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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
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
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
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
Formulating Strategy in SBUs
Broad strategic objectives of SBUs and
independent businesses:
I. Grow revenues and profits as rapidly as possible
II. Build a sustainable competitive advantage
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
Types of SBU Growth Strategies
Increase market share Enter new markets Identify new uses Create new products Acquire new businesses Collaborate with others
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
Thinking About Generic Business Strategies – á la Michael Porter
Businesses gain competitive advantage by givingtheir customers value unavailable from theircompetitors. There are three variables in pursuingthis 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
Types of Business-Level Strategies
Business-level strategies are intended to create Business-level strategies are intended to create differences between the firm’s position relative to differences between the firm’s position relative to those of its rivalsthose of its rivals
To position itself, the firm must decide whether it To position itself, the firm must decide whether it intends to perform activities differently or to perform intends to perform activities differently or to perform different activities as compared to its rivalsdifferent activities as compared to its rivals
Porter’s Generic Business Strategies
Combine the three variables into four genericbusiness strategies:
Full market low-cost leadership Full market differentiation Segment low-cost leadership Segment differentiation
Five Generic StrategiesCompetitive AdvantageCompetitive Advantage
Co
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CostCost UniquenessUniqueness
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Cost Cost LeadershipLeadership
DifferentiationDifferentiation
Focused Cost Focused Cost LeadershipLeadership
Focused Focused DifferentiationDifferentiation
Integrated CostIntegrated CostLeadership/Leadership/
DifferentiationDifferentiation
Cost Leadership Strategy
An integrated set of actions designed to produce or An integrated set of actions designed to produce or deliver goods or services at the deliver goods or services at the lowest costlowest cost, , relative to relative to competitorscompetitors with features that are acceptable to with features that are acceptable to customerscustomers
– relatively standardized productsrelatively standardized products– features acceptable to many customersfeatures acceptable to many customers– lowest competitive pricelowest competitive price
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?
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
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
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
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
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
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
Cost Leadership Strategy and the Five Forces of Competition
Rivalry Among Rivalry Among Competing FirmsCompeting FirmsCan use cost leadership Can use cost leadership strategy to advantage since:strategy to advantage since:
competitors avoid price competitors avoid price wars with cost leaders, wars with cost leaders, creating higher profits for creating higher profits for the entire industrythe entire industry
Rivalry Among
Rivalry Among
Competing Firms
Competing FirmsB
arga
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g P
ower
Bar
gain
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Pow
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
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Entrants
Entrants
Threat o
f
Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyers’ power Can mitigate buyers’ power by:by:
driving prices far below driving prices far below competitors, causing competitors, causing them to exit and shifting them to exit and shifting power with buyers back power with buyers back to the firmto the firm
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
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Pow
er
Bar
gain
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Pow
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of B
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Cost Leadership Strategy and the Five Forces of Competition
Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ Can mitigate suppliers’ power by:power by:
being able to absorb cost being able to absorb cost increases due to low cost increases due to low cost positionposition
being able to make very being able to make very large purchases, reducing large purchases, reducing chance of supplier using chance of supplier using powerpower
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
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Bar
gain
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Pow
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of B
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
f
Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Cost Leadership Strategy and the Five Forces of Competition
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
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of B
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Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
ew
Entrants
Entrants
Threat o
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Threat o
f
Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Threat of New EntrantsThreat of New EntrantsCan frighten off new Can frighten off new entrants due to:entrants due to: their need to enter on a their need to enter on a
large scale in order to be large scale in order to be cost competitivecost competitive
the time it takes to move the time it takes to move down the learning curvedown the learning curve
Cost Leadership Strategy and the Five Forces of Competition
Threat of Substitute Threat of Substitute ProductsProductsCost leader is well positioned Cost leader is well positioned to:to:
make investments to be make investments to be first to create substitutesfirst to create substitutes
buy patents developed by buy patents developed by potential substitutespotential substitutes
lower prices in order to lower prices in order to maintain value positionmaintain value position
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
gain
ing
Pow
er
Bar
gain
ing
Pow
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of B
uyer
sof
Buy
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Differentiation Strategy
An integrated set of actions designed by a firm to An integrated set of actions designed by a firm to produce or deliver goods or services (at an acceptable produce or deliver goods or services (at an acceptable cost) that customers perceive as being different in ways cost) that customers perceive as being different in ways that are important to themthat are important to them
– price for product can exceed what the firm’s target price for product can exceed what the firm’s target customers are willing to paycustomers are willing to pay
– nonstandardized productsnonstandardized products– customers value differentiated features more than they customers value differentiated features more than they
value low costvalue low cost
Differentiation Strategy
Value provided by Value provided by unique features and value unique features and value characteristicscharacteristics
Command premium priceCommand premium price High customer serviceHigh customer service Superior qualitySuperior quality Prestige or exclusivityPrestige or exclusivity Rapid innovationRapid innovation
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)
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?
