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Business Level Strategy: Examples & Types for Business Strategy Success

Published: 19 April, 2024

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In strategic management, businesses use a variety of approaches to craft a business model that stands apart from competitors. Among these, types of business-level strategies are particularly effective. Defining and implementing an effective business level strategy is more crucial than ever. This strategy determines how a company will compete in its chosen market or markets and is a vital component of the overall business strategy . An effective business level strategy can significantly enhance a company’s ability to respond to market conditions, leverage its strengths, and achieve sustainable growth.c

Business Level Strategy is a crucial component of the strategic management process within any organization aiming to achieve competitive advantage. By focusing on market positioning and meeting the needs and preferences of specific market segments, this strategy helps companies differentiate from competitors and achieve business needs. At Digital Leadership, we recognize the criticality of strategic adaptation and innovation in today’s business landscape. Our expertise in digital strategy and execution places us in a unique position to help businesses leverage their core competencies and navigate through the complexities of market competition.

What is Business Level Strategy?

Business Level Strategy guides firms in navigating competitive markets and aligning their operational activities with broader business goals . This strategic approach focuses on achieving competitive advantage through customer satisfaction, optimizing operational efficiency, and adapting to the ever-changing market dynamics. Understanding Business Level Strategy is crucial for any organization aiming to sustain and enhance its market position.

It provide frameworks that help businesses craft pricing strategies and reduce production costs, ultimately leading to good cost leadership. By following the principles outlined by Michael Porter and focusing on these three strategies, businesses can effectively attract customers and enhance their market position.

We believe that strategy is the driving force behind business success, and that our strategy execution framework model can help you successfully execute your strategy.

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2) understand the competitive environment.

Analyzing your competitive environment allows you to identify key competitors and market trends, helping to position your strategy effectively.

3) Define Strategic Objectives

Clear strategic objectives must be set to guide the direction of your business efforts and to measure progress against these goals.

4) Identify Target Customer Segments

Understanding who your customers are and what they need is crucial in tailoring your business strategy to meet their demands.

5) Select the Right Business-Level Strategy

Choose a strategy—be it cost leadership, differentiation, or focus—that aligns with your company’s strengths and market opportunities.

6) Develop Action Plans

Action plans translate your strategy into actionable steps that can be implemented within your organization.

7) Build Organizational Support Culture

Foster a culture that supports the strategic goals through training, leadership alignment, and employee engagement.

8) Implement and Monitor Key Performance Indicators (KPIs)

Implement the strategies and monitor their success through key performance indicators.

9) Evaluate the Effectiveness of the Strategy

Regularly evaluate the effectiveness of your business strategy to adapt and pivot as necessary.

Importance of Integrating Business Level Strategy in Organizations

As a piece of your  Organizational Strategy,  your  Business Level Strategy  articulates many of the operations that you’ll implement in order to achieve your broader  business goals.  There are several reasons why Business Level Strategy is an important piece of every thriving organization’s overall approach to the work they do.

• Facilitates differentiation from competitors
• Guides decision-making
• Enhances focus and defines target market
• Supports long-term planning
• Facilitates growth and development

(1) Facilitates differentiation from competitors

A strong Business Level Strategy enables an organization to gain a competitive advantage over its rivals.

(2) Guides decision-making

A clear Business Level Strategy helps managers coordinate their efforts and allocate resources effectively. With clear  strategic planning , a business is less-likely to undertake wasteful investments.

(3) Enhances focus and defines target market

Having a well-defined Business Level Strategy enables organizations to focus their efforts on the most critical aspects of their business, including a well-defined target market.

(4) Supports long-term planning

Effective Business Level Strategy provides a foundation for long-term planning and helps organizations set goals and objectives.

(5) Facilitates growth and development

The right Business Level Strategy can help organizations grow and develop by providing a roadmap for expanding into new markets, launching new products, and diversifying their operations.

Business Level Strategy is crucial for organizations to succeed in today’s rapidly  changing business environment . It helps organizations stay focused, make informed decisions, and achieve their  long-term goals.

How to Choose The Right Business Level Strategy To Gain a Competitive Advantage For Your Company?

Selecting the right business level strategy involves understanding your market, assessing your internal capabilities, and aligning your business goals with customer needs. This strategic alignment is crucial for gaining a competitive edge and ensuring the successful business outcome. To choose effectively:

• Assess the Market: Understand the dynamics of your market, including customer behavior, competitor strategies, and emerging trends. This will help identify opportunities where your business can effectively differentiate itself.
• Evaluate Internal Capabilities: Look at your company’s strengths and weaknesses to determine which type of strategy can make the most impact. For instance, if your production costs are inherently lower, a cost leadership strategy may be advantageous.
• Align with Customer Needs: Identify and understand the specific needs and preferences of your target segments. Strategy to attract customers should focus on how your offerings align with their expectations and how you can solve their problems better than competitors.

By carefully considering these elements, businesses can select a business level strategy that not only complements their strengths and the market environment but also resonates well with desired customer segments.

Challenges of Implementing Business-Level Strategies and How to Overcome Them

Challenges in implementing business-level strategies often include alignment of resources, resistance to change, and market unpredictability. Here’s how to address these challenges:

• Alignment of Resources: Ensure that all parts of the business are geared towards the strategy. This includes allocating budget, manpower, and other resources to support strategic initiatives.
• Resistance to Change: Change can often meet resistance within an organization. Overcoming this requires strong leadership to communicate the benefits clearly and to involve key stakeholders in the strategy development process. Engaging employees early and often helps in gaining their buy-in and making them feel a part of the journey.
• Market Unpredictability: To deal with unpredictability, businesses must remain flexible and agile. Regularly reviewing and adapting the strategy based on market feedback and performance can help stay relevant. Implementing a feedback loop from customers and frontline employees can provide insights that lead to quicker adjustments.

In implementing these strategies, companies can navigate the complexities of market competition and internal dynamics, enabling them to achieve specific goals and foster growth. This strategic approach not only helps in attracting customers who are looking for differentiated offerings but also enhances the company’s ability to compete effectively in new markets and with new products, ultimately ensuring the successful business in the long term.

Case Studies of Business-Level Strategy Implementation

Exploring case studies from successful companies like Apple and Starbucks can provide valuable insights into effective business-level strategy implementations. Both companies have masterfully used business-level strategies to carve out dominant positions in their respective markets through differentiation and a focus on customer loyalty.

Apple: A Synonym for Uniqueness and Differentiation

Apple’s business-level strategy hinges on its unparalleled ability to innovate and create products that define uniqueness in the market. The company’s focus on aesthetic design, user-friendly interfaces, and cutting-edge technology appeals to a specific niche of technology enthusiasts and premium product consumers. Apple not only differentiates its products but also maintains a higher price point to match its brand prestige, which in turn bolsters customer loyalty and premium positioning.

Starbucks: Crafting a Unique Customer Experience

Starbucks employs a differentiation business strategy that goes beyond just selling coffee. It creates a distinctive and comforting “third place” (apart from home and work) which resonates deeply with consumers. By focusing on the ambiance, consistent quality across outlets, and excellent customer service, Starbucks maintains customer loyalty and effectively differentiates itself in a crowded market. Their strategy includes exploring new markets and consistently innovating the customer experience, which keeps the brand relevant and loved.

How to Optimize the Customer Journey in Modern Business Level Strategy Execution

Optimizing the customer journey in the modern business environment involves a meticulous understanding of customer touchpoints and consistently enhancing interactions to improve customer experience and foster loyalty. This requires an integration of cost and differentiation strategies where businesses need to cut costs while enhancing the value offered to customers. This dual approach ensures that the business remains competitive on price while differentiating its offerings to better meet customer needs.

Effective optimization might involve using digital tools to streamline the purchasing process, offering personalized interactions through AI and machine learning, and constantly gathering feedback to refine the customer journey. Each step should be designed to enhance customer satisfaction and deepen engagement, turning one-time buyers into lifelong advocates.

Performance Indicators (KPIs) for Evaluating Business-Level Strategy Success

To measure the effectiveness of business-level strategies , organizations must establish and monitor Key Performance Indicators (KPIs). These indicators help businesses gauge their performance in areas critical to their strategic goals, such as:

• Market Share Growth: Measures the company’s ability to expand its presence in new and existing markets.
• Profit Margins: Keeps track of profitability changes, which reflect the success of cost leadership strategies and the ability to manage costs effectively.
• Customer Satisfaction Levels: An essential metric for assessing how well the company meets customer expectations, a direct outcome of differentiation strategies.
• Customer Retention Rates: Indicates customer loyalty, which is crucial for long-term success and is directly influenced by the company’s ability to maintain its uniqueness and meet underserved customer needs.

By integrating these elements into the business-level strategy , companies can ensure that they not only survive but thrive in competitive markets, leveraging their unique strengths to meet complex and ever-changing market demands.

Frequently Asked Questions

1) what is the advantage of setting business-level strategies.

Setting business-level strategies provides a clear roadmap for operational success and competitive positioning. It enables a company to tailor its operational focus to specific market demands, ensuring that resources are allocated efficiently to drive market share and profitability.

2) How often should a business-level strategy be reassessed?

Business-level strategies should be reassessed annually or whenever significant market shifts occur. This reassessment ensures that the strategy remains relevant and effective in addressing the current market conditions and company objectives.

3) Business-level strategy addresses which overarching question?

It addresses the critical question of how a company can achieve a competitive advantage in its designated market. This involves a deep understanding of the market, competitive forces, customer preferences, and internal capabilities.

4) Can Business Level Strategy Change Overtime?

Yes, business-level strategy can and often does change over time. As market conditions evolve, companies may need to adapt their strategies to maintain competitiveness. This could involve shifting from cost leadership to differentiation, targeting new customer segments, or even redesigning products to better meet the changing needs of the market.

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Business Level Strategies: What are they, How to use it?

By   Julie Choo

Published: October 3, 2023

Last Update: January 9, 2024

TOPICS:   Service Design

In the dynamic world of business, success hinges on the ability to craft and implement effective strategies. One crucial aspect of this strategy is business level strategy , which defines how a company competes in a specific market or industry. In this blog post, we will delve into the 3 broad business level strategies, and their types including Cost Leadership Strategy, Focused Differentiation Strategy, and more, to understand how they can propel a company towards its goals.

The traditional approach to business strategy, comprising corporate, functional, and business-level strategies, has long been the standard. However, the advent of the digital age and the complexities it presents have rendered this old strategy framework somewhat inadequate. 

The new way of thinking, as exemplified by the “ Strategy Journey ” framework outlined in our analyzed text, offers a transformative perspective. While the traditional strategy levels are still relevant, the Strategy Journey introduces a dynamic layer that enhances their effectiveness. It provides the motivational context, explains the imperative of digital transformation, and addresses the intricacies of the modern business landscape. By adding the Strategy Journey on top of the three business strategy levels, companies gain a practical, formulaic, data-driven means to navigate the challenges of digital transformation. This integrated approach guides the development of a more effective future enterprise and equips businesses with the agility to adapt to rapidly changing digital dynamics. It ultimately offers a holistic and value-driven strategy that recognizes the new realities of the digital economy.

Three Levels of Business Strategy

In the complex realm of business management, strategy plays a pivotal role in shaping an organization’s path to success. There exist three distinct levels of business strategy , each with its unique focus and significance. Let’s delve into these levels and gain a comprehensive understanding.

1. Corporate Level Strategy: Charting the Organizational Course

Corporate level strategy stands as the highest echelon, dictating the overall direction and scope of an entire organization. At this level, critical decisions revolve around diversification, expansion into new markets, mergers and acquisitions, and the management of the organizational portfolio. It addresses fundamental questions, such as which industries to enter or exit, how to allocate resources among different business units, and how to foster synergy among various facets of the organization. In essence, corporate level strategy sets the long-term vision and overarching objectives that guide the entire enterprise.

• Portfolio Diversification: Corporate level strategies allow for diversification into different industries or markets, reducing risk.
• Resource Allocation: These strategies determine how resources are allocated among various business units, optimizing resource utilization.
• Synergy Creation: Corporate level strategies can foster synergy among business units, enabling them to work cohesively and share resources or knowledge.
• Long-term Vision: They provide a long-term vision and direction for the entire organization.
• Complexity: Managing a diversified portfolio can be complex and may require significant oversight.
• Integration Challenges: Integrating diverse businesses may be challenging, leading to cultural clashes or operational difficulties.
• Risk Exposure: Diversification carries the risk of exposure to different market forces, and some business units may underperform.

2. Business Level Strategy: Competing in Defined Territories

The business strategies here shift the focus to the battleground of specific markets or industries. It outlines the approach a company adopts to secure a competitive edge within its chosen market segment. The strategies at this level are more precise and targeted, aiming to position the company advantageously relative to competitors. Three common archetypes of business level strategy include Cost Leadership (striving to become the lowest-cost producer), Differentiation (offering unique or high-quality products/services), and Focus (narrowing the scope to target a specific niche market). Business level strategies serve as the blueprint for how a company stands out in the marketplace.

Business Level Strategies Pros & Cons

Business level strategies are essential for companies to differentiate themselves from competitors and secure a competitive advantage. These strategies determine how a company positions itself in the market and how it delivers value to customers.

• Competitive Advantage: Business level strategies help create a competitive advantage within a specific market or industry.
• Customer Focus: They enable organizations to tailor their products or services to meet the specific needs and preferences of target customers.
• Brand Positioning: These strategies allow companies to establish a unique brand position, commanding premium prices or gaining market share.
• Clarity: Business level strategies provide clear guidance on how to compete effectively in a chosen market segment.
• Market Volatility: Relying heavily on a single business level strategy can make an organization vulnerable to market fluctuations.
• Imitation Risk: Competitors may imitate successful business level strategies, diminishing their uniqueness over time.
• Resource Intensity: Pursuing differentiation or other business level strategies may require significant investments in research, development, and marketing.

3. Functional Level Strategy: Orchestrating Departmental Success

At the functional level, strategies are formulated to optimize the performance of specific departments or functions within an organization. These departments, such as marketing, finance, operations, and human resources, each have their unique role to play. Functional level strategies align harmoniously with and bolster the broader corporate and business level strategies. They are the building blocks that translate high-level goals into actionable plans. For instance, a marketing department may craft a functional strategy that emphasizes digital marketing to bolster a differentiation business level strategy.

Functional level Strategies Pros & Cons

• Specialization: Functional strategies allow departments to specialize and excel in their respective areas, leading to greater expertise.
• Efficiency: These strategies optimize departmental processes and workflows, improving efficiency and productivity.
• Clear Objectives: Functional level strategies help define clear objectives and performance metrics for each department.
• Alignment: These strategies align with and support the broader corporate and business level strategies, ensuring coherence in the organization’s actions.
• Silos: Focusing solely on functional strategies can create silos within the organization, hindering cross-functional collaboration.
• Narrow Focus: These strategies may lead to a narrow perspective, with departments primarily concerned about their own goals rather than the organization’s overall success.
• Potential Conflicts: Conflicts may arise between departments if their strategies diverge or compete for resources.

