Strategy Formulation

Business Unit Level Strategies (Competitive Strategies)

Strategy Formulation

A Business Unit is defined as an organizational subsystem that has its own market, a set of competitors, and a mission distinct from those of the other subsystems in the organization

Strategy Formulation

Competition amounts to the efforts of multiple organizations that are offering a similar product or service in obtaining desired customers, market share, ranking or resources

Strategy Formulation

Strategic Group amounts to a set of firms competing within an industry that have similar strategies and resources.

Strategy Formulation

PriceQualityLevel of vertical

integrationGeographic scopeLevel of

diversificationR&D expenditures

Market ShareProfitsProduct

characteristicsAny other relevant

strategic factor

Potential Dimensions Used in Defining Strategic Groups

Strategy Formulation

VIRO Framework for defining a Sustainable Competitive Advantage

Value - does it provide a comp advantage?Rareness - do other competitors have it?Imitability - Is it costly for others to imitate?Organization - is the firm organized to

exploit the resource?

Porter’s Generic Competitive Business Unit Strategies

It is critical to envision org’s that are determined to both:

Serve a narrow or focused market niche versus a broad market (in terms of customers or product).

Elect to to compete on the basis of having the lowest costs (not price) or by being distinctively different (or differentiated).

Generic Strategies for Small Businesses

Niche-Low Cost

Niche-Differentiation

Niche-Low Cost/Differentiation

OrganizationStrategy

Product

Customer

Geographical

Generic Strategies for Small Businesses

Niche-Low Cost

Emphasizes keeping overall costs low while serving a narrow or focused segment (niche) of the market.

Niche-Low Cost

Cos

tDifferentiation

Jet Blue

Generic Strategies for Small Businesses

Niche-Low Cost Vulnerabilities

Technological obsolescence and thus lose sight of shifting cust preferences

Low cost competencies imitatedCompetition intense in no frill

environments & competition may successfully lower their costs more

Generic Strategies for Small Businesses

Niche-Differentiation

Emphasizes offering customers highly differentiated, need fulfilling products or services for a narrow or focused segment (niche) of the market.

Niche-Differentiation

Cos

t

Mikimoto

Differentiation

Generic Strategies for Small Businesses

Niche-Differentiation Vulnerability

Org must seek to remain unique despite efforts by competitors to copy

Competitors who also emphasize lowering of costs may be able to offer similar products at predatory prices.

Generic Strategies for Small Businesses

Niche-Low Cost/Differentiation

Emphasizes offering customers highly differentiated, need fulfilling products or services for a narrow or focused segment (niche) of the market while keeping costs low.

Generic Strategies for Small Businesses

Niche-Low Cost/Differentiation

Dedication to qualityProcess innovationsProduct innovationsLeverage through org’l expertise

& image

Niche Low-Cost/Differentiation

Cos

t

RedHook

Differentiation

BostonBrewing

Generic Strategies for Large Businesses

Low Cost

Differentiation

Low Cost/Differentiation

Generic Strategies for Large Businesses

Low CostEmphasizes keeping overall costs

low while serving a broad market industrywide.

Low Cost Strategy

Cos

tDifferentiation

Wal Mart

Neiman-Marcus

Generic Strategies for Large Businesses

Low Cost Vulnerabilities

Remain vulnerable to price competition pressuring margins further aggravated by price wars

Technological stability causing firms to avoid responding to new mrkt & product opportunities may become obsolete

Generic Strategies for Large Businesses

Differentiation

Emphasizes offering customers industrywide highly differentiated, need fulfilling products or services.

Differentiation Strategy

Cos

t Apple

Differentiation

Generic Strategies for Large Businesses

Low Cost Vulnerabilities

New competitors with similar products at lower costs (and prices)

Remaining unique in customer’s eyes

Generic Strategies for Large Businesses

Multiple Strategies

The use by an organization of more than one of the previously mentioned strategies

Mid Size Firms Perform Poorly

“Stuck in the Middle”Don’t possess the advantages of

either their smaller or larger competitors

Best they can hope for is to expand their operations over time & take advantage of economies of scale or retrench and become smaller

Selecting a Generic Strategy

Industry Life Cycle

Embryonic Growth Shakeout Maturity Decline

Getting “Stuck in the Middle”

Finding oneself between a niche strategy and a broad target market strategy is a recipe for disaster . . . No competitive advantage and thus “below average” performance is the best that one can expect