BUSINESS-LEVEL STRATEGY
Assignment requirement:
You must be read 2 readings (http://www.smartcompany.com.au/leadership/45525-how-brian-shanahan- created-temple-webster-a-28-million-online-destination-for-homewares.html and http://www.brw.com.au/p/entrepreneurs/temple_furniture_smarts_media_onlinline_VFqE8P1qQoAhMfJJqUhuuJ ) and only use this company (Temple & Webster), and then must be write following the below form.
According to this table. You can see there are 6 part:
1 Chapter 1introduction: 200 words, it should be including the strategic issues and challenges it faces, and statement.Required Reading:
Hanson et al Chapter 1 and pages 416 – 418.
Recommended Reading:
Porter, M. 1996 What is Strategy, Harvard Business Review, Nov-Dec., pp.1-20. (Moodle) Bart, C.K., Bontis, N. &Taggar, S. 2001. A model of the impact of mission statements on
firm performance, Management Decision, vol. 39, no. 1, pp. 19-35.?Davies, W. 2000. Understanding Strategy, Strategy & Leadership, vol. 28, no. 5, pp. 25-
30.?Frery, F. 2006 The Fundamental Dimensions of Strategy, MIT Sloan Management
Review, 48(1): 71-5.?Hitt, M., Boyd, B. & Li, D. 2004. The State of Strategic Management Research and a
Vision for the Future, Research Methodology in Strategy and Management, 1: 1-31. Slesky, J., Goes, J. &Baburoglu, E. 2007. Contrasting Perspectives of Strategy Making,
Organisation Studies, 28(1): 71-94.?Suddaby, R. & Greenwood 2005. Rhetorical Strategies of Legitimacy, Administrative
Science Quarterly, 50: 35-67.?Hambrick& Fredrickson, 2001. Are You Sure You Have a Strategy? Academy of
Management Executive, November.
2 Chapter 2 External analyses: the main issues: 50 words. Industry analysis porter’s 5 forces: 250 words. Conclusions and insights opportunities and threat, vision, mission and values: 150 words.
Required Reading:
Hanson et al Chapter 2
Recommended Reading:
Hambrick, D. & Fredrickson, J. 2005. Are You Sure You Have a Strategy?,Academy of Management Executive, 19 (4): 51-62.
Hamel, G. (1996) ‘Strategy as Revolution’, HBR (July-August)?Hamel, G. and Prahalad, C.K. 1989, ‘Strategic Intent’, Harvard Business Review, vol. 67,
no. 3, p. 63.
Mintzberg, H. 1987. Crafting Strategy, Harvard Business Review [HBR] (July/August): 66- 75 (reprinted in C. A. Montgomery & M. Porter (Ed.) Strategy, Harvard Business School Press.
Mintzberg, H. 1996, Five Ps for Strategy, in The Strategy Process: Concepts, Contexts, Cases, H. Mintzberg, and J. B. Quinn, eds., Prentice Hall: Upper Saddle River, NJ, , pp. 12-19.
Porter, M. E. 2008. The five competitive forces that shape strategy. Harvard Business Review (January): 78-93.
Ford, J. A., Steen, J. &Verreynne, M. 2014. How environmental regulations affect innovation in the Australian oil and gas industry: going beyond the Porter hypothesis. Journal of Cleaner Production.
3 Chapter 3 Internal analysis: resource model and associated concepts, and strengths and weaknesses: 450 words
Required Reading:
Hanson et al Chapter 3
Recommended Reading:
Hamel, G. &Prahalad, C.K., 1990. The Core Competence of the Corporation, Harvard Business Review, 68 (3):79-91
Bradfield, R. & van der Heijden, K. 2006. The Role of Scenario Planning in Exploring the Environment in View of the Limitations of PEST and its Derivatives, International Studies of Management and Organisation, 36(3): 50-76.
Lei, D. & Slocum, J. 2005. Strategic and Organisational Requirements for Competitive Advantage, Academy of Management Executive, 19(1): 131-45.
Wang, C.L. & Ahmed, P.K. 2007. Dynamic Capabilities, International Journal of Management Review, 9(1): 31-52.