Business Strategy Types

Michael Porter, a renowned strategy expert , outlined three generic business-level strategies that organizations can adopt to gain a competitive advantage in their respective industries. These strategies are:

Cost Leadership Strategy

Cost leadership strategy is a strategic approach that revolves around becoming a cost leader within a specific market. Organizations that successfully implement this strategy focus relentlessly on achieving low production costs, enabling them to offer their products or services at competitive, often lower, prices. By consistently delivering value at a lower cost than their competitors, cost leaders can attract a wide target market and gain a substantial market share. Despite offering products or services at a lower price point, they can still achieve profitability, which sets them apart from others in their industry.

Cost Leadership Example

Walmart is a prime illustration of a company employing a Cost Leadership strategy. The retail giant is known for its relentless focus on cost efficiency, which allows it to provide a wide range of products at lower prices than many competitors. Walmart achieves cost leadership through various means, including efficient supply chain management, inventory control, and economies of scale. By offering everyday low prices, Walmart has attracted a vast customer base and maintained a dominant position in the retail industry.

Corporate Level Strategy

While business level strategies focus on how a company competes in a specific market, Corporate Level Strategy looks at the broader picture of a company’s overall direction and portfolio of businesses. Corporate level strategies involve decisions about diversification, expansion, mergers, and acquisitions.

Corporate Level Strategy Example

Companies like Alphabet Inc. (Google’s parent company) have employed a corporate level strategy by diversifying their portfolio to include various businesses like search, advertising, and autonomous vehicles.

Differentiation Strategy

Focused Differentiation is a strategy where a company concentrates on a specific market segment or niche and tailors its products or services to meet the unique needs of that segment. By doing so, the company aims to stand out by offering distinct features or attributes that other competitors do not provide.

Differentiation Strategy Example

Apple Inc. is a standout example of a company following a Differentiation strategy. Apple’s products, such as the iPhone, iPad, and Mac, are known for their distinctive design, high-quality materials, and user-friendly interfaces. Apple’s emphasis on innovation, sleek aesthetics, and seamless integration across its ecosystem sets it apart from competitors. This differentiation strategy has not only cultivated a fiercely loyal customer base but has also allowed Apple to command premium prices and maintain impressive profit margins.

Focus Strategy

The focus strategy involves concentrating on a specific market segment or niche and tailoring products or services to meet the unique needs and preferences of that segment. By focusing efforts and resources on a well-defined target audience, organizations can become experts in serving that niche effectively. This strategy can take two forms:

• Cost Focus : A cost-focused strategy aims to be the lowest-cost producer within a specific niche market. It involves offering products or services at lower prices than niche competitors while still meeting the niche’s requirements.
• Differentiation Focus : A differentiation-focused strategy involves delivering a highly differentiated product or service to a niche market, often at premium prices. This approach is about catering to the unique desires of the niche audience.

Focus Strategy Example

Ferrari is a classic illustration of a company pursuing a Focus strategy. Ferrari concentrates on producing high-performance sports cars for a niche market of enthusiasts who are passionate about luxury and speed. By focusing on this exclusive segment, Ferrari can maintain its reputation for excellence, charge premium prices for its vehicles, and establish itself as a leader in the luxury sports car market. This focus on a specific niche has allowed Ferrari to maintain its exclusivity and desirability among its target customers.

Choosing and Implementing the Right Business-Level Strategy

By following these steps and integrating the focused cost leadership strategy into your business model, you can position your organization for success in a specific market niche while leveraging your core competencies to drive cost-efficient operations.

• Assess Your Core Competencies: Begin by identifying your organization’s unique strengths and capabilities that can serve as the foundation for your business-level strategy.
• Analyze Market Dynamics: Examine the industry and market conditions to determine where a focused cost leadership strategy can provide a competitive advantage.
• Evaluate Corporate Strategy: Ensure that your business-level strategy aligns with your overarching corporate strategy, considering the long-term goals and direction of the organization.
• Define Your Target Market: Clearly define the specific niche or segment within the broader market where you intend to apply the focused cost leadership strategy.
• Craft a Business Model: Develop a business model that outlines how you will achieve cost leadership while delivering value to your target market.
• Cost Optimization: Implement measures to optimize costs across your operations, from production to distribution, in alignment with the focused cost leadership strategy.
• Invest in Technology and Efficiency: Leverage technology and efficient processes to drive down costs and enhance competitiveness.
• Price Positioning: Determine your pricing strategy, ensuring that it aligns with the cost leadership approach while remaining attractive to your target customers.
• Continuous Improvement: Establish a culture of continuous improvement, regularly reviewing and refining your cost-saving measures.
• Monitor and Adapt: Continuously monitor market dynamics, customer preferences, and competitive forces, and be prepared to adapt your focused cost leadership strategy as needed to maintain your competitive edge.

In Conclusion

the exploration of business level strategies, including real-world examples, has shed light on the pivotal role these strategies play in shaping organizational success. Whether it’s Cost Leadership, Differentiation, or Focus, an effective business level strategy can steer a company toward achieving its strategic objectives.

By examining examples like Walmart’s cost leadership approach and Apple’s differentiation strategy, we’ve seen how these strategies can lead to competitive advantages, increased customer satisfaction, and sustained profitability. These strategies not only define how companies compete in specific markets but also serve as blueprints for delivering unique value to their target audiences.

About the author

Julie Choo is lead author of THE STRATEGY JOURNEY book and the founder of STRATABILITY ACADEMY. She speaks regularly at numerous tech, careers and entrepreneur events globally. Julie continues to consult at large Fortune 500 companies, Global Banks and tech start-ups. As a lover of all things strategic, she is a keen Formula One fan who named her dog, Kimi (after Raikkonnen), and follows football - favourite club changes based on where she calls home.

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FEATURED CASE STUDIES

The Army Crew Team . Emily Michelle David of CEIBS

ATH Technologies . Devin Shanthikumar of Paul Merage School of Business

Fabritek 1992 . Rob Austin of Ivey Business School

Lincoln Electric Co . Karin Schnarr of Wilfrid Laurier University

Pal’s Sudden Service—Scaling an Organizational Model to Drive Growth . Gary Pisano of Harvard Business School

The United States Air Force: ‘Chaos’ in the 99th Reconnaissance Squadron . Francesca Gino of Harvard Business School

Warren E. Buffett, 2015 . Robert F. Bruner of Darden School of Business

To dig into what makes a compelling case study, we asked seven experienced educators who teach with—and many who write—business case studies: “What is your favorite case to teach and why?”

The resulting list of case study favorites ranges in topics from operations management and organizational structure to rebel leaders and whodunnit dramas.

1. The Army Crew Team

Emily Michelle David, Assistant Professor of Management, China Europe International Business School (CEIBS)

“I love teaching  The Army Crew Team  case because it beautifully demonstrates how a team can be so much less than the sum of its parts.

I deliver the case to executives in a nearby state-of-the-art rowing facility that features rowing machines, professional coaches, and shiny red eight-person shells.

After going through the case, they hear testimonies from former members of Chinese national crew teams before carrying their own boat to the river for a test race.

The rich learning environment helps to vividly underscore one of the case’s core messages: competition can be a double-edged sword if not properly managed.

Executives in Emily Michelle David’s organizational behavior class participate in rowing activities at a nearby facility as part of her case delivery.

Despite working for an elite headhunting firm, the executives in my most recent class were surprised to realize how much they’ve allowed their own team-building responsibilities to lapse. In the MBA pre-course, this case often leads to a rich discussion about common traps that newcomers fall into (for example, trying to do too much, too soon), which helps to poise them to both stand out in the MBA as well as prepare them for the lateral team building they will soon engage in.

Finally, I love that the post-script always gets a good laugh and serves as an early lesson that organizational behavior courses will seldom give you foolproof solutions for specific problems but will, instead, arm you with the ability to think through issues more critically.”

2. ATH Technologies

Devin Shanthikumar, Associate Professor of Accounting, Paul Merage School of Business

“As a professor at UC Irvine’s Paul Merage School of Business, and before that at Harvard Business School, I have probably taught over 100 cases. I would like to say that my favorite case is my own,   Compass Box Whisky Company . But as fun as that case is, one case beats it:  ATH Technologies  by Robert Simons and Jennifer Packard.

ATH presents a young entrepreneurial company that is bought by a much larger company. As part of the merger, ATH gets an ‘earn-out’ deal—common among high-tech industries. The company, and the class, must decide what to do to achieve the stretch earn-out goals.

ATH captures a scenario we all want to be in at some point in our careers—being part of a young, exciting, growing organization. And a scenario we all will likely face—having stretch goals that seem almost unreachable.

It forces us, as a class, to really struggle with what to do at each stage.

After we read and discuss the A case, we find out what happens next, and discuss the B case, then the C, then D, and even E. At every stage, we can:

see how our decisions play out,

figure out how to build on our successes, and

address our failures.

The case is exciting, the class discussion is dynamic and energetic, and in the end, we all go home with a memorable ‘ah-ha!’ moment.

I have taught many great cases over my career, but none are quite as fun, memorable, and effective as ATH .”

3. Fabritek 1992

Rob Austin, Professor of Information Systems, Ivey Business School

“This might seem like an odd choice, but my favorite case to teach is an old operations case called  Fabritek 1992 .

The latest version of Fabritek 1992 is dated 2009, but it is my understanding that this is a rewrite of a case that is older (probably much older). There is a Fabritek 1969 in the HBP catalog—same basic case, older dates, and numbers. That 1969 version lists no authors, so I suspect the case goes even further back; the 1969 version is, I’m guessing, a rewrite of an even older version.

There are many things I appreciate about the case. Here are a few:

It operates as a learning opportunity at many levels. At first it looks like a not-very-glamorous production job scheduling case. By the end of the case discussion, though, we’re into (operations) strategy and more. It starts out technical, then explodes into much broader relevance. As I tell participants when I’m teaching HBP's Teaching with Cases seminars —where I often use Fabritek as an example—when people first encounter this case, they almost always underestimate it.

It has great characters—especially Arthur Moreno, who looks like a troublemaker, but who, discussion reveals, might just be the smartest guy in the factory. Alums of the Harvard MBA program have told me that they remember Arthur Moreno many years later.

Almost every word in the case is important. It’s only four and a half pages of text and three pages of exhibits. This economy of words and sparsity of style have always seemed like poetry to me. I should note that this super concise, every-word-matters approach is not the ideal we usually aspire to when we write cases. Often, we include extra or superfluous information because part of our teaching objective is to provide practice in separating what matters from what doesn’t in a case. Fabritek takes a different approach, though, which fits it well.

It has a dramatic structure. It unfolds like a detective story, a sort of whodunnit. Something is wrong. There is a quality problem, and we’re not sure who or what is responsible. One person, Arthur Moreno, looks very guilty (probably too obviously guilty), but as we dig into the situation, there are many more possibilities. We spend in-class time analyzing the data (there’s a bit of math, so it covers that base, too) to determine which hypotheses are best supported by the data. And, realistically, the data doesn’t support any of the hypotheses perfectly, just some of them more than others. Also, there’s a plot twist at the end (I won’t reveal it, but here’s a hint: Arthur Moreno isn’t nearly the biggest problem in the final analysis). I have had students tell me the surprising realization at the end of the discussion gives them ‘goosebumps.’

Finally, through the unexpected plot twist, it imparts what I call a ‘wisdom lesson’ to young managers: not to be too sure of themselves and to regard the experiences of others, especially experts out on the factory floor, with great seriousness.”

4. Lincoln Electric Co.

Karin Schnarr, Assistant Professor of Policy, Wilfrid Laurier University

“As a strategy professor, my favorite case to teach is the classic 1975 Harvard case  Lincoln Electric Co.  by Norman Berg.

I use it to demonstrate to students the theory linkage between strategy and organizational structure, management processes, and leadership behavior.

This case may be an odd choice for a favorite. It occurs decades before my students were born. It is pages longer than we are told students are now willing to read. It is about manufacturing arc welding equipment in Cleveland, Ohio—a hard sell for a Canadian business classroom.

Yet, I have never come across a case that so perfectly illustrates what I want students to learn about how a company can be designed from an organizational perspective to successfully implement its strategy.

And in a time where so much focus continues to be on how to maximize shareholder value, it is refreshing to be able to discuss a publicly-traded company that is successfully pursuing a strategy that provides a fair value to shareholders while distributing value to employees through a large bonus pool, as well as value to customers by continually lowering prices.

However, to make the case resonate with today’s students, I work to make it relevant to the contemporary business environment. I link the case to multimedia clips about Lincoln Electric’s current manufacturing practices, processes, and leadership practices. My students can then see that a model that has been in place for generations is still viable and highly successful, even in our very different competitive situation.”

5. Pal’s Sudden Service—Scaling an Organizational Model to Drive Growth

Gary Pisano, Professor of Business Administration, Harvard Business School

“My favorite case to teach these days is  Pal’s Sudden Service—Scaling an Organizational Model to Drive Growth .

I love teaching this case for three reasons:

1. It demonstrates how a company in a super-tough, highly competitive business can do very well by focusing on creating unique operating capabilities. In theory, Pal’s should have no chance against behemoths like McDonalds or Wendy’s—but it thrives because it has built a unique operating system. It’s a great example of a strategic approach to operations in action.

2. The case shows how a strategic approach to human resource and talent development at all levels really matters. This company competes in an industry not known for engaging its front-line workers. The case shows how engaging these workers can really pay off.

3. Finally, Pal’s is really unusual in its approach to growth. Most companies set growth goals (usually arbitrary ones) and then try to figure out how to ‘backfill’ the human resource and talent management gaps. They trust you can always find someone to do the job. Pal’s tackles the growth problem completely the other way around. They rigorously select and train their future managers. Only when they have a manager ready to take on their own store do they open a new one. They pace their growth off their capacity to develop talent. I find this really fascinating and so do the students I teach this case to.”

6. The United States Air Force: ‘Chaos’ in the 99th Reconnaissance Squadron

Francesca Gino, Professor of Business Administration, Harvard Business School

“My favorite case to teach is  The United States Air Force: ‘Chaos’ in the 99th Reconnaissance Squadron .

The case surprises students because it is about a leader, known in the unit by the nickname Chaos , who inspired his squadron to be innovative and to change in a culture that is all about not rocking the boat, and where there is a deep sense that rules should simply be followed.

