10

Strategy Formulation at Strategic

Business Unit Level

Department of Business Management

Faculty of Management Studies
Rajarata University of Sri Lanka
 ILOs Outlines
After completing this session Strategic Business Unit
you would be able to; Strategy formulation at
Understand SBU level SBU level
strategies and their role in Cost leadership
gaining competitive Differentiation
advantages Focused differentiation
Identify suitable SBU Hybrid strategy
strategies for a selected Strategic Clock
organization Blue ocean strategy
Develop strategies to gain
and retain competitive
advantages in the industry
 Strategy formulation at Business (SBU) Level of an MBO

A strategic business unit is a part of an organization for which

there is a distinct
Customer base, Competitors, Suppliers, External market for goods or services
that is different from another SBU
SBU,
generally engages in single business with a single or multiple products
has its own set of competitors, suppliers & buyers
operate as an independent profit unit or a investment center
has an independent management and strategy formulation
SBU
Decentralize initiatives
Allow corporation to diversify business strategies
Encourage accountability
SBU can be a Subsidiary company or a Major product division of a multi-business
organization
 Business-level strategy
A business-level strategy is an integrated set of commitments
and actions designed to provide value to customers and gain a
competitive advantage by utilizing core competencies in
specific markets

Business level strategies focus on enhancing competitive

position by delivering customer value and gain & retaining
competitive advantage

Can be identified based on

Competitive advantages (......................................................................)
Competitive scope (..............................................................................)
 Cost Leadership
Cost Leadership: Organizations compete based on price
Aim to be the lowest cost producer and distributor within their industry and try to
drive cost down for all production
More emphasis on operational efficiency and effectiveness and productivity
Price is based on internal efficiency
chooses a low level of product differentiation
Ignores the different market segments
Engages in mass marketing and mass production
Development core competencies in manufacturing and materials management
Effective
1. ...........................................
2. ...........................................
3. ...........................................
4. ...........................................
5. ...........................................
 Cost Leadership

Cost leadership strategy requires cost saving actions

Perform value chain activities more efficiently than rivals
Revamp firm’s overall value chain to eliminate waste and delays
Building efficient facilities (Infrastructure)
Tightly controlling production costs and overhead
Minimizing costs of sales
Building efficient manufacturing facilities
Monitoring costs of activities
Simplifying production processes
Risk of the cost leadership
There can only be one cost leader
Technological change might eliminate cost advantage
Efficiency focus may create blind spots: customer preferences
 Differentiation Strategy
Differentiation means providing something unique that is valuable to
buyer beyond simply offering a low price (Porter, 2000).
Here value is provided to customers through unique features and
characteristics of an organization's products.
The differentiator chooses a high level of product differentiation
Development of core competencies in research and development
This is done through
Quality (Chinese Vs Branded)
Features (Normal and Smart)
Customer service (Sampath bank vs People’s Bank)
Product innovation (Apple/ Sony)
Technology (Apple)
Image management
Promotion
 Keys to Successful Differentiation

Understanding customer needs and preferences

Commitment to customers
Knowledge of company's capabilities
Innovation (Source: Robert M. Grant, Contemporary Strategy Analysis , Basil Blackwell, 1991.)

Differentiation Strategy Effective

• There are many ways to differentiate and many buyers perceive the value of the
differences

• Buyer needs and uses are diverse (Tea)

• Few rival firms are following differentiation approach

 Focus strategy
Focus on particular needs of a limited customer group/or a unique
market segment
Creates a very unique products at a very low or high premium price
Focuser is very concern about the unique customer requirement of
its niche market
Eg. BMW Vehicles, Rolex Watches, Sampath Credit Card, Farley's Rusk Biscuits,
Sustagen, Odel.
Focused Strategy Effective when
Market niche is unique, profitable, growing and attractive
Industry leaders do not consider the niche as crucial
Firm lacks resources to compete in the broader market
The industry has many different niches and segments
 Focus strategy
Focused Low Cost- Organizations not only compete on price, but
also select a small segment of the market to provide goods and
services to.
MAS ladies ware
Teen girls
Gitz
Hutch/ Etisalat data sim
Mobitel university package

Focused Differentiation - Organizations not only compete based on

differentiation, but also select a small segment of market to provide
goods and services.
BMW, Benz
Senior citizen account
Children’s saving accounts
 Major Risks of Focused Strategies
Firm may be “out focused” by competitors
Large competitor may set its sights on your niche market
Preferences of niche market may change to time to time

Integrated Cost Leadership/Differentiation

Flexible manufacturing technologies allow firms to pursue a differentiation at a low
cost
QC, JIT, TQM help to reduce cost and increase the quality of the product
simultaneously.
Low price with somewhat highly differentiated features
More value for the money
Often called best-cost strategy
Examples: Toyota
 Strategy Clock

Bowman’s strategy clock is a diagrammatic representation

of relationship between customer value and prices

Developed by Cliff Bowman David Faulkner, in which put

Porter's three competitive strategies into eight and explains
how cost and perceived value combinations could be
effectively adopted in different time periods and
competitive situations for strategic success
 No Frills
Combines a low price with low perceived benefits and a focus on
a price-sensitive market segment

No frills effective when

Commodity markets. In this markets customers do not value
differences of product. Agriculture product
Price become key competitive issue
Price sensitive customer
Buyers have high power
Small market share
Products are competing on price basis
 low-price strategy

low-price strategy, seeks to achieve a lower price than

competitors while maintaining similar perceived product benefits to
those offered by competitors
Low price strategy effective
Economic of scale exist
This can lead to an inability to reinvest to develop product or
service
In long run, a low-price strategy cannot be pursued without a low-
cost base
key challenge is how costs can be reduced then low-price strategy
might give sustainable advantage.
 Differentiate effective
Differentiation strategy focus of providing products that offer
different benefits from those of competitors and that are widely
valued by buyers.
The aim is to achieve competitive advantage by offering better
products or services at the same price or enhancing margins by
pricing slightly higher

Differentiated strategy is effective

Identify and understand the strategic customer
Identify key competitors
Difficulty of imitation
Vulnerability to price-based competition
 Hybrid strategy effective

A hybrid strategy seeks simultaneously to achieve

differentiation and low price relative to competitors

Success depends on the ability to deliver enhanced benefits

to customers together with low prices & differentiation

High capability and core competencies

If firm can identify and focus on a market segment that is
unattractive to competitors
 Focus differentiation effective
Focused differentiation strategy provides high perceived
product/service benefits, typically justifying a substantial price
premium, usually to a selected market segment (or niche)

Effective
Tensions between a focus strategy and other strategies
Possible conflict with stakeholder expectations
Market changes may erode differences between segments