4 Chapter 4 business level strategies: 450 words
Required Reading:
Hanson et al Chapter 4
Recommended Reading:
Kumar, N. 2006. Strategies to Fight Low Cost Rivals, Harvard Business Review, 84(12): 104-13.
Wan, W.P. &Hoskisson, R.E. 2003. Home Country Environments, Corporate Diversity Strategies and Firm Performance, Academy of Management Journal, 46(1): 27-45.
Sinfield, J. V., E. Calder, B. McConnell and S. Colson. 2012. How to identify new business models. MIT Sloan Management Review (Winter): 85-90.
Zook, C. & J. Allen. 2011. The great repeatable business model: Leveraging a simple formula allows corporations to create new and more-lasting differentiation. Harvard Business Review (November): 106-114.
Gavetti and Rivkin, 2005 How Strategists Really Think, Harvard Business Review, April, pp. 54-63.
Gutterman A.S. 2011. Business Level Strategy (see Moodle). See end of chapter references in Hanson et al P128-130.
5 Chapter 5 recommendation (competitive advantage): 200 words
Required Reading:
Hanson et al Chapter 6
Recommended Reading:
Chakrabarti, A., Singh, K. & Mahmood, I., 2007. Diversification and Performance, Strategic Management Journal, 28: 101-20.
Hamel, G. &Prahalad, C.K., 1990. The Core Competence of the Corporation, Harvard Business Review, 68 (3):79-91
Klein, P.G. & Lien, L.B. 2009. Diversification, Industry Structure and Firm Strategy: An Organizational Economic Perspective, Advances in Strategic Management, Vol 26, 289- 312. (See Moodle)
O’Reilly and Tushman, 2004. The Ambidextrous Organization, Harvard Business Review, April, pp.74-81.
6 conclusion: 150 words
before doing this assignment. Please read the powerpoint and the text book first. Thank you very much.
Topic and question:
Topic: Case Study Analysis: Temple & Webster’s External Environment, Core Competencies and Strategic Choices
Question: First, using the internet and business related literature, research the company, Temple & Webster, an Australian $28 million online destination for homewares. You could begin your search with, http://www.smartcompany.com.au/leadership/45525-how-brian-shanahan- created-temple-webster-a-28-million-online-destination-for-homewares.html
and
http://www.brw.com.au/p/entrepreneurs/temple_furniture_smarts_media_onlinline_VFqE8P1qQoAhMfJJqUhuuJ
Second, by way of a formal introduction to your formal academic essay (ie not a business report), provide a brief synopsis of the company and the strategic issues and challenges it faces.
Third, in the body of your essay undertake the following analyses:
1. Temple & Webster’s general external environment. Focus on the most salient elements applicable to Temple & Webster (allocate your words according to the marking criteria). ?
2. An industry analysis for Temple & Webster. Remember to draw some conclusions or insights about T&W’s external environment and hence its opportunities and threats. For example, what are the industry structure and dynamics? What are the industry trends and the implications of those trends? ?
3. An internal organisation analysis for Temple & Webster. Again draw insights about its resources, capabilities, core competencies and hence competitive strengths and weaknesses. Also consider the implications for T&W’s vision, mission and values. ?
4. Identify, discuss and evaluate the business level strategies used by Temple & Webster to compete in the online homewares industry. Consider the risks and benefits associated with those strategies (eg against the forces of competition and why the company has been so successful to date). ?
Note: in undertaking the above analyses be sure to demonstrate your knowledge and understanding of the relevant core strategic management concepts and theories, as well as your ability to apply them meaningfully to the business case of Temple & Webster. This requires that you undertake a solid literature review and use theory to inform practice and strategy. Guard carefully against undocumented assertions. Be sure to fully reference your work (in-text and end reference list).
Fourth, assume you are a strategic adviser to the owners of Temple & Webster. In light of the issues you identified in the introduction and the analyses you have undertaken, what recommendations would you make to Temple & Webster with regard to developing the company’s competitive advantage for above average returns over the next 5 to 10 years?
Finally, what conclusions can you draw with regard to the relevance of strategic management theory to practice?
Note: You will need more than two (or three) drafts in order to achieve the clarity, consistency, and structure necessary for a graduate level analytical essay. Do not use dot or bullet points. Do not use direct quotes. Be sure to start your essay early and allow time to redraft your essay before its final submission. Your essay must not read like a series of unrelated short answer questions.
