Formulating Business Strategy Chapter 6 Team 6

1. Formulating Business StrategyChapter 6 Team 6 Jessica Aragon Raynee Bradley John Cayo Lawrence Griffith Cole Naylor Jessica Wilson Brandy Wolfe

2. Introduction • 3 Types of Strategy: • Competitive Strategy (AKA Business Unit Strategy) • Focus on creating a profitable competitive position and how a firm will compete • Overarching Corporate Strategy • Focus on where a company can compete successfully and how it can add value to its strategic business units, or SBUs • Optimal Strategies • More complex and relies on many factors, such as: nature of the industry, the company’s mission, goals and objectives, core competencies and its current position, and major competitors’ strategic moves

3. Material To Be Covered… • Foundation • How success is measured • How much industry matters • Firm’s positioning choices • Market share vs. profitability • The Harvard Business School’s PIMS Project and research findings • Formulating a Competitive Strategy • Four key challenges in formulating competitive strategy • Aspects of creating, sustaining and understanding competitive advantage, and use of value analysis • The value chain and value chain analysis

4. Material To Be Covered… • Porter’s Generic Business Unit Strategies • Two generic competitive strategies: low cost and differentiation • Requirements for success • Risks of each generic position • Dell example • Critiques of Porter’s Generic Strategies • Value Disciplines • Three generic strategies: • Product leadership and the four principles • Operational excellence • Customer intimacy • Designing a Profitable Business Model • Adrian Slywotzky and David Morrison’s 11 profitability business models

5. Foundations

6. This section will discuss the following questions: • What are the principal factors behind a business unit’s relative profitability? • How important are product superiority, cost, marketing and distribution effectiveness, and other factors? • How important is the nature of the industry?

7. Strategic Logic at the Business Unit Level • Much has been learned about what drives competitive success at the business unit level. • At the broadest level there are two factors: 1. The attractiveness of the industry in which a firm competes. 2. Its relative positioning within that industry.

8. How Much Does Industry Matter? • Anita McGahan and Michael Porter provided and answer to this question in a comprehensive study of business performance in four-digit SIC industry categories. • Industry accounted for 32% • Industry Segment accounted for 4% • Corporate Parent accounted for 19%

9. Relative Positioning • The relative profitability of rival firms depends on the nature of their competitive positioning. • Competitive advantage based on lower delivered cost. • Based on the ability to differentiate products or services from those of competitors and command a price premium relative to the cost incurred.

10. Choice of Competitive Scope • When a firm is choosing a competitive strategy their scope certain elements are considered: • The number of product and buyer segments served. • The number of geographical locations in which the firm competes. • The extent to which it is vertically integrated. • The degree to which it must coordinate its positioning with related businesses in which the firm is invested.

11. The Importance of the Market Share • This has been the subject of considerable controversy. • Should profitability be the primary goal of strategy? • Some analysts believe that firms have been lead astray by the principal pursuit of market share. • Executives must ask themselves “Are we managing for volume growth or value growth?”

12. The PIMS Project • Although no manager should pursue growth for growth’s sake, evidence suggests that in some industries market share is an important determinant of long-term profitability. • The Marketing Science Institute at the Harvard Business School undertook research in the relative profitability of different market strategies. • The PIMS (profit impact of market strategy) project involved more than 600 businesses over a period of more than 15 years.

13. Major Findings of the PIMS Study • Absolute and relative market share are strongly correlated with ROI. • Product quality is key to market leadership and allows companies with larger market shares to charge higher prices and, therefore, achieve higher margins. • ROI is positively correlated with market growth. • Vertical integration can be beneficial later in the product life cycle. Forward integration is more profitable that backward integration. • 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; companies with small market shares are particularly vulnerable.

14. These findings help to explain many business success stories through the 1980’s and many business performance declines of the 1990’s. • These findings were beneficial at the time, but because of the increase in technology over the past 20 years these findings are becoming less and less relevant. • This observation, basically, highlights the need for executives to continually update their assumptions about key strategic relationships.

