aimed at a broad, mass market seeking to create uniqueness on an industry wide basis. • Examples: Nike and Disney

25. Requirements For Success • Low Cost • Minimizing cost through continuous improvement in manufacturing, process engineering, and other cost reducing strategies. • Achieving and sustaining tight control and an organizational structure and incentive system supportive of a cost focused discipline.

26. Requirements For Success • Differentiation • Redefine the rules by which customers arrive at their purchase decisions by offering something unique that is valuable. • Most successful is involving multiple sources of differentiation.

27. Risk • Cost leaders must concern themselves with the technological change that can nullify past investments in scale economics or accumulated learning. • Differentiation must be concerned with imitation.

28. The Saga of Dell • Turned a low margin mail order operation into a high profit, high service business by challenging every aspect of PC selling and manufacturing. • After absence his company had fallen victim to complacency, believing that it is highly successful business model would remain defensible and productive.

29. Critique of Porter’s Generic Strategies • Low cost production and differentiation are not mutually exclusive and that when they can exist together in a firm’s strategy, they result in sustained profitability. • Evidence that the pursuit of a pure generic strategy will not sustain a competitive advantage in hypercompetitive environments.

30. Value Disciplines • Def: different ways a company can create value for customers • Choosing a value discipline and focusing on it sharpens a company’s strategic focus • Three Different Value Discipline Strategies • Product Leadership • Operation Excellence • Customer Intimacy

31. Consistently producing state-of-the-art products and services Innovation driven Raise the bar by offering more value and better solutions Examples: Apple, Nike, Amazon.com All Ranked in Business Week’s World’s 50 Most Innovative Companies Product Leadership

32. Encourage Innovation Shoes, Apparel, Customization, Accessories Risk-Oriented Management Style Risks and rewards when it comes to innovation Recognition of People Research and Design people are reason for current and future success Recognition of need to educate Promotes empowerment of women Healthy youth program emphasizing active lifestyles Product Leadership- Nike

33. Def: strategic approach aimed at better production and delivery mechanisms Value reputation of reliability, value, and consistency Example: Starwood Suites & Resorts Worldwide Operational Excellence

34. Operational Excellence- Sheraton • Starwood Hotels and Resorts • Underperforming Hotels: Sheraton and Four Points brand • Sheraton had $750 million renovation • 80% of original hotel torn down • All rooms redecorated and many different amenities added • Focus on operational excellence immediately successful

35. Customer Intimacy • Companies focusing on customer intimacy focus on customer loyalty • Customer friendly atmosphere • Tailor products and services to customer needs • Pursuing customer intimacy can be expensive, but pays off in long term • Example: Home Depot, Lifetime Fitness, Nordstrom

36. Customer Intimacy- Lifetime Fitness • Want people to spend multiple hours there • Open 24 hours a day • Latest fitness equipment • Indoor & Outdoor Pools with Slides, Hot tubs • Kid Center • Salon • Life Café (healthy food served) • Create environment of having fun, working out, and being healthy

37. Designing a Profitable Business Model • It is a critical part of formulating a business unit strategy • Creating an effective model requires a clear understanding of how the firm will generate profits and the strategic actions it must take to succeed over the long term

38. Business Models • Adrian Slwotzky and David Morrison have identified 22 business models • They present these models as examples • Authors also confirm that in some instances profitability depends on the relationship of two or more models

39. Business Models • The two most productive questions asked of executives • 1. What is our business model? • 2. How do we make a profit? • Classic strategy rule suggests • “Gain market share and profits will follow” • Because of globalization and rapid technological advancements, this once highly regarded belief of the correlation between market share and profitability has collapsed some industries

40. How can business earn sustainable profits? • Analyze the following questions: • Where will the firm be able to make a profit in this industry? • How should the business model be designed so that the firm will be profitable? • Slwotzky and Morrison give 11 profitability business models as a way to answer these questions

41. Profitability Models • Customer Development/Customer Solutions Profit Model • Companies use this model make money by discovering ways to improve their customers’ economic economics and investing in ways for them to improve their processes • Ex: Discover Credit Card

42. Profitability Models • Product Pyramid Profit Models • Effective in markets where customers have strong preferences for product characteristics • By offering a number of variations, companies build “product pyramids” Profits are concentrated at the top Strategic firewall- deters competitive entry, protecting margins at the top High –priced, low volume products Low-priced, high volume products • Ex: Car companies and consumer goods

43. Profitability Models • Multicomponent System Profit Model • Some businesses are characterized by a production/marketing system that consists of components that generate substantially different levels of profitability • In such cases it is useful to maximize the profitability of the whole system • Ex: • Switchboard Profit Model • Creates a high-value intermediary that connects multiple sellers and multiple buyers through one point, or “switchboard”, and reduces costs for both parties for a price. • Ex: Ebay, Amazon

44. Profitability Models • Time Profit Model • Speed is sometimes the key to profitability • Model follows the first-mover advantage • Constant innovation is essential to sustain this model • Ex: Software, technology, cell phones • Blockbuster Profit Model • In some industries profitability is driven by a few great product successes • In this business environment, there are high R&D and launch costs and finite product cycles • It pays to concentrate resource investments in a few projects rather than take positions in a variety of products. • Ex: Movie Studios, Pharmaceutical firms

45. Profitability Models • Profit Multiplier Model • Reaps gains from the same product, character, trademark, capability, or service • This model can be a powerful engine for business with strong consumer brands • Ex: Disney and Mickey Mouse • Entrepreneurial Model • Model stresses that diseconomies of scale can exist in companies • They attack other companies who have become comfortable with their profit levels and bureaucratic systems that are remote from customers • As their expenses grow and attention steers away from customers, the entrepreneurs who are in direct contact with customers, step in

46. Profitability Models • Specialization Profit Model • Stresses growth through sequenced specialization • Ex: Consulting companies • Installed Base Profit Model • Company that pursues this model profits because its established user base subsequently buys the company’s brand of consumables or follow-on products • Installed base profits provide a protected annuity stream • Ex: Razors and blades, swiffer and refill wipes, plug in air fresheners

47. Profitability Models • De Facto Standard Profit Model • Variant of the installed base model • This model is appropriate when the Installed Base Model becomes the de facto standard that governs competitive behavior in the industry

48. TakeawaysFoundations • Firm success is explained by two factors: - attractiveness of the industry in which the firm competes - relative position with in that industry • Two generic forms of competitive positioning are a competitive advantage based on: - lower delivered cost - differentiate products/services

49. TakeawaysValue Chain Analysis Involves the study of cost and elements of product or service differentiation throughout the chain of activities and linkages to determine present and potential sources of competitive advantage

50. TakeawaysPorter’s Generic Business Unit Strategies Industry-wide Particular segment-only Focus