Go to www.nucor.com. At the top of the frame you will see the heading Our Story. Then click on Chapter 1 Corporate Overview and read the information under this tab and then click on Chapter 2 History and read the information under this tab. The information under these two tabs will give you a good background on what Nucor does.

At the bottom of the webpage you will see the heading Division Sites: and then four divisions: Nucor Corporation, Harris Steel, David J Joseph, and Skyline Steel. Click on the link to their David J Joseph division and read the information on that website. Then tell me which Generic Business-Level Strategy (Chapter 6) you feel the David J Joseph division is presently using and why. Support your answer with information from your textbook/outlines and these websites. Your answer should be no more than two paragraphs long.

In addition to the assignment above, click on the link to Nucor Corporation and read the information on that website. Then tell me which Generic Business-Level Strategy (Chapter 6) you feel the Nucor Corporation is using and why. Support your answer with information from your textbook/outlines and these websites. Your answer should be no more than two paragraphs long.

Chapter 6

Business Strategy: Differentiation, Cost Leadership, and Blue Oceans

Chapter 11

Organizational Design: Structure, Culture, and Control

Functional Strategies

I. Chapter Introduction (NIB-p. 172)

A. Chapter 5 Learning Objectives (p. 174)

1. LO 6-1: Define business-level strategy and describe how it determines a firms

strategic position.

2. LO 6-2: Examine the relationship between value drivers and differentiation strategy.

3. LO 6-3: Examine the relationship between cost drivers and the cost-leadership strategy.

4. LO 6-4: Assess the benefits and risks of differentiation and cost-leadership strategies

vis--vis the five forces that shape competition.

5. LO 6-5: Evaluate value and cost drivers that may allow a firm to pursue a blue ocean

strategy.

6. LO 6-6: Assess the risks of a blue ocean strategy, and explain why it is difficult to

succeed at value innovation.

B. Chapter 11 Learning Objectives (p. 364)

1. LO 11-1: Define organizational design and list its three components.

2. LO 11-2: Explain how organizational inertia can lead established firms to failure.

3. LO 11-3: Define organizational structure and describe its four elements.

4. LO 11-4: Compare and contrast mechanistic versus organic organizations.

5. LO 11-5: Describe different organizational structures and match them with appropriate

strategies.

C. Functional Strategies Learning Objectives (NIB)

1. FSLO 1: Examine the relationship between business-level strategies and functionallevel

strategies.

2. FSLO 2: Describe the major functions of business and examine the major

strategies/tactics each function must choose to implement business-level strategy.

D. Overview (NIB-p. 175)

1. Chapter Case 6 JetBlue: Stuck in the Middle?

a. The case illustrates how JetBlue ran into trouble by trying to combine two

different business strategies at the same timea cost-leadership strategy, focused

on low cost, and a differentiation strategy, focused on delivering unique features

and service.

b. Although the idea of combining different business strategies seems appealing, it

is quite difficult to execute a cost-leadership and differentiation position at the

same time.

(1) This is because cost leadership and differentiation are distinct strategic

positions.

(2) Pursuing them simultaneously results in trade-offs that work against each

other.

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2. This chapter begins the strategy formulation phase of the Analyze, Formulate, and

Implement (AFI) framework.

a. The chapter takes a close look at business-level strategy and how to compete for

advantage.

b. Business-level strategy details the actions managers take in their quest for

competitive advantage when competing in a single product market.

3. The chapter introduces the generic business strategies and then dives into detail on

differentiation and cost-leadership strategies.

a. At the firm level, performance is determined by value and cost positions relative

to competitors.

4. The chapter continues by integrating the competitive forces model (from Chapter 3)

with business-level strategies to assess the benefits and risks of each strategy as they

vary with industry conditions.

5. Finally, the blue ocean strategy is discussed as a position combining both cost

leadership and differentiation.

II. 6.1 Business-Level Strategy: How to Compete for Advantage (p. 177)

A. Introduction (NIB-p. 177)

1. Business-level strategy details the goal-directed actions managers take in their quest

for competitive advantage when competing in a single product market.

a. It may involve a single product or a group of similar products that use the same

distribution channel.

2. It concerns the broad question, How should we compete? To formulate an

appropriate business-level strategy, managers must answer the who, what, why, and

how questions of competition:

a. Whowhich customer segments will we serve?

b. What customer needs, wishes, and desires will we satisfy?

c. Why do we want to satisfy them?

d. How will we satisfy our customers needs?

3. To formulate an effective business strategy, managers need to keep in mind that

competitive advantage is determined jointly by industry and firm effects.

a. As shown in Exhibit 6.1, one route to competitive advantage is shaped by

industry effects, while a second route is determined by firm effects.

b. As discussed in Chapter 3, an industrys profit potential can be assessed using the

competitive forces model. Managers need to be certain that the business strategy

is aligned with the competitive forces that shape competition.

c. The concepts introduced in Chapter 4 are key in understanding firm effects

because they allow us to look inside firms and explain why they differ based on

their resources, capabilities, and competencies.

d. It is also important to note that industry and firm effects are not independent, but

rather they are interdependent as shown in Exhibit 6.1.

