Managers engage in three levels of strategic planning. At the companywide level, many firms consist of several businesses; for instance, Pepsi Co includes Pepsis, Frito-Lay, and Pizza Hut. Pepsi Co therefore needs a corporate level strategy. A companyâ€™s corporate level strategy identifies the portfolio of businesses that, in total, comprise the company and the ways in which these businesses relate to each other For example, a diversification corporate strategy implies that the firm will expand by adding new product lines. A vertical integration strategy means the firm expands by, perhaps, producing its own raw materials, or selling its products direct. Consolidation â€“ reducing the companyâ€™s size and geographic expansion for instance, taking the business abroad are some other corporate strategy possibilities.
At the next level down, each of these businesses (such as Pizza Hut) needs a business-level/competitive strategy. A competitive strategy identifies how to build and strengthen the businessâ€™s long term competitive position in the marketplace. It identifies, for instance, how Pizza Hut compete with Papa Johnâ€™s or how Wal-Mart competes with target.
Companies try to achieve competitive advantages for each business they are in. Competitive advantage can be defined as any factors that allow an organization to differentiate its product or service from those of its competitors to increase market share.
Companies use several competitive strategies to achieve competitive advantage. One, cost leadership, means the enterprise aims to become the low cost leader in an industry. Wal-Mart is a typical industry cost leader: It maintains its competitive advantage through its satellite based distribution system, and (in its early days) by keeping store location costs to a minimum by placing stores on low cost land outside small-to medium-sized towns.
Differentiation is a second example of a competitive strategy. In a differentiation strategy, a firm seeks to be unique in its industry along dimensions that are widely valued by buyers. Thus, Volvo stresses the safety of its cars, Papa Johnâ€™s Pizza stresses fresh ingredients, Targets sells somewhat more upscale brands than Wal-Mart, and Mercedes-Benz emphasizes reliability and quality. Like Mercedes-Benz, firms can usually in charge a premium price if they successfully stake a claim to being substantially different from competitors in some coveted way. Still other firms choose to compete as focusers. They carve out a market niche (like Ferrari), and compete by providing a product or service customers can get in other way.
Finally, each individual business is composed of department, such as manufacturing, sales, and HR management. Functional strategies identify the basic courses of action that each department will pursue in order to help the business attain its competitive goals. The firmâ€™s functional strategies should make sense in terms of its business / competitive strategy. Dellâ€™s HR strategy of putting its activities on the web to support the parent firmâ€™s low cost competitive strategy is one example.
Managers crafting strategies invariably confront a dilemma: Given a firmâ€™s opportunities and threats, and its strengths and weaknesses, should they simply â€œfitâ€ capabilities to the opportunities and threats that they see, or, should they stretch well beyond their capabilities to take advantage of an opportunity? On this issue, there are two points of view.
The â€œfitâ€ point of view is all of the firmâ€™s activities must be tailored to or fit its strategy by ensuring that the firmâ€™s functional strategies support its corporate and competitive strategies: Itâ€™s this â€˜fitâ€™ that breathes life into the firmâ€™s strategy.
For example, Southwest Airlines pursues a low cost leader strategy, and then tailors its activities to deliver low cost, convenient service on its short haul routes. It gets fast, 15-minute turnarounds at the gate, so it can keep its planes flying longer hours than rivals and have more departures with fewer aircraft. It also shuns frills like meals, assigned seats, and premium classes of service on which other full service airlines build their competitive strategies.