Strategy: Chapter 6Strategy: Chapter 6Formulating Business Formulating Business Unit StrategyUnit Strategy

OverviewOverview

Porter’s generic business strategyPorter’s generic business strategy Value Chain analysisValue Chain analysis Value DisciplineValue Discipline Business ModelsBusiness Models

Business unit strategy involves creating a Business unit strategy involves creating a profitable competitive position for a profitable competitive position for a business within a specific industry or business within a specific industry or market segment.market segment.

Strategic Logic at the Business Strategic Logic at the Business Unit LevelUnit Level

The attractiveness of different strategic The attractiveness of different strategic options depends on the competitive options depends on the competitive situation.situation.

Michael Porter articulated a “strategic Michael Porter articulated a “strategic logic” that guides much of our strategic logic” that guides much of our strategic thinking at the business level.thinking at the business level.

Firm success is explained by two factors: Firm success is explained by two factors: attractiveness of the industry and it attractiveness of the industry and it relative position.relative position.

How much does industry How much does industry matter?matter?

IndustryIndustry 32%32% Industry SegmentIndustry Segment 4%4% Corporate ParentCorporate Parent 19%19%

Relative PositionRelative Position

What is the nature of the competitive What is the nature of the competitive position?position?

Either Either lower delivered costlower delivered cost or or differentiationdifferentiation..

Also depends on scope.Also depends on scope.

Importance of Market Importance of Market ShareShare

Profitability vs. Market ShareProfitability vs. Market Share A&P and Intel are high market share A&P and Intel are high market share

failuresfailures Managing for volume growth or value Managing for volume growth or value

growth?growth?

Formulating A Formulating A Competitive AdvantageCompetitive Advantage

Key ChallengesKey Challenges Analyzing the competitive environmentAnalyzing the competitive environment Anticipating key competitors actionsAnticipating key competitors actions Generating strategic optionsGenerating strategic options Choosing among alternativesChoosing among alternatives

Competitive Advantage (e.g., Competitive Advantage (e.g., Southwest)Southwest) Sustainability (VRIN)Sustainability (VRIN)

Value Chain AnalysisValue Chain Analysis

Porter’s Generic Business Porter’s Generic Business Unit Strategies Unit Strategies

Differentiation or Low CostDifferentiation or Low Cost

Low CostLow Cost

Broad Market vs. Cost FocusBroad Market vs. Cost Focus Broad MarketBroad Market

Example: Wal-MartExample: Wal-Mart Company chooses broad target marketCompany chooses broad target market Economies of Scale, Experience effects in Economies of Scale, Experience effects in

purchasing and manufacturingpurchasing and manufacturing Cost FocusCost Focus

Example: Southwest AirlinesExample: Southwest Airlines Well defined market niche – short roots & Well defined market niche – short roots &

secondary airportssecondary airports All activities focused on serving that nicheAll activities focused on serving that niche

DifferentiationDifferentiation

To provide something of value to the To provide something of value to the customer other than low pricecustomer other than low price

Use more than 1 source of differentiationUse more than 1 source of differentiation higher quality raw materials, unique product higher quality raw materials, unique product

design, more reliable manufacture, superior design, more reliable manufacture, superior marketing and distributionmarketing and distribution

Requires thorough understanding of what Requires thorough understanding of what customers valuecustomers value

Critique of Porter’s Critique of Porter’s Generic StrategyGeneric Strategy

Not always viableNot always viable Low cost not effective when low cost is industry Low cost not effective when low cost is industry

normnorm Not Mutually ExclusiveNot Mutually Exclusive Total Quality ManagementTotal Quality Management

Value Disciplines (Treacy Value Disciplines (Treacy & Wiersema, 1993)& Wiersema, 1993)

Product leadershipProduct leadership Produce a continuous stream of state-of-the-Produce a continuous stream of state-of-the-

art products and servicesart products and services Based on four principlesBased on four principles

1) encouragement of innovation1) encouragement of innovation 2) risk-oriented management style2) risk-oriented management style 3) talented product design people3) talented product design people 4) educate and lead the market4) educate and lead the market

Here is an example:Here is an example:

