Strategic

Management of
Business Units
William K. Holstein
The College of William and Mary
GSBA
Yip and Porters
Models
Buyer
power
Potential
competitors
Rivalry

Substitutes

Supplier
power
Firm infrastructure
Human resource management
Technology development
Procurement
Inbound
logistics
Outbound
logistics
Marketing
and
sales
Service
Opera-
tions
Drivers: in the context
of Porters 5-Forces
Leverage:
in the context
of Porters
Value Chain
Today
More discussion
of Porters two
models for
Industry and
Company
Analysis
Leaving you with
an encyclopedia
on Porters
Models
When I knew him!
Strategic Management
according to Booz-Allen
Booz-Allen believes the best
companies manage markets not
businesses. The constant leadership
challenge is to out-perform
competition, introduce change into
the market, enhance competitive
position, and make things happen.

Strategic Management
according to Booz-Allen
You create customer satisfaction
through quality, productivity,
people and ideas ...
It all begins with the recognition
that
your only business is creating
sustainable customer satisfaction.
John R. Rockwell
Senior Vice President
Booz-Allen and Hamilton, Consultants
First, Core Competency
A fundamental idea in Strategy, introduced by
Gary Hamel and C.K. Prahalad. They have
since gone their own ways with new books.
Strategy
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage.
Business
Level
Strategy
Actions taken to provide value to
customers and gain a competitive
advantage by exploiting core
competencies in specific,
individual product markets.
Core
Competency
The resources and capabilities that have been
determined to be a source of competitive
advantage for a firm over its rivals.
A brief summary of
models used in this
presentation
Models in this Presentation
Breadth of
Competitive
Scope
Source of Competitive Advantage
Broad
Target
Market
Narrow
Target
Market
Cost Uniqueness
There are 4 generic
ways to compete, based
on cost (price) or
uniqueness (value) and
whether targeted at a
broad or narrow (niche)
market
Generic Strategies
Primary Activities
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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The Value Chain defines the activities
of the firm and how they inter-relate
The Five Forces describe
the competitive environment
in the industry
Breadth of
Competitive
Scope
Source of Competitive Advantage
Broad
Target
Market
Narrow
Target
Market
Cost
Cost
Leadership
How can Generic Business Level Strategies be Applied?
Uniqueness
Differen-
tiation
Focused
Differen-
tiation
Focused
Low Cost
So, you can apply one of the
two strategies ...
To a broad target market
Or to a narrow target market, or NICHE

We turn first to the Broad Target Market and
explore first the Cost Leadership Strategy
Breadth of
Competitive
Scope
Source of Competitive Advantage
Broad
Target
Market
Narrow
Target
Market
Cost
Cost
Leadership
Generic Business Level Strategies
Uniqueness
Cost Leadership
Business Level Strategy

Key Criteria
Lowest competitive price
Relatively standardized products
Features acceptable to many
customers
Choices that Drive Costs
Economies of scale
Asset utilization
Capacity utilization pattern
Seasonal, cyclical
Interrelationships
Order processing and distribution
Value chain linkages
Advertising & Sales
Logistics & Operations

Choices that Drive Costs (cont.)
Product features
Performance
Mix & variety of products
Service levels
Small vs. large buyers
Process technology
Wage levels
Product Features
Hiring, training, motivation

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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Value Creating Activities common to a
Cost Leadership Business Level Strategy
Value Creating Activities common to a
Cost Leadership Business Level Strategy
Primary Activities
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Inbound
Logistics
Highly Efficient
Systems to Link
Suppliers
Products with the
Firms Production
Processes
Located in Close
Proximity with
Suppliers
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Value Creating Activities common to a
Cost Leadership Business Level Strategy
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Relatively Few
Management Layers to
Reduce Overhead
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness
Timing of Asset
Purchases
Efficient Plant
Scale to Minimize
Manufacturing
Costs
Selection of Low
Cost Transport
Carriers
Delivery Schedule
that Reduces
Costs
Products Priced to
Generate Sales
Volume
Small, Highly
Trained Sales
Force
Investments in Technology in order
to Reduce Costs Associated with
Manufacturing Processes
Frequent Evaluation Processes to
Monitor Suppliers Performances
Policy Choice of
Plant Technology
Organizational
Learning
Efficient Order
Sizes
O
p
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r
a
t
i
o
n
s