For years, I studied ‘rebels,’ people who do not accept the status quo; rather, they approach work with curiosity and produce positive change in their organizations. Chaos is a rebel leader who got the level of cultural change right. Many of the leaders I’ve met over the years complain about the ‘corporate culture,’ or at least point to clear weaknesses of it; but then they throw their hands up in the air and forget about changing what they can.

Chaos is different—he didn’t go after the ‘Air Force’ culture. That would be like boiling the ocean.

Instead, he focused on his unit of control and command: The 99th squadron. He focused on enabling that group to do what it needed to do within the confines of the bigger Air Force culture. In the process, he inspired everyone on his team to be the best they can be at work.

The case leaves the classroom buzzing and inspired to take action.”

7. Warren E. Buffett, 2015

Robert F. Bruner, Professor of Business Administration, Darden School of Business

“I love teaching   Warren E. Buffett, 2015  because it energizes, exercises, and surprises students.

Buffett looms large in the business firmament and therefore attracts anyone who is eager to learn his secrets for successful investing. This generates the kind of energy that helps to break the ice among students and instructors early in a course and to lay the groundwork for good case discussion practices.

Studying Buffett’s approach to investing helps to introduce and exercise important themes that will resonate throughout a course. The case challenges students to define for themselves what it means to create value. The case discussion can easily be tailored for novices or for more advanced students.

Either way, this is not hero worship: The case affords a critical examination of the financial performance of Buffett’s firm, Berkshire Hathaway, and reveals both triumphs and stumbles. Most importantly, students can critique the purported benefits of Buffett’s conglomeration strategy and the sustainability of his investment record as the size of the firm grows very large.

By the end of the class session, students seem surprised with what they have discovered. They buzz over the paradoxes in Buffett’s philosophy and performance record. And they come away with sober respect for Buffett’s acumen and for the challenges of creating value for investors.

Surely, such sobriety is a meta-message for any mastery of finance.”

More Educator Favorites

Emily Michelle David is an assistant professor of management at China Europe International Business School (CEIBS). Her current research focuses on discovering how to make workplaces more welcoming for people of all backgrounds and personality profiles to maximize performance and avoid employee burnout. David’s work has been published in a number of scholarly journals, and she has worked as an in-house researcher at both NASA and the M.D. Anderson Cancer Center.

Devin Shanthikumar  is an associate professor and the accounting area coordinator at UCI Paul Merage School of Business. She teaches undergraduate, MBA, and executive-level courses in managerial accounting. Shanthikumar previously served on the faculty at Harvard Business School, where she taught both financial accounting and managerial accounting for MBAs, and wrote cases that are used in accounting courses across the country.

Robert D. Austin is a professor of information systems at Ivey Business School and an affiliated faculty member at Harvard Medical School. He has published widely, authoring nine books, more than 50 cases and notes, three Harvard online products, and two popular massive open online courses (MOOCs) running on the Coursera platform.

Karin Schnarr is an assistant professor of policy and the director of the Bachelor of Business Administration (BBA) program at the Lazaridis School of Business & Economics at Wilfrid Laurier University in Waterloo, Ontario, Canada where she teaches strategic management at the undergraduate, graduate, and executive levels. Schnarr has published several award-winning and best-selling cases and regularly presents at international conferences on case writing and scholarship.

Gary P. Pisano is the Harry E. Figgie, Jr. Professor of Business Administration and senior associate dean of faculty development at Harvard Business School, where he has been on the faculty since 1988. Pisano is an expert in the fields of technology and operations strategy, the management of innovation, and competitive strategy. His research and consulting experience span a range of industries including aerospace, biotechnology, pharmaceuticals, specialty chemicals, health care, nutrition, computers, software, telecommunications, and semiconductors.

Francesca Gino studies how people can have more productive, creative, and fulfilling lives. She is a professor at Harvard Business School and the author, most recently, of  Rebel Talent: Why It Pays to Break the Rules at Work and in Life . Gino regularly gives keynote speeches, delivers corporate training programs, and serves in advisory roles for firms and not-for-profit organizations across the globe.

Robert F. Bruner is a university professor at the University of Virginia, distinguished professor of business administration, and dean emeritus of the Darden School of Business. He has also held visiting appointments at Harvard and Columbia universities in the United States, at INSEAD in France, and at IESE in Spain. He is the author, co-author, or editor of more than 20 books on finance, management, and teaching. Currently, he teaches and writes in finance and management.

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How to Write a Case Study Analysis

Step-By-Step Instructions

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When writing a business case study analysis , you must first have a good understanding of the case study . Before you begin the steps below, read the business case carefully, taking notes all the while. It may be necessary to read the case several times to get all of the details and fully grasp the issues facing the group, company, or industry.

As you are reading, do your best to identify key issues, key players, and the most pertinent facts. After you are comfortable with the information, use the following step-by-step instructions (geared toward a single-company analysis) to write your report. To write about an industry, just adapt the steps listed here to discuss the segment as a whole.

Step 1: Investigate the Company’s History and Growth

A company’s past can greatly affect the present and future state of the organization. To begin, investigate the company’s founding, critical incidents, structure, and growth. Create a timeline of events, issues, and achievements. This timeline will come in handy for the next step. 

Step 2: Identify Strengths and Weaknesses

Using the information you gathered in step one, continue by examining and making a list of the value creation functions of the company. For example, the company may be weak in product development but strong in marketing. Make a list of problems that have occurred and note the effects they have had on the company. You should also list areas where the company has excelled. Note the effects of these incidents as well.

You're essentially conducting a partial SWOT analysis to get a better understanding of the company's strengths and weaknesses. A SWOT analysis involves documenting things like internal strengths (S) and weaknesses (W) and external opportunities (O) and threats (T). 

Step 3: Examine the External Environment

The third step involves identifying opportunities and threats within the company’s external environment. This is where the second part of the SWOT analysis (the O and the T) comes into play. Special items to note include competition within the industry, bargaining powers, and the threat of substitute products. Some examples of opportunities include expansion into new markets or new technology. Some examples of threats include increasing competition and higher interest rates.

Step 4: Analyze Your Findings

Using the information in steps 2 and 3, create an evaluation for this portion of your case study analysis. Compare the strengths and weaknesses within the company to the external threats and opportunities. Determine if the company is in a strong competitive position, and decide if it can continue at its current pace successfully.

Step 5: Identify Corporate-Level Strategy

To identify a company’s corporate-level strategy, identify and evaluate the company’s mission , goals, and actions toward those goals. Analyze the company’s line of business and its subsidiaries and acquisitions. You also want to debate the pros and cons of the company strategy to determine whether or not a change might benefit the company in the short or long term.​

Step 6: Identify Business-Level Strategy

Thus far, your case study analysis has identified the company’s corporate-level strategy. To perform a complete analysis, you will need to identify the company’s business-level strategy. (Note: If it is a single business, without multiple companies under one umbrella, and not an industry-wide review, the corporate strategy and the business-level strategy are the same.) For this part, you should identify and analyze each company’s competitive strategy, marketing strategy, costs, and general focus.

Step 7: Analyze Implementations

This portion requires that you identify and analyze the structure and control systems that the company is using to implement its business strategies. Evaluate organizational change, levels of hierarchy, employee rewards, conflicts, and other issues that are important to the company you are analyzing.

Step 8: Make Recommendations

The final part of your case study analysis should include your recommendations for the company. Every recommendation you make should be based on and supported by the context of your analysis. Never share hunches or make a baseless recommendation.

You also want to make sure that your suggested solutions are actually realistic. If the solutions cannot be implemented due to some sort of restraint, they are not realistic enough to make the final cut.

Finally, consider some of the alternative solutions that you considered and rejected. Write down the reasons why these solutions were rejected. 

Step 9: Review

Look over your analysis when you have finished writing. Critique your work to make sure every step has been covered. Look for grammatical errors , poor sentence structure, or other things that can be improved. It should be clear, accurate, and professional.

Business Case Study Analysis Tips

Keep these strategic tips in mind:

• Know the case study ​backward and forward before you begin your case study analysis.
• Give yourself enough time to write the case study analysis. You don't want to rush through it.
• Be honest in your evaluations. Don't let personal issues and opinions cloud your judgment.
• Be analytical, not descriptive.
• Proofread your work, and even let a test reader give it a once-over for dropped words or typos that you no longer can see.
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How Costco's Unique Business Model Resulted In Global Success

Table of contents, here’s what you’ll learn from costco’s strategy study:.

• How developing a radically different business model can lead to an industry breakthrough.
• How global expansion can be safely explored when you’re at your very best.
• How to accompany a business model innovation with policies that create a cohesive strategy.
• How managing your competitive advantage requires the evolution of your strategic approach.
• How to respond to market trends without killing your strategic advantage.

Costco is the third biggest retail player in the world - behind only Walmart and Amazon. Yet there is something very unusual about the retail giant. Costco makes way less money per a sold product compared to other retail stores. 

The company’s average   gross profit margin was only around 12% in 2022 . That’s way lower than your average retailer gross margin which ranges from 20% all the way to 50% for department stores. E.g. Walmart’s average margin in 2022 was 24.4% . In fact, Costco even loses about $40 million a year on their $5 roasted chickens alone.

It also doesn’t have nearly as many stores as other big retailers, yet it outperforms everyone but Walmart. Costco has “only” 838 stores around the world, while Walmart has 10,593 retail stores in 2022 , Schwarz Group, the group that owns Lidl and Kaufland, has 13,500 stores , Kroger owns nearly 2,800 stores , and Target owns 1,948 stores .

After all, the company boasts:

• $222.7 billion net sales in 2022
• 314,000+ employees 273,000 employees
• Stores in 13 countries
• 120.9 million worldwide members
• A 93% membership renewal rate in the U.S. and Canada and an 90% renewal rate worldwide

Members - that’s Costco’s secret. Their warehouse retail stores are membership-only and that’s the foundation of their extremely successful business model.

Costco’s story is a masterclass of thinking outside the box and creating win-win scenarios which satisfy customers and employees while achieving the company’s business goals.

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A warehouse club: the birth of a disruptive business model

Costco’s story begins with Price Club which was founded in 1976 by Sol Price and his son Robert Price. The store introduced a brand new concept - a retail warehouse club . In order to shop there, you had to be a member.

At first, Price Club was limited exclusively to business members, who could purchase a wide range of supplies and wholesale items. But after a while, it opened up its membership to employees of local businesses, non-profit organizations, and government. 

One of the people who were instrumental in fine-tuning the new warehouse club concept was Jim Sinegal , the executive vice-president of merchandising, distribution, and marketing. He was previously employed by Sol Price and was familiar with the Price Club business model.

Seven years after the first Price Club store, Sinegal used his expertise to co-found Costco Wholesale with Jeff Brotman, and together they opened the first warehouse in Seattle, Washington in 1983.

In 1993, Costco and Price Club agreed to merge operations since Costco's business model and size were similar to those of Price Club, which made the merger more natural for both companies.

Costco has transformed the retail world as the world's first membership warehouse club for the wider public which accepted non-business members. While the idea of charging people to shop in your store seemed very bold and was not followed by any of the retail giants, it proved to be the right move. It allowed Costco more efficient buying and operating practices while giving the members access to unmatched savings.

Costco’s operating philosophy has always been simple: 

Keep costs down and pass the savings on to our members.

People loved the concept, which resulted in Costco’s stunning rise. By the end of 1984, 200,000 people held Costco memberships and Costco soon became the first company ever to grow from zero to $3 billion in sales in less than six years since its inception.

The annual membership of Costco’s first Seattle store back in 1983 was $25. The cost of a membership nowadays starts from $60, which is around the same as it was back in 1983 once adjusted to inflation.

The merger between Price Club and Costco created  the world's most successful warehouse club . In 1999 the name of the company was changed to Costco Wholesale Corporation and remained as such until this day.

Key takeaway #1: A radically different business model is a preposterously effective business strategy

Costco’s radically different business model was a disruptive innovation in the retail industry.

It created a constant flow of revenue that offered unmatched flexibility that was returned back to its customers. It’s important to note, though, that:

• Costco tested the model with a small circle before it proved successful. It didn’t go into full launch mode without  validation .
• The model is not different for the sake of being different. It included an advantage (e.g. the fixed revenue stream) and a way to turn that advantage into increased customer value (e.g. unbeatable low prices). It was  meaningfully different .

The different business model created a second, unique to Costco, profit model. The company faces the same challenges as any other retail, but its second profit model gives it the flexibility to challenge the conventional way of the industry (like having much lower profit margins). In other words, it offers an unfair advantage like every great strategy.

How Costco safely started its global strategy

Before Costco's international expansion, there was quite some doubt whether the innovative Costco retailing strategies would result in success outside the United States.

There are plenty of failure stories indicating that advantages aren’t easily transferred geographically:

• Target's exit from Canada in 2015
• Tesco's shutdown of its U.S. Fresh and Easy chain
• Walmart's store closings in Brazil in 2016

Being successful in the global market is not a given even for the biggest retail players.

However, Costco's expansion, which began in 2013, succeeded in ways that Target, Walmart, and Tesco failed to do. By   January 2023 , Costco was present in 14 countries outside the US and Puerto Rico.

Costco membership sign ups in the first 8 to 12 weeks of a new store opening overseas are generally 10 times greater than at Costco store openings in the United States. Additionally, the company’s international membership renewal rate was 90% at the end of its 2022 fiscal year.

While many other retail chains open international locations as a defensive strategy in order to shore up declining sales, Costco isn't compensating for domestic weakness. Costco's international expansion came in the middle of high profits in the U.S. market, allowing the company to focus on a long-term international strategy and to test if its business model would be well-received in other markets.

And talk about great reception! In 2017, before Costco opened its doors in Iceland, one out of eight Icelanders had already signed up for membership. On the opening day, search-and-rescue teams were deployed to manage the crowds.

Perhaps even more impressive is Costco’s opening of its first store in mainland China in Shanghai in 2019. On an opening day, 139,000 people got their Costco membership. The store even had to close early on the first day due to traffic jams caused by crowds of shoppers and three-hour wait times just to park .

Key takeaway #2: A global expansion attempt as a growth experiment

Costco’s strategic plan was carefully formed before it was executed.

And the approach had a few critical traits that helped it to succeed where other retail giants failed:

• Costco tested the waters beforehand . Again, validation, then action. Before opening its first store, the company enabled its potential customers to subscribe ahead of time, giving a feel of the potential demand.
• Costco expanded when its US profits were still rising.  That enabled it to take a long-term stance, in case the attempt wasn’t fruitful initially.

Costco’s business model innovation was market agnostic.  The retail giant could transfer the advantages of its innovative approach to any market whose fundamental working principles were the same as the US market.

Now let’s see what exactly makes Costco’s business model so successful.

