Strategic Management

Genie in a Lamp
A man was walking along a road when he found a lamp. Upon
rubbing the lamp a genie appeared who stated "I am the most
powerful genie in the world. Because I am so powerful, I can
grant you any wish you want, but only one wish."
The man pulled out a map of Asia and said "I'd like there to be
peace among the people." The genie responded, "Gee, I don't
know. Those people have been fighting since the beginning of
time. They are always going to be fighting. I can do just about
anything, but this is beyond my limits."
The man then said, "Well, we are starting a Management
programme. I wonder if you could teach the students this MBA
thing."
Genie: "Uh, let me see that map again."

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 Strategic Management

If a Manager Were a Car...

It would crash two or three times per day for no apparent reason. The driver is
often hurt, but the car itself receives no permanent damage. You'd just accept
this fact, restart the car, and begin your trip again.

Occasionally, your car would fail to restart after a crash, and you'd have to
reinstall the engine. For some strange reason, you'd just accept this too.

You would be forced to buy a new model every 18 months, and your old model
would have no resale value. Each new model would be bigger than the
previous one, require more petrol, and would operate differently. Furthermore,
parts from the old car would not be interchangeable with the new car.

You could call a special phone number when you have a problem. The phone
would be staffed by people who know less about your car than you do.

However, there is available a special MBA-Telecom model, powered by Amity.

Since we know what you want

It can run on 100 percent of the roads and requires easy driving skills.

&

The newest Model is here now!

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 Strategic Management

Scientists Tell Us...

The average MBA spends:
9.5 years sleeping
4.2 years eating
3.8 years on the toilet
2.8 years traveling

and...
1.9 years waiting for a job!

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 “Strategy is a framework which 
guides those choices that determine 
the nature and direction of an 
organization.”
­Benjamin B. Tregoe &
John W. Zimmerman
“Top Management Strategy”

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“Strategy is the creation of a unique 
and valuable position, involving a 
different set of activities.”
­Michael Porter
“What is Strategy?”
Harvard Business Review

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 “In terms of the three key players 
(competitors, customers, company) 
strategy is defined as the way in which a 
corporation endeavors to differentiate 
itself positively from its competitors, 
using its relative corporate strengths to 
better satisfy customer needs.”
­Kenichi Ohmae
“The Mind of the Strategist”
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 Planning Defined

In the business world, Henri Fayol, the French industrialist, is credited

with the first successful attempts at formal planning.
Growth is an accepted expectation of a firm; however, growth does not
happen by itself. Growth must be carefully planned: questions such as how
much, when, in which areas, where to grow, and who will be responsible for
different tasks must be answered. Unplanned growth will be haphazard and
may fail to provide desired levels of profit.
Planning is required in making a choice among the many equally
attractive alternative investment opportunities a firm may have. Thus, the
introduction of the concept of risk & uncertainty
Planning for future action has been called by many different names:
long-range planning, corporate planning, comprehensive planning, and formal
planning. Whatever its name, the reference is obviously to the future.
Planning is essentially a process directed toward making today’s decisions
with tomorrow in mind and a means of preparing for future decisions so that
they may be made rapidly, economically, and with as little disruption to the
business as possible.

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 Planning

Planning Principles
As far as possible the following principle should be adhered to:
• Plans should be based on facts rather than opinions.
• Plans should include some degree of flexibility to allow for
unforeseeable events.
• A plan should be as detailed as expenditure constraints allow.
• Plans should not extend too far into the future as accurate prediction of
the distant future is impossible.
• All alternative courses of action should be considered.
• Side effects and implications of the actions envisaged should be
examined.
• Instructions to individuals and departments should be incorporated into
the plan.
• Plans should be concise and easy to understand.
• Plans should be monitored for effectiveness as they are implemented.
• Targets embodied in plans should be reasonable and not over-
ambitious.
• The key factors determining the success of the plan should be identified
and receive the greatest emphasis.
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 Philosophies of Planning

Three different philosophies of planning - satisfying, optimizing, and

adaptivizing.