Operations
Efficient Plant
Scale to Minimize
Mfg. Costs
Timing of Asset
Purchases
Policy Choice of
Plant Technology
Organizational
Learning
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Value Creating Activities common to a
Cost Leadership Business Level Strategy
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Selection of Low
Cost Transport
Carriers
Delivery Schedule
that Reduces
Costs
National Scale
Advertising
Products Priced to
Generate Sales
Volume
Small, Highly
Trained Sales
Force
Effective Product
Installations to
Reduce Frequency
and Severity
of Recalls
Frequent Evaluation Processes to
Monitor Suppliers Performances
Efficient Order
Sizes
Interrelationships
with Sister Units
O
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L
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Outbound
Logistics
Selection of Low
Cost Transport
Carriers
Delivery Schedule
that Reduces Costs
Efficient Order
Sizes
Interrelationships
with Sister Units
S
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p
o
r
t

A
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v
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s

Value Creating Activities common to a
Cost Leadership Business Level Strategy
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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M
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National Scale
Advertising
Products Priced
to Generate Sales
Volume
Small, Highly
Trained Sales Force
Marketing
& Sales
S
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t

A
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Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Service
Effective Product
Installations to
Reduce
Recalls
Value Creating Activities common to a
Cost Leadership Business Level Strategy
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Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Procurement
Systems and Procedures to Find
the Lowest Cost Products to
Purchase Raw Materials
Frequent Evaluation
Processes to Monitor
Suppliers Performances
Procurement
Value Creating Activities common to a
Cost Leadership Business Level Strategy
S
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Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Technological Development
Technological Development
Easy-to-Use
Manufacturing
Technologies
Investments in Technology in
order to Reduce Costs Associated
with Manufacturing Processes
Value Creating Activities common to a
Cost Leadership Business Level Strategy
S
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p
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A
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Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Human Resource Management
Human Resource Management
Consistent Policies to
Reduce Turnover Costs
Effective Training Programs
to Improve Worker
Efficiency and Effectiveness
Value Creating Activities common to a
Cost Leadership Business Level Strategy
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Primary Activities
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Technological Development
Human Resource Management
Firm Infrastructure
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Firm Infrastructure
Firm Infrastructure
Cost Effective
MIS Systems
Relatively Few
Management Layers
to Reduce Overhead
Simplified Planning
Practices to Reduce
Planning Costs
Value Creating Activities common to a
Cost Leadership Business Level Strategy
We turn now to analyzing the effects of a strategy
on the Five Forces
Can frighten off
New Entrants
due to the need to:
Enter at large scale to
be Cost Competitive
Take time to
move down
Learning Curve
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
*
*
Can mitigate Customer
(Buyer) Power by:
Driving prices far below
competitors which may
cause exit and shift power
back to firm
*
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Ways to fight off Substitutes:
Make investments to create
substitutes first
*
Buy patents developed
by potential substitutes
*
Lower prices to maintain
value position
*
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Can mitigate Supplier Power by:
Low cost position
makes them better able
to absorb cost increases
*
*
More likely to make
very large purchases
which reduces chance
of supplier power
Effective Cost Leaders can remain profitable
even when the Five Forces appear unattractive
Competitors avoid
price wars with Cost
Leaders, which creates
higher profits for entire
industry
The Major
Risks involved
with a
Cost Leadership
Business Level
Strategy
Dramatic technological
change could take away
your cost advantage
Focus on efficiency could cause
Cost Leader to overlook changes
in customer preferences
Competitors may learn
how to imitate Value Chain
Breadth of
Competitive
Scope
Source of Competitive Advantage
Broad
Target
Market
Narrow
Target
Market
Cost
Cost
Leadership
Differen-
tiation
Generic Business Level Strategies
Uniqueness
Differentiation
Business Level Strategy
Key Criteria
Value provided by unique features and
value characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation

Drivers of Differentiation
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information

Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Value Creating Activities common to a
Differentiation Business Level Strategy
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A
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Value Creating Activities common to a
Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
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Inbound
Logistics
Superior handling
of incoming raw
materials to
minimize damage
and improve the
quality of the final
product
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A
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Value Creating Activities common to a
Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
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Operations
Rapid responses to
customers unique
manufacturing
specifications
Consistent
manufacturing of
attractive products
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A
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Value Creating Activities common to a
Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
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Outbound
Logistics
Accurate and
responsive order
processing
procedures
Rapid and timely
product deliveries
to customers
S
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p
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t

A
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Value Creating Activities common to a
Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
M
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Marketing
& Sales
Extensive personal
relationships with
buyers
Strong Coordination
among functions in
R&D, Marketing
and Product
Development
Premium
Pricing
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p
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r
t