Understanding Costco’s business model

Costco’s strategy remains at its core a cost leadership approach.

Costco’s mission is “to continually provide members with quality goods and services at the lowest possible prices.”  

This mission statement is directly linked to its business model and strategy. It emphasizes quality and cost leadership , which are two factors that top consumer’s priority charts. While they might seem mutually exclusive, Costco is known for both.

Costco is primarily a big-box store. Such stores achieve economies of scale by focusing on large sales volumes and are meant to be a one-stop shop for customers. Establishments like Costco took “the one-stop shop” a bit further and don’t offer just groceries and store products, but also a food court, optical services, gas stations, tire garages, or photo processing services. 

Big-box stores typically carry items in extra-large sizes and lure customers with the promise of saving by buying in bulk . Costco is no exception - real bargains can be had by purchasing bulk non-perishable items or items with long shelf life.

As a result, Costco’s generic strategy is cost leadership. 

This strategy entails maintaining the lowest prices possible and is used by many retail giants. However, Costco’s strategy incorporates the warehouse club membership business model, which differentiates it from other retailers and enables Costco to offer lower prices than its competitors.

Costco is so effective because its revenue is broadly divided into two streams:

• Product sales , which is revenue from all the sales of goods and services through all Costco’s channels.
• Membership fees , which is revenue from Gold Star, Business and Executive memberships to customers worldwide.

This is a very basic overview of Costco’s general business model. Now let’s go into more details and look at some specific elements - starting with the core of the business model, Costco’s membership.

Costco’s membership: the competitive advantage of Costco’s business model

As said, Costco uses a membership-only warehouse club business model , which means consumers pay a membership fee to access the low-cost products available at Costco stores.

Each member is entitled to issue a free supplementary card to someone living in the same household or to a fellow staff member working in the same company. Non-members may accompany members, but only members are allowed to purchase products in stores. In 2020, Costco had a total of 58.1 million paid members and 105.5 million cardholders .

Costco has two tiers of membership – basic and executive plans for consumers and businesses. Basic plans cost $60 per year, while Executive plans cost $120 per year.

Executive members get an annual 2% cashback on their purchases (up to $1,000 per year). This makes executive membership an enticing offer for people who often shop at Costco and there’s plenty of them. In fact, 45% of members pay $120 for the Gold Star Executive membership.

These membership fees actually represent the majority of Costco's operating profit. Yes, Costco makes most of its money by selling access to affordable products and not by selling those products.

In 2019, Costco made $4.2 billion from membership fees , an increase of 9% from the previous year. Its entire net income for the year was $5.8 billion.

Costco’s membership is also a powerful play on the human psyche. Once a customer pays the membership fee, it treats it like a sunk cost. The investment has been made and now it is time to get value from it. Because of that, customers will make additional trips to Costco to make sure they get value from their investment. 

While other retailers need to worry that a decline in same-store sales will lead to collapsing profits, Costco doesn’t really face this problem. Its profits are mostly dependent on its memberships, which are getting renewed on an extremely high basis (93% in the US and 90% internationally).

Obviously, such high renewal rates aren’t a coincidence. Costco does reinvest the membership fees into low prices for customers and by doing so ensures that everyone wins. We’ll talk more about product prices later on, but now let’s see what kind of people Costco wants for its members.

Target market: suburban homeowners

From the very beginning, Costco targeted relatively affluent and college-educated customers who would understand the value of membership.

A typical Costco shopper is an upper-middle or upper socioeconomic class and has an income of about $93,000 a year. 

But if Costco employs a cost leadership strategy, why does it target relatively wealthy people? Well, while all shoppers like a bargain, Costco’s customers also have the means to buy in bulk, which is the only way one can buy most products Costco stocks.

While the price of an individual product generally is the lowest around, shoppers usually have to buy at least a three-pack, which means that the average transaction total is quite high.

That also explains why the vast majority of Costco stores are located in affluent suburban areas both in the U.S. and around the world. It’s hard to make the most of a Costco membership if you’re renting a small flat as it takes a lot of space to store bulk purchases. That’s why a typical shopper is a suburban homeowner.

Speaking of buying and selling in bulk - that is also an important part of Costco’s business model.

Bulk purchasing

Product quality is a crucial aspect that Costco focuses on for driving growth and maintaining customer loyalty.

Instead of selling a hundred thousand different products as most other retailers, Costco’s merchandise is limited to under 4,000 items (for comparison, Walmart sells over 142,000 SKUs in each of its supercenters). This allows Costco’s procurement team to rigorously screen each product in order to provide the best quality and the best price to members. Each item Costco sells is meticulously selected . As a result, consumers don’t suffer from choice paralysis and can always rely on Costco for selling quality products.

Because of the lower number of options, each option has a higher perceived quality and is more likely to sell, which allows Costco to order more stock and thus lower the product’s price. Remember that Costco is selling most products in bulk packaging, so shoppers can’t buy just one cereal box but have to get 5 or them - which complements Costco’s ordering model.

By selling products in bulk Costco entices customers to buy large quantities of items. The perception of getting a deal often negates the fact that one may not even need all the products. Customers believe they're saving more money by spending more money , which leads them to spend more in the long run. 

According to Perfect Price’s research from 2015 , customers spend by far the most money per shopping trip when visiting Costco compared to other retailers.

Here are the top 10 stores where customers spend the most per shopping trip:

• Costco, $136 
• Sam’s Club, $81 (similar membership model)
• Target, $62
• Stop & Shop, $56
• Wal-Mart, $55
• Meijer, $54
• Whole Foods, $54
• Trader Joe’s, $50
• Kroger, $50 

There’s another part of Costco’s business model we haven’t mentioned yet that makes big purchases less risky.

Costco’s refund policy is essentially a promise for a risk-free investment

Costco has a very liberal return policy where customers can return almost anything they have purchased at any time. Even their membership.

On Costco’s website it says: 

“We are committed to providing quality and value on the products we sell with a risk-free 100% satisfaction guarantee on both your membership and merchandise. ” 

Having such a liberal return policy is almost necessary if you want to entice shoppers to try new products which they can only buy in bulk. If you know you can return anything if you don’t like the first product in the box of ten, you’ll be much more inclined to buy something new.

And yes, members can also claim a refund on their memberships at any time if they are not satisfied with the service, which means anyone can try shopping at Costco risk-free.

There was even a case of a woman who successfully returned a Christmas tree 10 days after Christmas because the tree was dead.

Efficient inventory management and warehouse design

From a logistics standpoint, Costco is one of the most efficient retailers in the world. This is because of two factors: inventory management and warehouse design.

Costco uses its warehouse-style stores as retail and storage spaces in one . It utilizes cross-docking, which means that products from a supplier or a manufacturing plant are distributed directly to the retail chain with marginal to no handling or storage time, which reduces inventory management costs and storage space costs.

Costco also displays goods in their shipping pallets, instead of arranging individual items on shelves, which further reduces inventory costs.

Costco’s warehouses are strategically designed to make restocking as easy as possible . Warehouse design allows forklifts to restock the store, which also makes it easier to rotate seasonal products and enables the treasure-hunt experience. This purposeful design saves both time and costs.

The combination of impeccable inventory management and warehouse design also allows Costco to utilize the just-in-time stocking principle , which is a management strategy that has a company receive goods as close as possible to when they are actually needed.

Once you combine everything mentioned thus far in this chapter, you can see why Costco can cut prices even lower and pass on the savings to their members, thus attracting more membership sign-ups and directly increasing their bottom line.

However, their store design serves yet another purpose.

“Costco doesn’t use any fancy decor or lighting, instead, they make sure that their store resembles a warehouse with exposed beams, pallets, and simple metal shelving,” says Mark Ortiz, a marketing expert and founder of Reviewing This. “This is smart because it tricks the consumer into believing that they are purchasing goods at low prices . Logically, you would think, less money spent on decor equals less overhead cost equals the opportunity to lower your prices.”

The warehouse design is a part of “the Costco Experience”, which Costco is famous for, which shouldn’t be neglected when talking about their business model. Let’s see what the famed experience is all about.

The Costco experience and Costco culture

Shopping at Costco is often called “The Costco experience”.

As offering superior customer experience is the key to customer loyalty, Costco does its best to be an experience in itself. By putting customers first in every choice and innovation, Costco continues to build its loyal customer base 

Consumers go crazy for a deal, and Costco has designed its entire strategy around this core tenet. A good deal “feels like winning,” says Bob Nelson, the senior vice president of financial planning and investor relations at Costco. And Costco would like their members to feel like they’re always winning, even if this means resisting the urge to raise prices and increase profits.

James Sinegal, Costco’s co-founder and former CEO, once talked about how once Costco was selling Calvin Klein men’s jeans for $29.99 a pair. The pants were selling faster than Costco could stock them, and when he bought another shipment for $22.99 per pair, it was ultra-tempting to charge more. However, Costco stayed true to their philosophy of passing the savings to their members and sold the jeans for $22.99 per pair.

Making sure that the customers get the best deal at Costco is an integral part of Costco’s culture.

Besides providing an exceptional shopping experience, Costco is also famous for an employee-focused organizational culture, which we’ll explore later. 

The combination of cost, generous return policy, and satisfied employees resulted in a shopping experience that many customers get addicted to.

It was believed at the company that culture is not the most important thing, but the only way forward . Costco saw promoting its core values as the only recipe for success. Maintaining integrity, passion, motivation, and customer trust is what enables Costco to outdo its competitors.

Shopping features aside, there is something more to Costco that cultivates such a loyal customer base.

"Costco relaxes my soul," says John, the founder of the I love Costco blog. 

"I do love that everyone at Costco appears to be relaxed humans," says Ellinger. "I love overhearing a weird personal conversation between two employees unloading a box and knowing that Costco is a safe space for people to just be people."

Costco also has great food courts which drive visits on their own. And they offer amazing deals, which are even losing them money in some cases.

We already mentioned the $5 roasted chicken, but there’s also the famous hot dog and soda combo for $1.50. It still costs the same as in 1985 when it was introduced and that is a big part of its almost mythical status among Costco’s members. Yes, Costco could make a lot of money by raising the price, but it’s much more valuable if they let it serve as a reminder of Costco culture every time a customer decides to grab a hot dog after a shopping trip.

All this helped the company build an outstanding image among its customers and it’s apparent that it leads to more sales year after year.

Key takeaway #3: Reap the benefits of a business model innovation with a cohesive strategy

Costco’s business model isn’t an isolated difference from its competitors, but one of many distinctly different policies, approaches, and benefits that create a cohesive corporate strategy.

Otherwise, any one of its competitors could duplicate the business model and reap the benefits for itself, rendering Costco competitively exposed. Here some policies that tie well with Costco’s innovative business model:

• Customer filtering. Costco’s subscription model discourages low-income customer groups from becoming members, like students and small household tenants. That ensures a larger average spend per shopping trip.
• Supplier independence.  Since Costco makes most of its profits from its membership fees and has a more exclusive customer base, it doesn’t need a big variety of products. As a result, it can be more picky with its product and supplier selection, increasing its negotiating leverage.
• A loyal culture. Costco has one of the most supportive cultures in the business world. It pays its employees above average, provides rare benefits and powerful leadership initiatives. That’s why it enjoys a triple retention rate than the industry average (90%) and increased productivity. Also, customers feel employee loyalty by having a pleasurable experience while buying.
• A cheap design. Maintaining an industrial decoration keeps operating costs at lower levels and the “I’m getting a bargain” feeling at higher levels.

But does Costco’s strategy produce results? How successful has its business model been during the last few years? We’ll let the numbers do the talking.

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How Costco’s corporate strategy evolves leading to constant expansion

Costco pricing strategy - lower margins, lower prices, high value.

Offering quality products at the lowest prices is as much a part of Costco’s business model as the result of it.

According to Craig Jelinek, Costco's CEO and Director: 

"Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead which enables us to pass on dramatic savings to our members." 

Unlike most other retailers, Costco’s membership model allows them to focus on strategies for making products cheaper for customers , rather than trying to increase revenue by finding ways to make customers pay more.

Because of its limited range of products, Costco can stay committed to delivering high-quality items at the lowest prices. Because of its efficient inventory management system and constant revenue from membership fees, Costco can keep its gross profit margins lower than most other retailers. Low margins result in cheaper products as Costco passes the savings to their members. 

Kirkland Signature: one of the most trusted private-label brands

When it comes to affordable yet quality products, Costco’s own private-label brand, Kirkland Signature, deserves its own chapter.

In 1995 Costco began the Kirkland Signature. Its mission was to create an item of the same or better quality than the leading brand at a lower price and do so by controlling every element of the item’s creation , including packaging and transportation. 

Costco claims that Kirkland Signature products are high-quality goods at simply excellent prices and openly invites customers to compare any Kirkland Signature product with its brand-name counterpart. The store’s return policy basically guarantees Kirkland’s quality.

Costco prices Kirkland Signature items according to its philosophy and that’s why they are always cheaper than their brand-name equivalents, often by more than 20%.

It’s no surprise that nowadays Kirkland products account for roughly 25% of Costco’s sales and shoppers can find them in virtually any category, from groceries to household products and clothing.

"I am not sure there is another [private-label] brand that has established this level of trust," says Timothy Campbell, a senior analyst at Kantar Consulting.

The success of Kirkland Signature is possible because of Costco’s business model as they have direct contact with lots of manufacturers and their members trust them that they will only choose and offer quality products.

In return, Kirkland Signature has become one of the top reasons that customers are so loyal to Costco. Creating such a strong store brand shows that Costco cares about its customers and wants them to have great products at a great price.

A lot of Kirkland products are actually manufactured under a private label by name-brands just for Costco. 

Select varieties of Kirkland Signature Coffee are actually roasted by Starbucks Coffee Company, Kirkland Signature dry dog and cat foods are made by Diamond Pet Food and Craig Jelinek, Costco’s CEO, said in an interview that Kirkland Signature Batteries are made by Duracell. 

There are many other examples and in each case, Kirkland products are cheaper than their brand-name counterparts.

The treasure hunt experience

If you’ve ever spoken with a Costco member, you’ve probably heard them brag about their latest find at our warehouse. Costco calls those products treasure hunt items , and they’re offered in various departments throughout the year. 

They’re there to make the customers feel the thrill of discovery . The aisles at Costco aren’t labeled, which tempts shoppers to walk down each one. That makes them more likely to encounter what Costco calls its “treasures.” 

“Treasures” make up 25% of Costco’s inventory and they are items that make shopping an adventure. When customers turn the corner they might suddenly find the luxury “surprise” of the week. It’s often something one would expect in upscale department stores, but certainly not in Costco. Surprises like Waterford Crystal, Coach handbags, Omega watches, Andrew Marc, Calvin Klein, Adidas, Chanel, Prada handbags and many more are offered at incredibly low prices. Other treasures include electronics, appliances and other less frequently purchased finds at extremely good prices. These products appear on Costco’s shelves one day, but are gone the next. 