Planning on the basis of the satisfying philosophy aims at easily

achievable goals and molds planning efforts accordingly. This type of
planning requires setting objectives and goals that are “high enough’’ but
not as “high as possible.’’ The satisfying planner, therefore, devises only
one feasible and acceptable way of achieving goals, which may not
necessarily be the best possible way. Under a satisfying philosophy,
confrontations that might be caused by conflicts in programs are diffused
through politicking, underplaying change, and accepting a fall in
performance as unavoidable.

For example, the present government.

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 Philosophies of Planning

Three different philosophies of planning - satisfying, optimizing, and

adaptivizing.

The philosophy of optimizing planning has its foundation in operations

research. The optimizing planner seeks to model various aspects of the
organization and define them as objective functions. Efforts are then
directed so that an objective function is maximized (or minimized), subject
to the constraints imposed by management or forced by the environment.

For example, an objective may be to obtain the highest feasible market

share; planning then amounts to searching for different variables that affect
market share: price elasticity, plant capacity, competitive behavior, the
product’s stage in the life cycle, and so on. The effect of each variable is
reduced to constraints on the market share. Then an analysis is
undertaken to find out the optimum market share to target.

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 Philosophies of Planning

Three different philosophies of planning - satisfying, optimizing, and

adaptivizing.

The philosophy of adaptivizing planning is an innovative approach. To

understand the nature of this type of planning, let us compare it to
optimizing planning. In optimization, the significant variables and their
effects are taken for granted. Given these, an effort is made to achieve
the optimal result.
With an adaptivizing approach, on the other hand, planning may be
undertaken to produce changes in the underlying relationships themselves
and thereby create a desired future. Underlying relationships refer to an
organization’s internal and external environment and the dynamics of the
values of the actors in these environments (i.e., how values relate to needs
and to the satisfaction of needs, how changes in needs produce changes
in values, and how changes in needs are produced).

Example, acceptance of mobiles.

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 Planning in Organizations
Every plan should have: Objectives, Strategies, Programmes, Controls

Mission : purpose, scope

Vision/Intent, desired future state Goal

Objectives : SMART

Strategies : How to Achieve the Objective

Policies – Clear guidelines for decisions and actions

Programmes: The Operational Activities Involved

The programmes are the details of the plan; they clarify:

• Responsibilities
• Money
• Controls - Measurements

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 Planning in Organizations
Evolution of Strategic Management

Strategy’s Military Roots

•Battlefield strategies to gain an edge
•Exploit weak spots

Academic Origins of Strategic Management

•Economic theory
•Early organizational studies

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 Planning in Organizations
Evolution of Strategic Management

• 1960s Design School

• 1970s BCG Portfolio Management

• 1980s Porter Positioning School

• Early 1990s Resource-based View

(Core Competence), & Learning Organization

• Mid 1990s Stretching ambition, not just positioning/Fit

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 Planning in Organizations
Levels of Strategy; Hierarchy of Strategies

Unfortunately, these sets of processes are not carried out as discrete

actions and do not follow nicely in a linear manner.

• Corporate level: Purpose and scope, Long Term Survival

• Business Level: Competition

• Operations Level: Action plans and implementation for human resources,

financing, manufacturing, R&D, etc.

• Short term 0 to 12 months.

• Medium term 12 to 36 months.
• Long term over three years.

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 Planning in Organizations
The concern of strategy is effectiveness (doing the right things). The
concerns of operations are efficiency (doing things right).

Strategic Planning
Strategic planning is a systematic, analytical approach that reviews the business as
a whole in relation to its environment, with the objective of:
• Developing an integrated, co-ordinated and consistent view of the route the
company wishes to follow.
• Facilitating the adaptation of the organisation to environmental change.

The aim of strategic planning is to create a viable link between the organisation’s
objectives and resources and its environmental opportunities.

