By. Ms.
Janette Cruz-Carabeo
STRATEGIC
MANAGEMENT
Bataan Peninsula State University
CHAPTER 5
Strategy Formulation
Hill, Strategic Management, 13e. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or part.
LEARNING OBJECTIVES (1 of 2)
▪ Explain the difference between low-cost and
differentiation strategies
▪ Articulate how the attainment of a differentiated or low-
cost position can give a company a competitive
advantage
▪ Explain how a company executes its business-level
strategy through function-level strategies and
organizational arrangements
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publicly accessible website, in whole or part. 3
LEARNING OBJECTIVES (2 of 2)
▪ Describe what is meant by the term “value innovation”
▪ Discuss the concept of blue ocean strategy, and explain
how innovation in business-level strategy can change the
competitive game in an industry, giving the innovator a
sustained competitive advantage
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publicly accessible website, in whole or part. 4
BUSINESS-LEVEL STRATEGY
▪ Business-level strategy
▪ Overall competitive theme of a business.
▪ Way a company positions itself in the marketplace to gain a
competitive advantage.
▪ Different positioning strategies that can be used in different
industry settings.
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publicly accessible website, in whole or part. 5
LOWERING COSTS
▪ Enables a company to:
▪ gain a competitive advantage in commodity markets.
▪ undercut rivals on price.
▪ gain market share.
▪ maintain or increase profitability.
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publicly accessible website, in whole or part. 6
DIFFERENTIATION (1 of 2)
▪ Distinguishing oneself from rivals by offering something that they
find hard to match.
▪ Product differentiation is achieved through:
▪ superior reliability, functions, and features.
▪ better design, branding, point-of-sale service, after sales service, and
support.
▪ Advantages
▪ Allows a company to charge a premium price.
▪ Helps a company to grow overall demand and capture market share from its
rivals.
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publicly accessible website, in whole or part. 7
DIFFERENTIATION (2 of 2)
Figure 5.1 Options for Exploiting Differentiation
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publicly accessible website, in whole or part. 8
THE DIFFERENTIATION–LOW-COST TRADE-OFF (1 of 3)
▪ Efficiency frontier
▪ Shows all the positions a company can adopt with regard to
differentiation and low cost.
▪ Has a convex shape because of diminishing returns.
▪ Multiple positions on the differentiation-low cost
continuum are viable.
▪ Have enough demand to support an offering.
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publicly accessible website, in whole or part. 9
THE DIFFERENTIATION–LOW-COST TRADE-OFF (2 of 3)
Figure 5.2 The Differentiation–Low-Cost Trade-off
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publicly accessible website, in whole or part. 10
THE DIFFERENTIATION–LOW-COST TRADE-OFF (3 OF 3)
▪ To get to the efficiency frontier, a company must:
▪ pursue the right functional-level strategies.
▪ be properly organized.
▪ ensure its business-level strategy, functional-level strategy,
and organizational arrangement align with each other.
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publicly accessible website, in whole or part. 11
VALUE INNOVATION (1 OF 2)
▪ Value innovation - Occurs when innovations push out the
efficiency frontier in an industry, allowing for greater
value to be offered through superior differentiation at a
lower cost than was thought possible.
▪ Enables a company to outperform its rivals for a long
period of time.
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publicly accessible website, in whole or part. 12
VALUE INNOVATION (2 OF 2)
Figure 5.3 Value Innovation in the PC Industry
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publicly accessible website, in whole or part. 13
MARKET SEGMENTATION
▪ Market segmentation - Decision of a company to group
customers, based on important differences in their needs, to gain a
competitive advantage.
▪ Standardization strategy - Producing a standardized product for the
average customer, ignoring different segments.
▪ Segmentation strategy - Producing different offerings for different
segments, serving many segments or the entire market.
▪ Focus strategy - Serving a limited number of segments or just one
segment.
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publicly accessible website, in whole or part. 14
COMPARISON OF MARKET SEGMENTATION
APPROACHES
Standardization Segmentation Focus
strategy strategy strategy
▪ Associated with lower ▪ Involves customization ▪ Have a higher cost
costs than a of product offerings, structure as:
segmented strategy which drive up costs as: ▪ new product features
▪ Attempts to attain ▪ achieving economies and functions need to
economies of scale of scale is difficult. be added.
through high-volume ▪ production and ▪ attaining economies
sales delivery costs tend to of scale is difficult.
be high.
