[Solution] Business-Level Strategy Formulation
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Author: Sarah Bennett
Managers often use Porter's generic strategies, the Miles and Snow typology, or the product life cycle as a framework for formulating business-level strategies.
Porter's Generic Strategies
Michael Porter states that at the business level, organizations may pursue a differentiation, overall cost leadership, or focus strategy. Each is applicable to a wide range of competitive situations.
- With a differentiation strategy, an organization makes products or services of high quality to distinguish them from those of its competitors. Customers are willing to pay more for these products/services. Advertising that highlights features of a product/service is aimed at creating a perception of high quality, and thus differentiation, among consumers.
- An organization that pursues an overall cost leadership strategy seeks to reduce costs so it can charge lower prices than its competitors and still make a profit. Advertising that highlights low prices is communicating this strategy to consumers.
- If an organization adopts a focus strategy, it concentrates on a particular region, product, or customer group. Within that area, the organization may pursue either a differentiation strategy or an overall cost leadership strategy.
Porter's Generic Strategies
Differentiation
- Create unique, high-quality products
- Command premium prices
- Build brand loyalty
Cost Leadership
- Minimize production costs
- Achieve economies of scale
- Offer competitive prices
Focus
Focus Differentiation:
Unique products for specific market segment
Focus Cost Leadership:
Low-cost products for specific market segment
The Miles and Snow Typology
The Miles and Snow typology classifies business strategies into four types:
- Prospector strategy: Taking risks and innovating for high growth
- Defender strategy: Maintaining current profitability and market position
- Analyzer strategy: Balancing innovation and stability across different business units
- Reactor strategy: Responding to changes as they occur without a coherent plan
The Product Life Cycle Model
The product life cycle model suggests that products go through distinct stages, each requiring different strategic approaches:
- Introduction: Initial product launch and market entry
- Growth: Increasing demand and expanding production
- Maturity: Stable demand and increased competition
- Decline: Decreasing demand and market consolidation
Select the correct response for each of the following questions.
If an organization is following Porter's overall cost leadership strategy, what should its managers decide to do?
- Make no-frills products at low cost and advertise low prices.
- Determine what a subset of customers desires and tailor a product to them.
- Make products with desirable features and advertise these features.
View Explanation
An organization that follows an overall cost leadership strategy offers products or services that it can make at low cost and then sell at a low price. Managers should determine the minimal product/service that will meet customers' needs and how to produce it as efficiently as possible. Then they should promote the low price in advertising.
The managers of a firm decide the best course of action is to ensure the company can maintain its moderate rate of growth. In terms of the Miles and Snow typology, which strategy are these managers pursuing?
- Analyze strategy
- Defender strategy
- Prospector strategy
- Reactor strategy
View Explanation
Managers using the defender strategy seek to maintain current profitability by investing in existing products or services, improving their performance where possible and cutting costs.
A firm using the prospector strategy takes risks and innovates in the hopes of seeing high growth. With the analyzer strategy, managers adopt a high-risk, innovative (prospector) approach to some businesses and an emphasis on cost cutting and incremental improvement (defender) to other businesses. The reactor strategy is not very strategic: managers just react to changes in the environment as seems best in the moment.
The table lists features of several stages of the product life cycle. For each row, select the stage that is described.
With competitors entering the market, managers may adopt a differentiation strategy to keep a competitive advantage.
Managers seek out other business opportunities that offer greater growth potential.
Managers focus on increasing the organization's output without sacrificing quality.
View Explanation
When an organization introduces a new product or service and it is successful, demand begins to grow. Managers must increase production while maintaining quality. They also need to hire more employees and manage inventory and cash flow, as they need to purchase more supplies even as they sell more.
When an organization introduces a new product or service that has established itself as successful, other organizations see an opportunity to make profits and enter the market. Managers need to maintain a competitive advantage by satisfying customers with quality and a reliable supply and may also add features to their product/service to distinguish it from the competition.
At a certain point, demand for a product or service and for competitors' offerings reaches equilibrium and levels off; no longer seeing growth opportunities, new competitors stop entering the market. This is the maturity stage. If managers want to see high profits, they need to cut costs, and they may also seek out new markets with more growth potential.
After periods of growth and maturity, a product typically enters the decline stage, in which the overall size of the market shrinks. Organizations that can maintain demand for their particular product or service, because its features stand out as desirable, can continue to do well even as competitors fail. Another option is to cease operations and invest in other businesses instead.