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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
S
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Service
Complete field
stocking of
replacement
parts
Value Creating Activities common to a
Differentiation Business Level Strategy
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
Procurement
Procurement
Located in
Close Proximity
with Suppliers
Systems and procedures
used to find the highest
quality raw materials
Purchase of highest
quality replacement
parts
Value Creating Activities common to a
Differentiation Business Level Strategy
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
Technological Development
Technological Development
Strong
capability in
basic research
Investments in technol-
ogies to produce highly
differentiated products
Coordination among
R&D, marketing and
product development
Value Creating Activities common to a
Differentiation Business Level Strategy
S
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p
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t

A
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Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
Human Resource Management
Human Resource Management
Compensation programs
which encourage worker
creativity and productivity
Extensive use of
subjective performance
measures
Superior
personnel
training
Value Creating Activities common to a
Differentiation Business Level Strategy
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
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Primary Activities
S
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p
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t

A
c
t
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v
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t
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s

Firm Infrastructure
Firm Infrastructure
A companywide emphasis
on producing high quality
products
Highly developed Information
Systems to better understand
customers purchasing preferences
Value Creating Activities common to a
Differentiation Business Level Strategy
Effectiveness with Differentiation grows out of
Value Chain activities
Heineken beer
Raw materials
Caterpillar tractors
Service buyers needs quickly
anywhere in the world
Steinway pianos
Raw materials & Workmanship
Examples:
Intel microprocessors
Technological superiority
Mercedes Benz autos
Technology and Workmanship
Differentiation Business Level Strategy
Can fend off
New Entrants because
New Products must
surpass proven products
Or be equal to
performance at
lower prices
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Can mitigate Customer
(Buyer) Power by:
*
Well differentiated pro-
ducts reduce customer
sensitivity to price
increases
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Ways to fight off Substitutes:
Brand loyalty tends to
reduce new product trial
and brand switching
*
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Bargaining
Power of
Suppliers
Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Can mitigate Supplier Power by:
Absorbing price increases
due to higher margins
*
*
Passing on higher
supplier prices
because buyers are
brand loyal

Effective Differentiators can remain profitable
even when the Five Forces appear unattractive
Brand loyalty
overcomes much
price competition
The Major
Risks involved
with a
Differentiation
Business Level
Strategy
Customers may decide that
the cost of uniqueness is
too great
The means of uniqueness
may no longer be valued
by customers
Competitors may learn
how to imitate Value Chain
Breadth of
Competitive
Scope
Source of Competitive Advantage
Broad
Target
Market
Narrow
Target
Market
Cost
Cost
Leadership
Differen-
tiation
Generic Business Level Strategies
Focused
Differen-
tiation
Focused
Low Cost
Uniqueness
Firm may lack resources
to compete industry wide
Large firms may
overlook small niches
However.....
Opportunities may exist because:
*
*
*
May be able to serve a narrow market segment more
effectively than industry-wide competitors
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
Focused Business Level Strategies
- Bang & Olufsen
Upscale electronic components
- Iams Company
Premium pet foods
- Snap-on tools
High quality mechanics tools
May be able to retrofit old
factories to keep costs down
Minimize R&D costs by
copying innovators
*
*
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
Focused Business Level Strategies
Focused Differentiators
may thrive by selecting a
small market that is
underserved by large
players
Custom manufacturers of parts for
Harley-Davidson Motorcycles
*
Focused
Business Level
Strategies
involve the
same basic
approach as
Broad Market
Strategies
Focused Business Level Strategies
The Major
Risks involved
with a Focused
Differentiation
Business Level
Strategy
Firm may be outfocused
by competitors
Preferences of niche market
may change to match those of
broad market
Large competitor may
set its sights on your
niche market
What if a Competitor
accomplishes BOTH Strategies?
Cost Leadership

And

Differentiation
Breadth of
Competitive
Scope
Source of Competitive Advantage
Broad
Target
Market
Narrow
Target
Market
Cost
Cost
Leadership
Differen-
tiation
Generic Business Level Strategies
Focused
Differen-
tiation
Focused
Low Cost
Integrated
Low Cost/
Differentiation
Uniqueness
Integrated Low
Cost/Differentiation Strategy
Recognize that the Integrated Low Cost/
Differentiation business level strategy
involves a Compromise
The risk is that the firm may become
Stuck in the Middle lacking a strong
commitment to or expertise with either
type of generic strategy
Integrated Low
Cost/Differentiation Strategy
Low Cost
Use a single aircraft model
(Boeing 737)
Use secondary airports
Fly short routes
No meals
15 minute turnaround time
No reserved seats
No travel agent reservations




Integrated Low Cost/
Differentiation Strategy
Differentiation
Focus on customer
satisfaction High
level of employee
dedication
New flight services
for business travelers
(Phones and faxes)

Others are Following the
Out-Performing Strategy
Few can execute it successfully, but IT IS POSSIBLE!