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B. Strategic Position (p. 178)

1. In Chapter 5 it was noted that competitive advantage is based on the difference between

the perceived value a firm is able to create for consumers (V), captured by how much

consumers are willing to pay for a product or service, and the total cost (C) the firm

incurs to create that value.

a. The greater the economic value created (V C), the greater is a firms potential

for competitive advantage.

b. To answer the business-level strategy question of how to compete, managers have

two primary competitive levers at their disposal: value and cost.

2. A firms business-level strategy determines its strategic positionits strategic profile

based on value creation and costin a specific product market.

a. Higher value creation tends to require higher cost.

b. To achieve a desired strategic position, managers must make strategic tradeoffschoices

between a cost or value position.

C. Generic Business Strategies (p. 178)

1. There are two fundamentally different generic business strategiesdifferentiation and

cost leadership.

a. A differentiation strategy seeks to create higher value for customers than the

value that competitors create, by delivering products or services with unique

features while keeping costs at the same or similar levels, allowing the firm to

charge higher prices to its customers.

b. A cost-leadership strategy, in contrast, seeks to create the same or similar value

for customers by delivering products or services at a lower cost than competitors,

enabling the firm to offer lower prices to its customers.

2. These two business strategies are called generic strategies because they can be used by

any organizationmanufacturing or service, large or small, for-profit or nonprofit,

public or private, domestic or foreignin the quest for competitive advantage,

independent of industry context.

3. When considering different business strategies, managers also must define the scope of

competitionwhether to pursue a specific, narrow part of the market or go after the

broader market.

4. See Exhibit 6.2 Strategic Position and Competitive Scope: Generic Business Strategies

a. This generic business strategy model was developed by Michael Porter

b. Other Commonly Used Terminology

(1) Differentiation Strategy Broad Differentiation Strategy

(2) Cost-Leadership Strategy Overall Low-Cost Provider Strategy

(3) Focused Differentiation Strategy Niche Differentiation Strategy

(4) Focused Cost-Leadership Strategy Niche Cost-Leadership Strategy or

Focused Low-Cost Provider Strategy

III. 6.2 Differentiation Strategy: Understanding Value Drivers (p. 180)

A. Introduction (NIB-p. 180)

1. The goal of a differentiation strategy is to add unique features that will increase the

perceived value of goods and services in the minds of consumers so they are willing to

pay a higher price.

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2. A company that uses a differentiation strategy can achieve a competitive advantage as

long as its economic value created (V ? C) is greater than that of its competitors.

3. Exhibit 6.3 Differentiation Strategy: Achieving Competitive Advantage

a. Term: Cost Parity Producing an equivalent product at approximately the same

cost as competitors.

b. Although increased value creation is a defining feature of a differentiation

strategy, managers must also control costs. If cost rises too much as the firm

attempts to create more perceived value for customers, it has value gap shrinks,

negating any differentiation advantage.

4. Although a differentiation strategy is generally associated with premium pricing,

managers have an important second pricing option.

a. When a firm is able to offer a differentiated product or service and can control its

costs at the same time, it is able to gain market share from other firms in the

industry by charging a similar price but offering more perceived value.

B. Value Drivers (NIB-p. 181)

1. Managers can adjust a number of different levers to improve a firms strategic position.

a. These levers either increase perceived value or decrease costs.

b. Here, we will study the most salient value drivers that managers have at their

disposal (we look at cost drivers in the next section). Following are the most

important value drivers:

(1) Product Features

(2) Customer Service

(3) Complements

(4) Marketing Strategies (NIB)

c. These value drivers are related to a firms expertise in, and organization of,

different internal value chain activities.

2. Product Features One of the obvious but most important levers that managers can

adjust is product features, thereby increasing the perceived value of the product or

service offering.

a. Adding unique product attributes allows firms to turn commodity products into

differentiated products commanding a premium price.

b. Strong R&D capabilities are often needed to create superior product features.

3. Customer Service Managers can increase the perceived value of their firms product

or service offerings by focusing on customer service.

a. Strong service capabilities are obviously needed to create differentiated customer

service.

4. Complements When studying industry analysis in Chapter 3, we identified the

availability of complements as an important force determining the profit potential of an

industry.

a. Complements add value to a product or service when they are consumed in

tandem.

b. Finding complements, therefore, is an important task for managers in their quest

to enhance the value of their offerings.

c. As an external factor, organizations may need to enter in with other organizations

through strategic alliances (discussed in Chapters 8 and 9).