That uncertainty creates a sense of urgency , and means that Costco shoppers don't just buy a pack of gum on impulse - they buy an 80" 3D television or a whole box of fine wine.

The company refers to this strategy as “treasure hunting,” in which Costco shoppers must navigate through the entire warehouse in search of exciting deals and unbelievable bargains. And they know some of the things they can find as they receive a pamphlet filled with coupons and irresistible deals as soon as they walk into the warehouse.

Every Costco warehouse is purposely designed with the necessities at the back of the store, meaning customers have to walk through the rotating items and sales to get their most-needed products and groceries. 

The treasure hunt atmosphere is also a safeguard against online competitors as customers have to go into a Costco store to see what is new and exciting. 

One would think that unlabeled isles, rotating inventory and purposely longer shopping trips would bother customers, but in the case of Costco, it’s quite the opposite. It’s all a part of the famed Costco experience and members enjoy it as they feel that’s how they get the most value for their membership. Instead of a run-of-the-mill grocery trip, Costco becomes an adventure that loyal customers are obsessed with.

Setting up the adventure is made possible by Costco’s inventory management and warehouse design which enables the store to quickly and efficiently rotate merchandise and allows them to grab the best deals their procurement team can find.

The treasure hunt experience is once again something that is enabled by Costco’s business model and at the same time a part of it. It’s also another factor that contributes to Costco’s extremely high customer retention rate.

Customer loyalty

Most consumers take pride in being a Costco member and the company’s high level of customer loyalty is no secret.

The emphasis Costco places on excellent customer experience and the value to their members results in an extremely high membership renewal rate - 93% in the US and Canada and 90% on the global market . 

Costco’s number of cardholders has also been steadily growing - there were 76.4 million cardholders in 2014 and the number rose to 120.9 million cardholders in 2022. Around 66.9 million of them are paying members as each member gets an additional card for their household. These numbers are what makes Costco’s customer retention rate even more impressive.

But Costco’s members aren’t just loyal, some of them are obsessed with the Costco experience. There are websites and blogs solely devoted to people talking about the warehouse. Some of them, like Costco Insider , have huge followings as they review recent deals at the store.

A blog dedicated to the Costco experience

This stable base of members who are making repeat purchases throughout the year is the result of Costco’s business model. There’s another very interesting thing Costco does or rather doesn’t do, in order to keep their profits higher and prices lower.

No advertising

Costco spends next to nothing on advertising and has no official advertising budget. It does send targeted emails to prospective members, email coupons and offers to existing members, but that’s negligible. Considering the huge sums of money most retailers spent to bring customers into their stores, that’s a really unorthodox approach.

How can Costco completely shun traditional advertising and still be successful? There are two reasons.

First, Costco has a product that sells itself . The membership offers great value to those who shop regularly at Costco, and because they’re excited about the deals they get, they spread the word.

Costco’s focus on customer satisfaction helped them create a strong brand and nowadays it’s safe to say that their reputation precedes them and that most of their target market has at least heard of Costco.

Second, spending on marketing to get existing members to shop more wouldn't really help Costco’s bottom line as membership fees are the real driver of profits. You might think that spending heavily to gain more members would make sense, but when you look at the numbers it actually doesn’t.

Spending just 0.5% of its revenue on marketing would wipe out 17% of the company's operating profit. If Costco was to spend 2% of revenue on advertising, as Target does, it would erase nearly 70% of their operating profit. The number of new members they’d get couldn’t possibly cover that loss, so it’s just not worth it.

Costco’s membership model allows them to focus on improving every aspect of the experience that leads to customer loyalty and inevitable word-of-mouth recommendations instead of spending on traditional marketing campaigns. This is one of the company’s core strengths as almost no other retailer can afford to pretty much ignore advertising.

Instead of investing in ads, Costco invests in something that much more directly impacts their members’ experience - their employees.

Higher wages and great employee benefits

Costco is often recognized as being much more employee-focused than other Fortune 500 companies. By offering higher wages and top-notch health benefits, the company has created a workplace culture that attracts positive, high-energy, talented employees.

Costco’s objective is to have motivated employees and reduce the employee turnover rate. And it succeeded as Costco's annual employee turnover is 13% while the industry turnover is believed to be well above 20% annually. The company also cultivates most of its leaders through internal leadership development, which presents an opportunity for professional growth and development.

Costco fosters a culture that is built on employee empowerment. It invests in its employees in order to improve operations and drive profits. Employees are recognized as an asset for the company as they are the ones driving the competitive advantage in the physical retail landscape. Costco doesn’t only provide them with good wages and health benefits but also promotes cultural diversity and inclusion.

This inclusive organizational culture and HRM practices have resulted in extreme popularity along with a strong social image - driving more and more loyal customers into the stores.

Apart from that, the focus of Costco has been on a company culture that promotes constructive criticism, and the philosophy has been ‘leading from the floor’, which means there’s much less micromanagement than in many other similar jobs.

Of course one of the biggest draws is a higher wage, so let’s take a closer look at it.

In early 2019, Costco raised its minimum hourly pay to $15. Its average hourly pay in 2019 was about $17.60 an hour, compared to about $10.88 on average for retailers, according to Payscale. When you add healthcare benefits, you get arguably the best job package in the retail sector.

According to Forbes surveys, Costco is consistently among the 5 top employees on America’s Best Large Employers chart. In 2017, it was even ranked as #1, and in 2021, it is ranked as #4.

How can Costco afford these higher wages and great benefits? Once again, it’s all thanks to its business model. In fact, Costco always had a much higher revenue per employee than other big retailers.

The average Costco employee generates nearly triple the revenue produced by the average Wal-Mart and Target employee and the latest results show, Costco is ranked #1 for revenue per employer in the retail sector, the wholesale industry as well as the general market!

Highly paid, motivated and happy employees help customers enjoy a consistently good shopping experience . That plays a large part when it comes to membership renewal and ensures that Costco’s customers keep coming back. In the end, that’s what matters the most.

Key takeaway #4: Expand your competitive advantages to evolve your strategy

Complacency is a giant killer in the business world.

Large enterprises that rest on their laurels, don’t evolve their strategies, and manage their competitive advantage die.

Costco’s strategy is constantly adapting to market changes. The company keeps finding new ways to take advantage of its unique business model and the policies surrounding it. Here is the list of the policies that no Costco competitor could benefit from implementing isolated:

• Offering premium product options with the lowest market prices.
• Spend zero on advertising and promoting its sales and special offers.
• Offer a treasure-hunt-like experience.

Other policies like its employee extensive support are repeatable but work exceptionally well for Costco.

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Why Costco’s growth strategy doesn’t follow the norm

Costco is a shining example of how very successful an innovative business model can be and how it can create an environment where everybody wins.

Almost everything we discussed in this study is thought-thru and purposeful innovation - from Costco’s membership model to its warehouse store design. 

Despite its success (or because of it?) Costco never stopped evolving. It expanded its offering to services such as gas stations, pharmacies, beauty salons and travel agencies which generated about 16% of the company’s $166 billion in revenue in 2020. 

It added a food court and if it weren't considered a retailer, Costco would be #14 on the list of the largest pizza chains in the U.S in 2018. They cannot be easily implemented by e-commerce giants like Amazon and as such make Costco more “future-proof” than many other retailers.

Let’s take a look at two interesting examples of how Costco evolved some aspects of its business and  how it implemented its growth strategy.

The art of free samples

Free samples in stores are anything new or groundbreaking, but there’s no brand that’s as strongly associated with them as Costco. 

The company took the promotional activity to the next level and people have been known to tour the sample tables at Costco stores for a free lunch, acquired piecemeal. There are even personal finance and food bloggers who’ve encouraged the practice . 

There are shopper blogs about favorite sample options, and some say the samples are their main reason for coming into the store.

Of course, free samples boost sales of certain products (in some cases even up to 2,000% ), but Costco knows that they also can make the store a fun place to be .

Consider this - Penn Jillette, from the famous magic act Penn & Teller, has even taken his dates to Costco to enjoy free samples on more than one occasion. And he’s surely not the only one.

However, samples don’t just make Costco’s store more appealing, they operate on a more subconscious level as well. As author Robert Cialdini writes in his best-selling book Influence, the Psychology of Persuasion : “One of the most potent of the weapons of influence around us is the rule for reciprocation. The rule says that we should try to repay, in kind, what another person has provided us.”

This means that customers feel a stronger urge to buy something after they sample it and that creates a potent combination for Costco. Even if people come to their stores because trying samples is fun, a variety of psychological mechanisms kick in, compelling them to buy more products over a longer period of time.

The curious case of Costco and e-commerce

Costco actually entered the e-commerce world in 1998 , which shows that they were again quick to evolve and try something new. However, online shopping never became a substantial part of its business model.

As for most other companies, the COVID-19 pandemic changed that to a certain extent. Costco’s e-commerce sales grew by 10% in 2022 .

Costco definitely upped their e-commerce game and also started selling their products via Instacart, which had to hire 300,000 new staff to accommodate the surge in shopping delivery.

Costco now also offers same-day delivery service to its customers located within a 20 minute vicinity. 

While Costco evolved its e-commerce activities, it hadn’t quite recreated the unique in-store experience online. And the interesting thing is, perhaps it doesn’t need to.

Costco’s online margins aren’t as good as their in-store sales and even as foot traffic slowed at some of its competitors, Costco saw their members spending more in stores during the pandemic. That’s why the company opened 16 new warehouses even in 2020.

“Ultimately, we still want our members to come into the warehouse,” CFO Richard Galanti said during a December 2020 earnings call . “When they come in, they see the items and they are more likely to buy some of those items.”

When you think about it, it’s apparent why Costco is more resistant to the rising e-commerce threat. Their members give them a stable income and treat their fees as a cost that makes them come to the store. Costco entices them with the services they offer and the treasure hunting experience which can’t really be replicated. Customers genuinely enjoy being there and they buy in bulk, which means they don’t have to visit the store that often if they don’t want to.

So in the case of e-commerce, it’s not that Costco wouldn’t be willing to further evolve, it just doesn’t make a lot of business sense for them at that very moment.

This already shows that there are some unusual strengths when it comes to Costco’s business model, which means it’s high time to look at Costco’s SWOT analysis.

Key takeaway #5: Study a market trend meticulously to understand how you fit in it

Costco is unlike any other retail player.

Naturally, its business is affected by market trends, but not in the same way as its competitors. Costco’s business model compels its members to go to the store to make their purchases. If Costco tried to make its online experience something like offline, it would kill its advantage.

The company would end up slowly transitioning to a more conventional retail player, lose its competitive advantage, and eventually die.

Instead, it uses its online presence in a complementary way that supports its offline experience and invites members back to the store.

Where initiatives like free samples have a big impact on buying behavior.

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Costco’s SWOT analysis

While there’s certainly a lot to love when it comes to Costco and its business model, there are always things that could be improved. As the SWOT analysis is going to recap a lot of what you already read in this study.

Membership business model

Costco’s membership fees enable Costco to better predict their income, cut prices and ensure customers have an incentive to shop at the store. 

Loyal customer base

Membership card renewal rates of 91% in the US and 88% worldwide show that Costco has an extremely loyal customer base in an industry where it’s very easy to switch brands and retailers. 

Low prices, high quality

Costco’s strategy of stocking high-quality items, which are sold in bulk-size at low-profit margins entices their target customers to become Costco members and to buy more products during their shopping trip. Their own Kirkland Signature brand is also a result of Costco’s philosophy to offer the highest quality products at the lowest price.

Selling in bulk

Costco can keep their margins low because they sell more of the same product compared to other retailers. It significantly increases how much money customers spend during one trip to Costco.

Low operation costs

Costco’s inventory management, warehouse store design and selling in bulk directly from transport pallets keep overhead costs low. 

Passing savings to customers

Costco is not reliant on making huge profit margins in sales and can therefore pass the savings to customers, which encourages loyalty and entices new members.

Costco doesn’t rely on ads to sell their products and doesn’t need to spend huge amounts of money on ad campaigns, which allows them to keep their prices lower than their competitors. Their strong brand name and word of mouth are enough to bring in new members.

High paying retail jobs with generous benefits

Costco takes care of their employees which translates into a better customer experience for their members. Satisfied and motivated employees do a better job and are less likely to leave which results in a low turnover rate.

Flexible inventory

Costco rotates their inventory faster than other retailers which enables them to make the most out of the best deals on the market (e.g. by buying the surplus stock at the lowest prices) and create a treasure hunting experience.

Eco-friendly

Costco’s eco-friendly approach focuses on four main objectives:

• Creating proper waste management systems
• Significantly reducing their carbon footprint
• Changing how they package designs
• Improving energy management systems in warehouses

This is important for eco-conscious shoppers, which a lot of their target customers are.

Limited product selection

While this is a plus for some, it’s indisputable that Costco offers much fewer choices than other retailers and that customers often can’t find more “exotic” products. Therefore, Costco is unable to attract a wider customer base, who want a bigger selection of products in smaller quantities.

Cumbersome transportation and storage

Buying in bulk can be very difficult for people living in cities and storing these products can be tough if a customer doesn’t own a house. 

Aging customer base

Costco has an aging problem . It is mostly attributed to its lack of digital advertising and limited e-commerce. A lot of younger people prefer a quick shopping experience or an online shopping spree, which is not something Costco is known for.

Long lines at the checkout

That’s the biggest complaint of Costco members, which Costco is trying to address with self-service lanes at selected locations.

Wasted food

As consumers are becoming more eco-conscious, it’s starting to bother them that a lot of food from Costco goes uneaten as there’s just too much of it in the one big package the store offers.

Opportunities

Online presence and e-commerce 

Although we said Costco might not need e-commerce as much as other retailers, it’s still an opportunity they can explore to attract new members and increase their revenue.

Social media

Costco could tap into new markets by using social media and social advertising for a fraction of the cost of traditional advertising. Currently, they have 0 tweets on their Twitter accounts and are lacking behind the competition on Facebook.

Global expansion

Costco has shown it can successfully enter new markets, which is an opportunity to expand further. China especially represents a huge opportunity after the success of Costco’s first Shanghai store. 

Reputational damage

Costco relies on its strong brand name more than other retailers and therefore has to retain a strong reputation. Product recalls can seriously damage Costco’s image of a store that provides quality items. Instances such as a rotisserie chicken salad recall in November 2015 due to the outbreak of E. Coli toxin where 19 people were infected make Costco less attractive to potential members.