Key points to observe
1. The essay is to be typewritten or word processed. ?Typed essays demonstrate a commitment to academic standards. ?
2. Type on one side of the page. ?
3. Leave a generous margin on the left hand side of the page. ?
4. Always use double spacing. ?
5. Aim for a simple, clear and direct writing style.
a) Use one point per sentence. ?
b) Complete sentences should always be used. ?
c) Each paragraph should cover only one main idea or a set of closely connected ideas. ?
d) Headings and sub-headings can be used to make the underlying structure of the analysis clearer. ?
e) A “chatty” or “journalistic” style should be avoided. The first person (I, we) should be avoided in favour of an impersonal style (the evidence suggests that…) ?
f) Spelling, grammar and other elements of expression will be considered in the assessment. ?
6. Avoid many of the problems of poor presentation by drawing up a plan and preparing one or more preliminary drafts before writing the final version of the report. Proof read your final typed version. ?
7. Use gender neutral language. This is most easily achieved by using the plural form, for example, using “they” instead of “he”. Thus, “A worker faced by new technology may feel that his skills are being devalued” can be re-stated as, “Workers faced by new technology may feel their skills are being devalued.” ?
8. Appendices to the report should contain any additional information which you regard as important (e.g. graphs, tables, questionnaires). Appendices should be referred to in the text and should be numbered and sequenced in the same order as they appear in the text. ?
9. Pages should be numbered and the entire report securely stapled. Plastic covers and the like are cumbersome and unnecessary. ?
10. All sources of information and ideas are to be acknowledged. References in the report should be cited by author and date of publication. ?Example ?Beauchamp and Bowie (2004) suggest …….?OR?It has been suggested (Beauchamp & Bowie, 2004) that …… ?
11. A reference list must be included on a separate page at the conclusion of your essay. Present the list of references in alphabetical order. In the list of references presented at the end of the essay, cite journal articles and books in the manner of the sample references given below. ?In your reference list, name only those authors that have been referred to in the essay. Do not list any additional reading whose author you have not named in the essay. ?Failure to cite your sources in the body of your essay, along with the absence of an end reference list, will normally lead to a failed grade for your assignment. ?
1
BUSINESS-LEVEL STRATEGY
By Alan S. Gutterman1
Abstract
Growth is a key goal and objective for emerging companies and management must carefully determine the best way to combine the core competencies within a firm’s functional departments to provide the firm with the best opportunity for achieving and sustaining a competitive advantage in its chosen environment. This report focuses on the process of setting business level-strategy, which includes (1) selecting the domain(s) in which the firm will be competing for scarce resources (e.g., capital, personnel, technology, inputs and customers) and (2) positioning the firm in each chosen domain so that its function-based core competencies are most effectively leveraged to establish a competitive advantage. The overall goal of business-level strategy is to protect the firm’s position in its current domain and, if possible, enlarge the domain in which the firm can operate with a competitive advantage.
I. Overview
Senior executives and managers involved in the development and implementation of business-level strategies are tasked with identifying the core competencies within the various functional departments of the company and combining them in a way that provides the company with the best opportunity for achieving and sustaining a competitive advantage in its chosen environment. The key choices that must be made when setting business-level strategy include: (1) selecting the domain(s) in which the company will be competing for scarce resources (e.g., capital, personnel, technology, inputs and customers) and (2) positioning the company in each chosen domain so that its function-based core competencies are most effectively leveraged to establish a competitive advantage. The overall goal of business-level strategy is to protect the company’s position in its current domain and, if possible, enlarge the domain in which the company can operate with a competitive advantage. The tools available to business-level strategists are created at the functional level and may include core competencies in one or more key functional areas such as manufacturing, HR, materials management, sales and marketing and/or R&D.2
1 The material in this report will appear in Organizational Management and Administration: A Guide for Managers and Professionals by Dr. Alan S. Gutterman and is presented with permission of Thomson Reuters/West. Copyright 2011 Thomson Reuters/West. For more information or to order call 1-800-762-5272. Dr. Gutterman is the Director of the Center for Management of Emerging Companies [www.managingemergingcompanies.org].
