CHAPTER 4

STRATEGY FORMULATION AND BUSINESS LEVEL

STRATEGIC ACTION

STRATEGY FOCUS AND DEVELOPMENT

The development of strategy is the making of top executives and line managers by making
choices among alternatives that are more likely to gain the desired profit objectives. The strategic
development process begins with analysis of the internal and external environment.

• Table discussion and brainstorming- everyone

contribute ideas and opinions until chosen strategy is finalized.

1.The participative system in drawing the strategy makes people in the organization aware of the
probable actions and plans that will agreed upon.

2.Dictated strategies develop resentment which will not result in cooperative efforts for achievement.

Business level strategy is the process of deciding what industry to compete and the kind of
product and market segment that will be most attractive to the firm. Choices established link between
firm strategy and long-term performance goals.

Strategic Goals affect the degree of competitive advantage in the achievement of the above
average return on investment or ROI.

External environment is saddled with opportunities and threats and identifying them develop
corporate leadership awareness of their proposed plans and actions.

The firm specific strategy is aimed at the desired outcome in terms of market share and profit.
With the integration of their internal and external capabilities they develop theory to compete and
develop value with their stakeholders.

Effective formulated strategy marshals, integrates and allocates the firms resource, capabilities
and core competencies so that they are properly aligned with its internal environment. The formulation
of effective strategy encompasses many variables including markets, customers, technology and the
worldwide economic situation as they affect business operation in general.

Implement the strategic action which will form the foundation of success of the firm. Human
resources with corporate managers equipped with the vision for greatness and progress also they need
expertise in planning, organizing, directing, and controlling both human and material resources of the
firm.

IDENTIFICATION OF CUSTOMERS
 Strategic competitiveness achieved when firm able to satisfy the needs and wants of the
customers using competencies to compete in individual products in the market. Seeking to chart new
competitive space to serve new customers and continuously try finding ways to serve better the existing
ones.

Customers vital component in the development of new strategies and the firm must adapt
flexibility to find new markets as they serve the needs of their old customers.

Market Segmentation is the process of clustering customers into different individuals and
groups with similar needs and wants.

DIMENSIONS:

1.THE TARGET CUSTOMERS- refers to the specific segments or group of customers that the firm intends
to enter and the richness of the segments in terms of population and their capacity to buy the product.

THE CUSTOMER MARKET SEGMENTS

a. Demographic Segmentation

• Age of the target customers

• Income or capability to pay

• Gender as either male of female as they difference in wants and needs

b. Socioeconomic Segmentation

• The social class and living condition

• Stage in the family life cycle

• Employment classification

c. Geographic Segmentation

• Urban distribution

• Rural distribution networks

• National distribution networks

• International or global market

d. Psychographic Segmentation

• Population lifestyle

• Personality traits

• Social levels and educational status

e. Consumers Consumption Patterns

• Heavy consumers

• Moderate consumers

• Light users

f. Perceptual Factors Segments

• Benefit segmentation as to quality and features

• Perceptual and information linkages

THE INDUSTRIAL AND COMMERCIAL CONSUMERS

a. End-User Segments

• Construction companies and developers

• Airlines and transport Sector

b. Product Segments

• Machineries and equipment's

• Electronics and other components

• Supplies and materials

c. Geographic Distribution

• Local Market

• International or Global distribution

d. Customer Size Segments

• Number of industrial users

• Market population distribution

Increasing differentiation in market segments needs careful data analysis. Sophisticated

programs are being used to determine the market niches that identify the changing customers’ needs
and wants in order to gain the competitive advantage. Programs allow gain insights that are needed to
segment the market into specific groups with unique needs and wants.

Generation X (born between 1965 and 1976)

• Age ranges between 40-50 years old

• Different lifestyle and wanted products that are promised in advertisements.

• Prime life with sophisticated knowledge of computer age.

This generation uses internet as means of knowing product specifications from web. Some of
this groups are higher professional occupying positions in business and industries. They do not have
much time to shop for goods, using spare time in office to look for new and innovative products.

Generation Y (born between 1977 to 1986)

• Age between 30-40 years old

These groups are more mobile and adventurous and prefer to shop at stores and make choices
of the products. Some would search the web and further explore product specifications and features in
shopping malls.

Advent of Globalization and international marketing develops new type of market segments that
multinational firms even small entrepreneurs have developed interest to explore.

Global market segmentation process identifying specific segments or consumer groups across
countries with homogenous groups that exhibits similar behavior. This could be explored by small
entrepreneurs in the Philippine setting as there are customers in the world market need unique
products coming from our country.