15. Formulating A Competitive Strategy • Key challenges • Creating a competitive advantage • Value Chain Analysis

16. Key Challenges • Managers face four key challenges in formulating competitive strategy. • 1) Analyzing the competitive environment • 2) Anticipating key competitors’ actions • 3) Generating strategic options • 4) Choosing among alternatives

17. What is a Competitive Advantage? • A firm has a competitive advantage when it is successful in designing and implementing a value-creating strategy that competitors are not currently using. • The competitive advantage is sustainable when current or new competitors are not able to imitate or supplant it. • A competitive advantage often is created by combining strengths. • Southwest Airlines leads the industry with a 15-minute turn around time for getting the planes back in the air. This saves the firm $175 million annually in capital expenditures and differentiates the firm by allowing it to offer more flights per plane per day.

18. Competitive Advantage (continued) • Building a competitive advantage is best achieved by identifying, practicing, strengthening, and instilling throughout the organization those leadership traits that improve the firm’s reputation among its stakeholders. • A focus on organizational learning and on creating, retaining, and motivating a skilled and knowledgeable work-force may be the best way for executives to maintain competitive advantages in a rapidly changing business environment

19. Value Chain Analysis • A value chain is a model of a business process. It depicts the value creation process as a series of activities, beginning with processing raw materials and ending with sales and service to end users. • Value chain analysis involves 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. • The value chain divides a firm’s business process into component activities that add value: primary activities that contribute to the physical creation of the product and support activities that assist the primary activities and each other.

20. Value Chain (continued) • A firm differentiates itself from its competitors when it provides something unique that is valuable to buyers beyond a low price. • For example, Dell’s ability to sell, build-to-order, and ship a computer to the customer within a few days is a unique differentiator of its value chain. • Analyzing the value chains of competitors customers, and suppliers can help a firm add value by focusing on the needs of downstream customers or the weaknesses of upstream suppliers. • For example, BASF adds value by leveraging its core competencies in the paint-coating process by painting car doors for auto manufacturers, instead of just selling them paint.

21. Value Chain (continued) • Approaching value chain analysis as a shared process involving the different members of the chain can optimize a firm’s value creation by minimizing collective costs. • For example, Home Depot and General Electric established an alliance between their value chains that reduces direct and indirect costs for each firm. They accomplished this by a web based application that links Home Depot’s point of purchase data to GE’s e-business system which enables Home Depot to ship directly to its customers from GE. • With advances in IT and through the internet companies can monitor value creation across many activities and linkages.

22. Porter’s Generic Business Strategies

23. Differentiation or Low Cost? • Low Cost Strategies: • Cost leaders generally charge less for their products and services than do rivals, and aim for a substantial share of the market by appealing to budget-sensitive customers. • These strategies are complimented by cheap supplies and well-defined market segments.

24. Differentiation or Low Cost? • Differentiation Strategies: • Aimed at a broad, mass market and seeks to create uniqueness on an industry-wide basis. • Broad scale differentiation can be achieved through product design, brand image, technology, distribution, service, or a combination of these elements. • This strategy is also aimed at a well-defined market segment.

25. Requirements for Success Strategic Advantage Uniqueness perceived by the customer Low-cost Position Strategic Target Industry-wide Differentiation Overall Cost Leadership Particular segment only Focus

26. Risks • Each generic posture carries unique risks • Cost leaders must concern themselves with technological change which can nullify past investments. • Differentiators have to look out for imitation. • The goal of each strategic generic posture is to create sustainability • For cost leaders, sustainability requires continually improving efficiency. • For differentiators, it requires the firm to erect barriers to entry around their uniqueness.