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
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
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
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
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
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
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
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
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
Differentiation Strategy and the Five Forces of Competition
Rivalry Among Rivalry Among Competing FirmsCompeting FirmsCan defend against Can defend against competition because:competition because:
brand loyalty to brand loyalty to differentiated product differentiated product offsets price competitionoffsets price competition
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
Bar
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Bargaining Power Bargaining Power of Suppliersof Suppliers
Threat of N
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Differentiation Strategy and the Five Forces of Competition
Bargaining Power of Bargaining Power of BuyersBuyersCan mitigate buyer power Can mitigate buyer power because:because:
well differentiated well differentiated products reduce customer products reduce customer sensitivity to price sensitivity to price increasesincreases
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Differentiation Strategy and the Five Forces of Competition
Bargaining Power of Bargaining Power of SuppliersSuppliersCan mitigate suppliers’ power Can mitigate suppliers’ power by:by:
absorbing price increases absorbing price increases due to higher marginsdue to higher margins
passing along higher passing along higher supplier prices because supplier prices because buyers are loyal to buyers are loyal to differentiated branddifferentiated brand
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Differentiation Strategy and the Five Forces of Competition
Threat of New EntrantsThreat of New EntrantsCan defend against new Can defend against new entrants because:entrants because:
new products must surpass new products must surpass proven products or, proven products or,
new products must be at new products must be at least equal to performance least equal to performance of proven products, but of proven products, but offered at lower pricesoffered at lower prices
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
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Threat of N
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Entrants
Entrants
Threat o
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Threat o
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Substitute
Products
Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
Differentiation Strategy and the Five Forces of Competition
Threat of Substitute Threat of Substitute ProductsProductsWell positioned relative to Well positioned relative to substitutes because:substitutes because:
brand loyalty to a brand loyalty to a differentiated product tends differentiated product tends to reduce customers’ to reduce customers’ testing of new products or testing of new products or switching brandsswitching brands
Rivalry Among
Rivalry Among
Competing Firms
Competing Firms
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Threat of N
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Entrants
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Substitute
Products
Five Forces ofFive Forces ofCompetitionCompetition
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
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
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
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
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
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
“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?
STUCKIN THEMIDDLE
MY FIRM HASA COMPETITIVE
ADVANTAGE
MY FIRM HASA COMPETITIVE
ADVANTAGE
Choosing a Generic Business-Level Strategy
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
Integrated Competitive Strategy
Cost Leadership and Differentiation
CostCostLeadershipLeadership
BenefitsBenefits
DifferentiationDifferentiationBenefitsBenefits
Integrated Competitive Strategy
Cost Leadership and Differentiation
CostCostLeadershipLeadership
BenefitsBenefits
DifferentiationDifferentiationBenefitsBenefits
Value-AddedValue-AddedOrOr
IntegratedIntegrated
CombinedCombinedBenefitsBenefits
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
Benefits of Integrated Strategy
Successful firms using this strategy have above-Successful firms using this strategy have above-average returnsaverage returns
Firm offers two types of values to customersFirm offers two types of values to customers– some differentiated features (but less than a true some differentiated features (but less than a true
differentiated firm)differentiated firm)– relatively low cost (but now as low as the cost relatively low cost (but now as low as the cost
leader’s price)leader’s price)
Major Risks of Integrated Strategy
An integrated cost/differentiation business level An integrated cost/differentiation business level strategy often involves compromises (neither the strategy often involves compromises (neither the lowest cost nor the most differentiated firm)lowest cost nor the most differentiated firm)
The firm may become “stuck in the middle” lacking The firm may become “stuck in the middle” lacking the strong commitment and expertise that the strong commitment and expertise that accompanies firms following either a cost leadership accompanies firms following either a cost leadership or a differentiated strategyor a differentiated strategy
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
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
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