2. THE CUSTOMERS NEEDS AND WANTS

The need of customers is to buy products that create value to them in terms of basic
requirements for survival or the creation of emotional satisfaction. Customers are looking for affordable
products in terms of cost factor or highly differentiated features with acceptable cost. Firms must be
able to identify particular needs or wants of the customers and develop new or innovative products.

The success of firm’s survival and probability rests on how they constantly seek new customers
and the way they satisfy the needs of the existing clientele.

• Change social and economic status

• Higher standard of education and literacy

Top level executives and line managers play critical role in recognizing and understanding the
needs of the customers. Field manager who are direct contact to consumer and the careful analysis of
prevailing environment in terms of service, technology updates and distributions are factors of decision
making, innovations and adding new feature will sustain continuous patronage.
3. STRATEGIES TO SATISFIES CUSTOMER NEEDS

Customer satisfaction is limitless, and the company must always seek to satisfy customer needs and
wants.

Changes: Seeking new and better products.

• New innovative product must be similar or more superior to the existing product in the market
in order to switch the customer preference and gain greater market share

Market innovation, technological advancements and new product features will drive the firm’s
competencies for competitive advantage.

CUSTOMER RELATION
Superior value is the key to effective customer relations as it strengthens the binding
attachment building customer loyalty. When other firms in creating value to its customers use products,
the patronage is developed.

Selecting the type of customers according to their needs and wants is a challenge to the firm.
Competition is not limited to the local market as globalization created many alternative products for the
customer. The power of customer increases due to many choices of products available and dominating
the market creating the challenges of superiority and price ceilings.

Another factor is that customers could get product information through the internet and could
compare product specification and features.

Customer Relation Management (CRM) software is available for firms to enhance their
customer relations program. Web-page profile is created to monitor customers through the internet,
making communication channels open to all probable consumers. A successful CRM program can be the
source of competitive advantage as he firm uses knowledge gained from it to improve strategy
implementation process.

TYPES OF S T R A T E G Y

Business level strategies are intended to create differences between the firm’s strategy
advantages relative to those present in the industry. Positioning the firm’s strategy is the process of
identifying whether to enter activities differently with competitors or performing different activities with
its rivals. The firms higher management decision could be reflective of their value chain competencies in
terms of their primary and support activities in ways that create unique value.

The unique value is delivered to the customer when the firm is able to use its competitive
advantage. The integration of its core competencies forming an activity system that develops superior fit
among its primary and support activities will be resultant dimensions. In turn, an effective activity
system helps the firm establish and exploit its strategic superior position. Favorable positioning is
important in the universal objective of the firm towards the development of sustained advantage over
its rivals.

Some simple secrets of success are:

UNIVERSAL BUSINESS LEVEL STRATEGIES

COST LEADERSHIP STRATEGY

This level strategy focuses on the delivery of products to consumers at a lower cost and
differentiation against competitors in the market/ It is quite difficult to produce products at lower cost
without careful analysts of the materials cost and the process of production. The primary support and
activities of the firm are factors that will be the focus of attention in order to reduce the inputs of
production and delivery to its target consumers.

TWO IMPORTANT COST STRATEGIES

1. Effective Management and control of the primary activities

a. Production efficiency and materials management system

b. Manpower efficiency and cost control

c. Effective delivery of products and services

d. Use of reliable middleman and distributors

e. Effective management of finances

2. Strategic Management of support activities

a. Strategic outsourcing of materials

b. Cooperative supplier relationships

c. Long term relationships with suppliers

d. Just-in-Time materials delivery

e. Development of alternative substitute

Effective Management and control of the primary activities

a. Production efficiency and materials management system

The primary activities of inbound logistics that has something to do with purchasing and delivery
of materials to the warehouse and the inventory control system applied are cost factors that could
reduce material cost handling. The efficiency of the machineries and the procedures applied in the
production of goods including quality controls are other factors that contribute additional cost to the
product.
Effective Management and control of the primary activities

b. Manpower efficiency and cost control

Manpower cost could be another factor. These include salaries, wages and benefits which are
variable cost. Salaries and allowances of executives are fixed cost and must be maintained at levels that
could make the product cost competitive in the market.

c. Effective delivery of product and services

Strategic management of the outbound logistics refers to the delivery of products direct to the
customers in the case of consumer products like milk, coffee, chocolate products, and many others.

Effective Management and control of the primary activities

Many firms used the warehouse distribution of distributors as jump off point to the customers
and developed cooperative undertakings that brought cost reduction.

d. Use of reliable middleman and distributors

San Miguel Corporation used to deliver beer and other products to retail stores but the recent
strategy is to deliver them to the warehouse of the distributors as am added cost reduction strategy. It
means reduced cost in the maintenance of equipment and salaries of regular sales clerk and truck
helpers.

