Strategic Planning at Business Unit Level
After the corporate plan is made, companies go for business unit-level planning. The business unit plan comes out of the corporate plan. There are some important steps involved in business unit-level strategic planning.
Deciding on the Business Mission: Each SBU operates in different market conditions. So the business mission should stem from the overall corporate mission and objective of the firm. It should essentially express why it is in the business portfolio of the company and what function the corporate expects it to play.
Table of Contents
- 1 Strategic Planning at Business Unit Level
- 2 Analyzing Industry and Competition
- 2.1 Conducting Swot (Strength, Weakness, Opportunity, and Threat) Analysis
- 2.2 External Environmental Analysis for Identifying Opportunities and Threats
- 2.3 Internal Appraisal for Strengths and Weaknesses
- 2.4 Rivalry Among Competing Sellers (Threat of Competitions)
- 2.5 The threat of New Entrants
- 2.6 Threat of Substitutes
- 2.7 Bargaining Power of Suppliers
- 2.8 Bargaining Power of Buyers
- 3 Formulating Business Strategy
- 4 Program Formulation and Implementation
- 5 Feedback and Control
- 6 Competitive Advantage
- 7 Core Competencies
When a company expects the business unit to give more market share in that particular industry segment, it should set the mission statement for the business.
Analyzing Industry and Competition
- Conducting Swot (Strength, Weakness, Opportunity, and Threat) Analysis
- External Environmental Analysis for Identifying Opportunities and Threats
- Internal Appraisal for Strengths and Weaknesses
- Rivalry Among Competing Sellers (Threat of Competitions)
- The threat of New Entrants
- Threat of Substitutes
- Bargaining Power of Suppliers
- Bargaining Power of Buyers
Conducting Swot (Strength, Weakness, Opportunity, and Threat) Analysis
The firm needs to conduct a strength, weakness, opportunity, and threat analysis for the business unit. While strengths and weakness analysis is an analysis of the internal strengths of the firm, opportunity, and threat analysis is the analysis of the external environment to identify the potential risks and returns opportunities in the business.
- An ideal business is high in major opportunities and low in major threats
- A speculative business is high in both major opportunities and threats
- A mature business is low in major opportunities and low threats
- A troubled business is low in opportunities and high in threats
External Environmental Analysis for Identifying Opportunities and Threats
The external appraisal includes all the factors outside the organization, which provide opportunities or pose threats to the organization. The external appraisal involves scanning the external environment. External analysis helps in analyzing and monitoring macro-environmental factors and significant micro-environmental or competitive environment-related factors.
The marketing intelligence unit provides relevant information on macro and micro environmental trends. For each corresponding trend, managers need to identify threats and opportunities for the firm.
A market opportunity analysis helps in identifying a potential need and interest of buyers, which is currently not being met and has the potential for giving a higher profit flow to the firm. Market opportunity analysis helps in identifying market attractiveness and success probability of an opportunity.
Marketing managers also develop an opportunity matrix for any current or potential business trend to find out its attractiveness and success probability and a threat matrix to find out the probability of occurrence of that threat and its level of serious effect on business. The following diagrams explain both the opportunity matrix and the threat matrix.
|Organization Related Factors||Strategy Related Factors|
|Organization’s structure||Experience in the formulation of strategies|
|Organization’s size||Evaluation level|
|Organization’s age||Motivation level|
|Organization’s complexity||Styles of working|
|Nature of business||Ability to work hard|
|Nature of product and services||Team spirit|
From the success matrix (Figure ), it is evident that when the attractiveness is high and the probability of success is high, firms should go and exploit the opportunity. In some opportunities success probability is high but they may not give long-term results, therefore firms should not take decisions by looking at the success probability alone.
In the threat matrix, management should consider those threats more seriously in which occurrence probability is high. In cases where the occurrence probability is high and the degree of seriousness of the impact on business is low, they should monitor these threats for their adverse effects on the current business.
An environmental threat will only affect the business when a defensive and corrective marketing action plan is not in place. When the corrective action plan is ready and the degree of seriousness of the impact on the business is low, monitoring the business will provide enough precaution for survival of the business.
