Chapter 5 STRATEGIC FORMULATION

(GIVE THE MEANING OF STRATEGIC FORMULATION)

Business-Level Strategy: Creating and Sustaining Competitive Advantages

Business-level Strategy- a strategy designed for a firm or a division of a firm that competes within a
single business.

Generic Strategies- basic types of business level strategies based on breadth of target market
(industrywide versus narrow market segment) and type of competitive advantage (low cost versus
uniqueness).

Types of Competitive Advantage and Sustainability

Michael Porter presented three generic strategies that a firm can use to overcome the five forces and
achieve competitive advantages. Each of Porter’s generic strategies has the potential to allow a firm to
outperform rivals in their industry.

1. Overall cost leadership – is based on creating a low-cost-position. Here, a firm must manage the
relationships throughout the entire chain.
2. Differentiation - requires a firm to create product and/or services that are unique and valued.
Here, the primary emphasis is on “nonprice” attributes for which costumers will gladly pay a
premium.
3. Focus - direct attention (or “focus”) toward narrow product lines, buyer segments, or targeted
geographic markets and they must attain advantages either through differentiation or cost
leadership.

Overall Cost Leadership

- A firm’s generic strategy based on appeal to the industrywide market using a competitive
advantage based on low cost.
 The first strategy is overall cost leadership. Overall cost leadership requires a tight set of interrelated
tactics that include:

 Aggressive construction of efficient-scale facilities.

 Vigorous pursuit of cost reductions from experience.
 Tight cost and overhead control.
 Avoidance of marginal costumer accounts.
 Cost minimization in all activities in the firm’s value chain, such as R&D, service, sales force, and
advertising.

Potentials Pitfalls of Overall Cost Leadership Strategies includes:

 Too much focus on one or a few value-chain activities.

 Increase the cost of the inputs on which the advantage is based.
 The strategy is imitated too easily.
 A lack of parity on differentiation.
 Reduced flexibility.
 Obsolescence of the basis of cost advantage.

Differentiation

- A firm generic strategy based on creating differences in the firm’s product or service offering by
creating something that is perceived industrywide as unique and valued by customers.
Differentiation can take many forms:
 Prestige or brand image (Adam’s Mark hotels, BMW automobiles).
 Technology (Martin guitars, Marantz stereo components, North Face camping equipment).
 Innovation (Medtronic medical equipment, Apple’s iPhones and iPads).
 Features (Cannondale mountain bikes, Honda Goldwing motorcycles).
 Customer service (Nordstrom department stores, Sears lawn equipment retailing).
 Dealer network (Lexus automobiles, Caterpillar earthmoving equipment).

Potentials Pitfalls of Differentiation Strategies includes:

 Uniqueness that is not valuable.

 Too much differentiation.
 Too high a price premium.
 Differentiation that is easily imitated.
 Dilution of brand identification through product-line extensions.
 Perceptions of differentiation may vary between buyers and sellers.

Focus

- A firm’s generic strategy based on appeal to a narrow market segment within an industry.
- A firm following this strategy selects a segment or group of segments and tailors its strategy to
serve them.

Potentials Pitfalls of Focus Strategies includes:

 Erosion of cost advantages within the narrow segment.

  Even product and service offerings that are highly focused are subject to competition from new
entrants and from imitation.
 Focusers can become too focused to satisfy buyer’s needs.

Combination Strategies: Integrating Overall Low Cost and Differentiation

Perhaps the primary benefit to firms that integrate low-cost and differentiation strategies is the
difficulty for rivals to duplicate or imitate. Next, we consider three approaches to combining overall low
cost and differentiation.

 Automated and Flexible Manufacturing Systems

 Exploiting the Profit Pool Concept for Competitive Advantage
 Coordinating the “Extended” Value Chain by Way of Information Technology

Potentials Pitfalls of Integrated Overall Cost Leadership and Differentiation Strategies includes:

 Firms that fail to attain both strategies may end up with neither and become “suck in the
middle”.
 Underestimating the challenges and expenses associated with coordinating value-creating
activities in the extended value chain.
 Miscalculating sources of revenue and profit pools in the firm’s industry.