Data security 

Costco gathers and hands over its customers’ and employees’ information to a third-party cloud service for safekeeping. In an era where people are more and more conscious of cybersecurity, any incident can create a major problem for the company.

Competition and digitalization

A lot of Costco’s competitors are ahead of them when it comes to e-commerce and digital services. While this might not be a problem yet it does represent a threat in the long run if Costco doesn’t evolve and starts losing younger potential members to their competitors.

Why is Costco so successful?

Costco has been so successful because it introduced a new business model, accompanied it with a cohesive strategy, and managed its competitive advantage cautiously.

It’s a company with strong leadership and a powerful culture.

Costco’s unwavering commitment to doing what they feel is the right thing for their members, their employees, their suppliers, and their communities have created a Costco culture and a strong brand with an impressive social image. That’s quite an achievement for a retail company that primarily employs a cost leadership strategy.

Growth by the numbers

As a result, a lot of customers are crazy about Costco. They love the company and have fun going to their stores. It’s not just a shopping trip, it’s a Costco experience - an adventure where members look forward to what treasures they might find. 

Functional Level Strategy: Explained with Examples and Types

Functional-level strategy refers to a functional area’s approach to achieving corporate and business unit objectives and strategies by maximizing resource productivity. This is generally considered to be the tactical level of the strategy that addresses specific operations within the functional areas of an organization, such as marketing, production, human resources, research and development, and finance.

Each functional area within an organization has its operational and strategic objectives, and the functional level strategy helps each department reach its goals using a planned and coordinated approach. Here are a few examples:

• Marketing:  In this area, the functional strategy could be something like “increase market share by 5% over the next 12 months through a targeted digital marketing campaign.”
• Finance:  For finance, an example could be “reduce operational expenses by 7% over the next financial year by implementing a new budgeting system and process.”
• Human Resources:  In human resources, it might be something like “improve staff retention by 10% over the next two years by implementing a comprehensive staff training and development program.”

The key to effective functional strategy is aligning these functional goals and approaches with the overall business and corporate strategies, ensuring all parts of the organization work together effectively towards the same overall objectives.

Types of Functional level strategy

Functional-level strategies are categorized based on the various functions within an organization. Some common types of functional-level strategies include:

• Marketing Strategy:  These strategies focus on identifying target audiences, understanding market dynamics, creating value propositions, and developing marketing campaigns to reach customers effectively.
• Financial Strategy:  This strategy involves financial planning and management, such as budgeting, cost control, cash flow management, capital structure, risk management, and investment decisions.
• Operational Strategy:  Operational strategies focus on improving efficiency and effectiveness in producing and delivering products or services. They encompass supply chain management, production planning, quality control, logistics, and inventory management.
• Human Resource Strategy:  HR strategies include decisions about recruitment, selection, training, performance management, compensation, and employee retention. The aim is to attract, develop, and retain a workforce that can effectively execute business strategies.
• Information Technology Strategy:  IT strategies involve planning for and managing the organization’s technology resources. It could include decisions related to systems, data management, cybersecurity, technology infrastructure, and digital innovation.
• Sales Strategy:  This involves strategies for selling products/services, including setting sales targets, deciding on sales tactics, managing the sales force, and customer relationship management.
• Research and Development (R&D) Strategy:  In certain industries, like pharmaceuticals or technology, R&D strategies are critical. They guide how resources are invested in creating new products, technologies, and services.

Each functional strategy should be integrated and aligned with the organization’s overall business strategy to ensure that each function is working towards the organization’s goals. The specific strategies in each function will depend on the nature of the organization, its industry, its objectives, and the specific challenges it faces.

Examples of Functional level strategy

• Marketing Strategy:  A company like Coca-Cola might have a marketing strategy to strengthen its brand image by associating it with happiness and fun. This could involve launching a global advertising campaign focusing on these themes, local events, and experiences that resonate with this message.
• Financial Strategy:  A startup might have a financial strategy of securing additional capital to fuel its rapid growth. This could involve pursuing venture capital funding, maintaining a lean operational budget to extend their financial runway, and planning for a future initial public offering (IPO).
• Operational Strategy:  Amazon has an operational strategy of fulfilling orders as quickly as possible to improve customer satisfaction. This involves sophisticated supply chain management, including massive, strategically located fulfillment centers and a commitment to continuous process improvements and technological innovation.
• Human Resource Strategy:  Google has a human resource strategy of attracting and retaining the best talent in the industry. They do this by providing a great work environment, excellent compensation packages, opportunities for career growth, and other perks like free meals and employee wellness programs. Talent Management Strategy & Practices
• Information Technology Strategy:  A bank might have an IT strategy of improving its online and mobile banking platforms to provide a better customer experience while investing heavily in cybersecurity measures to protect its customers’ data.
• Sales Strategy:  A B2B software company might have a sales strategy of employing a direct sales force to engage with large enterprise clients while utilizing a web-based self-service platform for smaller customers. How To write a Sales Strategy?
• Research and Development (R&D) Strategy:  A pharmaceutical company like Pfizer might have an R&D strategy focused on developing innovative drugs for high-impact areas like oncology and immunology. This would involve significant investment in scientific research and clinical trials.

These examples can vary widely based on the organization’s specific circumstances, objectives, and industry. The key is that each functional strategy supports and aligns with the company’s overall business strategy.

Case study of Functional level strategy

Let’s examine Apple Inc. as a case study for functional-level strategies:

• Marketing Strategy:  Apple has a clear marketing strategy focusing on creating a powerful brand image associated with innovation, quality, and luxury. This is done through high-impact product launches, minimalist and creative advertising, and cultivating a sense of exclusivity around its products. They also meticulously control their retail environments (both physical and online) to ensure the buying experience is aligned with their brand image. Marketing & Advertising Strategy of Apple: A critical lens
• Financial Strategy:  Apple maintains a very large cash reserve, which gives them significant flexibility in strategic investments, acquisitions, and R&D. Despite their cash holdings, they also use debt financing strategically, taking advantage of low-interest rates.
• Operational Strategy:  Apple is known for its efficient supply chain management. They’ve built strong relationships with suppliers and often secure large amounts of critical components ahead of time. They’ve also invested heavily in proprietary manufacturing processes to produce unique components like their custom chips.
• Human Resource Strategy:  Apple works hard to attract and retain top talent, offering competitive compensation packages, opportunities for career development, and a work environment that is both challenging and rewarding. They also foster a culture of secrecy and urgency around their product development, which helps drive innovation.
• Information Technology Strategy:  Apple consistently seeks to leverage technology for competitive advantage, whether through developing proprietary hardware and software (like their A-series chips and iOS operating system) or using data analytics to understand customer behavior and improve their products and services.
• Sales Strategy:  Apple uses a mix of direct and indirect sales. They have their own retail stores and online platform, where they can control the customer experience end-to-end, but they also distribute their products through third-party retailers and carriers. Their direct sales approach helps maintain their brand image and allows them to capture more of the retail margin.
• Research and Development (R&D) Strategy:  Apple is renowned for its focus on innovation. A significant portion of their budget is allocated to R&D, which leads to groundbreaking products like the iPhone, iPad, and Apple Watch. They’ve created a culture that encourages creativity, exploration, and pushing the boundaries of technology.

In each of these functional areas, Apple’s strategies align with its overall business strategy: to provide superior, user-friendly products that combine technology and design to create a unique, premium experience for customers. This demonstrates the power of effective functional-level strategy in supporting and executing a firm’s larger strategic vision.

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Home » Management Case Studies » Case Study: Walt Disney’s Business Strategies

Case Study: Walt Disney’s Business Strategies

Walt Disney Company is a $27 billion a year Global Entertainment giant which is an American based company was started by Walter Disney in venture with his brother named Roy O Disney in 1923. In 1928, Walt Disney created Mickey Mouse for which Walt wanted to call his character “Mortimer” but his wife convinced him to be called as “Mickey Mouse” and since then Mickey has been a classical hit for Walt Disney. In 1937 Disney presented their first feature full length Musical animated movie called “Snow white and the seven dwarfs” which is still a huge hit and remained in the hearts of its consumers forever.

Walt Disney recognizes what is customer value in Disney brand. They value a fun experience and homespun entertainment based on old-fashioned family values. Disney responds to these consumer preferences by leveraging the brand across different consumer markets. Let’s say that an American family goes to see a Disney movie together. They have a great time. They want to continue the experience. So Walt Disney offers Disney’s consumer products with multiple product lines aimed at specific age groups.

In 2003, Walt Disney came up with a movie called “Pirates of the Caribbean” which was a block buster hit at the box office. The movie was targeted for all the members of a family. In addition to the movie, Disney created a theme park ride, merchandising program, video game, TV series and comic books. In 2004, Disney presented the movie called “Home on the range” which was again a hit. Apart from the movie Disney created an accompanying sound track album, a line of toys for kids, clothing featuring the heroine, a theme park ride and a series of books. So Disney more often or not supports and promotes its movies with a host of secondary products attached to it.

Disney’s strategy is to build consumer markets for each of its characters, from classics like Mickey Mouse to snow white to new hits like Kim Possible. Each brand is created for a special age group and distribution channel. Disney has a large distribution channel. Baby Mickey Mouse and Disney babies target infants. Mickey Mouse is sold through the department and specially gift stores while Baby Mickey Mouse is a lower price option sold through mass-market channels. Disney’s Mickey’s stuff for kids targets boys and girls while Mickey unlimited targets teens and adults.

When it comes to TV channels, Disney has its own channel called the Disney channel which is the top prime time destination for kids’ age b/w 6 to 14. Disney has a pre school program called the “play house” which is targeted to small kids’ age b/w 2 to 6. Disney offers a Co-branded visa cards to adults. Card holders earn one dollar for every $100 charged to the card and the card holders can charge the card up to $75000 annually and then they can redeem the earnings for Disney merchandise or services, including Disney’s theme parks and resorts, Disney stores, Disney studios and Disney stage products. Disney has also been in Home depot offering a line of licensed kids’ room paint colors with paint swatches in the signature mouse and ears shape.

Disney also has licensed food products with its characters on its brands. For example, Disney provides a Yogurt called Yo-Pals yogurt which feature Winnie the Pooh and its friends. The four ounce yogurts are targeted to preschoolers who have an illustrated short story under each lid of the yogurt that encourages reading and discovery. Disney also has some imprinted cookies in vanilla and other flavors have impressions of its famous characters like Mickey Mouse, Donald Duck etc.

Disney has come up with a recent TV program character called KIM POSSIBLE, which is an integration of all of its consumer product lines. Kim possible is a typical high school going girl who in her spare time saves the world from evil villains. It is the number one rated cable program in its time slot and has spawned a variety of merchandise offered by the seven Disney consumer product divisions. The merchandise includes:

• Disney Hard lines- stationery, lunchboxes, food products, room decor.
• Disney Soft lines- sportswear, sleepwear, daywear, accessories.
• Disney toys- action figures, wigglers, beanbags, plush, fashion dolls, poseables.
• Disney Publishing- Diaries, junior novels, comic books.
• Walt Disney records- Kim possible soundtrack.
• Buena Vista Home Entertainment- DVD/video.
• Buena Vista Games- Game Boy advance.

The success of Kim Possible is driven by action packed storylines which translate well into merchandise products in many categories. Today, the pervasiveness of Disney product offerings is staggering and all in all, there are over 3 billion entertainment-based impressions of Mickey Mouse received by children every year.

Porter’s Five Forces Analysis of  Walt Disney

Threat of New Entrants

Since the Walt Disney Company has been able to find a very unusual niche within the industry, the entrance barriers are high relatively. The company is able to grow over a long term period, and has to develop from the departments of Research and Development (R&D) , marketing, and finance. By depending on past experience, the company officials know to a large extent what the target customer wants.

Threat of Substitutes

The products or services are moderate to low. Other cartoon figures, theme parks, and movies can search the market in which the Walt Disney Company is operating in, but this is obviously representing a significant threat. The Walt Disney Company has placed price controls on many of its product lines already, and should be able to cope with other new competitors. However, by upgrading products and services, the threat alone of new entrants into the market requires the Walt Disney Company to hedge against such risk by simultaneously.

Bargaining Power of Suppliers

The suppliers are governed by a few companies as the Walt Disney Company is operating in a highly differentiated and unique industry with high switching costs associated with operations. Besides, they are most probably very concentrated. However, the Walt Disney Company is a unique company and important customer of many suppliers. Furthermore, the size of the company may be a great advantage certainly. The company will create a dependency relationship in the industry by being able to order large volumes of unique products from unique suppliers.

Bargaining Power of Buyers

The bargaining power of buyers is high in the service and in the entertainment industry. The customers have powers certainly since a large number of customers are needed to make the Walt Disney Company’s operations run smoothly. For example, if the price on a particular home video is too high, customers may be averse to spending the money needed to purchase the products. Another example is the entrance fee charged at the Walt Disney Company’s theme parks. Furthermore, the entertainment industry does not take the buyer money, even if it is planned in a way that it will make the buyer spend more. A majority of the Walt Disney Company’s product mix focuses on intangible returns of the buyer’s money. However, some customers may not realize that they are getting such a return may increase the bargaining power of the customers.

Rivalry among Existing Firms

It does not play a very important role in the Walt Disney Company’s external operational environment. Nevertheless, it is true that the company’s exit barriers are extremely high. Furthermore, capacity is expanded in extremely large investments. However, there are no closer direct competitors to the Walt Disney Company’s operations. Competitors such as “Lonely Tunes” retail stores do not appear to appoint themselves to expensive advertising campaigns in order to obtain market shares. Moreover, the Walt Disney Company’s products are highly differentiated. The switching costs are therefore quite significant. A multinational corporation such as the Walt Disney Company faces internal weaknesses and strengths, which can to a certain extent be controlled. The external forces such as opportunity and threats are more difficult to control, and the Walt Disney Company has to adopt and take advantage to those forces.

SWOT Analysis of  Walt Disney

There are four things a business should consider that are crucial to keep up with the competition and to give an accurate point of view on where they stand. The four things are Strengths, Weaknesses, Opportunities and Threats referred to as SWOT analysis . The SWOT analysis provides information that is useful in matching the firm’s resources and capabilities to the competitive environment in which it operates. When doing a SWOT analysis it is imperative to know that the Strengths and Weaknesses are internal reflections, while the Opportunities and Threats are external reflections.

The Walt Disney Company’s main strength is in its resources, its experience in the business, and its low-cost strategy. Besides, the company has developed clearly a very strong and well known “brand-name” through many years. The company has also been able to diversify its operations and products to hedge against decreasing sales in product lines. In recent years, it has categorized into Home Video, Film, merchandise, Radio broadcasting, Net-work television and in theme parks. It has also effectively diversified globally its operations from USA to Japan and Europe. The main strengths in internal resources relate to human resources and financial stability. Employees in the Walt Disney Company studies appear to be extremely creative and they have produced several box-office productions in these recent years. A company without new ideas is bounded in today’s competitive business environment . However, the low-cost corporate strategy is a benefit for the company. The company can control costs , and still produce quality goods and services. Financial risks have been minimized by sharing initial investment costs with a maximum number of outside participants.