An ideal business opportunity should be high on the opportunity and low on the threat. If both the threat and the opportunity are high, it is a speculative business like stock market investments. A mature business is well settled and will always be low on both opportunity and threat and the marketer is likely to reap only tradesman’s profit from this business.
A business is in trouble when the opportunity is low and the threat to the existence of the business is very high.
Internal Appraisal for Strengths and Weaknesses
The internal appraisal can be understood in terms of the organizational resources, behavior, strengths, weaknesses, synergistic effects, and distinctive competencies. This is an evaluation of the internal capability of the firm in exploiting the emerging business opportunity and countering the emerging threat in the external environment.
Resources as a basis of internal superiority are explained in Figure.
SWOT Analysis is best appreciated in the context of marketing analysis and strategy formulation. Together with a consideration of the environment, the resources, values, expectations, and objectives provide the basis for marketing analysis, so as to arrive at a view of the organization’s strategic situation. It helps to form a basis for deciding the extent to which a change in strategy is necessary.
The components of the SWOT analysis are shown in Table.
of a new
Entry of new
Rivalry Among Competing Sellers (Threat of Competitions)
When rivals compete to win over customers to improve market share or profitability that is rivalry among competing sellers. The intensity of rivalry among competing sellers is a function of how vigorously they employ tactics such as lower prices, snazzier features, expanded customer service, longer warranties, special promotional offers, and the introduction of new products.
All these lead to adverse impacts on the profits of the firm. The rivalry intensifies as the number of competitors increases and as competitors become equal in size and capability.
The threat of New Entrants
A new entrant in the industry represents a competitive threat to established firms, sometimes called the incumbents. These barriers are a challenge for the new entrant and a protective shield for the established player and include:
- Cost Disadvantage Independent of Scale
- Learning and Experience Curve
- Product Differentiation
- Capital Requirement
- Switching Costs
- Access to Distribution
- Government and Regulatory Environment
Threat of Substitutes
This refers to the market attempts of companies in other industries to win customers over to their own substitute products.
For instance, a producer of scooters will compete with motorcycle makers, CD players compete with DVD players, Makers of eyeglasses compete with the makers of contact lenses, and road transport services compete with the railways.
Bargaining Power of Suppliers
Suppliers have little or no bargaining power when there are many suppliers and supply exceeds demand. Suppliers compete with each other to grab orders. On the other hand, bargaining power is high when it comes to high technology whether the supplier has the expertise, or if the supplier is working at economies of scale.
The supplier has high bargaining power if he has a significant cost advantage or constantly improves the product in the interest of the consumer, or finances the buyer.
Bargaining Power of Buyers
The buyer can bargain for a reduction of prices, a quantity discount, better quality at the same price, better after-sales service, or even credit or finance facility.
Boeing, for instance, arranges finances for its buyers. Today the consumer durables industry and the two-wheelers and automobile industry arranges finances for customers in collaboration with banks.
Formulating Business Strategy
Strategies are long-term goal-directed actions. A company deliberately chooses a particular strategy depending on its strengths and goals set for the business unit. While goals indicate what is to be achieved, strategy is the game plan used to achieve these goals.
Michael Porter has proposed three generic strategies that a firm can follow. They are cost, differentiation, and focus strategy.
Companies follow a cost strategy when they can produce and distribute goods and services at the lowest possible cost compared to competitors to win a larger market share. Cost leaders are good at purchasing, manufacturing, and distribution.
This shows that they have greater control over the value chain. Firms often follow this strategy when they have control over raw materials, patents over technology used, and strongly held physical distribution channels.
Companies can differentiate their offer on a particular dimension, which is a significant criterion for customers in making a decision. If the differentiation is irrelevant for customers, companies may not get sufficient market share over competitors.
Companies like Intel, Godrej, and Marico work on differentiation strategies whereby they have significant quality leadership over their competitors.
Companies may pursue focused goals in which they concentrate on a narrowly defined business or serve a closely defined market segment. Though there may be an additional opportunity in other sectors they prefer to focus their business attention on a particular product market segment and achieve success.