Strategic And Operational Planning

Strategic management planning produces both the primary goals for operational
plans and the framework in which they can be realised. The main intended
outcome of strategy is the successful positioning of the company in the market
place (including satisfactory market share, adequate profitability, possible
market leadership, etc.).
The main intended outcome of operational planning is the efficient attainment of
budgeted sales and/or revenue targets. Operational planning is sometimes also
referred to as tactical planning.
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 Planning Process

The Planning Cycle

Major corporate planning exercises normally take place every three to six years
Operational planning exercises may take place every year or half year.

Benefits to be gained from planning include:

•Risk Reduction
•Reduction of Uncertainty
•Setting Targets and Standards
•Guidance
•Commitment
•Improves Decision Making

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 Planning Process

No Strategic Planning
• Poor Reward Structures.
• Fire-fighting.
• Waste of Time.
• Too Expensive.
• Laziness.
• Content with Success.
• Fear of Failure.
• Overconfidence.
• Prior Bad Experience.
• Self-Interest.
• Fear of the Unknown.
• Honest Difference of Opinion.
• Suspicion.

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 Planning Process Activity

Take an organisation that you are familiar with and answer the following
questions:

1. Does the organisation have a mission statement?

• Yes
• No
• Don’t Know

• If the answer to 1 is Yes, write out the mission statement as

accurately as you can.

• If the answer to 1 was No or Don’t Know, suggest a suitable mission

statement from your knowledge of the organisation and its activities.

• What do you think is the best way of making employees aware of an

organisation’s mission statement.

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 Strategic Planning Models
The Linear Static Model of Strategy

Strategic thinking can be divided into two segments : strategy formulation and strategy
implementation.
Strategy formulation involves:
4. Doing a situation analysis: both internal and external; both micro-environmental and macro-
environmental. (where you are now)
5. Concurrent with this assessment, objectives are set. This involves crafting vision statements
(long term), mission statements (medium term), overall corporate objectives (both financial and
strategic), strategic business unit objectives (both financial and strategic), and tactical
objectives. (where you want to go)
6. These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan
provides the details of how to obtain these goals. (how to get there)
The next phase, is the implementation of the strategy. This involves:
8. Allocation of sufficient resources
9. Establishing a chain of command or some alternative structure
10. Assigning responsibility of specific tasks or processes to specific individuals or groups
11. Involves managing the process - this includes monitoring results, comparing to benchmarks and
best practices, evaluating the efficacy and efficiency of the process, controlling for variances,
and making adjustments to the process as necessary.
When implementing specific programs, this involves acquiring the requisite resources, developing
the process, training, process testing, documentation, and integration with (and/or conversion from)
legacy processes.
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 Strategic Planning Models
The Dynamic Model of Strategy
Charles Lindblom (1959) claimed that strategy is a fragmented process of serial and
incremental decisions.
James Brian Quinn (1980) developed an approach that he called "logical
incrementalism“ : "Constantly integrating the simultaneous incremental process of
strategy formulation and implementation is the central art of effective strategic
management."
Whereas Lindblom saw strategy as a disjointed process without conscious direction,
Quinn saw the process as fluid but controlable.
Henry Mintzberg (1978) made a distinction between deliberate strategy and emergent
strategy. Emergent strategy originates not in the mind of the strategist, but in the
interaction of the organization with its environment. He claims that emergent
strategies tend to exhibit a type of convergence in which ideas and actions from
multiple sources integrate into a pattern.
This is a form of organizational learning, in fact, on this view, organizational learning is
one of the core functions of any business enterprise (Peter Senge's The Fifth
Discipline)

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 Strategic Planning Models
The Dynamic Model of Strategy
Constantinos Markides (1999) describes strategy formation and implementation as an
on-going, never-ending, integrated process requiring continuous reassessment and
reformation. In this model, strategy is both planned and emergent, dynamic, and
interactive.

