STRATEGIC MANAGEMENT

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 objective. The strategic development
process begins with analysis of the internal and external environment. The data and information are put
in round table discussions and brainstorming. Everyone is expected to contribute their ideas and opinion
until the chosen strategy is finalized. The participative system in drawing the strategy makes people in
the organization aware of the probable actions and plans that will be agreed upon. 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. The choice is important as there exist is an
established link between the firms strategy and the long term performance goals. Strategic goals will
affect the degree of competitive advantage in the achievement of the above average return on
investments. In this process the firm identifies the type of strategy as they acquire business information
and knowledge needed to make the right choice. The external environment is saddled with opportunities
and threats and identifying them develop corporate leadership's awareness of their proposed plans and
actions.

The firm's 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 on how they intend to
compete and develop value with their stakeholders. Strategies are purposeful undertakings that precede
taking actions to which they apply, demonstrate and share understanding of the firm's strategic intent and
mission.

An effective formulated strategy marshals, integrates, and allocates the firms resources,
capabilities and core competencies so that they are properly aligned with its internal environment. It
rationalized the firm's strategic intent and mission along with the action taken to realize them. The
formulation of effective strategy encompasses many variables including markets, customers, technology,
and the worldwide economic situation as they affect business operation in general.

All the above discussions need manpower base that will be task to implement the strategic actions
which will form the foundation of success of the firm. The art of managing this important human
resources rest with corporate managers equipped with the vision for greatness and progress. To
emphasize further they need the expertise in planning, organizing, directing and controlling both the
human and material resources of the firm.

IDENTIFICATION OF CUSTOMERS
Strategic competitiveness is achieved when the firm is able to satisfy the needs and wants of the
customer by using its competencies to compete in individual products in the market. Firm's success is
founded in constantly seeking to chart new competitive space in order to serve new customers and
continuously try finding ways to serve better the existing ones. Customers are the 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. In selecting the business level strategy, it is important to consider the
following dimensions:

1. THE TARGET CUSTOMERS

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

Based on their level of competencies in the internal and external environment the firm must be able
to serve the following specific segments

The Consumer 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 life style
● 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 equipments
● Electronics and other components
● Supplies and materials

c. Geographic Distributions
● Local Market
● International or Global distribution

d. Customer Size Segments

● Number of industrial users
● Market Population distribution

The 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. Using this program allows firm to gain insights that
are needed to segment the market into specific groups with unique needs and wants.

The Generation X, those born between 1965 and 1976, has a different lifestyle and wanted
products that are promised in advertisements. As of the present, their age ranges is between 40 to 50
years old, and they are in the prime of life with sophisticated knowledge of the computer age. This
generation uses the internet as a means of knowing products and then visiting stores and comparing
prices after getting the product specifications from the web. Some of these groups are higher
professionals occupying positions in business and industries. They do not have much time to shop for
goods, using their spare time in office to look for new and innovative products.

The Generation Y, those born between 1977 to 1986, whose ages at the present date is between
30 to 40 years old, is another segment with specific characteristics that affect how firm use business
level strategies to serve their customer needs. 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.

The advent of globalization and international marketing develops a new type of market segments
that multinational firms and even small entrepreneurs have developed interest to explore. Global market
segmentation is the process of identifying specific segments or consumer groups across countries with
homogeneous groups that exhibits similar buying behavior. This could be explored by small
entrepreneurs in the Philippine setting as there are customers in the world market that need unique
products coming from our country.

2. THE CUSTOMERS NEEDS AND WANTS

The need of the customer 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. The firm must be
able to identify the particular needs or wants of the customers and develop new or innovative products.
The success of the firm's survival and profitability rests on how they constantly seek new customers and
the way they satisfy the needs of the existing clientele. Customers change preferences overtime as their
social and economic status change with the economic conditions prevailing in the society where they
belong. The higher standard of education and literacy are contributory factors in the changing customer
needs and wants.

Top level executives and line managers play critical role in recognizing and understanding the
needs of the customers. The valuable insights from field managers who are in direct contact with the
consumer and the careful analysis of the prevailing environment in terms of service, technology updates,
and distributions are factors for decision making. Innovation and adding new features 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. Customer's level of satisfaction changes overtime seeking new and better products. The new
or innovative product must be similar or more superior to the existing product in the market in order to
switch the customers' preference and gain greater market share.

Dr. Jose P. Rizal wrote the novels Noli Me Tangere and El Filibusterismo with the use of feathers
dipped in ink while in Spain. Fountain pens came into being, then used by students and executives for
decades until the various types of ball pen arrived for a more convenient use and at an affordable price
to the consumers. More students now use erasable ballpen inks for more convenient changes in the test
paper or during note taking.

Typewriters were used for decades in writing business letters for communication in both the
educational sector and in industry. The advent of more sophisticated computers replaced the once
valuable typewriter. The race now in the market is innovation and technological advancements. This is
very true in electronic communications and the car industry where firms are competing for innovative
products. High breed cars are developed for economy and pollution control with ease and convenient
driving features. It is therefore innovation and new product features that will drive firms competencies for
competitive advantage.

CUSTOMER RELATION MANAGEMENT

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. Receiving superior value enhances customers' loyalty to the firm's product and
positive relationship exists to develop profitability.

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 the customer increases due to many choices of the 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 the firm uses knowledge gained from it to improve strategy implementation
process.

TYPES OF BUSINESS LEVEL STRATEGY

Business level strategies are intended to create differences between the firm's strategic
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 firm's 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 the 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:

1. Keeping costs down

2. Focusing on customer value
3. Keeping the employees happy and
4. Keeping simple operations contented

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 analysis of the materials cost and the process of production. The primary and
support 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 are:

1. Effective Management and control of the primary activities

a. Production efficiency and materials management system

The primary activities of inbound logistics that has something 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. Some firms develop outsourcing strategy of the
materials needed in the production. 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.