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5. Marketing Function Strategies (NIB) Marketing strategies (e.g., decisions regarding a

companys target market(s), pricing, promotion, place, and product) can influence the

perceived value of a companys products.

IV. 6.3 Cost-Leadership Strategy: Understanding Cost Drivers (p. 183)

A. Introduction (NIB- p. 183)

1. The goal of a cost-leadership strategy is to reduce the firms cost below that of its

competitors while offering adequate value.

2. A cost leader can achieve a competitive advantage as long as it is economic value

created (V C) is greater than that of its competitors.

3. Exhibit 6.4 Cost-Leadership Strategy: Achieving Competitive Advantage

a. Term: Differentiation Parity Producing an equivalent product at

approximately the same value as competitors.

b. In a cost-leadership strategy, managers must focus on lowering the costs of

production while maintaining a level of quality acceptable to the customer.

B. Cost Drivers (NIB-p. 184)

1. Managers can adjust a number of different levers to improve a firms strategic position.

a. These levers either increase perceived value or decrease costs.

b. Here, we will study the most salient cost drivers that managers have at their

disposal. Following are the most important cost drivers:

(1) Cost of Input Factors

(2) Economies of Scale

(3) Learning-Curve Effects

(4) Experience-Curve Effects

(5) Production/Operations Strategies (NIB)

c. These cost drivers are related to a firms expertise in, and organization of,

different internal value chain activities.

2. Cost of Input Factors One of the most basic advantages a firm can have over its rivals

is access to lower-cost input factors such as raw materials, capital, labor, and IT

services.

3. Economies of Scale Firms with greater market share might be in a position to reap

economies of scale, decreases in cost per unit as output increases.

a. Exhibit 6.5 Economies of Scale, Minimum Efficient Scale, and Diseconomies of

Scale

b. What causes per unit cost to drop as output increases (up to point Q1)? Economies

of scale allow firms to do the following:

(1) Spread their fixed costs over a larger output.

(2) Employ specialized systems and equipment.

(3) Take advantage of certain physical properties.

c. Spreading Fixed Costs Over Larger Output Larger output allows firms to spread

their fixed costs over more units. That is why gains in market share are often

critical to drive down per-unit cost.

d. Employing Specialized Systems and Equipment Larger output also allows firms

to invest in more specialized systems and equipment, such as enterprise resource

planning (ERP) software or manufacturing robots.

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e. Taking Advantage of Certain Physical Properties Economies of scale also occur

because of certain physical properties. One such property is known as the cubesquare

rule: the volume of the body such as a pipe or a tank increases

disproportionately more than its surface.

(1) Rule: When an object undergoes a proportional increase in size, its new

surface area is proportional to the square of the multiplier and its new

volume is proportional to the cube of the multiplier.

(2) Example: If you double the size of a tank in a brewery, the cost of the

materials to make it (stainless steel) increases fourfold but the volume

increases eightfold. So if you have the production to support it, you get

double the bang for your buck in tankagethus the average cost per ounce

of beer decreases.

f. Minimum Efficient Scale (MES) In Exhibit 6.5, the output range between Q1

and Q2 in the figure is considered the minimum efficient scale (MES) in order to

be cost-competitive. Between Q1 and Q2, the returns to scale are constant.

(1) It is the output range needed to bring the cost per unit down as much as

possible, allowing a firm to stake out the lowest-cost position achievable

through economies of scale.

(2) If the firms output range is less than Q1 or more than Q2, the firm is at a

cost disadvantage.

(3) The concept of minimum efficient scale applies not only to manufacturing

processes but also to managerial tasks such as how to organize work.

g. Diseconomies of Scale Beyond Q2 in Exhibit 6.5, firms experience

diseconomies of scaleincreases in cost as output increases. As firms get too

big, the complexity of managing and coordinating raises the cost, negating any

benefits to scale.

4. Learning Curve The learning curve is a graphic expression of learning effects theory

(see Exhibit 6.6) (NIB).

a. Learning effects theory is a relationship between unit production time and the

cumulative number of units produced. As individuals or organizations

collectively repeat a particular process, they gain skill or efficiency from their

experience and production time improvements result.

(1) Learning effects theory assumes the underlying technology remains

constant.

b. Learning effects differ from economies of scale (discussed earlier) as shown:

(1) Differences in Timing Learning effects occur over time as output

accumulates, while economies of scale are captured at one point in time

when output increases. Although learning can decline or flatten (see Exhibit

6.6), there are no diseconomies to learning (unlike diseconomies to scale in

Exhibit 6.5).

(2) Differences in Complexity In some production processes (e.g., the

manufacture of steel rods), effects from economies of scale can be quite

significant, while learning effects are minimal. In contrast, in some

professions (brain surgery or the practice of estate law), learning effects can

be substantial, while economies of scale are minimal.