2 G. Jones, Organizational theory, design and change (5th Ed.) (Upper Saddle River, N.J.: Pearson/Prentice Hall, 2007). See also M.E. Porter, Competitive Strategy (New York: The Free Press, 1980), Chapter 2.
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II. Steps for Creation of the Business-Level Strategy
As discussed above, companies can create a core competency at the functional level either by reducing the costs of performing the value-creation activities that occur within the function (“low cost advantage”) or performing the value-creation activities that occur within the function to differentiate its products from those offered by competitors in a way that customers perceive as having value (“differentiation advantage”). Creation of a business-level strategy builds on functional-level strategies and involves two steps: (1) selecting the domain(s) in which the company will compete, a decision that should be based on where the company’s core competencies can be best leveraged; and (2) for each domain that is selected, deciding whether to compete using a low cost strategy, a differentiation strategy, or both. If a company has developed a core competency in low cost production of its products (i.e., a low cost advantage) it can adopt a “low-cost business-level strategy” based on selling low priced products to all of the target customers in the domain. The initial strategies deployed by Dell Computer are an example of attempting to use a low cost advantage to capture a significant share of a broadly defined market. On the other hand, if there are target customers within the domain that are willing to pay higher or premium prices the company may use a “differentiation business-level strategy” that emphasizes product quality, customer services, image of prestige and other features that distinguish the company’s products from competitors.3 This is the path chosen by Starbucks when it entered the market and transformed expectations of consumer regarding their morning cup of coffee. It is also possible, albeit difficult, for a company to use both strategies simultaneously and offer differentiated goods and services produced at lower costs due to the innovative use of technology and business processes such as supply chain management.4
In addition to balancing low cost and differentiation advantages, senior management must also decide whether to serve the entire market or focus company efforts on selected segments of a larger market. If a focused approach is used the company can either attack the segment as the “lowest cost” competitor or alternatively can seek to compete in that market on the basis of offering clearly differentiated products or services that will be valued by customers in that segment. In either case, the company that adopts this so-called “focus strategy” has made a conscious decision to focus all of its available resources on one specific segment and seek to become a “specialist” in identifying and serving the needs of customers in the chosen segment. One example of this approach would be the way that Kentucky Fried Chicken decided to specialize in chicken rather than other areas of the broader fast food market, an example of what is called “focused low-cost leadership”. Similarly, Rolls Royce made a conscience choice to limits its
3 Examples of various differentiation strategies include Mercedes (exceptional quality and image of prestige or exclusivity) and IBM (customer service).
4 Id. at 216. See also M.E. Porter, Competitive Strategy (New York: The Free Press, 1980), Chapter 2.
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activities within the automobile manufacturing market to customers in the high price segment, an example of “focused differentiation”.5
Two companies may be in the same broadly defined industry, such as retail clothing; however, they may opt to compete in different domains which are defined by specific target customer groups. For example, Target produces and sells clothing in its retail stores with an eye toward appealing to customers looking for modestly priced items of predictable quality, which means that Target has selected a low-cost business-level strategy that can be supported by Target’s functional core competencies in low cost production. On the other hand, a high-end clothing retailer such as Nordstrom has traditionally focused on customers willing and able to pay premium prices and has been successful with this differentiation business-level strategy because it has been able to forge relationships with exclusive clothes designers that allow it to offer items with differentiated appeal.6
McDonald’s is an example of that rare company that has successfully executed a combined differentiated and low-cost business-level strategy in its chosen domain—the fast food industry. Using its functional core competencies in marketing McDonald’s has had a long-standing practice of creating and disseminating sophisticated advertising and marketing messages that have established the company as a unique brand name in the industry and successfully differentiated it from its competitors. At the same time McDonald’s has developed legendary core competencies in supply chain management, including manufacturing and distribution, to carefully control its costs. For example, McDonald’s has entered into a number of strategic alliances with outside parties based on long-term contracts that ensure availability of food items and the supplies and furnishings necessary to operate the extensive network of McDonald’s outlets around the world. In addition, in some cases McDonald’s actually owns the sources of its inputs, such as herds of cattle in Brazil and other countries. The execution of each strategy is tightly and carefully managed through a rigorous standardization process applied throughout the company’s franchise system that allows the company to control the content and quality of the experience that customers have whenever they visit a McDonald’s outlet, regardless of its location.7
Amazon is another example of a company that used its core competency in new information technology to successfully launch a combined differentiated and low-cost business level strategy that has upset the dual competitive environment that had co-existed before Amazon entered the retail bookselling domain. Historically there were two types of business-level strategies for attracting the interest of customers interested in
5 Id. at 217. Other examples of focused low-cost leadership and focused differentiation include Enterprise Rent-a-Car and Edward Jones Investments, respectively.
