Transcript Slide 1

Strategy Formulation
HCAD 5390
Managerial Scope of SBU vs Corporate
Executives
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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)
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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)
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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
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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
Broad strategic objectives of SBUs and
independent businesses:
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II.
Grow revenues and profits as rapidly as
possible
Build a sustainable competitive advantage
Ways to Grow Revenues and Profits
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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
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Increase market share
Enter new markets
Identify new uses
Create new products
Acquire new businesses
Collaborate with others
Building Sustainable Competitive
Advantage
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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 – 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
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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
Combine the three variables into four generic
business strategies:
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Full market low-cost leadership
Full market differentiation
Segment low-cost leadership
Segment differentiation
Five Generic Strategies
Broad
target
Cost
Uniqueness
Cost
Leadership
Differentiation
Integrated Cost
Leadership/
Differentiation
Narrow
target
Competitive Scope
Competitive Advantage
Focused Cost
Leadership
Focused
Differentiation
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
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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
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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
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Current chain configuration is not the only
one possible:
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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
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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
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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 costcutting 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)
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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)
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Align performance incentives with a low-cost
operational strategy
Leaders experienced in managing low-cost
operations
Corporate culture that is comfortable with a lowcost operating model
Cost Leadership Strategy and the
Five Forces of Competition
Rivalry Among
Competing Firms
Five Forces of
Competition
Bargaining Power
of Suppliers
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 Competition
Bargaining Power of
Buyers
Five Forces of
Competition
Bargaining Power
of Suppliers
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 Competition
Bargaining Power of
Suppliers
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 Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
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 Competition
Threat of Substitute
Products
Five Forces of
Competition
Bargaining Power
of Suppliers
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
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
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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 Strategy
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Value provided by unique features and value
characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
Differentiation Strategy (I)
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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)
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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
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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
Rivalry Among
Competing Firms
Five Forces of
Competition
Bargaining Power
of Suppliers
Can defend against
competition because:
 brand loyalty to
differentiated product
offsets price competition
Differentiation Strategy and the
Five Forces of Competition
Bargaining Power of
Buyers
Five Forces of
Competition
Bargaining Power
of Suppliers
Can mitigate buyer power
because:
 well differentiated
products reduce customer
sensitivity to price
increases
Differentiation Strategy and the Five
Forces of Competition
Bargaining Power of
Suppliers
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 Competition
Threat of New Entrants
Five Forces of
Competition
Bargaining Power
of Suppliers
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 Competition
Threat of Substitute
Products
Five Forces of
Competition
Bargaining Power
of Suppliers
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
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Not selling to the entire potential market, but
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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
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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
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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)
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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)
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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
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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
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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
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
STUCK
IN THE
MIDDLE
Hybrid Strategy
(“Stuck-in-the-Middle”)
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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
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Cost Leadership and Differentiation
Cost
Leadership
Benefits
Differentiation
Benefits
Integrated Competitive Strategy
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Cost Leadership and Differentiation
Value-Added
Or
Integrated
Cost
Leadership
Benefits
Combined
Benefits
Differentiation
Benefits
Hybrid Strategy
(Offering “Best Value”)
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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
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Successful firms using this strategy have aboveaverage 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
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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
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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)
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Clinical Operations
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Capacity
Location
Organizational Structure
Quality Assurance and Improvement
Reporting and Control
Marketing and Promotion
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Market Research
Advertising and Promotion
Product and Service offerings
Examples of Functional Area Strategic
Activities (II)
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Human Resources
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Staffing
Motivation and Incentives
Culture and Working Conditions
Employee Development
Information and Clinical Technologies
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Information Systems
Communication Systems
Clinical Medical Technologies
Examples of Functional Area Strategic
Activities (III)
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Financial Resources
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Availability of Investment Capital
Capital Structure and Creditworthiness
Financial Controls