Business-Level Strategy

Business-level strategy : an integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by exploiting core competencies in specific product markets

The Central Role of Customers

In selecting a business-level strategy, the firm determines 1.

who

it will serve 2.

what

needs those target customers have that it will satisfy 3.

how

those needs will be satisfied

Managing Relationships With Customers

• Customer relationships are strengthened by offering them superior value – help customers to develop a new competitive advantage – enhance the value of existing competitive advantages

Five Generic Strategies

Competitive Advantage Cost Uniqueness

Cost Leadership Differentiation Integrated Cost Leadership/ Differentiation 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

Cost Leadership Strategy

Cost saving actions required by this strategy: – building efficient scale facilities – tightly controlling production costs and overhead – minimizing costs of sales, R&D and service – building efficient manufacturing facilities – monitoring costs of activities provided by outsiders – simplifying production processes

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 Strategy

• Value provided by unique features and value characteristics • Command premium price • High customer service • Superior quality • Prestige or exclusivity • Rapid innovation

Differentiation Strategy

Differentiation actions required by this strategy: – developing new systems and processes – shaping perceptions through advertising – quality focus – capability in R&D – maximize human resource contributions through low turnover and high motivation

Focused Business-Level Strategies

A focus strategy must exploit a narrow target’s differences from the balance of the industry by: – isolating a particular buyer group – isolating a unique segment of a product line – concentrating on a particular geographic market – finding their “niche”

Advantages of Integrated Strategy

A firm that successfully uses an integrated cost leadership/differentiation strategy should be in a better position to: – adapt quickly to environmental changes – learn new skills and technologies more quickly – effectively leverage its core competencies while competing against its rivals

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 not as low as the cost leader’s price)

Corporate-Level Strategy What is Corporate Level Strategy?

Definition: Action taken to gain a competitive advantage through the selection and management of a mix of businesses competing in several industries or product markets.

Key Questions of Corporate Strategy

1. What businesses should the corporation be in?

2. How should the corporate office manage the array of business units?

Corporate Strategy

is what makes the corporate whole add up to more than the sum of its business unit parts

Levels and Types of Diversification

Low Levels of Diversification

Single business

> 95% of revenues from a single business unit

Dominant business

Between 70% and 95% of revenues from a single business unit

A B A Moderate to High Levels of Diversification

Related constrained

< 70% of revenues from dominant business; all businesses share product, technological and distribution linkages

B

Related linked (mixed)

< 70% of revenues from dominant business, and only limited links exist

B Very High Levels of Diversification

Unrelated-Diversified

Business units not closely related

B A C A C A C

Strategic Leadership

Strategic Leadership involves: The ability to anticipate, envision, maintain flexibility and empower others to create strategic change Multi-functional work that involves working through others Consideration of the entire enterprise rather than just a sub-unit A managerial frame of reference

Strategic Leadership and the Strategic Management Process

Effective Strategic Leadership

shapes the formulation of

Strategic Intent

and influence

Strategic Mission Successful Strategic Actions Formulation of Strategies Implementation of Strategies Strategic Competitiveness Above-Average Returns

Factors Affecting Managerial Discretion

External Environment

Industry Structure Rate of market growth # and type of competitors Political/Legal constraints Product differentiation

Organizational Characteristics

Size and age Culture Resource availability Employee interaction

Managerial Discretion Characteristics of the Manager

Tolerance for ambiguity Commitment to the firm Interpersonal skills Aspiration level Self-confidence

Exercise of Effective Strategic Leadership

Establishing balanced organizational controls Determining strategic direction Exploiting and maintaining core competencies Effective Strategic Leadership Emphasizing ethical practice Sustaining an effective organizational culture Developing human capital

Determining Strategic Direction

• Strategic direction means the development of a long term vision of a firm’s strategic intent • A charismatic leader can help achieve strategic intent • It is important not to lose sight of the strengths of the organization when making changes required by a new strategic direction • Executives must structure the firm effectively to help achieve the vision

Exploiting and Maintaining Core Competencies

• Core competencies are resources and capabilities that serve as a source of competitive advantage for a firm over its rivals • Strategic leaders must verify that the firm’s competencies are emphasized in strategy implementation efforts

Exploiting and Maintaining Core Competencies

• In many large firms, and certainly in related diversified ones, core competencies are exploited effectively when they are developed and applied across different organizational units • Core competencies cannot be developed or exploited effectively without developing the capabilities of human capital