6 Id. at 216.
7 Id. at 216. See also R.E. White, “Generic Business Strategies, Organizational Context and Performance: An Investigation,” Strategic Management Journal, 217-231; and G.R. Jones and J.E. Butler, “Costs, Revenue, and Business-Level Strategy,” Academy of Management Review, 13 (1988), 202-213.
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purchasing books—the large book chains, such as Barnes & Noble, pursued a low-cost strategy to negotiate substantial discounts with publishers based on the volume of purchases and passed the savings along to customers in the form of lower prices available at their conveniently located outlets in large shopping malls; and independent bookstores, large and small, and smaller specialized stores, all of which competed through a differentiated strategy based on offering selections not readily available through the mega-stores and providing patrons with personalized service that created a strong sense of customer loyalty. Amazon’s strategy of selling books over the Internet simultaneously created a differentiated and low-cost competitive advantage that has significantly challenged both the large book chains and the independents. From the perspective of a differentiation strategy Amazon’s online catalog of literally every available book in the English language provided choices for customers that could not be matched by even the most specialized book store. In addition, Amazon used its elaborate and innovative IT structure to dramatically reduce the costs associated with procurement, marketing and distribution of books and created opportunities for customers to obtain the same discounted pricing offered by large book chains along with the convenience of shopping from their home or office with prompt delivery.8
III. Role of Structure in Business-Level Strategy
The ability of a company to create value with its business-level strategy depends on how well senior management is able to combine its functional-based core competencies. A strong set of skills and talents in R&D will be of limited value unless and until the company is able to establish a structure, processes and supporting culture that facilitates coordination between R&D and the members of marketing function who are in touch with customer needs and able to provide R&D with the information necessary to develop new products that will have be perceived as valuable by customers. Obviously the combination of core competencies depends in large part on the choices that are made with regard to design of the organizational structure at the business level and those choices will vary depending on the type of business-level strategy selected for use by the company. For example, the optimal structure for a low-cost strategy will likely be different than the structure used when the company is pursuing a differentiation strategy. In addition, a “focused” low-cost or differentiation strategy, in which the company is competing in one market segment or a very small number of market segments, will call for a different organizational structure than if the company was pursuing the same type of strategy in many different segments.9 In any event, strategic choices will lead to
8 Id. at 216-217. Initially “prompt delivery” meant same day shipment of books arranged through elaborate fulfillment arrangements; however, Amazon took things even further through the development of its e-reader, the “Kindle”, which has allowed customers to immediately access the works of their favorite authors in a convenient format suited to the increasing popularity of mobile devices.
9 Id. at 217. See also White, “Generic Business Strategies, Organizational Context and Performance”; D. Miller, “Configurations of Strategy and Structure,” Strategic Management 7 (1986), 223-249.
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different approaches with respect to specialization, centralization and formalization when creating the appropriate organizational structure.