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publicly accessible website, in whole or part. 15
BUSINESS-LEVEL STRATEGIES (1 of 2)
▪ Generic business-level strategy - Gives a
company a specific form of competitive position
and advantage in relation to its rivals.
▪ Broad low-cost strategy - Lowers costs to lower prices
and still make a profit.
▪ Broad differentiation strategy - Differentiates a
company’s product in some way.
▪ Focus low-cost strategy - Targets a niche and tries to be
the low-cost player in that niche.
▪ Focus differentiation strategy - Targets a niche and
customizes offerings with features and functions.
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publicly accessible website, in whole or part. 16
BUSINESS-LEVEL STRATEGIES (2 of 2)
Figure 5.4 Generic Business-Level Strategies
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publicly accessible website, in whole or part. 17
BUSINESS-LEVEL STRATEGY, INDUSTRY, AND
COMPETITIVE ADVANTAGE
Low-cost companies Differentiated companies
▪ Charge low prices and still ▪ Withstand pricing pressure
make profits from powerful buyers and
▪ Absorb cost increases from increase prices without buyer
suppliers resistance
▪ Offer deep discount prices for ▪ Absorb price increases from
buyers suppliers and pass them to
customers without losing
market share
▪ Withstand substitute goods, as
a result of brand loyalty
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publicly accessible website, in whole or part. 18
IMPLEMENTING BUSINESS-LEVEL STRATEGY
Figure 5.5 Strategy Is Implemented Through Function and Organization
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publicly accessible website, in whole or part. 19
LOWERING COSTS THROUGH FUNCTIONAL
STRATEGY AND ORGANIZATION (1 OF 2)
▪ Achieve economies of scale and learning effects.
▪ Adopt lean production and flexible manufacturing
technologies.
▪ Implement quality improvement methodologies to
produce reliable goods.
▪ Streamline processes.
▪ Use information systems to automate business process.
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publicly accessible website, in whole or part. 20
LOWERING COSTS THROUGH FUNCTIONAL STRATEGY
AND ORGANIZATION (2 OF 2)
▪ Implement just-in-time inventory control systems.
▪ Design products with a focus on reducing costs.
▪ Increase customer retention.
▪ Ensure that the organization’s structure, systems, and
culture reward actions that lead to:
▪ higher productivity.
▪ greater efficiency.
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publicly accessible website, in whole or part. 21
DIFFERENTIATION THROUGH FUNCTIONAL-
LEVEL STRATEGY AND ORGANIZATION (1 OF 2)
▪ Customize product offering and marketing mix to different market
segments.
▪ Design product offerings that have a high perceived quality
regarding their:
▪ functions.
▪ features.
▪ performance.
▪ reliability.
▪ Handle and respond to customer queries and problems promptly.
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publicly accessible website, in whole or part. 22
DIFFERENTIATION THROUGH FUNCTIONAL-LEVEL STRATEGY
AND ORGANIZATION (2 OF 2)
▪ Focus marketing efforts on:
▪ brand building.
▪ perceived differentiation from rivals.
▪ Ensure employees act in a manner consistent with the company’s
image.
▪ Create the right organizational structure, controls, incentives, and
culture.
▪ Ensure that the control systems, incentive systems, and culture
align with the strategic thrust.
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publicly accessible website, in whole or part. 23
BLUE OCEAN STRATEGY (1 of 2)
▪ Successful companies build their competitive advantage
by redefining their product offering through value
innovation.
▪ Creating a new market space.
▪ Blue Ocean - Wide open market space where a company
can chart its own course.
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publicly accessible website, in whole or part. 24
BLUE OCEAN STRATEGY (2 of 2)
▪ To redefine its market and create a new business-level
strategy, a company must:
▪ eliminate factors that rivals take for granted, and reduce costs.
▪ reduce certain factors below industry standards, and lower costs.
▪ raise certain factors above industry standards, and increase value.
▪ create factors that rivals do not offer, and increase value.
Hill, Strategic Management, 13e. © 2020 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or part. 25