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c. Managers need to understand such differences to calibrate their business-level

strategy.

(1) If a firms cost advantage is due to economies of scale, a manager should

worry less about employee turnover (and a potential loss in learning) and

more about drops in production runs.

(2) In contrast, if the firms low-cost position is based on complex learning, a

manager should be much more concerned if a key employee (e.g., a star

researcher) was to leave.

d. By moving further down a given learning curve than competitors, a firm can gain

a competitive advantage.

e. See Strategy Highlight 6.1 Dr. Shetty: The Henry Ford of Heart Surgery

5. Experience Curve The experience curve is a graphic expression of experience effects

theory (see Exhibit 6.6) (NIB).

a. Experience effects theory recognizes that underlying technological changes

(e.g., process innovation) may initiate a new and steeper learning curve.

Experience effects are not dependent upon the cumulative number of units

produced.

b. Instructors Note: Most authors use learning effects and experience effects

interchangeably since they are highly related.

6. Production/Operations Function Strategies (NIB) POM strategies (e.g., decisions

regarding a companys product/service quality, facilities, technology, and operations

planning and control) can greatly affect the cost of the companys goods and/or

services.

V. 6.4 Business-Level Strategy and the Five Forces: Benefits and Risks (p. 191)

A. Introduction (NIB-p. 191)

1. The business-level strategies introduced in this chapter allow firms to carve out strong

strategic positions that enhance the likelihood of gaining and sustaining competitive

advantage.

2. The five forces model introduced in Chapter 3 helps managers assess the forcesthreat

of entry, power of suppliers, power of buyers, threat of substitutes, and rivalry among

existing competitorsthat make some industries more attractive than others.

3. With this understanding of industry dynamics, managers use one of the generic

business-level strategies to protect themselves against the forces that drive down

profitability.

4. Exhibit 6.7 Competitive Positioning and the Five Forces: Benefits and Risks of

Differentiation and Cost-Leadership Business Strategies details the relationship

between competitive positioning and the five forces.

a. In particular, it highlights the benefits and risks of differentiation and costleadership

business strategies, which we discuss next.

B. Differentiation Strategy: Benefits and Risks (p. 192) Use Exhibit 6.7 as an outline

C. Cost-Leadership Strategy: Benefits and Risks (p. 192) Use Exhibit 6.7 as an outline

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D. Summary (NIB-p. 193)

1. None of the business-level strategies discussed in this chapter is inherently superior.

The success of each depends on context and relies on two factors:

a. How well the strategy leverages the firms internal strengths while mitigating its

weaknesses.

b. How well it helps the firm exploit external opportunities while avoiding external

threats.

2. There is no single correct business strategy for a specific industry. The deciding factor

is that the chosen business strategy provides a strong position that attempts to

maximize economic value creation and is effectively implemented.

VI. 6.5 Blue Ocean Strategy: Combining Differentiation and Cost Leadership (p. 194)

A. Introduction (NIB-p. 194)

1. When Michael Porter developed the generic business strategy model discussed in this

chapter, he argued that managers should not try to do both a differentiation and lowcost

strategy at the same time because of the inherent trade-offs in the different

strategic positions.

a. In fact, his research showed that managers attempting to accomplish both generic

strategies at the same time became stuck in the middle. (See Part C below.)

2. Later, strategy scholars W. Chan Kim and Rene Mauborgne argued that companies

can succeed by creating blue oceans of uncontested market space, as opposed to red

oceans where competitors fight for dominance, the analogy being that an ocean full of

vicious competition turns red with blood.

a. The research is based on the study of 150 strategic moves spanning more than

100 years and 30 industries.

b. Originally a marketing strategy, blue ocean strategy can be thought of as a

generic business-level strategy that successfully combines differentiation and

cost-leadership activities using value innovation to reconcile the inherent tradeoffs

in those two distinct strategic positions.

c. Thus, a blue ocean strategy allows a firm to offer a differentiated good and/or

service at low cost.

3. A.k.a. Best-Cost Provider Strategy, Integration Strategy or Value Innovation

Strategy

B. Value Innovation (p. 194)

1. For a blue ocean strategy to succeed, managers must resolve trade-offs between the two

generic strategic positionslow cost and differentiation.

a. This is done through value innovation, aligning innovation with total perceived

consumer benefits, price and cost (also see the discussion in Chapter 5 on

economic value creation).

b. Instead of attempting to out-compete your rivals by offering better features or

lower costs, successful value innovation makes competition irrelevant by

providing a leap in value creation, thereby opening new and uncontested market

spaces.

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2. Successful value innovation requires that a firms strategic moves lower its costs and at

the same increase the perceived value for buyers (see Exhibit 6.8).

a. Lowering a firms costs is primarily achieved by eliminating and reducing the

taken-for-granted factors that the firms rivals in their industry compete on.

b. Perceived buyer value is increased by raising existing key success factors and by

creating new elements that the industry has not offered previously.