Corporations always have internal weaknesses. The Walt Disney Company’s main weaknesses are the following: A very large work load, often changes in top-management, and high overhead expenditures. The company has 58,000 employees in 1991. This fact represents possible communications problems, and a high bureaucracy level through the corporation. The company’s work load will increase even larger, and the organizational structure has to be able to support an extension of the work load by varying into more businesses and niches. The company has a very frequently changes and its corporate officers makes the corporate structure even more difficult. There are many positive things that often changes, but the changes are also associated with resistance, and high expenses.

Opportunities

External opportunities should be recognized, analyzed, and responded to in a very early stage. The Walt Disney Company is facing several external opportunities. However, the external threats facing the company are out-numbering the opportunities. Opportunities include the following; positive government attitudes towards its operations, barriers of entry are significant, and include the entertainment industry itself. Legal and legislative forces are usually identified as negative external factors to the company. Furthermore, the French government contributed greatly in the Euro Disneyworld project in the Walt Disney Company’s case. The French government invested in the project to built communication facilities, and gave the Walt Disney Company tax relief’s on cost of goods sold accounts. In addition, since the barriers of entry into the highly specialized industry in which the Walt Disney Company is still operating, competition will find it difficult to penetrate the company’s highly diversified product or service mix. Therefore, large initial capital investments are required to enter the industry accordingly.

Major threats to the Walt Disney Company include the following; Over saturated markets, politics and economic aspects from a global perspective, and foreign competition. As the supply of products and services in the entertainment industry is starting to saturate the markets, competition will be more exciting, and only the most powerful companies will be able to survive finally. The Walt Disney Company has leveraged this risk to a certain level as it has diversified and globalized its operations, but still, the company is in the service/entertainment business. The Cable-giants such as Turner Broadcasting Systems (TBS) may not be able to manage the stress on its operation such as the Network-television division.

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Large language models approach expert-level clinical knowledge and reasoning in ophthalmology: A head-to-head cross-sectional study

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* E-mail: [email protected] (AJT); [email protected] (DSJT)

Affiliations University of Cambridge School of Clinical Medicine, Cambridge, United Kingdom, Oxford University Clinical Academic Graduate School, University of Oxford, Oxford, United Kingdom

Roles Data curation, Investigation, Writing – review & editing

Affiliation University of Cambridge School of Clinical Medicine, Cambridge, United Kingdom

Affiliation Eye Institute, Cleveland Clinic Abu Dhabi, Abu Dhabi Emirate, United Arab Emirates

Roles Data curation, Investigation, Writing – original draft, Writing – review & editing

Affiliations University of Cambridge School of Clinical Medicine, Cambridge, United Kingdom, Department of Physiology, Development and Neuroscience, University of Cambridge, Cambridge, United Kingdom

Roles Data curation, Investigation

Affiliation West Suffolk NHS Foundation Trust, Bury St Edmunds, United Kingdom

Affiliation Manchester Royal Eye Hospital, Manchester University NHS Foundation Trust, Manchester, United Kingdom

Affiliation Birmingham and Midland Eye Centre, Sandwell and West Birmingham NHS Foundation Trust, Birmingham, United Kingdom

Affiliation Department of Ophthalmology, Chang Gung Memorial Hospital, Linkou Medical Center, Taoyuan, Taiwan

Affiliation Yong Loo Lin School of Medicine, National University of Singapore, Singapore

Roles Data curation, Investigation, Project administration, Writing – review & editing

Affiliation Bedfordshire Hospitals NHS Foundation Trust, Luton and Dunstable, United Kingdom

Affiliation Singapore Eye Research Institute, Singapore National Eye Centre, Singapore, Singapore

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Affiliations Birmingham and Midland Eye Centre, Sandwell and West Birmingham NHS Foundation Trust, Birmingham, United Kingdom, Academic Unit of Ophthalmology, Institute of Inflammation and Ageing, University of Birmingham, Birmingham, United Kingdom

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Affiliations Singapore Eye Research Institute, Singapore National Eye Centre, Singapore, Singapore, Duke-NUS Medical School, Singapore, Singapore, Byers Eye Institute, Stanford University, Palo Alto, California, United States of America

•  [ ... ],

Roles Conceptualization, Formal analysis, Funding acquisition, Methodology, Project administration, Supervision, Writing – original draft, Writing – review & editing

Affiliations Birmingham and Midland Eye Centre, Sandwell and West Birmingham NHS Foundation Trust, Birmingham, United Kingdom, Academic Unit of Ophthalmology, Institute of Inflammation and Ageing, University of Birmingham, Birmingham, United Kingdom, Academic Ophthalmology, School of Medicine, University of Nottingham, Nottingham, United Kingdom

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• Arun James Thirunavukarasu, 
• Shathar Mahmood, 
• Andrew Malem, 
• William Paul Foster, 
• Rohan Sanghera, 
• Refaat Hassan, 
• Sean Zhou, 
• Shiao Wei Wong, 
• Yee Ling Wong, 

• Published: April 17, 2024
• https://doi.org/10.1371/journal.pdig.0000341
• Reader Comments

Large language models (LLMs) underlie remarkable recent advanced in natural language processing, and they are beginning to be applied in clinical contexts. We aimed to evaluate the clinical potential of state-of-the-art LLMs in ophthalmology using a more robust benchmark than raw examination scores. We trialled GPT-3.5 and GPT-4 on 347 ophthalmology questions before GPT-3.5, GPT-4, PaLM 2, LLaMA, expert ophthalmologists, and doctors in training were trialled on a mock examination of 87 questions. Performance was analysed with respect to question subject and type (first order recall and higher order reasoning). Masked ophthalmologists graded the accuracy, relevance, and overall preference of GPT-3.5 and GPT-4 responses to the same questions. The performance of GPT-4 (69%) was superior to GPT-3.5 (48%), LLaMA (32%), and PaLM 2 (56%). GPT-4 compared favourably with expert ophthalmologists (median 76%, range 64–90%), ophthalmology trainees (median 59%, range 57–63%), and unspecialised junior doctors (median 43%, range 41–44%). Low agreement between LLMs and doctors reflected idiosyncratic differences in knowledge and reasoning with overall consistency across subjects and types ( p >0.05). All ophthalmologists preferred GPT-4 responses over GPT-3.5 and rated the accuracy and relevance of GPT-4 as higher ( p <0.05). LLMs are approaching expert-level knowledge and reasoning skills in ophthalmology. In view of the comparable or superior performance to trainee-grade ophthalmologists and unspecialised junior doctors, state-of-the-art LLMs such as GPT-4 may provide useful medical advice and assistance where access to expert ophthalmologists is limited. Clinical benchmarks provide useful assays of LLM capabilities in healthcare before clinical trials can be designed and conducted.

Author summary

Large language models (LLMs) are the most sophisticated form of language-based artificial intelligence. LLMs have the potential to improve healthcare, and experiments and trials are ongoing to explore potential avenues for LLMs to improve patient care. Here, we test state-of-the-art LLMs on challenging questions used to assess the aptitude of eye doctors (ophthalmologists) in the United Kingdom before they can be deemed fully qualified. We compare the performance of these LLMs to fully trained ophthalmologists as well as doctors in training to gauge the aptitude of the LLMs for providing advice to patients about eye health. One of the LLMs, GPT-4, exhibits favourable performance when compared with fully qualified and training ophthalmologists; and comparisons with its predecessor model, GPT-3.5, indicate that this superior performance is due to improved accuracy and relevance of model responses. LLMs are approaching expert-level ophthalmological knowledge and reasoning, and may be useful for providing eye-related advice where access to healthcare professionals is limited. Further research is required to explore potential avenues of clinical deployment.

Citation: Thirunavukarasu AJ, Mahmood S, Malem A, Foster WP, Sanghera R, Hassan R, et al. (2024) Large language models approach expert-level clinical knowledge and reasoning in ophthalmology: A head-to-head cross-sectional study. PLOS Digit Health 3(4): e0000341. https://doi.org/10.1371/journal.pdig.0000341

Editor: Man Luo, Mayo Clinic Scottsdale, UNITED STATES

Received: July 31, 2023; Accepted: February 26, 2024; Published: April 17, 2024

Copyright: © 2024 Thirunavukarasu et al. This is an open access article distributed under the terms of the Creative Commons Attribution License , which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

Data Availability: All data are available as supplementary information , excluding copyrighted material from the textbook used for experiments.

Funding: DSWT is supported by the National Medical Research Council, Singapore (NMCR/HSRG/0087/2018; MOH-000655-00; MOH-001014-00), Duke-NUS Medical School (Duke-NUS/RSF/2021/0018; 05/FY2020/EX/15-A58), and Agency for Science, Technology and Research (A20H4g2141; H20C6a0032). DSJT is supported by a Medical Research Council / Fight for Sight Clinical Research Fellowship (MR/T001674/1). These funders were not involved in the conception, execution, or reporting of this review.

Competing interests: AM is a member of the Panel of Examiners of the Royal College of Ophthalmologists and performs unpaid work as an FRCOphth examiner. DSWT holds a patent on a deep learning system to detect retinal disease. DSJT authored the book used in the study and receives royalty from its sales. The other authors have no competing interests to declare.

Introduction

Generative Pre-trained Transformer 3.5 (GPT-3.5) and 4 (GPT-4) are large language models (LLMs) trained on datasets containing hundreds of billions of words from articles, books, and other internet sources [ 1 , 2 ]. ChatGPT is an online chatbot which uses GPT-3.5 or GPT-4 to provide bespoke responses to human users’ queries [ 3 ]. LLMs have revolutionised the field of natural language processing, and ChatGPT has attracted significant attention in medicine for attaining passing level performance in medical school examinations and providing more accurate and empathetic messages than human doctors in response to patient queries on a social media platform [ 3 , 4 , 5 , 6 ]. While GPT-3.5 performance in more specialised examinations has been inadequate, GPT-4 is thought to represent a significant advancement in terms of medical knowledge and reasoning [ 3 , 7 , 8 ]. Other LLMs in wide use include Pathways Language Model 2 (PaLM 2) and Large Language Model Meta AI 2 (LLaMA 2) [ 3 ], [ 9 , p. 2], [ 10 ].

Applications and trials of LLMs in ophthalmological settings has been limited despite ChatGPT’s performance in questions relating to ‘eyes and vision’ being superior to other subjects in an examination for general practitioners [ 7 , 11 ]. ChatGPT has been trialled on the North American Ophthalmology Knowledge Assessment Program (OKAP), and Fellowship of the Royal College of Ophthalmologists (FRCOphth) Part 1 and Part 2 examinations. In both cases, relatively poor results have been reported for GPT-3.5, with significant improvement exhibited by GPT-4 [ 12 , 13 , 14 , 15 , 16 ]. However, previous studies are afflicted by two important issues which may affect their validity and interpretability. First, so-called ‘contamination’, where test material features in the pretraining data used to develop LLMs, may result in inflated performance as models recall previously seen text rather than using clinical reasoning to provide an answer. Second, examination performance in and of itself provides little information regarding the potential of models to contribute to clinical practice as a medical-assistance tool [ 3 ]. Clinical benchmarks are required to understanding the meaning and implications of scores in ophthalmological examinations attained by LLMs and are a necessary precursor to clinical trials of LLM-based interventions.

Here, we used FRCOphth Part 2 examination questions to gauge the ophthalmological knowledge base and reasoning capability of LLMs using fully qualified and currently training ophthalmologists as clinical benchmarks. These questions were not freely available online, minimising the risk of contamination. The FRCOphth Part 2 Written Examination tests the clinical knowledge and skills of ophthalmologists in training using multiple choice questions with no negative marking and must be passed to fully qualify as a specialist eye doctor in the United Kingdom.

Question extraction

FRCOphth Part 2 questions were sourced from a textbook for doctors preparing to take the examination [ 17 ]. This textbook is not freely available on the internet, making the possibility of its content being included in LLMs’ training datasets unlikely [ 1 ]. All 360 multiple-choice questions from the textbook’s six chapters were extracted, and a 90-question mock examination from the textbook was segregated for LLM and doctor comparisons. Two researchers matched the subject categories of the practice papers’ questions to those defined in the Royal College of Ophthalmologists’ documentation concerning the FRCOphth Part 2 written examination. Similarly, two researchers categorised each question as first order recall or higher order reasoning, corresponding to ‘remembering’ and ‘applying’ or ‘analysing’ in Bloom’s taxonomy, respectively [ 18 ]. Disagreement between classification decisions was resolved by a third researcher casting a deciding vote. Questions containing non-plain text elements such as images were excluded as these could not be inputted to the LLM applications.

Trialling large language models

Every eligible question was inputted into ChatGPT (GPT-3.5 and GPT-4 versions; OpenAI, San Francisco, California, United States of America) between April 29 and May 10, 2023. The answers provided by GPT-3.5 and GPT-4 were recorded and their whole reply to each question was recorded for further analysis. If ChatGPT failed to provide a definitive answer, the question was re-trialled up to three times, after which ChatGPT’s answer was recorded as ‘null’ if no answer was provided. Correct answers (‘ground truth’) were defined as the answers provided by the textbook and were recorded for every eligible question to facilitate calculation of performance. Upon their release, Bard (Google LLC, Mountain View, California, USA) and HuggingChat (Hugging Face, Inc., New York City, USA) were used to trial PaLM 2 (Google LLC) and LLaMA (Meta, Menlo Park, California, USA) respectively on the portion of the textbook corresponding to a 90-question examination, adhering to the same procedures between June 20 and July 2, 2023.

Clinical benchmarks

To gauge the performance, accuracy, and relevance of LLM outputs, five expert ophthalmologists who had all passed the FRCOphth Part 2 (E1-E5), three trainees (residents) currently in ophthalmology training programmes (T1-T3), and two unspecialised ( i . e . not in ophthalmology training) junior doctors (J1-J2) first answered the 90-question mock examination independently, without reference to textbooks, the internet, or LLMs’ recorded answers. As with the LLMs, doctors’ performance was calculated with reference to the correct answers provided by the textbook. After completing the examination, ophthalmologists graded the whole output of GPT-3.5 and GPT-4 on a Likert scale from 1–5 (very bad, bad, neutral, good, very good) to qualitatively appraise accuracy of information provided and relevance of outputs to the question used as an input prompt. For these appraisals, ophthalmologists were blind to the LLM source (which was presented in a randomised order) and to their previous answers to the same questions, but they could refer to the question text and correct answer and explanation provided by the textbook. Procedures are comprehensively described in the protocol issued to the ophthalmologists ( S1 Protocol ).