Developing Human Capital

• Human capital refers to the knowledge and skills of the firm’s entire workforce • Employees are viewed as a capital resource that requires investment • No strategy can be effective unless the firm is able to develop and retain good people to carry it out • The effective development and management of the firm’s human capital may be the primary determinant of a firm’s ability to formulate and implement strategies successfully

Sustaining an Effective Organizational Culture

• An organizational culture consists of a complex set of ideologies, symbols, and core values that is shared throughout the firm and influences the way it conducts business • Shaping the firm’s culture is a central task of effective strategic leadership

Sustaining an Effective Organizational Culture

• An appropriate organizational culture encourages the development of an entrepreneurial orientation among employees and an ability to change the culture as necessary • Reengineering can facilitate this process

Changing Culture and Reengineering

The benefits of

business reengineering

are maximized when employees believe that: • Every job in the company is essential and important • All employees must create value through their work • Constant learning is a vital part of every person’s job • Teamwork is essential to implementation success • Problems are solved only when teams accept the responsibility for the solution.

Emphasizing Ethical Practices

• Ethical practices increase the effectiveness of strategy implementation processes • Ethical companies encourage and enable people at all organizational levels to exercise ethical judgment

Emphasizing Ethical Practices

• To properly influence employee judgment and behavior, ethical practices must shape the firm’s decision-making process and be an integral part of an organization’s culture • Leaders set the tone for creating an environment of mutual respect, honesty and ethical practices among employees

Establishing Balanced Organizational Controls

• Organizational controls provide the parameters within which strategies are to be implemented and corrective actions taken • Financial controls are often emphasized in large corporations and focus on short-term financial outcomes • Strategic control focuses on the content of strategic actions, rather than their outcomes

Establishing Balanced Organizational Controls

• Successful strategic leaders balance strategic control and financial control (they do not eliminate financial control) with the intent of achieving more positive long-term returns

Why do a situation analysis?

Situation analysis concentrates on generating solid answers to a well defined set of strategic questions and using these answers to: – Appraise the company’s strategic situation and business position – Craft a suitable strategy

Situation analysis focuses on:

–EXTERNAL FACTORS – the firm’s MACRO-environment (industry and competitive conditions) –INTERNAL FACTORS – the firm’s immediate MICRO-environment (its own internal situation and competitive position)

The Key Questions in Company Situation Analysis

1.

2.

3.

4.

How well is the company’s present strategy working?

What are the company’s strengths, weaknesses, opportunities, and threats?

Are the company’s prices and costs competitive?

How strong is the company’s competitive position?

5. What strategic issues does the company face?

SWOT Analysis

• SWOT represents the first letter in Strengths, Weaknesses, Opportunities, and Threats.

• SWOT analysis – Involves sizing-up a company’s

INTERNAL

strengths and weaknesses and its

EXTERNAL

opportunities and threats – Is an easy to use tool for getting a quick overview of a company’s strategic situation

Why SWOT Analysis is Important

It is the basis for matching strategy to the company’s situation – – To its internal strengths and weaknesses – To its external threats and opportunities A winning strategy must always fit the company’s situation.

Strengths

• What is a company Strength?

– Something a company is good at doing or a characteristic that gives it an important capability.

Weaknesses

• What are company weaknesses?

– Something a company lacks or does poorly (in comparison to others) or a condition that puts it at a disadvantage.

Opportunities

• What are company opportunities?

– Those that offer important avenues for profitable growth, those where a company has the most potential for competitive advantage, and those which the company has the financial resources to pursue.

Threats

• What are company Threats?

– Certain factors in a company’s external environment that pose a threat to its well being.

Some questions to consider once the SWOT listings have been compiled are: • Does the company have internal strengths or core competencies an attractive strategy can be built around?

• Do company weaknesses make a company vulnerable and does it disqualify a company from pursuing industry opportunities?

• Which weaknesses does a company need to correct?

Some questions to consider once the SWOT listings have been compiled are: • Which opportunities does the company have the skills and resources to pursue with a real chance for success? Which opportunities are the best from the company’s standpoint? (Remember: Opportunity without the means to capture is only an illusion.) • What external threats should management be worried most about and what strategic moves need to be made to craft a good defense?