The alignment of action with strategic intent (the top line in the diagram), is the
blending of strategic intent, emergent strategies, and strategies in action, to
produce strategic outcomes. The continuous monitoring of these strategic
outcomes produces strategic learning (the bottom line in the diagram). This
learning is comprised of feedback into internal processes, the environment, and 1-22
strategic intentions.
 Strategic Management Defined

Set of managerial decisions and actions

that determines the long-run performance
of a firm.

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 The Four Stages of Strategic Management

Stage 1 Stage 2 Stage 3 Stage 4

Basic Forecast Externally Full

Financial Based Oriented Strategic
Planning Planning Planning Management

people,
sales, markets, markets,
Rs production, industry, numbers,
manpower benchmarking industry,
production

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 Basic Concepts of Strategic Management

Basic Elements of the Strategic

Management Process

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 Strategic Management Model

Environmental
Strategy Strategy Evaluation
and Control
Scanning Formulation Implementation andControl
and Control

External Mission
Reason for
Societal
existence
Environment Objectives
General Forces
What results
to
Task Strategies
accomplish
Environment
by when Plan to
Industry Analysis
achieve the
Policies
mission &
Internal objectives Broad
guidelines for Programs
Structure decision Process
Chain of Command making Activities to monitor
needed to performance
Culture Budgets and take
accomplish
Beliefs, Expectations, a plan corrective
Cost of the
Values action
programs
Procedures
Resources
Sequence
Assets, Skills
of steps
Competencies,
needed to
Knowledge do the job Performance

Feedback/Learning
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 Outcome of Strategic Management

Superior Profit

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 Alternative Models of Superior Returns

Industrial Resource-Based
Organization Model Model
The External Environment Resources

An Attractive Industry Capability

Strategy Formulation Competitive Advantage

Assets and Skills An Attractive Industry

Strategy Implementation Strategy Implementation

Superior Returns Superior Returns

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I/O Model of Superior Returns
The Industrial Organization model suggests that
above-average returns for any firm are largely
determined by characteristics outside the firm.

This model largely focuses on industry structure or

attractiveness of the external environment rather
than internal characteristics of the firm.

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 I/O Model of Superior Returns
Action required:
External
Environment Study the external
environment, especially the
General industry environment.
Environment
Industry
Environment
Competitive
Environment

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 I/O Model of Superior Returns
External Action required:
Environment Locate an industry with
high potential for above-
An Attractive Industry
General Environment average returns.
IndustryAn
Environment
industry whose
structural characteristics
Competitive
suggest above-average
Environment
returns are possible

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 I/O Model of Superior Returns
Action required:
External
Identify strategy called for
Environment
Attractive by the industry to earn
GeneralIndustry
Environment above-average returns.

An industryStrategy
Industry Environment
whose
Competitive Formulation
structural characteristics
Environment
suggest above-average
Selection of a
returns are possible
strategy linked with
above-average
returns in a particular
industry

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 I/O Model of Superior Returns
External Environment Action required:
Develop or acquire assets
Attractive Industry and skills needed to
General Environment implement the strategy.
Industry EnvironmentStrategy Formulation
An industry whose
Competitive
structural characteristics
Environment
suggest above-average
Selection ofAssets and Skills
a strategy
returns are linked
possible
with above-
Assets
average returns inand
a skills
required to implement
particular industry
a chosen strategy

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 I/O Model of Superior Returns
External Environment Action required:
Use the firm’s strengths (its
Attractive Industry assets or skills) to
General Environment implement the strategy.
Industry EnvironmentStrategy Formulation
An industry whose
Competitive
structural characteristics
Environment
suggest above-average
Selection ofAssets and Skills
a strategy
returns are linked
possible
with above-
Assets
average returns a Strategy
inand skills Implementation
required to implement
particular industry
a chosen strategy
Selection of strategic
actions linked with
effective implementation
of the chosen strategy

