1. Strategy: Chapter 6 Formulating Business Unit Strategy

2. Overview Porter’s generic business strategy Value Chain analysis
Value Discipline
Business Models

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

4. Strategic Logic at the Business Unit Level
The attractiveness of different strategic options depends on the competitive situation.
Michael Porter articulated a “strategic logic” that guides much of our strategic thinking at the business level.
Firm success is explained by two factors: attractiveness of the industry and it relative position.

5. How much does industry matter?
Industry Segment 4%
Corporate Parent 19%

6. Relative Position What is the nature of the competitive position?
Either lower delivered cost or differentiation.
Also depends on scope.

7. Importance of Market Share
Profitability vs. Market Share
A&P and Intel are high market share failures
Managing for volume growth or value growth?

8. Formulating A Competitive Advantage
Key Challenges
Analyzing the competitive environment
Anticipating key competitors actions
Generating strategic options
Choosing among alternatives
Competitive Advantage (e.g., Southwest)
Sustainability (VRIN)

9. Value Chain Analysis

10. Porter’s Generic Business Unit Strategies
Differentiation or Low Cost

11. Low Cost Broad Market vs. Cost Focus Broad Market Example: Wal-Mart
Company chooses broad target market
Economies of Scale, Experience effects in purchasing and manufacturing
Cost Focus
Example: Southwest Airlines
Well defined market niche – short roots & secondary airports
All activities focused on serving that niche

12. Differentiation
To provide something of value to the customer other than low price
Use more than 1 source of differentiation
higher quality raw materials, unique product design, more reliable manufacture, superior marketing and distribution
Requires thorough understanding of what customers value

13. Critique of Porter’s Generic Strategy
Not always viable
Low cost not effective when low cost is industry norm
Not Mutually Exclusive
Total Quality Management

14. Value Disciplines (Treacy & Wiersema, 1993)
Product leadership
Produce a continuous stream of state-of-the-art products and services
Based on four principles
1) encouragement of innovation
2) risk-oriented management style
3) talented product design people
4) educate and lead the market

15. Here is an example:

16. Value Disciplines Operational Excellence
Strategic approach aimed at better production and delivery mechanisms
Wal-Mart, American Airlines, Fed-Ex

17. Value Disciplines Customer Intimacy
Concentrates on building customer loyalty
Can be expensive, but the long-term benefits of a loyal clientele can pay off

18. Employee Competencies
Product leadership – info. sharing, creativity, group-problem solving, visionary
Operational Excellence – process control, continuous improvement, teamwork
Customer Intimacy – relationship building, listening, initiative, quality-focused

19. What is a business model?
A firm’s business model is its plan or diagram for how it competes, uses its resources, structures its relationships, interfaces with customers, and creates value to sustain itself on the basis of the profits it generates.
The term “business model” is used to include all the activities that define how a firm competes in the marketplace.

20. Dell as an example

21. Designing a Profitable Business Model
Designing a profitable business model is a critical part of formulating a business unit strategy
How can we earn sustainable profits?
Where will we be able to make profits?
How should the business model be designed so that we will be profitable?

22. Customer Development/Solutions
Find ways to improve customers’ economics and processes
Ex: Priceline.com
Product Pyramid
Variety of products, most profitable on top, bottom serves as a barrier to entry
Ex: Marriott
Multicomponent System
Focus on components that generate substantially higher profits
Ex: Room rentals vs. bar operations for hotels, Casinos

23. Switchboard Time Blockbuster
Connect multiple sellers to multiple buyers
Low costs for both, in exchange for a fee
Ex: banks
Time
First-mover advantage
Requires constant innovation
Ex: Apple
Blockbuster
Profitability driven by a few great products
Ex: Movie studios or pharmaceutical companies

24. Profit Multiplier Entrepreneurial Specialization
Reaps gains repeatedly from same products, services…etc.
Works well with strong consumer brands
Ex: Michael Jordan, Disney
Entrepreneurial
Take advantage of other companies’ lack of closeness to customers
Works for small companies
Specialization
Growth through sequenced specialization
Ex: Consulting companies

25. Installed Base De Facto Standard
Customers buy consumables or follow-on products
Ex: software & upgrades
De Facto Standard
When the Installed Base has become the industry standard that governs competitive behavior
Ex: Oracle, Microsoft