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 would make the product cost competitive in the market. Research activities to create
product differentiation entail cost of technical and professional scientist that commands higher
wages and allowances to stay with the firm.

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. Many firms used the warehouse 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 an added cost reduction
strategy. It means reduced cost in the maintenance of equipment and salaries of regular sales
clerk and truck helpers. Warehousing is now the responsibility of the distributors and its delivery
to retailers, thereby creating cost reduction in outbound logistics.

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.

2. 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.

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 only 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.

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 of 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.

d. Just-In-Time materials delivery

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 Just-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 requirements could be programmed based on new product specifications which could be
monitored with cooperative supplier relationships.

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 develoment in product substitute, where the entrants of the competitor
could be difficult.

THE RISK ASSOCIATED WITH COST LEADERSHIP STRATEGY

Any strategy implemented is not risk-free as competitors are keen enough to develop new
strategies. They learn also new levels of competitive advantage as any firm does to keep afloat in
business. Cost leadership strategy is not a monopoly of the firm as innovation is everybody's business.
Nevertheless, the firm must keep on guard on the following:

1. 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.

2. 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.

3. 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.

4. 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 looking for a better bargain.

PRODUCT DIFFERENTIATION STRATEGY

Differentiation in product features and value is the firm's integrated action to produce and deliver
products or services that are acceptable to the consumer are perceived to be of higher quality than those
offered by the competitor. While cost leadership strategy focuses on typical industry customers,
differentiation strategy focuses on customers with higher perceived value than those that ordinarily exist
in the market.

Customers will be willing to pay additional premium with products they like and distinctively differ
with those present in the market and with price that is competitively affordable. Competitive affordability
reduces upward pressure on the valued customers to pay differentiated premium products and thereby
develops patronage and brand loyalty. The firm must therefore develop a thorough understanding of
what the customer wants and what level of price they are willing to pay.

Success with differentiated product strategy results when the firm consistently upgrades product
features that the customer values without significant increase in price. The firm's unique product is a
competitive advantage. The firm must produce it at the price that substantially exceeds the cost of
creating its differentiated features outperforming those of the rivals while earning above average return.

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 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.

Differentiation strategy is not as easy as most people think, as it involves rapid product innovation
and the application of technological leadership, engineering design, superior product performance,
developing features differently from those in the market. There could be limited number of ways to
reduce cost as innovation and technology updates need additional investments. It may run counter to the
cost leadership strategy but customer value is the prime consideration to satisfy.
 Differentiation and cost strategy are faced with the same forces of the external environment in the
development of competencies for earning above average return on investments. The challenge is to
identify the forces of the primary and support activities that could be linked together to form a strong
base of competitive advantage while developing product differentiation strategy without necessarily
adding substantial cost in its production.

The external environmental factors that affect differentiations;

1. Competitors 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 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 of 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

Continuous supply of quality inputs in the production of goods can assure the delivery of
differentiated products to the customers. These could be achieved with the maintenance of good
relationship with the supplier and development of strong linkages. The buying firm may invest in
higher technology as partners or eventually buy out shares to avoid competitors from
encroaching in the supply chain.

4. Imitation and product substitute

Products that developed substantial brand image in the industry are positioned effectively against
product substitutes. Customers could easily distinguish imitations from the original. It will require
new entrant substantial investment in capital and marketing resources to penetrate known brands
offering differentiated products.

RISK INVOLVED IN DIFFERENTIATION 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 firm's 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 its usability according to their needs.
There are many examples in the electronic business.

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 wide competitors. It is the firm's intention to focus on a particular segment
and concentrate their core competencies to the needs of a particular group. These groups may focus on
the health needs of industrial workers such as health plans. Example is value care and other health care
providers that are being offered to employees with participation of the company or joint undertaking of
the firm and the employees.

Some firms made special wheelchair for a particular segment of senior citizens, and those with
special disabilities. This could also be true in some baby products where firms produce specific milk
formulation depending on the age groups of children. The same is true with baby diapers that they
divided the segments into specific age groups.

The following risk factors involve:

1. The competitor may focus on a more narrow segment

2. Competitors may decide to enter the narrow market, thereby slicing the market pie.
3. Similarity in product features reduces the attractiveness of the market.

INTEGRATED COST LEADERSHIP AND DIFFERENTIATION STRATEGY

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 are integrating the cost leaderships and product
differentiation strategy are in a better position along the following areas:

1. Adapt quickly to environmental change

 2. Learn new skills and technology more quickly
3. Greater leverage against competitors in core competencies

The cost leadership strategy and differentiation uses a variety of flexible operating system to be
competitive in the market. Modern information technologies have helped make flexible manufacturing
system possible. These systems increase the flexibility of human resources, the physical assets and the
information resources that enable the firm to create differentiated products at lower cost. Flexible
manufacturing systems 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 intervention. The economies of scale are created and they can
easily switch to another product by shifting to a differentiated operation. While investments in new
technology require capital investments, the return on investments is generated as competitive advantage
is greater than its cost.

NETWORK LINKAGES AND INFORMATION SYSTEM

The development of network and linkages with suppliers, distributors and retailers and the
consumers provide another source of strategic flexibility. The stakeholders' expectation about the
company's product quality and services is developed and continuous patronage and loyalty is assured
through a network of linkages of information. Customer Relation Management (CRM) is the product of
information network and linkages that develops better understanding of customers' needs and wants.

CRM 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.

Information network are also critical to the firm that uses enterprise resource planning system as it
identifies and plan the resources needed in the production and the delivery of the products to the
intended customers. Enterprise resource planning (ERP) improves efficiency in financial planning and
data analysis as it moves across departments 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.