3. See IKEA example in your book.

C. Blue Ocean Strategy Gone Bad: Stuck in the Middle (p. 197)

1. Although appealing in a theoretical sense, a blue ocean strategy can be quite difficult to

translate into reality.

a. The reason is that differentiation and cost leadership are distinct strategic

positions that require important trade-offs.

b. A blue ocean strategy is difficult to implement because it requires the

reconciliation of fundamentally different strategic positionsdifferentiation and

low costwhich in turn require distinct internal value chain activities (see

Chapter 4) so the firm can increase value and lower cost at the same time.

2. Exhibit 6.9 Value Innovation versus Stuck in the Middle suggests how a successfully

formulated blue ocean strategy based on value innovation combines both a

differentiation and low-cost position.

a. It also shows the consequence of a blue ocean strategy gone badthe firm ends

up being stuck in the middle, meaning the firm has neither a clear differentiation

nor a clear cost-leadership profile.

b. Being stuck in the middle leads to inferior performance and a resulting

competitive disadvantage.

c. Strategy Highlight 6.2 illustrates how JCPenney failed at a blue ocean strategy

and ended up in the red ocean of cut-throat competition.

3. The value curve is the basic component of the strategy canvas. It graphically depicts a

companys relative performance across its industrys factors of competition.

a. A strong value curve has focus and divergence, and it can even provide a kind of

tagline as to what strategy is being undertaken or should be undertaken.

b. Exhibit 6.10 Strategy Canvas of JetBlue versus Low-Costs Airlines and Legacy

Carriers plots the strategic profiles or value curves for three kinds of competitors

in the U.S. airline industry.

c. A value curve that zigzags across the strategy canvas indicates a lack of

effectiveness in its strategic profile.

(1) The curve visually represents how JetBlue is stuck in the middle and as a

consequence experienced inferior performance and thus a sustained

competitive disadvantage vis--vis airlines with a stronger strategy profile

such as Southwest Airlines and Delta, among others.

VII. 6.6 Implications for the Strategist (p. 200) Read

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VIII. 11.1 Organizational Design and Competitive Advantage (p. 367)

A. Introduction (NIB-p. 367)

1. Organizational design is the process of creating, implementing, monitoring, and

modifying the structure, processes, and procedures of an organization.

a. The key components of organizational design are structure, culture, and control.

b. The goal is to design an organization that allows managers to effectively translate

their chosen strategy into a realized one.

2. Because strategy implementation transforms strategy into actions and business models,

it often requires changes within the organization.

a. However, strategy implementation often fails because managers are unable to

make the necessary changes due to the effects on resource allocation and power

distribution within an organization.

b. Managers are leery to disturb the status quo.

B. Organizational Inertia: The Failure of Established Firms (p. 368)

1. To implement a formulated business strategy successfully, structure must accommodate

strategy, not the other way around.

2. In reality, however, a firms strategy often follows its structure.

3. This reversal implies that some managers consider only strategies that do not change

existing organizational structures; they do not want to confront the inertia that often

exists in established organizations.

4. Inertia, a firms resistance to change the status quo, can set the stage for the firms

subsequent failure.

5. See Strategy Highlight 11.1 The Premature Death of a Google like Search Engine at

Microsoft

C. Organizational Structure (p. 371)

1. Some of the key decisions managers must make when designing effective organizations

pertain to the firms organizational structure.

a. Organizational structure determines how the work efforts of individuals and

teams are orchestrated and how resources are distributed.

b. In particular, an organizational structure defines how jobs and tasks are divided

and integrated, delineates the reporting relationships up and down the hierarchy,

defines formal communication channels, and prescribes how individuals and

teams coordinate their work efforts.

2. The key building blocks of an organizational structure are:

a. Specialization

b. Formalization

c. Centralization

d. Hierarchy

3. Specialization Specialization describes the degree to which a task is divided into

separate jobsthat is, the division of labor.

a. Larger firms, such as Fortune 100 companies, tend to have a high degree of

specialization; smaller entrepreneurial ventures tend to have a low degree of

specialization.

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4. Formalization Formalization captures the extent to which employee behavior is

steered by explicit and codified rules and procedures.

a. Formalized structures are characterized by detailed written rules and policies of

what to do in specific situations.

b. Formalization is not necessarily negative; often it is necessary to achieve

consistent and predictable results.

5. Centralization Centralization refers to the degree to which decision making is

concentrated at the top of the organization.

a. Centralized decision making often correlates with slow response time and

reduced customer satisfaction. In decentralized organizations, decisions are

made and problems solved by empowered lower-level employees who are closer

to the sources of issues.

b. Different strategic management processes (discussed in Chapter 2) match with

different degrees of centralization:

(1) Top-down strategic planning takes place in highly centralized organizations.