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 I/O Model of Superior Returns
External Environment Action required:
Maintain selected strategy in
Attractive Industry order to outperform industry
General Environment rivals.
Industry EnvironmentStrategy Formulation
An industry whose
Competitive
structural characteristics
Environment
suggest above-average
Selection ofAssets and Skills
a strategy
returns are linked
possible
with above-
Assets
average returns a Strategy
inand skills Implementation
required to implement
particular industry
a chosen strategy Superior Returns
Selection of strategic
actions linked with
Earning of above-
effective implementation
average
of the chosen returns
strategy

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Resource-Based Model of Superior
Returns
The Resource-Based model
suggests that above-average
returns for any firm are largely
determined by characteristics
inside the firm.
This model focuses on developing
or obtaining valuable resources
and capabilities which are difficult
or impossible for rivals to imitate.

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Resource-Based Model of Superior Returns
Action required:
Resources Identify firm resources.
Study strengths and weak-
Inputs to a firm’s
nesses relative to rivals.
production process

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Resource-Based Model of Superior Returns
Action required:
Resources Determine what firm
Capability capabilities allow it to do
Inputs to a firm’s better than rivals.
production process.
Capacity for an integrated
set of resources to perform
a task or activity.

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Resource-Based Model of Superior Returns
Action required:
Resources Determine how firm’s
Capability resources and capabilities
Inputs to a firm’s may create competitive
production process.
Capacity Competitive
for an integrated advantage.
Advantage
set of resources to
integratively perform a
Ability of a firm to
task or activity.
outperform its rivals

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Resource-Based Model of Superior Returns
Action required:
Resources Locate an attractive
Capability industry.
Inputs to a firm’s
production process.
Capacity Competitive
for an integrated
Advantage
set of resources to
integratively perform An a Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivals
Location of an
industry with
opportunities that can
be exploited by the
firm’s resources and
capabilities

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Resource-Based Model of Superior Returns
Action required:
Resources Select strategy that best
Capability exploits resources and
Inputs to a firm’s capabilities relative to
production process.
Capacity Competitive
for an integrated opportunities in environs.
Advantage
set of resources to
integratively perform An a Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivalsStrategy
Location of an
Formulation and
industry with
Implementation
opportunities that can
be exploited by the
Strategic
firm’s resources andactions taken to
earn above-average
capabilities
returns

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Resource-Based Model of Superior Returns
Action required:
Resources Maintain selected strategy
Capability in order to outperform
Inputs to a firm’s industry rivals.
production process.
Capacity Competitive
for an integrated
Advantage
set of resources to
integratively perform An a Attractive
Ability of aIndustry
task or activity. firm to
outperform its rivalsStrategy
Location of an
Formulation and
industry with
opportunities Superior Returns
Implementation
that can
be exploited by the
Strategic
firm’s resources andactions
Earningtaken to
of above-
earn above-average
capabilities average returns
returns

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Resources and capabilities lead to
Competitive Advantage when they are:

Valuable allow the firm to exploit opportunities or

neutralize threats in its external environment

Rare possessed by few, if any, current and potential

competitors

Costly to Imitate when other firms either cannot obtain them or

must obtain them at a much higher cost

Non-substitutable the firm must be organized appropriately to

obtain the full benefits of the resources in order
to realize a competitive advantage
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When these four
criteria are met,
Resources and Core Competencies
Capabilities
become:

Core Competencies are resources and capabilities

that can serve as a source of Competitive Advantage.