How the Internet and Digital Technologies Affect the Competitive Strategies

Overall Cost Leadership

The Internet and digital technologies create new opportunities for firms to achieve low-cost
advantages by enabling them to manage costs and greater efficiencies. Managing costs, and even
changing the cost structures of certain industries, is a key feature of the digital economy.

Potentials Internet-Related Pitfalls for Low-Cost Leaders

 Imitation.
 Become overly enamored with using the internet for cost-cutting and thus jeopardize customer
relations or neglect other cost centers.

Differentiation

For many companies, Internet and digital technologies have enhanced their ability to build
brand, offer quality products and services, and achieve other differentiation advantages. Among the
most striking trends are new ways to interact with customers. In particular, the Internet has created
new ways of differentiating by enabling mass customization, which improves the response to customer
wishes.

Potentials Internet-Related Pitfalls for Differentiators

  Traditional differentiation strategies such as building strong brand identity and prestige pricing
have been undermined by Internet-enabled capabilities such as the ability to compare product
features side-by-side or bid online for competing services.
 The sustainability of Internet-based gains from differentiation.

Focus

A focus strategy targets a narrow market segment with customized products and/or services.
With focus strategies, the Internet offers new avenues in which to compete because they can access
markets less expensively (low cost) and provide more services and features (differentiation).

Potentials Internet-Related Pitfalls for Focusers

 A key danger for focusers using the Internet relates to correctly assessing the size of the online
marketplace.
 Focusers can misread the scope and interests of their target markets.
 Can cause them to focus on segments that are too narrow to be profitable or to lose their
uniqueness in overly broad niches, making them vulnerable to imitators or new entrants.

Industry Life Cycles Stages: Strategic Implications

The industry life cycle refers to the stages of introduction, growth, maturity, and decline that
occur over the life of an industry. The importance of considering the industry life cycle to determine a
firm’s business-level strategy and its relative emphasis on functional area strategies and value-creating
activities.

Stages of the Industry Life Cycle

Introduction Stage

- The first stage of the industry life cycle, characterized by (1) new products that are not known to
customers, (2) poorly defined market segments, (3) unspecified product features, (4) low sales
growth, (5) rapid technological change, (6) operating losses, and (7) a need for financial support.

Growth Stage

- The second stage of the product life cycle, characterized by (1) strong increases in sales, (2)
growing competition, (3) developing brand recognition, (4) a need for financing complementary
value-chain activities such as marketing, sales, customer service, and research and development.

Maturity Stage

- The third stage of the product life cycle, characterized by (1) slowing demand growth, (2)
saturated markets, (3) direct competition, (4) price competition, and (5) strategic emphasis on
efficient operations.

Two positioning strategies that managers can use to affect consumers’ mental shifts are:

Reverse Positioning – a break in industry tendency to continuously augment products,

characteristic of the product life cycle, by offering products with fewer product attributes and lower
prices.

Breakaway Positioning - a break in industry tendency to incrementally improve products along

specific dimensions, characteristic of the product life cycle, by offering products that are still in the
industry but that are perceived by customers as being different.

Decline Stage

- The fourth stage of the product life cycle, characterized by (1) falling sales and profits, (2)
increasing price competition, and (3) industry consolidation.
- Four basic strategies are available in the decline phase: maintaining, harvesting, exiting, or
consolidating.

Turnaround Strategies – a strategy that reverses a firm’s decline in performance and returns it to
growth and profitability. A need for turnaround may occur at any stage in the life cycle but is more likely
to occur during maturity or decline.

A study of 260 mature businesses in need of a turnaround identified three strategies use by
successful companies.

 Asset and cost surgery.

 Selective product and market pruning.
 Piecemeal productivity improvements.