Strategy formulation at Business and Corporate Levels:

Strategy can be formulated on three different levels:

 corporate level
 business unit level
 functional or departmental level

While strategy may be about competing and surviving as a firm, one can argue that products, not corporations
compete, and products are developed by business units. The role of the corporation then is to manage its business
units and products so that each is competitive and so that each contributes to corporate purposes.

Corporate-Level
Strategy:
Corporation What business are
we in?
Business-Level
Strategy:
How do we compete?

Textile Units Chemicals Unit Auto Parts Unit

Functional-Level Strategy:
How do we support the business-
level strategy?

Finance R&D Manufacturing Marketing

Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses in which the company should
compete and with the development and coordination of that portfolio of businesses.
Corporate level strategy is concerned with:
 Reach - defining the issues that are corporate responsibilities; these might include identifying the overall goals
of the corporation, the types of businesses in which the corporation should be involved, and the way in which
businesses will be integrated and managed.
 Competitive Contact - defining where in the corporation competition is to be localized.
 Managing Activities and Business Interrelationships- Corporate strategy seeks to develop synergies by
sharing and coordinating staff and other resources across business units, investing financial resources across
business units, and using business units to complement other corporate business activities. Igor Ansoff
introduced the concept of synergy to corporate strategy.
 Management Practices - Corporations decide how business units are to be governed: through direct corporate
intervention (centralization) or through more or less autonomous government (decentralization) that relies on
persuasion and rewards.
Corporations are responsible for creating value through their businesses. They do so by managing their portfolio of
businesses, ensuring that the businesses are successful over the long-term, developing business units, and sometimes
ensuring that each business is compatible with others in the portfolio.

Directional Strategy:
– Orientation toward growth
 • Expand, cut back, status quo?
• Concentrate within current industry, diversify into other industries?
• Growth and expansion through internal development or acquisitions, mergers, or strategic
alliances?
– Three Grand Strategies:
• Growth strategies
• Stability strategies
• Retrenchment strategies

Growth Strategies:
– Most widely pursued strategies
– External mechanisms:
• Mergers
– Transaction involving two or more firms in which stock is exchanged but only one firm
survives.
• Acquisition
– Purchase of a firm that is absorbed as an operating subsidiary of the acquiring firm.
• Strategic Alliance
– Partnership of two or more firms to achieve strategically significant objectives that are
mutually beneficial.
Basic Growth Strategies:
– Concentration (Current product line in one industry)

Vertical Growth Horizontal Growth

– Vertical integration - Horizontal integration
• Full integration
• Taper integration
• Quasi-integration
– Backward integration
– Forward integration

Basic Diversification Strategies (Into other product lines in other industries)

– Concentric Diversification
– Conglomerate Diversification

Concentric: Conglomerate:
- Growth into related industry - Growth into unrelated industry
- Search for synergies - Concern with financial considerations

Stability Strategies:
 – Pause/proceed with caution
– No change
– Profit strategies

Retrenchment Strategies:
– Turnaround
– Captive Company Strategy
– Selling out
– Bankruptcy
– Liquidation

Business Unit Level Strategy

An integrated and coordinated set of commitments and actions the firm uses to gain a competitive advantage by
exploiting core competencies in specific product markets. A strategic business unit may be a division, product line, or
other profit center that can be planned independently from the other business units of the firm.
At the business unit level, the strategic issues are less about the coordination of operating units and more about
developing and sustaining a competitive advantage for the goods and services that are produced. At the business
level, the strategy formulation phase deals with:
 positioning the business against rivals
 anticipating changes in demand and technologies and adjusting the strategy to accommodate them
 influencing the nature of competition through strategic actions such as vertical integration and through
political actions such as lobbying.
Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented
at the business unit level to create a competitive advantage and defend against the adverse effects of the five forces.

The Central Role of Customers: In selecting a business-level strategy, the firm determines

1. who it will serve

2. what needs those target customers have that it will satisfy
3. how those needs will be satisfied

Managing Relationships with Customers:

- Customer relationships are strengthened by offering them superior value
- Help customers to develop a new competitive advantage
- Enhance the value of existing competitive advantages

Michael Porter’s “Generic Strategies”

• Porter’s five-forces model describes strategy as taking actions that create defendable positions in an industry.
• In general, the strategy can be offensive or defensive with respect to competitive forces.
• Defensive strategies take the structure of the industry as given, and position the company to match its strengths and
weaknesses to it.
• In contrast, offensive strategies are designed to do more than simply cope with each of the competitive forces; they
are meant to alter the underlying cause of such forces, thereby altering the competitive environment itself.

There are, of course, many specific strategies of each type (offensive or defensive), and identifying which is best depends
on the circumstances. But Porter suggests 3 broad or generic strategies for creating a defendable position in the long-run
and outperforming competitors.
1) Cost Leadership
• Cost leadership means having the lowest per-unit (i.e., average) cost in the industry – that is, lowest cost
relative to your rivals.
• This could mean having the lowest per-unit cost among rivals in highly competitive industries, in which case
returns or profits will be low but nonetheless higher than competitors
• Or, this could mean having lowest cost among a few rivals where each firm enjoys pricing power and high
profits.
• Notice that cost leadership is defined independently of market structure.