The Resource-Based model argues that Core

Competencies are the basis for a firm’s Competitive
Advantage, Strategic Competitiveness and Ability to
Earn Above-average Returns.
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Competitive Advantage and the
Value Chain
• A firm can gain competitive advantage by
finding differentiation or low costs in its
activities
• Value chain is a convenient way of looking
at the firm’s activities
• Value chain: all the activities that a firm
used to design, produce, market, deliver,
and support its product
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The Value Chain

1-46
Components of the Value Chain
• Primary activities: physical actions of
creating, selling, and after-sale service of
products
• Upstream: early activities in the value
chain
– R&D
– Dealing with suppliers

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Components of the Value Chain
(cont.)
• Downstream: later value chain activities
– Sales and dealing with distribution channels
• Support activities: systems for human
resources management, organizational
design and control, and technology

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Core The resources and capabilities that have been
Competency determined to be a source of competitive
advantage for a firm over its rivals.

An integrated and coordinated set of

Strategy actions taken to exploit core competencies
and gain a competitive advantage.

Actions taken to provide value to customers

Business Level and gain a competitive advantage by
Strategy exploiting core competencies in specific,
individual product markets.

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 Generic Business Level Strategies

Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Cost Differen-
Target Leadership tiation
Market Leadership
Breadth of
Competitive
Scope
Focused
Narrow Focused Low Differen-
Target Cost
Market tiation

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 Value Creating Activities Common to a
Cost Leadership Business Level Strategy

Firm Infrastructure
Activities

M
Support

Human Resource Management A

R
Technological Development G
IN
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
RG
A
M
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Primary Activities
 Value Creating Activities Common to a
Cost Leadership Business Level Strategy
Simplified Planning Relatively Few
Cost Effective
MIS Systems Firm Infrastructure
Practices to Reduce
Planning Costs
Management Layers to
Reduce Overhead
Activities

M
Support

Effective Training Programs

Human Resource Management
Consistent Policies to
Reduce Turnover Costs to Improve Worker
Efficiency and Effectiveness A
R
Easy-to-Use Manufacturing
Technological Development
Investments in Technology in order G
Technologies to Reduce Costs Associated with
Manufacturing Processes
IN
Systems and Procedures to find the
Procurement
Frequent Evaluation Processes to
Lowest Cost Products to Purchase
Raw Materials
Monitor Suppliers’ Performances

Highly Efficient Efficient Plant Delivery Schedule Small, Highly Effective Product

Service
Systems to Link Scale to Minimize that Reduces Trained Sales Installations to
Operations

Suppliers’ Manufacturing
Outbound
Costs Force Reduce Frequency

Marketing
Logistics
Inbound

Products with the Costs and Severity

& Sales
Logistics

IN
Firm’s Production Selection of Low Products Priced to of Recalls
Processes Timing of Asset Cost Transport Generate Sales

RG
Purchases Carriers Volume

A
Located in Close Policy Choice of Efficient Order National Scale

M
Proximity with Plant Technology Sizes Advertising
Suppliers
Organizational Interrelationships
Learning with Sister Units
1-52
Primary Activities
Effective Cost Leaders can remain profitable even when the
Five Forces appear unattractive

Threat
of New
Entrants

Can frighten off New Entrants due to the need to:

* Enter at large scale to be Cost Competitive

* Take time to move down the “Learning Curve”

1-53
 Effective Cost Leaders can remain profitable even when the
Five Forces appear unattractive

Can frighten off New Entrants due

Threat of to the need to:
New * Enter at Large Scale to be
Cost Competitive
Entrants
* Take time to move down the
“Learning Curve”

Can mitigate Buyer Power by: Bargaining

Power of
* Driving prices far below competitors Buyers
may cause exit and shift power back
to firm

1-54
 Effective Cost Leaders can remain profitable even when the
Five Forces appear unattractive

Can frighten off New Entrants due

Well positioned relative toThreat
New
of to the need to:
* Enter at Large Scale to be
Substitutes in order to: Entrants Cost Competitive
* Take time to move down the
* Make investments to create “Learning Curve”
substitutes first
* Buy patents developed by Bargaining
potential substitutes Power of
Buyers
* Lower prices to maintain
value position
Can mitigate Buyer Power by:

Driving prices far below

Threat of competitors which may
cause exit and shift power
Substitute back to firm
1-55
Products
 Effective Cost Leaders can remain profitable even when the
Five Forces appear unattractive