Value DisciplinesValue Disciplines

Operational ExcellenceOperational Excellence Strategic approach aimed at better Strategic approach aimed at better

production and delivery mechanismsproduction and delivery mechanisms Wal-Mart, American Airlines, Fed-ExWal-Mart, American Airlines, Fed-Ex

Value DisciplinesValue Disciplines

Customer IntimacyCustomer Intimacy Concentrates on building customer loyaltyConcentrates on building customer loyalty Can be expensive, but the long-term Can be expensive, but the long-term

benefits of a loyal clientele can pay offbenefits of a loyal clientele can pay off

Employee CompetenciesEmployee Competencies

Product leadershipProduct leadership – info. sharing, creativity, – info. sharing, creativity, group-problem solving, visionarygroup-problem solving, visionary

Operational ExcellenceOperational Excellence – process control, – process control, continuous improvement, teamworkcontinuous improvement, teamwork

Customer IntimacyCustomer Intimacy – relationship building, – relationship building, listening, initiative, quality-focusedlistening, initiative, quality-focused

What is a business What is a business model?model?

Business ModelBusiness Model A firm’s business model is its plan or diagram for A firm’s business model is its plan or diagram for

how it competeshow it competes, uses its resources, structures its , uses its resources, structures its relationships, interfaces with customers, and relationships, interfaces with customers, and creates value to sustain itself on the basis of the creates value to sustain itself on the basis of the profits it generates.profits it generates.

The term “business model” is used to include The term “business model” is used to include all all the activitiesthe activities that define how a firm competes in that define how a firm competes in the marketplace.the marketplace.

Dell as an exampleDell as an example

Designing a Profitable Designing a Profitable Business ModelBusiness Model

Designing a profitable business model is Designing a profitable business model is a critical part of formulating a business a critical part of formulating a business unit strategyunit strategy

How can we earn sustainable profits?How can we earn sustainable profits? Where will we be able to make profits?Where will we be able to make profits? How should the business model be designed How should the business model be designed

so that we will be profitable?so that we will be profitable?

1.1. Customer Development/SolutionsCustomer Development/Solutions• Find ways to improve customers’ economics Find ways to improve customers’ economics

and processes and processes • Ex: Priceline.comEx: Priceline.com

2.2. Product PyramidProduct Pyramid• Variety of products, most profitable on top, Variety of products, most profitable on top,

bottom serves as a barrier to entry bottom serves as a barrier to entry • Ex: MarriottEx: Marriott

3.3. Multicomponent SystemMulticomponent System• Focus on components that generate Focus on components that generate

substantially higher profitssubstantially higher profits• Ex: Room rentals vs. bar operations for Ex: Room rentals vs. bar operations for

hotels, Casinoshotels, Casinos

4.4. SwitchboardSwitchboard• Connect multiple sellers to multiple buyersConnect multiple sellers to multiple buyers• Low costs for both, in exchange for a fee Low costs for both, in exchange for a fee • Ex: banksEx: banks

5.5. TimeTime• First-mover advantageFirst-mover advantage• Requires constant innovationRequires constant innovation• Ex: AppleEx: Apple

6.6. BlockbusterBlockbuster• Profitability driven by a few great productsProfitability driven by a few great products• Ex: Movie studios or pharmaceutical Ex: Movie studios or pharmaceutical

companiescompanies

7.7. Profit MultiplierProfit Multiplier• Reaps gains repeatedly from same Reaps gains repeatedly from same

products, services…etc.products, services…etc.• Works well with strong consumer brandsWorks well with strong consumer brands• Ex: Michael Jordan, DisneyEx: Michael Jordan, Disney

8.8. EntrepreneurialEntrepreneurial• Take advantage of other companies’ lack of Take advantage of other companies’ lack of

closeness to customerscloseness to customers• Works for small companiesWorks for small companies

9.9. SpecializationSpecialization• Growth through sequenced specializationGrowth through sequenced specialization• Ex: Consulting companiesEx: Consulting companies

10.10. Installed BaseInstalled Base• Customers buy consumables or follow-on Customers buy consumables or follow-on

productsproducts• Ex: software & upgradesEx: software & upgrades

11.11. De Facto StandardDe Facto Standard• When the Installed Base has become the When the Installed Base has become the

industry standard that governs competitive industry standard that governs competitive behaviorbehavior

• Ex: Oracle, MicrosoftEx: Oracle, Microsoft