(2) Planned emergence is found in more decentralized organizations.

c. Whether centralization or decentralization is more effective depends on the

specific situation.

6. Hierarchy Hierarchy determines the formal, position-based reporting lines and thus

stipulates who reports to whom.

a. This is also referred to as the chain of command.

b. The number of levels of hierarchy determines the managers span of control

how many employees directly report to a manager.

D. Mechanistic versus Organic Organizations (p. 372)

1. Several of the building blocks of organizational structure frequently appeared together,

creating distinct organizational forms mechanistic or organic organizations.

2. Mechanistic Organizations Mechanistic organizations are characterized by a high

degree of specialization and formalization and by a tall hierarchy that relies on

centralized decision making.

a. Mechanistic structures allow for standardization and economies of scale, and

often are used when the firm pursues a cost-leadership strategy at the business

level.

3. Organic Organizations Organic organizations have a low degree of specialization

and formalization, a flat organizational structure, and decentralized decision making.

a. Organic structures tend to be correlated with the following: a fluid and flexible

information flow among employees in both horizontal and vertical directions;

faster decision making; and higher employee motivation, retention, satisfaction,

and creativity.

b. Organic organizations also typically exhibit a higher rate of entrepreneurial

behaviors and innovation.

c. Organic structures allow firms to foster R&D and/or marketing, for example, as a

core competency.

d. Firms that pursue a differentiation strategy at the business level frequently have

an organic structure.

e. Strategy Highlight 11.2 W. L. Gore & Associates: Informality and Innovation

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4. Exhibit 11.3 Mechanistic versus Organic Organizations: Building Blocks of

Organizational Structure

IX. 11.2 Strategy and Structure (p. 374)

A. The important and interdependent relationship between strategy and structure directly

impacts a firms performance.

1. Moreover, the relationship is dynamicchanging over time in a somewhat predictable

pattern as firms grow in size and complexity.

2. See Exhibit 11.4 Changing Organizational Structures and Increasing Complexity as

Firms Grow

B. Simple Structure

1. A simple structure generally is used by small firms with low organizational

complexity. In such firms, the founders tend to make all the important strategic

decisions and run the day-to-day operations.

C. Functional Structure

1. As sales increase, firms generally adopt a functional structure, which groups

employees into distinct functional areas based on domain expertise.

2. These functional areas often correspond to distinct stages in the value chain such as

R&D, engineering and manufacturing, and marketing and sales, as well as supporting

areas such as human resources, finance, and accounting.

3. See Exhibit 11.5 Typical Functional Structure

4. Instructors Note: In an organization with a functional structure, corporate level

strategy and business level strategy exist on the same level. In Exhibit 1.5 the CEO

would formulate and implement both.

a. A company with a functional structure is by definition competing in one industry

(a.k.a. a single business). This type of corporate level strategy is generally

referred to as concentration strategy or concentrated growth strategy.

b. The business level question of how to compete could still be any one of the three

generic areas: cost leadership, differentiation, or value innovation/blue ocean.

D. Geographic and Product Line Structures (NIB)

1. As single businesses grow, there is often a need to add another layer of coordination to

the company structure.

2. Some companies use a regional or geographic organizational structure preferring to

duplicate various functional areas across regions.

a. For example, a small consumer products company may employ marketing

managers in the east, central, west, and southern regions of a country.

3. Some companies use a product organizational structure preferring to duplicate

various functional areas across product lines.

4. Instructors Note: In each case, the company remains a single business organization

with corporate level strategy and business level strategy existing on the same level.

E. Multidivisional Structure (p. 377)

1. Over time, a firm may choose to diversify into multiple industries. In such cases the

organization generally implements a multidivisional or matrix structure.

2. The multidivisional structure (or M-form) consists of several distinct strategic

business units (SBUs), each with its own profit-and-loss responsibility.

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3. Each SBU is operated more or less independent from one another, and each is led by a

CEO (or equivalent general manager) who is responsible for the units business

strategy and its day-to-day operations.

4. Corporate strategy is now in the purview of corporate headquarters.

5. See Exhibit 11.7 Typical Multidivisional (M-Form) Structure

F. Matrix Structure (p. 381)

1. To reap the benefits of both the M-form and the functional structure, many firms

employ a mix of these two organizational forms, called a matrix structure.

2. See Exhibit 11.9 Typical Matrix Structure with Geographic and SBU Divisions

X. Functional Strategies (NIB)

A. Ensuring Coherence in Strategic Direction (NIB) Chapter 2

1. Organizations express priorities best through stated goals and objectives that form a

hierarchy of goals, which includes its vision, mission, values, and strategic

goals/objectives.

2. In addition, strategies are chosen to meet organizational goals/objectives and that are

consistent with the hierarchy of goals and the hierarchy of strategies.