Can frighten off New Entrants due

Threat of to the need to:
Bargaining New * Enter at Large Scale to be
Cost Competitive
Power of Entrants
* Take time to move down the
Suppliers “Learning Curve”

Can mitigate Supplier Power by: Bargaining

Power of
Buyers
* Low cost position makes them better
able torelative
Well positioned absorb
to cost increases Can mitigate Buyer Power by:
Substitutes in order to:
* More likely to make very
* Make investments to create substitutes large purchases
Threat of
Driving prices far below
competitors which may
* which
Can buy reduces
patents developed
potential substitutes
chance
by of supplier
Substitute power
cause exit and shift power
back to firm
* Lower prices to maintain Products 1-56
value position
 Effective Cost Leaders can remain
profitable even when the Competitors avoid
Five Forces appear unattractive price wars with Cost
Can mitigate Supplier Power by: Leaders,
Can frighten offwhich
New Entrants due
Threat of creates higher
to the need to: profits
* Low cost position makes them
better able to absorb cost increases New * Enter at Large Scale to be

* More likely to make very large Entrants forCostentire industry

Competitive
* Take time to move down the
purchases which reduces chance “Learning Curve”
of supplier power

Bargaining Rivalry Among Bargaining

Power of Competing Firms Power of
Suppliers in Industry Buyers

Well positioned relative to Can mitigate Buyer Power by:

Substitutes in order to:
* Make investments to create substitutes Driving prices far below
Threat of competitors which may
* Can buy patents developed by cause exit and shift power
potential substitutes Substitute
back to firm
* Lower prices to maintain Products 1-57
value position
 Major Risks of Cost Leadership Business Level Strategy

Dramatic technological change could take away your cost

advantage

Competitors may learn how to imitate Value Chain

Focus on efficiency could cause Cost Leader to overlook

changes in customer preferences

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 Generic Business Level Strategies

Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Cost Differentiation
Target Leadership
Market Leadership
Breadth of
Competitive
Scope
Focused
Narrow Focused Low Differen-
Target Cost
Market tiation

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 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

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 Differentiation Business Level Strategy

Requirements: Constant effort to differentiate products through:

•Developing new systems and processes

•Shaping perceptions through advertising

•Quality focus

•Capability in R&D

•Maximize H R contributions through low turnover and high motivation

1-61
 Value Creating Activities Common to a
Differentiation Business Level Strategy
Highly Developed Information A companywide
Firm Infrastructure
Systems to better understand
customers’ purchasing preferences
emphasis on producing
high quality products
Activities

Compensation programs Extensive use of subjective Superior

M
Support

Human Resource Management

intended to encourage worker
creativity and productivity
rather than objective
performance measures
personnel
training A
R
Coordination among R&D,
Technological Development
Investments in technologies that will Strong
G
product development and
marketing
allow the firm to consistently produce
highly differentiated products
capability in
basic research IN
Systems and procedures used to find Purchase of highest quality
Procurement
the highest quality raw materials
replacement parts

Superior Consistent Accurate and Strong Coordin- Complete field

Service
handling of manufacturing of responsive order ation among stocking of
Operations

Outbound functions in R&D, replacement parts

Marketing
incoming raw attractive processing
Logistics
Inbound

Marketing and
Logistics

& Sales
materials to products procedures

IN
minimize Product
damage and Development

RG
improve the Rapid responses Extensive
quality of the Rapid and timely personal

A
to customers
final product product deliveries relationships

M
unique
manufacturing to customers with buyers
specifications
Premium
Pricing
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Primary Activities
Effective Differentiators can remain profitable even when the Five
Forces appear unattractive

Threat of
New
Entrants

Can fend off New Entrants because:

New products must surpass proven

* products
Or be equal to performance at lower
* prices

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Effective Differentiators can remain profitable even when the Five
Forces appear unattractive