In order for a company to successfully execute a low-cost strategy it must develop and maintain core competencies in those functional areas that make the greatest contribution to reducing the costs associated with product development and manufacturing.10 In general, the key functional areas for these types of companies are materials management and manufacturing and other functions, such as research and development and marketing, are expected to focus their specific activities on supporting the goal of lowering production costs and converting the savings into higher sales revenues. Accordingly, it is not surprising that a simple mechanistic structure is thought to be most appropriate for a company that has selected a low-cost strategy. These companies are not interested in engaging in expensive and highly risky new product development projects and usually wait until a competitor has introduced a new or improved product and a market for that product has been established. At that point the low-cost company focuses on imitating the competitor’s product and achieving a competitive advantage through lower production costs that allow the company to undercut the prices being charged by competitors who had been first in the market. Centralized decision making and standardized rules and procedures for production activities, including highly structured job roles, are the best way to achieve the necessary control over costs and there is little need for the cross-departmental integration and mutual adjustment associated with organic structures. Contingency theory also supports the notion that simple structures are generally the best choice for companies pursuing low-cost strategies in relatively stable and slowly evolving business environments.11
On the other hand, a company following a differentiation strategy is heavily reliant on its ability to design new and innovative products and get them into the marketplace before its competitors. Cost reduction is less important for this type of company and the primary goal is to complete the development and launch of new products as quickly as possible. Accordingly, the marketing function plays a key role in tracking new product ideas and new product R&D is a primary activity. In order for the differentiation strategy to be successful an organic structure is the preferred approach since it lays the necessary organizational foundation for efficient communication among all functional areas and facilitates the rapid decision making required to keep product development projects on track. For example, companies seeking differentiation need close collaboration among all of the functional groups in the value-creation process—research and development, manufacturing, marketing and sales—and this is best achieved by deploying autonomous cross-functional teams that manages all aspects of the product development and launch process free of the tall hierarchy, centralization and rigid job specifications and rules associated with a mechanistic structure. Contingency theory predicts that companies in relatively unstable and rapidly changing business environments, which require
10 Id. at 218. See also S. Kotha and D. Orne, “Generic Manufacturing Strategies: A Conceptual Synthesis,” Strategic Management Journal, 10 (1989), 211-231.
11 Id. at 218-219. See also P.R. Lawrence and J.W. Lorsch, Organizational Environment (Cambridge, MA: Harvard University Press, 1967).
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continuous development of new differentiated products, are most likely to be pushed toward complex organic organizational structures that are most conducive to coordination and integration of functional activities.12
Business-level strategy also includes decisions about which of the main types of organizational structure—functional, divisional or matrix—is best suited for successful execution of the company’s operational activities in each of its target markets. In general, three factors are most relevant to the choice that must be made by the senior management team. First, as the range of products and services offered by the company expands the organizational structure must be able to provide increasing levels of control and coordination with respect to development, production and marketing activities. Second, as the company increases its focus on specific customer segments it will need an organizational structure that can quickly and efficiently satisfy the unique requirements of each segment. Finally, if and when the pace of new product development accelerates within the domains in which the company is competing, it must establish an organizational structure that facilitates the type of cross-functional coordination necessary for continuous innovation and refreshment of the company’s product line.13
There is evidence of strong correlations between business-level strategy (i.e., low-cost or differentiated) and the optimal form of organizational structure. For example, a low-cost strategy is typically used by companies that limit the size of their product line as part of their effort to remain focused on reduction of production and marketing expenses. These companies do not have to worry about managing expansive and diverse product lines nor do they typically attempt to cater to specific customer groups. They also avoid the race to be first to market with new products and generally follow a strategy of low-price imitation once competitors have established the market that reduces the need for cross-functional coordination. Because of all these factors a low-cost business-level strategy can usually be implemented and sustained with a fairly simple functional-based organizational structure. On the other hand, a differentiated strategy calls for a large product line, customization to the needs of specific customer groups, and continuous innovation with respect to product development. As such, a company pursuing a differentiated business-level strategy will generally find it best to use a more complex organizational structure, with the type of structure being driven by the factor that is more important in the company’s specific differentiation strategy. For example, if product diversity is paramount the company should adopt a product division structure; if identifying and satisfying the needs of customer segments is most important than a market or geographic structure would serve the company best; and a matrix structure or product teams should be used when success depends primarily on rapid development and introduction of new technologies and products.14
Companies may design their organizational structure in ways that allow them to simultaneously pursue different business-level strategies based on what the managers of a