3. This coherence in strategic direction is diagram below.

B. Developing Functional Level Strategies/Tactics

1. Business-level strategies are implemented through day-to-day decisions made at the

operating level of the firm.

a. The competitive advantages and distinctive competencies that are sought by firms

are often embedded in skills, resources, and capabilities at the functional level.

b. Functional level strategies are the plans for matching those skills, resources, and

capabilities to the business and corporate strategies of the organization.

c. The collective pattern of day-to-day decisions made and actions taken by

employees responsible for value activities create functional strategies (a.k.a.

functional tactics), detailed action plans for managing resources and

implementing the business-level and corporate-level strategies of the company.

Vision

Mission

Values

Corporate Level Goals

Corporate Level Objectives Corporate Level Strategies

Business Level Goals

Business Level Objectives

Functional Level Objectives

Business Level Strategies

Functional Level Strategies

Tactics

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2. Well-developed functional strategies should have the following characteristics:

a. Decisions made within each function should be consistent with each other.

(1) For example, if the marketing department chooses to spend a great deal of

effort and money creating a premium brand name for a new product, it

should take advantage of distribution channels that allow the product to

reach customers who will pay a premium price.

b. Decisions made within one function should be consistent with those made in

other functions.

c. Decisions made within functions should be consistent with the strategies of the

business.

3. A company needs functional strategies for every major functional activity.

C. Marketing Strategy

1. Marketing consists of four strategic considerations: product (good and/or service),

price, place (distribution), and promotion.

a. In general, the mix of these elements should be appropriate, and the plans for

each of the elements must also be appropriate.

b. Marketing strategy is concerned with matching existing or potential products or

services with the needs of customers.

2. The particular generic business strategy adopted by a business unit influences the types

of goods and/or services the business offers, its prices for those goods and/or services,

the channels of distribution it uses, the location of its outlets, and its advertising and

promotional policies.

3. The marketing strategy selected by an organization is dependent on whether the

organization is attempting to reach new or existing customers and whether its goods

and/or services are new or already exist.

a. A market penetration strategy consists of offering the firms existing goods

and/or services to more customers in a present market segment.

b. A market development strategy consists of introducing the firm's existing

goods and/or services to customers in market segments it presently does not

serve.

c. A firm using a product development strategy creates a new good and/or service

for existing customers in a present market segment(s).

d. With a diversification marketing strategy, an organization offers a new good

and/or service to a new market segment(s).

4. The functional strategy for the place component identifies where, when, and by whom

the goods and/or services are to be offered for sale. This component of marketing

strategy guides decisions regarding channels to ensure consistency with the total

marketing effort.

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5. A number of pricing options are available (https://quickbooks.intuit.com/r/pricingstrategy/6-different-pricing-strategies-which-is-right-for-your-business/)

a. Pricing at a Premium With premium pricing, businesses set prices higher than

their competitors. Premium pricing is often most effective in the early days of a

products lifecycle, and ideal for small business that sell unique goods.

(1) Because customers need to perceive products as being worth the higher

price tag, a business must work hard to create a value perception. Along

with creating a high-quality product, owners should ensure their marketing

efforts, the products packaging and the stores dcor all combine to support

the premium price.

b. Pricing for Market Penetration Pricing penetration strategies aim to attract

buyers by offering lower prices on goods and services. While many new

companies use this technique to draw attention away from their competition,

penetration pricing does tend to result in an initial loss of income for the business.

(1) Over time, however, the increase in awareness can drive profits and help

small businesses to stand out from the crowd. In the long run, after

sufficiently penetrating a market, companies often wind up raising their

prices to better reflect the state of their position within the market.

c. Economy Pricing Used by a wide range of businesses including generic food

suppliers and discount retailers, economy pricing aims to attract the most priceconscious

of consumers. With this strategy, businesses minimize the costs

associated with marketing and production in order to keep product prices down.

As a result, customers can purchase the products they need without frills.

(1) While economy pricing is incredibly effective for large companies like WalMart

and Target, the technique can be dangerous for small businesses.

Because small businesses lack the sales volume of larger companies, they

may struggle to generate a sufficient profit when prices are too low. Still,

selectively tailoring discounts to your most loyal customers can be a great

way to guarantee their patronage for years to come.

d. Price Skimming Designed to help businesses maximize sales on new products

and services, price skimming involves setting rates high during the introductory

phase. The company then lowers prices gradually as competitor goods appear on

the market.

(1) One of the benefits of price skimming is that it allows businesses to

maximize profits on early adopters before dropping prices to attract more

price-sensitive consumers. Not only does price skimming help a small

business recoup its development costs, but it also creates an illusion of

quality and exclusivity when your item is first introduced to the

marketplace.

e. Psychology Pricing With the economy still limping back to full health, price

remains a major concern for American consumers. Psychology pricing refers to

techniques that marketers use to encourage customers to respond on emotional

levels rather than logical ones.

