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
brain storming. 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 an 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 in the
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 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 environn
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 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 factors 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 over time 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 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 product 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 contented
4. Keeping simple operations
UNIVERSAL BUSINESS LEVEL STRATEGIES

COST LEADERSHIP STRATEGY

This level strategy focuses on the delivery of products to consumer 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, handling cost as materials could be delivered
direct to the production line in time for production. On the other hand, it will
reduce ma damage and obsolescence as changes in material requirements could be
programmed based on new product specifications which could monitored with
cooperative supplier relationships.

e Development of alternative substitute

The technical competence that was developed by the suppliers 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

Any strategy implemented is not risk-free as competitors are keen enough
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 customers 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 firms
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 a
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 develop par
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 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 prodi,
with differentiated value from that of the competitors. Brand loyal purchas
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 I 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 imag that
developed the winning formula. San Miguel beer dominates consumen 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

It is the tendency that the firm's means of differentiation may cease to
provide value for customers are willing to pay due to other external factors of
production. Rival’s imitation product causes customer to try new offerings
As the firms 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
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,
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 help 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 system 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.