1. Strategy Formulation
HCAD 5390

2. Managerial Scope of SBU vs Corporate Executives
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

3. Strategies Duties of SBU Management (I)
Define strategic direction
Conduct internal/external environmental assessments
Negotiate strategy with corporate parent
Adopt a generic strategy
Formulate action strategies

4. Strategies Duties of SBU Management (II)
Develop needed resources and competencies
Negotiate with functional area managers for strategy implementation
Appoint and evaluate functional area managers
Monitor and control strategy implementation

5. Role of Corporate Center in SBU Strategy
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

6. Formulating Strategy in SBUs
Broad strategic objectives of SBUs and
independent businesses:
Grow revenues and profits as rapidly as possible
Build a sustainable competitive advantage

7. Ways to Grow Revenues and Profits
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

8. Types of SBU Growth Strategies
Increase market share
Enter new markets
Identify new uses
Create new products
Acquire new businesses
Collaborate with others

9. Building Sustainable Competitive Advantage
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

10. 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

11. Types of Business-Level Strategies
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

13. Porter’s Generic Business Strategies
Combine the three variables into four generic
business strategies:
Full market low-cost leadership
Full market differentiation
Segment low-cost leadership
Segment differentiation

14. Five Generic Strategies
Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differentiation
Broad target
Integrated Cost
Leadership/
Differentiation
Competitive Scope
Narrow target
Focused Cost Leadership
Focused Differentiation

15. 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

16. Low-Cost Leadership Strategy
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?

17. Achieving Low-Cost Leadership
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

18. Internal Value Chain Modifications
Current chain configuration is not the only one possible:
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

19. Exploiting Low-Cost Leadership
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

20. Downside to Low-Cost Leadership
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 cost-cutting innovations
If preferences do not change and innovations cannot be imitated --- sustainable competitive advantage results

21. Keys to Success of a Low-Cost Leadership Strategy (I)
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

22. Keys to Success of a Low-Cost Leadership Strategy (II)
Align performance incentives with a low-cost operational strategy
Leaders experienced in managing low-cost operations
Corporate culture that is comfortable with a low-cost operating model

23. Cost Leadership Strategy and the Five Forces of Competition
Rivalry Among Competing Firms
Can use cost leadership strategy to advantage since:
competitors avoid price wars with cost leaders, creating higher profits for the entire industry
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

24. Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Buyers
Can mitigate buyers’ power by:
driving prices far below competitors, causing them to exit and shifting power with buyers back to the firm
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

25. Cost Leadership Strategy and the 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
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

26. Cost Leadership Strategy and the Five Forces of Competition
Threat of New Entrants
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
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

27. Cost Leadership Strategy and the Five Forces of Competition
Threat of Substitute Products
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
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

28. 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

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

30. Differentiation Strategy (I)
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)

31. Differentiation Strategy (II)
Create differentiation as economically as possible, while …
Also keeping other costs as low as possible
What kinds of differentiation should be created?

32. Bases for Creating Differentiation
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

33. Generic Forms of Differentiation (I)
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

34. Generic Forms of Differentiation (II)
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

35. Criteria for Choosing a Differentiation Feature (I)
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

36. Criteria for Choosing a Differentiation Feature (II)
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

37. Benefits of a Differentiation Strategy (I)
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

38. Benefits of a Differentiation Strategy (II)
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

39. Disadvantages of a Differentiation Strategy (I)
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

40. Disadvantages of a Differentiation Strategy (II)
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

41. Differentiation Strategy and the Five Forces of Competition
Rivalry Among Competing Firms
Can defend against competition because:
brand loyalty to differentiated product offsets price competition
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

42. Differentiation Strategy and the Five Forces of Competition
Bargaining Power of Buyers
Can mitigate buyer power because:
well differentiated products reduce customer sensitivity to price increases
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

43. Differentiation Strategy and the 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
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

44. Differentiation Strategy and the Five Forces of Competition
Threat of New Entrants
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
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

45. Differentiation Strategy and the Five Forces of Competition
Threat of Substitute Products
Well positioned relative to substitutes because:
brand loyalty to a differentiated product tends to reduce customers’ testing of new products or switching brands
Rivalry Among Competing Firms
Bargaining Power of Buyers
Bargaining Power of Suppliers
Threat of New Entrants
Substitute Products
Threat of
Five Forces of
Competition

46. Focus Strategy Not selling to the entire potential market, but …
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

47. Focus Strategy Principles
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

48. When Focus Strategy Makes Sense
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

49. Focus Strategy Success Factors (I)
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

50. Focus Strategy Success Factors (II)
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

51. Focus Strategy Negatives
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

52. “Stuck-in-the-Middle” Strategy
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?

53. Choosing a Generic Business-Level Strategy
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
MY FIRM HAS
A COMPETITIVE
ADVANTAGE
STUCK
IN THE
MIDDLE 14

54. Hybrid Strategy (“Stuck-in-the-Middle”)
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

55. Integrated Competitive Strategy
Cost Leadership and Differentiation
Cost
Leadership
Benefits
Differentiation
Benefits 9

56. Integrated Competitive Strategy
Cost Leadership and Differentiation
Value-Added Or
Integrated
Cost
Leadership
Benefits
Combined
Benefits
Differentiation
Benefits 10

57. Hybrid Strategy (Offering “Best Value”)
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

58. 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 now as low as the cost leader’s price)

59. Major Risks of Integrated Strategy
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

60. Functional Area Strategies
In support of the SBU strategies
Integrated with other functional area strategies
Consistent with current operational activities
Means by which SBU strategies are implemented

61. Examples of Functional Area Strategic Activities (I)
Clinical Operations
Capacity
Location
Organizational Structure
Quality Assurance and Improvement
Reporting and Control
Marketing and Promotion
Market Research
Advertising and Promotion
Product and Service offerings

62. Examples of Functional Area Strategic Activities (II)
Human Resources
Staffing
Motivation and Incentives
Culture and Working Conditions
Employee Development
Information and Clinical Technologies
Information Systems
Communication Systems
Clinical Medical Technologies

63. Examples of Functional Area Strategic Activities (III)
Financial Resources
Availability of Investment Capital
Capital Structure and Creditworthiness
Financial Controls