12 Id.
13 Id. at 219.
14 Id.
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particular unit believe is best suited for the products that they oversee. It is possible for a company to create two separate product divisions and have one of those divisions pursue a differentiated strategy for its products while they other manages a group of products that will compete through low-cost business-level strategies. In many cases the products that emerge from each group will be complimentary and it may be possible to bundle them when approaching potential customers. For example, a company engaged in the development and commercialization of printers for computers may create one division that follows a differentiated strategy with respect to its hardware products (i.e., the printers) and another division that pursues a low-cost strategy in developing and improving ancillary products such as toner and paper that the consumers will typically purchase to use with the printers. A similar approach may be taken by firms in the photography market by dividing activities up into two product groups—one division develops and markets digital cameras and accessories and follows a differentiated strategy to keep up with changing technology and the other division handles ancillary products such as film and paper and follows a low-cost strategy. In any event, the elements of the organizational structure within each division will differ and be customized to suit the specific business-level strategy for the division. The overriding objective is for the company to remain competitive in markets where innovation is necessary while still pursuing appropriate opportunities to reduce costs.15
While there has been much discussion of creating and using organizational structures that facilitate differentiation and/or cost reduction, managers must not forget the need to satisfy the unique requirements of key customer groups. Simply put, customers don’t care how companies organize their businesses, they simply want to know that contracts will be performed and expectations will be fulfilled. Business-level strategists need to be mindful of the drawbacks associated with the traditional practice of using function-based alignments of people and other resources (e.g., sales and marketing, procurement, or manufacturing departments). While using functions as the primary dimension when organizing a company’s business activities can be useful in achieving the benefits of task-based specialization, including the development of function-based core competencies, and can result in substantial savings through economies of scale, it also can quickly become a hindrance in developing new products and services if a functional department continues to focus on its own goals and ignores the need to cooperate with other departments in order to deliver the new product or service to customers at the lowest price and highest level of quality. For example, the procurement department may decide to purchase the raw materials for a new product from a particular vendor because the vendor provided the lowest price and this fits the specific goals and budget of that department. However, if the materials turn out to be defective that means that other departments, such as manufacturing and technical service, will be forced to “overspend” in relation to their budgets to make up for the decision made by the procurement department. At the end of the day the entire project may be delayed and over budget even though the procurement department achieved its budget goals.
15 Id. at 220.
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Companies must not forget that customers do not care whether the procurement department meets it budget objectives nor do they care whether other departments had to work overtime in order to overcome problems created by bad decisions made elsewhere in the organizational structure. Moreover, customers are not interested in paying for extra costs that arise because companies don’t push their departments to cooperate with one another. Companies need to bring all departments on to the “same page” in the development process. One way to do this is to carefully evaluate and define the “flow” for the development and commercialization of a new product or service as it moves throughout the company. The goal is to determine which functional departments will need to be involved and when decisions that will impact more than one department will need to be made. Companies should then make sure that a cross-functional team is put in place to manage the process and make decisions with an eye toward the greater good of the company rather than specific departments. As part of this process, incentives should be created for each department to cooperate and collaborate with other departments. When dealing with significant customers—customers that are expected to provide a large percentage of the projected sales in a particular market—consideration should be given to bringing them directly into the organizational design process to get their views on what the ultimate goals for both parties should be in managing the relationship.
IV. Role of Organizational Culture in Business-Level Strategy
Another challenge in establishing and executing the business-level strategy for a company is setting and disseminating values, norms and rules that are understood and followed throughout the organization so that functional resources can be combined effectively and that members of each business units can communicate and collaborate in a way that maximizes the advantages of the company’s core competencies. Organizational values can and should be developed in a manner that is consistent with the choice made between pursuing either a low-cost or a differentiation strategy. In order to be successful in executing a low-cost strategy a company should encourage the development of values that are consistent with reducing and managing expenses and the practices of managers and employees in discharging their duties should reflect those values (i.e., small offices with no frills and flying economy class when traveling on business). These values should also be part of functional-level strategies and performance measures. For example, rewards and incentives for the marketing department should be based on identifying the most cost-effective methods for attracting and maintaining customers. On the other hand, a company following a differentiation strategy needs to establish a family of core values that includes innovation, excellence and quality and cultivate a culture that celebrates risk-taking and thinking “out of the box” in a way that leads to the development of cutting-edge products that keeps the company ahead of its competitors.16
16 Id at 220. See also T.J. Peters and R.H. Waterman, Jr., In Search of Excellence (New York: Harper and Row, 1982); and E. Deal and A.A. Kennedy, Corporate Cultures (Reading, MA: Addison-Wesley, 1985).