27. Critique of Porter’s Generic Strategies • Evidence suggests that executives reject Porter’s generic strategies in favor of strategies that combine elements of cost leadership, differentiation, and flexibility to meet customer demands. • The most common arguments against these strategies is that cost leadership and differentiation are not mutually exclusive and that when they can exist together in a firm’s strategy, they result in sustained profitability. • Each strategy can compliment the other, and improve the overall firm strategy by pursuing both.

28. Value Discipline • Product leadership • Operational excellence • Customer intimacy • Most companies try to excel at one of these strategies and be competitive at the others

29. Product Leadership • Companies produce a continuous stream of state-of-the-art products and services • Raise the bar for competitors • Based on 4 principles: • Encouragement of innovation • Risk-oriented management style • Success depends on talented product design people • Need to educate and lead the market

30. Operational Excellence • Aimed at better production and delivery of mechanisms • Wal-mart, American Airlines, FedEx, Starwood Hotels & Resorts Worldwide

31. Customer Intimacy • Concentrates on building customer loyalty • Nordstrom & Home Depot • 2 Requirements: • Quick movement in developing markets • Efficient operations as markets mature

32. Competencies

33. Designing a Profitable Business Model • Critical in formulating a business unit strategy • Adrian Slywotsky and David Morrison • 22 models to generate profits in a unique way • Two most productive questions: 1. What is our business model? 2. How do we make a profit? • Classic Strategy: “Gain market share and profits will follow” --- Collapsed Correlation • Globalization & Technological Advancement

34. How can businesses earn sustainable profits? • Analyzing 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? • Answer: • 11 Profitability business models

35. Customer Solutions Profit Model • Identify.Learn.Create. --- Move “Beyond the Box” • Profit Zone: Selling Additional P/S Internet retailing, consulting, and adding financial services. Product Pyramid Profit Model • Customers have strong preferences for product characteristics (variety, style, color, and price). Top: High priced, low volume *Profit Concentration Base: Low Priced, high volume *Strategic Firewall

36. Multicomponent System Profit Model • Multiple products, but only some represent the bulk of profitability. Switchboard Profit Model • Connecting multiple sellers to multiple buyers which leads to lower costs for both parties. Maintain position/Deepen Loyalty = Low-margin grocery store Profit Zone = Fountain and Vending/In- store “Dream Package: Hollywood agent who represents stars, writers and directors. High bargaining power.

37. Time Profit Model • Innovators with a time-limited competitive advantage (First mover advantage) • Relies on continuous innovation Blockbuster Profit Model • Big profits from few mega-sale blockbusters. (high R&D – high revenue that pays many times over) Earns highest profits on processors that are fresh out of the gate and unparalleled by the competition.

38. Profit Multiplier Model • Reaps gains, again and again, from the same product, character, trademark, or service. • Powerful engine for strong consumer brands Entrepreneurial Profit Model • Stresses: Diseconomies of scale • As companies grow, overhead and expenses increase, and customers become remote. • Counteract: Organize the company into smaller profit centers to maintain closeness with customers.

39. Specialization Profit Model • Stresses growth through sequenced specialization. • Profitability of Specialists > Generalists - “Killer Categories” (strong reputation) Installed Base Profit Model • Well established user base buys the company’s brand of “follow-on” products.

40. De Facto Standard Profit Model • A variant of the Installed Base Profit Model • Appropriate when the Installed Base model becomes the de facto standard that governs competitive behavior in the industry. • Able to “Plan” the industry • Lower Marketing costs due to high consumer base

41. Review • 3 Types of Strategy • Competitive strategy • Overarching Corporate Strategy • Optimal Strategies • Foundations • Two factors explain success • How much industry matters • PIMS Project

42. Formulating a Competitive Strategy • Key challenge • Competitive Advantage • Value Chain Analysis • Porter’s Generic Business Unit Strategies • Low cost and differentiation • Requirements for success • Risks • Critique of Porter’s Generic Strategies

43. Value Disciplines • Product leadership • Operational excellence • Customer Intimacy • Designing a Profitable Business Model • 11 profit models