Effective Management and control of the primary activities

e. Effective management of finances

The manufacturer of beer and other products are assured of payments, as distributors are
required to make bond guarantees or cash-in-bank deposits equivalent to their monthly allocations. On
the other hand, distributors are assured of the sales as they are given sole distributorship agreements in
the provincial or regional level. Competitive advantage is developed as parties undertaking dual
responsibility create return on investments.

Strategic management of support activities

a. Strategic outsourcing of materials

Strategic outsourcing of materials is one prime consideration in the development of competitive

competencies as the firm must take advantage of the raw materials available both in the local and
international market. The firm must concentrate on its core values of product research and
development as they may not have all the capabilities and technical advantage to develop added
material inputs for production.

Strategic management of support activities

b. Cooperative supplier relationships

 The development of effective outsourcing could be done with cooperative technical
undertakings of the firm and with at least two suppliers. The firm must not rely on one supplier of
material inputs as they may take advantage of the firm’s dependence on them. Developing technical
cooperative relationships with two or more suppliers means that the firm’s purchasing executives must
be able to visit and assist the suppliers in the innovation and development of materials quality while
reducing cost.

Strategic management of support activities

c. Long term relationships with suppliers

Long term relationship could be established with suppliers in terms of volume purchase which in
turn could be an added advantage due to volume discounts. Suppliers could be assured also to long-
term profitability if the firms are committed to volume orders. The economies of scale can reduce the
cost of the supplier which in turn is an added advantage to both firms.

Strategic management of support activities

d. Just-in-Time materials deliveries

Just-in-Time delivery agreements could be made possible as the supply of inputs could be
programmed according to the firm’s manufacturing schedule. The Jus-in-Time delivery system will
reduce handling cost as materials could be delivered direct to the production line in time for production.
On the other hand, it will reduce material damage and obsolescence as changes in material requirement
could be programmed based on new product specifications which could be monitored with cooperative
supplier relationships.

Strategic management of support activities

e. Development of alternative substitute

The technical competence that was developed by the supplier’s and the firm’s technical
specialist could be tasked to develop alternative and to improve materials without necessarily adding
cost or even resulting in cost reduction that could be advantageous to both firms. Both firms could
patent this development in product substitute, where the entrants of the competitor could be difficult.

THE RISK ASSOCIATED WITH COST LEADERSHIP STRATEGY

1. The presence of imitation

2. Distribution strategy and dealers’ relations
3. Obsolescence of machinery and equipment in the production of goods
4. Product differentiation and improvement in features

The obsolescence of machinery and equipment in the production of goods

The firm may have concentrated on the production of its products using the same technology.
Keeping the machineries and equipment at maximum level of usability to reduce cost on investments
and innovation may cause the rival competitors to introduce new technology. Technological
advancement in the processing of new and innovative products is a competitive advantage that must be
given focus while reducing cost of production.

Distribution strategy and dealers’ relations

Competitors have ways to penetrate the market with new strategy that could be better than
that of the firms in terms of more liberal credit, rebates and commissions. Cost of distribution is another
factor that must be looked into as competitive advantage in cost leadership strategy may reduce
customer perception in product value and price advantage.

Product differentiation and improvement in features

Customers will always be looking for new product features. The firm may have concentrated on
producing the same product overtime to reduce cost and maintain cost leadership. Product
differentiation is the vanguard of customer's long patronage as new and better products could
penetrate the market.

The presence of imitation

The rival firms may introduce imitation products with lower cost but with the same features.
Patents and innovations could easily be avoided with the development in new design and features that
could be different from the firm's original design. Most imitation products kill the original as consumers
will always be better looking for a better bargain.

PRODUCT DIFFERENTIATION STRATEGY

The differentiation strategy is a continuous process concentrating on research, development,
and inventing new features in ways that develop customer value. It seeks to be different from those
produced by rivals in the industry, in as many dimensions as possible to avoid immediate imitation. The
more the products differ from those existing in the market, the more buffered it is from the competitor's
action.

The external environmental factors that affect differentiations.

1. Competitor’s presence in the market

The firms hold on the customer's loyalty and patronage hinges on the products with differentiated
value from that of the competitors. Brand loyal purchasers increases when products are differentiated in
ways that are meaningful to the consumer and sensitivity to price difference is reduce. The strong
relationship on brand attachments insulates the customer from competitive rivalry as long it continuous
to satisfy the differential the differential needs of its group of customers.