(1) For example, setting the price of a watch at $199 is proven to attract more

consumers than setting it at $200, even though the true difference here is

quite small.

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(2) One explanation for this trend is that consumers tend to put more attention

on the first number on a price tag than the last. The goal of psychology

pricing is to increase demand by creating an illusion of enhanced value for

the consumer.

f. Bundle Pricing With bundle pricing, businesses sell multiple products for a

lower rate than consumers would face if they purchased each item individually.

(1) Not only is bundling goods an effective way of moving unsold items that

are taking up space in your facility, but it can also increase the value

perception in the eyes of your customers, since youre essentially giving

them something for free.

(2) Bundle pricing is more effective for companies that sell complimentary

products. For example, a restaurant can take advantage of bundle pricing by

including dessert with every entre sold on a particular day of the week.

Businesses should keep in mind that the profits they earn on the highervalue

items must make up for the losses they take on the lower-value

product.

6. Promotion is one of the key elements of the marketing mix and deals with any one- or

two-way communication that takes place with the consumer. Examples of promotional

strategies and marketing include advertising, public relations, personal selling, and

sponsorship.

7. The key is to strive for consistency among all of the marketing elements.

D. Production/Operations Strategy

1. Production/operations strategy is the plan for aligning the production and/or service

operations of the firm with the intended business strategies.

a. Operations managers, like marketing managers, must manage multiple

stakeholder interests in their daily decision-making.

2. The major decisions in production/operations strategy concern the following areas:

a. Capacity Planning Lead demand to ensure availability or lack demand to

achieve capacity utilization.

b. Facility Location Locate near suppliers, customers, labor, natural resources,

transportation.

c. Facility Layout Continuous or intermittent flow.

d. Technology and Equipment Choices Degree of automation, computerization.

e. Sourcing Arrangements Cooperative relationships with a few verses

competitive bidding.

f. Planning and Scheduling Make to stock, make to order, flexibility to customer

requests.

g. Workforce Policies Training levels, cross training, reward systems.

E. Research and Development Strategy

1. In many organizations, R&D efforts are essential for effective strategy implementation.

2. A firms research and development strategy should define the priorities for new

product and new service development, long-range innovation efforts, the role of

intellectual property protection, and any alliances or partnerships needed to advance

innovation goals.

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3. The major decisions in research and development strategy concern the following areas:

a. Research Focus Product, process, applications.

b. Orientation Leader versus follower.

c. Linkages with external research organizations.

F. Human Resources Strategy

1. An organizations human resources strategy defines its approach to recruitment,

selection, training, performance evaluation, rewards, and other key human resource

management practices.

2. Managers within the human resources department survey coordinating role between the

organizations management and employees, and between the organization and external

stakeholder groups including labor unions and government regulators of labor and

safety practices (e.g., the Equal Employment Opportunity Commission (EEOC) and the

Occupational Safety and Health Administration (OSHA)).

3. The major decisions in human resources strategy concern the following areas:

a. Recruitment Internal versus external.

b. Selection Selection criteria and methods.

c. Performance Appraisal Appraisal methods, frequency.

d. Salary and Wages Relationship to performance, competitiveness.

e. Benefits Bonuses, stock ownership plans, other benefits.

G. Financial Strategy

1. The finance and accounting functions play a strategic role within organizations because

they control the funds that are needed to acquire, develop, and utilize strategic

resources.

2. The primary purpose of a financial strategy is to provide the organization with the

capital structure and operating funds that are appropriate for implementing growth and

competitive strategies, and to do so in a manner that maximizes financial returns to the

organization.

3. The finance/accounting group decides the appropriate levels of debt, equity, and

internal financing needed to support strategies by weighing the costs of each

alternative, the plans for the funds, and the financial interests of various internal and

external stakeholder groups.

4. This group also determines dividend policies and, through preparation of financial

reports, influences how financial performance will be interpreted and presented to

stockholders.

5. The major decisions in financial strategy concern the following areas:

a. Capital Debt versus equity versus internal financing.

b. Basis for Allocating Overhead Costs Direct labor, machine use, sales volume,

activity.

c. Minimum Return on Investment Levels

d. Financial Reporting to Stockholders

H. Information Systems Strategy

1. The purpose of an information systems strategy is to provide the organization with

the technology and systems that are necessary for operating, planning, and controlling

the business.

2. In many organizations, computer information systems affect every aspect of business

operations and serve a major role in linking stakeholders.

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3. The major decisions in information systems strategy concern the following areas:

a. Hardware Capability and Integration across the Organization Mainframe,

network, hardware linkages.

b. Software Capability and Integration across the Organization User support,

compatibility, security, standardization.

c. Investments in New Technologies