Cost leadership is a defendable strategy because:

 I. It defends the firm against powerful buyers. Buyers can drive price down only to the level of the
next most efficient producer.
II. It defends against powerful suppliers. Cost leadership provides flexibility to absorb an increase in
input costs, whereas competitors may not have this flexibility.
III. The factors that lead to cost leadership also provide entry barriers in many instances. Economies
of scale require potential rivals to enter the industry with substantial capacity to produce, and this
means the cost of entry may be prohibitive to many potential competitors.

Achieving a low cost position usually requires the following resources and skills:
I. Large up-front capital investment in new technology, which hopefully leads to large market share
in the long-run, but may lead to losses in the short-run.
II. Continued capital investment to maintain cost advantage through economies of scale and market
share.
III. Process innovation – developing cheaper ways to produce existing products.
IV. Intensive monitoring of labor, where workers frequently have an incentive-based pay structure
(i.e., a contract which includes some combination of a fixed-wage plus piece-rate pay).
V. Tight control of overhead.
2) Differentiation

• Differentiating the product offering of a firm means creating something that is perceived industry wide as being
unique.
• It is a means of creating your own market to some extent.
• There are several approaches to differentiation:
􀂾 Different design
􀂾 Brand image
􀂾 Number of features
􀂾 New technology

A differentiation strategy may mean differentiating along 2 or more of these dimensions.

Differentiation is a defendable strategy for earning above average returns because:
I. It insulates a firm from competitive rivalry by creating brand loyalty; it lowers the price elasticity
of demand by making customers less sensitive to price changes in your products.
II. Uniqueness, almost by definition, creates barriers and reduces substitutes. This leads to higher
margins, which reduces the need for a low-cost advantage.
III. Higher margins give the firm room to deal with powerful suppliers.
IV. Differentiation also mitigates buyer power since buyers now have fewer alternatives.

Achieving a successful strategy of differentiation usually requires the following:

I. Exclusivity, which unfortunately also precludes market share and low cost advantage.
II. Strong marketing skills.
III. Product innovation as opposed to process innovation.
IV. Applied R&D.
V. Customer support.
VI. Less emphasis on incentive based pay structure.

3) Focus or Niche Strategy

• Here we focus on a particular buyer group, product segment, or geographical market.

• Whereas low cost and differentiation are aimed at achieving their objectives industry wide, the focus or niche
strategy is built on serving a particular target (customer, product, or location) very well.
• Note, however, that a focus strategy means achieving either a low cost advantage or differentiation in a narrow
part of the market. For reasons discussed above, this creates a defendable position within that part of the
market.

Stuck in the Middle:

• Failure to develop a strategy in one of these 3 directions is a firm that is “stuck in the middle.”
• This means you lack the market share, capital, and overhead control to be a cost leader, and lack the industry wide
differentiation necessary to create margins which obviate the need for a low-cost position.
• Being “stuck” implies low profits as a rule: profits are bid away to compete with low cost producers; or, the firm
loses high margin business to firms who achieve better differentiation.
• Classic examples of this problem are large, international airline companies, many of which are now bankrupt.
 • Depending on a firm’s capabilities and resources, a “stuck” firm must gravitate toward either low cost (usually by
buying market share) or focus or differentiation (which may mean decreasing market share).

Risks of each Strategy:

Each generic strategy is based on erecting different kinds of defences against the competitive forces, and hence they
involve different risks.

1) Cost Leadership:

Maintaining cost leadership can be risky because:

i. Innovations nullify past inventions and learning, and hence cost leadership requires continual capital
investment to maintain cost advantage.
ii. Exclusive attention to cost can blind firms to changes in product requirements.
iii. Cost increases narrow price differentials and reduce ability to compete with competitors’ brand loyalty.

2) Differentiation:

Risks are:
i. Cost differentiation between low cost firms and differentiating firms becomes too large to hold customer
loyalty. Buyers trade-off features, service, or image for price.
ii. Buyers need for differentiation falls.
iii. Imitation decreases perceived differentiation.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and departments. The strategic issues at
the functional level are related to business processes and the value chain. Functional level strategies in marketing,
finance, operations, human resources, and R&D involve the development and coordination of resources through
which business unit level strategies can be executed efficiently and effectively.
Functional units of an organization are involved in higher level strategies by providing input into the business unit
level and corporate level strategy, such as providing information on resources and capabilities on which the higher
level strategies can be based. Once the higher-level strategy is developed, the functional units translate it into discrete
action-plans that each department or division must accomplish for the strategy to succeed.

International Business Strategies

Exporting
Licensing
Franchising
Joint Ventures
Acquisitions
Green-Field Development
Production Sharing
Turnkey Operations
BOT Concept
Management Contracts