Reliance Industries, during its founding years, had focused on the business of petrochemicals to achieve greater success and subsequently moved to differentiate its business strategy in different sectors and is now following cost leadership in its telecommunication business. So companies can follow different kinds of strategies in different business units.
Program Formulation and Implementation
Once the business unit planning is over, the marketing manager should develop detailed supporting programs. These programs are purely functional plans to execute the strategies.
Marketing managers need to develop a marketing plan, which should include cost estimates, and budget allocations on various functional activities and link the investments with the likely returns to decide whether it is worth executing a particular program.
Marketing planners use Activity Based Costing (ABC) methods to allocate resources to various activities through the identification of relevant cost drivers to undertake a particular activity. Functional programs are short-term in nature and have immediate goals and expenditure patterns.
Once the programs are made, the marketing planner designs responsibility and authority centers, execution assignments, and work and time charts for implementation of the program. The implementation of a program specifies the structures, responsibilities, and roles of each member of the organization.
Feedback and Control
Finally, for successful business planning and implementation, it is important to monitor and evaluate the execution at different points in time. Firms design milestones and targets to measure performance and if they find a gap between what was planned and the results of the plan, they need to take corrective actions.
This feedback flow also helps in finding out the validity of assumptions on likely market response to the marketing strategy, made during the planning stage. Managers can control the program execution in different ways, which include cost control, performance control, and adaptability control.
A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.
Following on from his work analyzing the competitive forces in an industry, Michael Porter suggested four “generic” business strategies that could be adopted in order to gain a competitive advantage. The four strategies relate to the extent to which the scope of a business’s activities is narrow versus broad and the extent to which a business seeks to differentiate its products.
seeks to differentiate its products. The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.
This strategy involves selecting one or more criteria used by buyers in a market – and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product – often to reflect the higher production costs and extra value-added features provided for the consumer.
Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.
With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed on minimizing costs. If the achieved selling price can at least equal (or near) the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits.
This strategy is usually associated with large-scale businesses offering “standard” products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximize sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.
Strategy – Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers.
The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants – in other words that there is a valid basis for differentiation – and that existing competitor products are not meeting those needs and wants.
Here a business seeks a lower-cost advantage in just one or a small number of market segments. The product will be basic – perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called “I too’s”.
Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analyzing core competencies is recognizing that competition between businesses is as much a race for competence mastery as it is for market position and market power.
Senior management cannot focus on all activities of a business and the competencies required to undertake them. So the goal is for management to focus attention on competencies that really affect competitive advantage.
The main ideas about Core Competencies were developed by C K Prahalad and G Hamel through a series of articles in the Harvard Business Review followed by a best-selling book – Competing for the Future. Their central idea is that over time companies may develop key areas of expertise which are distinctive to that company and critical to the company’s long-term growth.
These areas of expertise may be in any area but are most likely to develop in the critical, central areas of the company where the most value is added to its products.
For example, for a manufacturer of electronic equipment, key areas of expertise could be in the design of electronic components and circuits. For a ceramics manufacturer, they could be the routines and processes at the heart of the production process.
For a software company the key skills may be in the overall simplicity and utility of the program for users or alternatively in the high quality of software code writing they have achieved. Core Competencies are not seen as being fixed.
Core Competencies should change in response to changes in the company’s environment. They are flexible and evolve over time. As a business evolves and adapts to new circumstances and opportunities, its Core Competencies will have to adapt and change.
Core competencies are the skills that enable a business to deliver a fundamental customer benefit – in other words: what is it that causes customers to choose one product over another?
To identify core competencies in a particular market, ask questions such as “why is the customer willing to pay more or less for one product or service than another?” “What is a customer actually paying for?
A core competence should be “competitively unique”: In many industries, most skills can be considered a prerequisite for participation and do not provide any significant competitor differentiation. To qualify as “core”, competence should be something that other competitors wish they had within their own business.
A competence that is central to the business’s operations but which is not exceptional in some way should not be considered a core competence, as it will not differentiate the business from any other similar businesses.
For example, a process that uses common computer components and is staffed by people with only basic training cannot be regarded as a core competence. Such a process is highly unlikely to generate a differentiated advantage over rival businesses. However, it is possible to develop such a process into a core competence with suitable investment in equipment and training.