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The cultural values that a company adopts in order to support its business-level strategy can also be further advanced through the proper design of the organizational structure of the company. For example, if the company has selected a low-cost strategy it will make sense for it to use a mechanistic organizational structure since it increases the focus of managers and employees on making existing work systems more efficient (i.e., cost-effective). A mechanistic structure relies heavily on formal rules and standard operating procedures that reduce the likelihood that employees will deviate off course and cause the company to incur unanticipated expenses. Japanese manufacturing systems are a good illustration of the perceived correlation between a mechanistic flow of work activities and reduction of costs. On the other hand, a differentiated business-level strategy generally calls for a more organic organizational structure since the company needs to create an overall environment in which innovation is more likely to occur.17
The cultural values that support the business-level strategies of two firms should also be considered before those firms decide to combine their activities in a merger or other form of acquisition. For example, at first blush a merger between a company that is known for its success in pursuing a strategy of innovative new product development and a competitor that has thrived through creation of efficient manufacturing techniques that have reduced production costs will seem like an attractive proposition. It can reasonably be expected that the combined firm would be able to tap into both differentiated and low-cost advantages by expanding its product line and innovative activities while taking advantage of economies of scale and best practices with respect to respect to manufacturing processes. However, a crucial factor in the success of such a merger will be the ability of the parties to reconcile their dominant cultural values. There is a real risk of conflict between the managers of a firm in which innovation is the driving force and their counterparts within a prospective merger partner who have been concentrating on controlling costs during the periods leading up to the transaction. If the merger does proceed the group of managers from the party that has been following a low-cost strategy may continue to push for projects that are low risk and tightly controlled from a cost perspective in order to achieve short-term profits; however, the managers from the other party who thrive on differentiation will likely agitate for high risk and relatively expensive development projects to create truly innovative projects that can only be evaluated over a much longer time horizon. If the managers from the two merger participants cannot reconcile their different cultural backgrounds the promised benefits of the merger will not be realized.18
V. Managerial Implications
It is important for every functional manager throughout the company to understand the business-level strategy that the company is pursuing (i.e., low-cost or differentiated) and the role that his or her functional unit is expected to play in contributing to the success of that particular strategy. Managers and employees in each department should not only review their intra-department activities to identify way to lower costs or differentiate
17 Id. at 221.
18 Id.
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products but should also think about how they can collaborate with other departments to achieve the applicable strategic objective. For example, the R&D and manufacturing functions can work together to create a product design that reduces production costs and thus allows the company to offer the products at prices below those charged by competitors.19
All managers should be encouraged and motivated to take an entrepreneurial approach to setting and modifying their business-level strategies by continuously seeking and evaluating promising opportunities to strengthen the company’s position in its current domains and use the company’s core competencies to successfully enter new domains. Among the possible actions that can be taken are identifying and pursuing new markets within the company’s existing organizational domain, adapting and modifying existing products so that they provide higher and different levels of value to customers, developing new products, and increasing emphasis a previously ignored or under-exploited type of business-level strategy (i.e., low-cost or differentiated). For example, a television broadcasting network generally has several business units that each focus on specific types of programming—news, documentaries, comedy and drama—and the responsibility of the managers for each of these business units is to scan their specific environments to determine the types of programming that are most likely to be perceived as valuable by their prospective customers (i.e., viewers). This information is then collected and discussed by the top management team in order to provide directions to each business unit regarding the type and amount of programming that each of one of them will be responsible for commissioning. The business-level strategy not only drives the activities of each business unit it also identifies how the network intends to create a competitive advantage through a specific mix of programming and the image that the network seeks to portray to the audience.20
Since the success of any specific business-level strategy is heavily dependent on the choices that managers make with respect to organizational structure and culture it is essential for those managers to continuously and carefully evaluate how well the structure and culture of each business unit is supporting the strategy being pursued by that unit. If problems are identified the managers must be prepared and empowered to make the necessary changes. For example, in order for a differentiated business-level strategy to succeed it may be necessary to reduce the number of hierarchical levels, disburse decision-making authority to lower levels in the business units and consciously modify the message transmitted to employees to encourage and motivate them to act in a entrepreneurial and innovative manner.21
19 Id.
20 Id. at 209.
21 Id. at 221.