Can fend off New Entrants because:

Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices

Can mitigate Buyer Power because: Bargaining

Power of
Well differentiated products reduce Buyers
customer sensitivity to price increases

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Effective Differentiators can remain profitable even when the Five
Forces appear unattractive

Can fend off New Entrants because:

Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices
Well positioned relative to
Substitutes because:
Bargaining
* Brand loyalty tends to Power of
reduce new product trial Suppliers
and brand switching
Can mitigate Buyer Power
because well differentiated
Threat of products reduce customer
Substitute sensitivity to price increases
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Products
Effective Differentiators can remain profitable even when the Five
Forces appear unattractive

Can fend off New Entrants because:

Threat of New products must
*
New surpass proven products
Entrants * Or be equal to performance
at lower prices
Bargaining Can mitigate Supplier Power by:
Power of
Suppliers * Absorbing price increases dueBargaining
to
higher margins Power of
Well positioned relative to Suppliers
* Passing on higher supplier prices
Substitutes because:

because
* Brand buyers
loyalty tends to
reduce new product trial
are brand loyal
Can mitigate Buyer Power
and brand switching
Threat of because well differentiated
products reduce customer
Substitute sensitivity to price increases
Products 1-66
Effective Differentiators can remain profitable even when the Five
Forces appear unattractive

Can mitigate Supplier Power by:

Threat of Can fend off New Entrants because:
Absorbing price increases
*
due to higher margins New
*
Brand loyalty
New products must
*
Entrants overcomes much
surpass proven products
Passing on higher supplier prices
because buyers are brand loyal * Or be equal to performance
price competition
at lower prices

Bargaining Rivalry Among Bargaining

Power of Competing Firms in Power of
Buyers Industry Suppliers

Well positioned relative to

Substitutes because: Can mitigate Buyer Power
Threat of because well differentiated
* Brand loyalty tends to products reduce customer
reduce new product trial Substitute sensitivity to price increases
and brand switching Products 1-67
Major Risks of a Differentiation Business Level Strategy

•Customers may decide that the cost of “uniqueness” is too great

•Competitors may learn how to imitate Value Chain

•The means of uniqueness may no longer be valued by customers

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 Generic Business Level Strategies

Source of Competitive Advantage

Cost Uniqueness

Broad Cost
Cost Differentiation
Target Leadership
Market Leadership
Breadth of
Competitive
Scope Focused
Narrow Focused Low Cost Differentiation
Target
Market

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 Focused Business Level Strategies
Focused Business Level Strategies involve the same basic approach as Broad Market
Strategies.

However, opportunities may exist because:

•Large firms may overlook small niches

•Firm may lack resources to compete industry-wide

•May be able to serve a narrow market segment more effectively than

Industry wide competitors

•Focus can allow you to direct resources to certain value chain activities
to build competitive advantage

•May be able to retrofit old factories to keep costs down

•Minimize R&D costs by copying innovators

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Major Risks Involved With a Focused Differentiation Business Level Strategy

•Firm may be “outfocused” by competitors

•Large competitor may set its sights on your niche market

•Preferences of niche market may change to match those of broad market

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Integrated Low Cost/Differentiation Strategy

Firms using an Integrated Strategy may:

•Adapt more quickly

•Learn new skills and technologies

•Utilize Flexible Manufacturing Systems to create differentiated

products at low costs

•Leverage core competencies through Information Networks

across multiple business units

•Utilize Total Quality Management (TQM) to create high quality

differentiated products which simultaneously driving down costs

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 Strategic Management Questions

1. Why has strategic management become so important to

today’s organizations?
2. How does strategic management typically evolve in an
organization?
3. In what ways could a typical organization’s strategic
management process be improved ?
4. How are strategic decisions different from other kinds of
decisions?
5. When is the planning mode of strategic decision making
superior to the entrepreneurial and adaptive modes?
6. What are common differences between functional and
strategic actions and decisions?

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