2. The power of customer to exert pressure

Customers are the king and queen in the market. The uniqueness in differentiated goods reduces
customers' sensitivity to price increases. The uniqueness of the materials and product features develops
brand image that developed the winning formula. San Miguel beer dominates consumer patronage due
to its unique taste and its brand image. The same is true with Coke and Pepsi that still dominate the soft
drink industry worldwide.

3. The supplier' influence on quality of materials

It is the customers' perception that the brand they used to patronize has been overtaken by another
brand that offers similar features but offering lower prices. Customers learn new product specifications
and standards, and they begin to compare its usability according to their needs. There are many
examples in the electronic business.

4. The process of counterfeit products

Some small firms with less investments may develop counterfeit products that offer similar features and
design without much differences from the original. Less brand loyalist will have difficulty in determining
the original from counterfeit products.

RISK INVOLVED IN DEFFERENTATION STRATEGY

1. Customer’s perception of product features and price

It is the customer’s value analysis that the cost leadership product is excessively priced higher
than its perceived value.

The firm then becomes vulnerable to competitors that are able to offer combination of features
and price that are more consistent with their needs.

2. Consistency in providing the desired product value

It is the tendency that the firms’ means of differentiation may cease to provide value for which
the customers are willing to pay due to other external factors of production.

Rivals’ imitation product causes customer to try new offerings as the firm’s product is the same
as its competitors in terms of features and value.

3. The narrow difference in product differentiation

It is the customers’ perception that the brand they used to patronize has been overtaken by
another brand that offers similar features but offering lower prices.

Customers learn new product specifications and standards, and they begin to compare it
usability according to their needs.

4.The presence of counterfeit products

 Some small firms with less investments may develop counterfeit products that offer similar
features and design without much differences from the original.

Less brand loyalist will have difficulty in determining the original from counterfeit products.

Segmented Focus Strategy

Firms using the segmented focus strategy intend to serve a particular segment of an industry
more effectively than those industry with wide competitors. It is the firms intention to focus on a
particular segment and concentrate their core competencies to the needs of a particular group.

Examples

Some firms made special wheelchair for a particular segment of senior citizens, and those with special
disabilities.

Also in some baby products:

Firms produce specific milk formulation depending on the age group of children.

Just like with baby diapers that they divided the segments into specific age groups.

The following risk factors involve:

 The competitor may focus on a narrower segment.

 Competitors may decide to enter the narrow market, thereby slicing the market pie.
 Similarly, in product features reduces the attractiveness of the market.

COST LEADERSHIP
- A strategy where company is the most competitively price
product on the market, meaning it is the cheapest.

DIFFERENTATION STRATEGY

- An approach businesses develop by providing customers with something unique, different and distinct
from items their competitors may offer in the marketplace.

In the global market, the firm that produces the lowest cost products and with differentiation
can expect to perform well in the market. Successful firms and integrating the cost leadership and
product differentiation strategy are in a better position along the following areas:

1. Adapt quickly to environment change

2. Learn new skills and technology more quickly

3. Greater leverage against competitions in core competencies

FLEXIBLE MANUFACTURING SYSTEM (FMS)

- Increase the flexibility of human resources, the physical assets and the information resources
that enable the firm to create differentiated products at lower cost.

- Allow the company to produce variety of products in moderate, flexible quantities with
minimum of manual intervention.

- The firm that uses the Flexible Manufacturing System (FMS) develops greater competitive
advantage as it reduces material handling and establishes a greater flow of material

resources in the production line without much human

NETWORKING - is defined as the organization is working with other organizations without any formal
contracts.

LINKAGEs - are relationships between the way one value activity is performed and the cost or
performance of another.

INFORMATION SYSTEM - can reduce the number of levels in an organization by providing managers
with information to supervise larger numbers of workers and by giving lower-level employees more
decision-making authority.

CUSTOMER RELATION MANAGEMENT (CRM)

- The product of information network and linkages that develops better understanding of
customers’ needs and wants.

- Provides a 360-degree view of the total customer’s satisfaction level.

- It encompasses all contact points of all business processes including all communication sales
channels.

- It further determines the tradeoff points in customers who are willing to purchase differentiated
product features at lower cost which are vital for firm’s using the integrated cost leadership and
differentiated strategy.

ENTERPRISE RESOURCE PLANNING (ERP)

- Improves efficiency in financial planning and data analysis as it moves across department that
require immediate action.

The transfer of data facilitates improvement in operational efficiency delivering competitive

advantage for the firm. This however requires investments in improved computerized system of the
whole information network.