Our null hypothesis was that LLMs and doctors would exhibit similar performance, supported by results in a wide range of medical examinations [ 3 , 6 ]. Prospective power analysis was conducted which indicated that 63 questions were required to identify a 10% superior performance of an LLM to human performance at a 5% significance level (type 1 error rate) with 80% power (20% type 2 error rate). This indicated that the 90-question examination in our experiments was more than sufficient to detect ~10% differences in overall performance. The whole 90-question mock examination was used to avoid over- or under-sampling certain question types with respect to actual FRCOphth papers. To verify that the mock examination was representative of the FRCOphth Part 2 examination, expert ophthalmologists were asked to rate the difficulty of questions used here in comparison to official examinations on a 5-point Likert scale (“much easier”, “somewhat easier”, “similar”, “somewhat more difficult”, “much more difficult”).

Statistical analysis

Performance of doctors and LLMs were compared using chi-squared (χ 2 ) tests. Agreement between answers provided by doctors and LLMs was quantified through calculation of Kappa statistics, interpreted in accordance with McHugh’s recommendations [ 19 ]. To further explore the strengths and weaknesses of the answer providers, performance was stratified by question type (first order fact recall or higher order reasoning) and subject using a chi-squared or Fisher’s exact test where appropriate. Likert scale data corresponding to the accuracy and relevance of GPT-3.5 and GPT-4 responses to the same questions were analysed with paired t -tests with the Bonferroni correction applied to mitigate the risk of false positive results due to multiple-testing—parametric testing was justified by a sufficient sample size [ 20 ]. A chi-squared test was used to quantify the significance of any difference in overall preference of ophthalmologists choosing between GPT-3.5 and GPT-4 responses. Statistical significance was concluded where p < 0.05. For additional contextualisation, examination statistics corresponding to FRCOphth Part 2 written examinations taken between July 2017 and December 2022 were collected from Royal College of Ophthalmologists examiners’ reports [ 21 ]. These statistics facilitated comparisons between human and LLM performance in the mock examination with the performance of actual candidates in recent examinations. Failure cases where all LLMs provided an incorrect answer were appraised qualitatively to explore any specific weaknesses of the technology.

Statistical analysis was conducted in R (version 4.1.2; R Foundation for Statistical Computing, Vienna, Austria), and figures were produced in Affinity Designer (version 1.10.6; Serif Ltd, West Bridgford, Nottinghamshire, United Kingdom).

Questions sources

Of 360 questions in the textbook, 347 questions (including 87 of the 90 questions from the mock examination chapter) were included [ 17 ]. Exclusions were all due to non-text elements such as images and tables which could not be inputted into LLM chatbot interfaces. The distribution of question types and subjects within the whole set and mock examination set of questions is summarised in Table 1 and S1 Table alongside performance.

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Question subject and type distributions presented alongside scores attained by LLMs (GPT-3.5, GPT-4, LLaMA, and PaLM 2), expert ophthalmologists (E1-E5), ophthalmology trainees (T1-T3), and unspecialised junior doctors (J1-J2). Median scores do not necessarily sum to the overall median score, as fractional scores are impossible.

https://doi.org/10.1371/journal.pdig.0000341.t001

GPT-4 represents a significant advance on GPT-3.5 in ophthalmological knowledge and reasoning.

Overall performance over 347 questions was significantly higher for GPT-4 (61.7%) than GPT-3.5 (48.41%; χ 2 = 12.32, p <0.01), with results detailed in S1 Fig and S1 Table . ChatGPT performance was consistent across question types and subjects ( S1 Table ). For GPT-4, no significant variation was observed with respect to first order and higher order questions (χ 2 = 0.22, p = 0.64), or subjects defined by the Royal College of Ophthalmologists (Fisher’s exact test over 2000 iterations, p = 0.23). Similar results were observed for GPT-3.5 with respect to first and second order questions (χ 2 = 0.08, p = 0.77), and subjects (Fisher’s exact test over 2000 iterations, p = 0.28). Performance and variation within the 87-question mock examination was very similar to the overall performance over 347 questions, and subsequent experiments were therefore restricted to that representative set of questions.

GPT-4 compares well with other LLMs, junior and trainee doctors and ophthalmology experts.

Performance in the mock examination is summarised in Fig 1 —GPT-4 (69%) was the top-scoring model, performing to a significantly higher standard than GPT-3.5 (48%; χ 2 = 7.33, p < 0.01) and LLaMA (32%; χ 2 = 22.77, p < 0.01), but statistically similarly to PaLM 2 (56%) despite a superior score (χ 2 = 2.81, p = 0.09). LLaMA exhibited the lowest examination score, significantly weaker than GPT-3.5 (χ 2 = 4.58, p = 0.03) and PaLM-2 (χ 2 = 10.01, p < 0.01) as well as GPT-4.

Examination performance in the 87-question mock examination used to trial LLMs (GPT-3.5, GPT-4, LLaMA, and PaLM 2), expert ophthalmologists (E1-E5), ophthalmology trainees (T1-T3), and unspecialised junior doctors (J1-J2). Dotted lines depict the mean performance of expert ophthalmologists (66/87; 76%), ophthalmology trainees (60/87; 69%), and unspecialised junior doctors (37/87; 43%). The performance of GPT-4 lay within the range of expert ophthalmologists and ophthalmology trainees.

https://doi.org/10.1371/journal.pdig.0000341.g001

The performance of GPT-4 was statistically similar to the mean score attained by expert ophthalmologists ( Fig 1 ; χ 2 = 1.18, p = 0.28). Moreover, GPT-4’s performance exceeded the mean mark attained across FRCOphth Part 2 written examination candidates between 2017–2022 (66.06%), mean pass mark according to standard setting (61.31%), and the mean official mark required to pass the examination after adjustment (63.75%), as detailed in S2 Table . In individual comparisons with expert ophthalmologists, GPT-4 was equivalent in 3 cases (χ 2 tests, p > 0.05, S3 Table ), and inferior in 2 cases (χ 2 tests, p < 0.05; Table 2 ). In comparisons with ophthalmology trainees, GPT-4 was equivalent to all three ophthalmology trainees (χ 2 tests, p > 0.05; Table 2 ). GPT-4 was significantly superior to both unspecialised trainee doctors (χ 2 tests, p < 0.05; Table 2 ). Doctors were anonymised in analysis, but their ophthalmological experience is summarised in S3 Table . Unsurprisingly, junior doctors (J1-J2) attained lower scores than expert ophthalmologists (E1-E5; t = 7.18, p < 0.01), and ophthalmology trainees (T1-T3; t = 11.18, p < 0.01), illustrated in Fig 1 . Ophthalmology trainees approached expert-level scores with no significant difference between the groups ( t = 1.55, p = 0.18). None of the other LLMs matched any of the expert ophthalmologists, mean mark of real examination candidates, or FRCOphth Part 2 pass mark.

Expert ophthalmologists agreed that the mock examination was a faithful representation of actual FRCOphth Part 2 Written Examination papers with a mean and median score of 3/5 (range 2-4/5).

Results of pair-wise comparisons of examination performance between GPT-4 and the other answer providers. Significantly greater performance for GPT-4 is highlighted green, significantly inferior performance for GPT-4 is highlighted orange. GPT-4 was superior to all other LLMs and unspecialised junior doctors, and equivalent to most expert ophthalmologists and all ophthalmology trainees.

https://doi.org/10.1371/journal.pdig.0000341.t002

LLM strengths and weaknesses are similar to doctors.

Agreement between answers given by LLMs, expert ophthalmologists, and trainee doctors was generally absent (0 ≤ κ < 0.2), minimal (0.2 ≤ κ < 0.4), or weak (0.4 ≤ κ < 0.6), with moderate agreement only recorded for one pairing between the two highest performing ophthalmologists ( Fig 2 ; κ = 0.64) [ 19 ]. Disagreement was primarily the result of general differences in knowledge and reasoning ability, illustrated by strong negative correlation between Kappa statistic (quantifying agreement) and difference in examination performance (Pearson’s r = -0.63, p < 0.01). Answer providers with more similar scores exhibited greater agreement overall irrespective of their category (LLM, expert ophthalmologist, ophthalmology trainee, or junior doctor).

Agreement correlates strongly with overall performance and stratification analysis found no particular question type or subject was associated with better performance of LLMs or doctors, indicating that LLM knowledge and reasoning ability is general across ophthalmology rather than restricted to particular subspecialties or question types.

https://doi.org/10.1371/journal.pdig.0000341.g002

Stratification analysis was undertaken to identify any specific strengths and weaknesses of LLMs with respect to expert ophthalmologists and trainee doctors ( Table 1 and S4 Table ). No significant difference between performance in first order fact recall and higher order reasoning questions was observed among any of the LLMs, expert ophthalmologists, ophthalmology trainees, or unspecialised junior doctors ( S4 Table ; χ 2 tests, p > 0.05). Similarly, only J1 (junior doctor yet to commence ophthalmology training) exhibited statistically significant variation in performance between subjects ( S4 Table ; Fisher’s exact tests over 2000 iterations, p = 0.02); all other doctors and LLMs exhibited no significant variation (Fisher’s exact tests over 2000 iterations, p > 0.05). To explore whether consistency was due to an insufficient sample size, similar analyses were run for GPT-3.5 and GPT-4 performance over the larger set of 347 questions ( S1 Table ; S4 Table ). As with the mock examination, no significant differences in performance across question types ( S4 Table ; χ 2 tests, p > 0.05) or subjects ( S4 Table ; Fisher’s exact tests over 2000 iterations, p > 0.05) were observed.

LLM examination performance translates to subjective preference indicated by expert ophthalmologists.

Ophthalmologists’ appraisal of GPT-4 and GPT-3.5 outputs indicated a marked preference for the former over the latter, mirroring objective performance in the mock examination and over the whole textbook. GPT-4 exhibited significantly ( t -test with Bonferroni correction, p < 0.05) higher accuracy and relevance than GPT-3.5 according to all five ophthalmologists’ grading ( Table 3 ). Differences were visually obvious, with GPT-4 exhibiting much higher rates of attaining the highest scores for accuracy and relevance than GPT-3.5 ( Fig 3 ). This superiority was reflected in ophthalmologists’ qualitative preference indications: GPT-4 responses were preferred to GPT-3.5 responses by every ophthalmologist with statistically significant skew in favour of GPT-4 (χ 2 test, p < 0.05; Table 3 ).

Accuracy (A) and relevance (B) ratings were provided by five expert ophthalmologists for ChatGPT (powered by GPT-3.5 and GPT-4) responses to 87 FRCOphth Part 2 mock examination questions. In every case, the accuracy and relevance of GPT-4 is significantly superior to GPT-3.5 (t-test with Bonferroni correct applied, p < 0.05). Pooled scores for accuracy (C) and relevance (D) from all five raters are presented in the bottom two plots, with GPT-3.5 (left bars) compared directly with GPT-4 (right bars).

https://doi.org/10.1371/journal.pdig.0000341.g003

t-test results with Bonferroni correction applied showing the superior accuracy and relevance of GPT-4 responses relative to GPT-3.5 responses in the opinion of five fully trained ophthalmologists (positive mean differences favour GPT-4), and χ 2 test showing that GPT-4 responses were preferred to GPT-3.5 responses by every ophthalmologist in their blinded qualitative appraisals.

https://doi.org/10.1371/journal.pdig.0000341.t003

Failure cases exhibit no association with subject, complexity, or human answers.

The LLM failure cases—where every LLM provided an incorrect answer—are summarised in Table 4 . While errors made by LLMs were occasionally similar to those made by trainee ophthalmologists and junior doctors, this association was not consistent ( Table 4 ). There was no preponderance of ophthalmological subject or first or higher order questions in the failure cases, and questions did not share a common theme, sentence structure, or grammatical construct ( Table 4 ). Examination questions are redacted here to avoid breaching copyright and prevent future LLMs accessing the test data during pretraining but can be provided on request.

Summary of LLM failure cases, where all models provided an incorrect answer to the FRCOphth Part 2 mock examination question. No associations were found with human answers, complexity, subject, theme, sentence structure, or grammatic constructs.

https://doi.org/10.1371/journal.pdig.0000341.t004

Here, we present a clinical benchmark to gauge the ophthalmological performance of LLMs, using a source of questions with very low risk of contamination as the utilised textbook is not freely available online [ 17 ]. Previous studies have suggested that ChatGPT can provide useful responses to ophthalmological queries, but often use online question sources which may have featured in LLMs’ pretraining datasets [ 7 , 12 , 15 , 22 ]. In addition, our employment of multiple LLMs as well as fully qualified and training doctors provides novel insight into the potential and limitations of state-of-the-art LLMs through head-to-head comparisons which provide clinical context and quantitative benchmarks of competence in ophthalmology. Subsequent research may leverage our questions and results to gauge the performance of new LLMs and applications as they emerge.

We make three primary observations. First, performance of GPT-4 compares well to expert ophthalmologists and ophthalmology trainees, and exhibits pass-worthy performance in an FRCOphth Part 2 mock examination. PaLM 2 did not attain pass-worthy performance or match expert ophthalmologists’ scores but was within the spread of trainee doctors’ performance. LLMs are approaching human expert-level knowledge and reasoning in ophthalmology, and significantly exceed the ability of non-specialist clinicians (represented here by unspecialised junior doctors) to answer ophthalmology questions. Second, clinician grading of model outputs suggests that GPT-4 exhibits improved accuracy and relevance when compared with GPT-3.5. Development is producing models which generate better outputs to ophthalmological queries in the opinion of expert human clinicians, which suggests that models are becoming more capable of providing useful assistance in clinical settings. Third, LLM performance was consistent across question subjects and types, distributed similarly to human performance, and exhibited comparable agreement between other LLMs and doctors when corrected for differences in overall performance. Together, this indicates that the ophthalmological knowledge and reasoning capability of LLMs is general rather than limited to certain subspecialties or tasks. LLM-driven natural language processing seems to facilitate similar—although idiosyncratic—clinical knowledge and reasoning to human clinicians, with no obvious blind spots precluding clinical use.

Similarly dramatic improvements in the performance of GPT-4 relative to GPT-3.5 have been reported in the context of the North American Ophthalmology Knowledge Assessment Program (OKAP) [ 13 , 15 ]. State-of-the-art models exhibit far more clinical promise than their predecessors, and expectations and development should be tailored accordingly. Results from the OKAP also suggest that improvement in performance is due to GPT-4 being more well-rounded than GPT-3.5 [ 13 ]. This increases the scope for potential applications of LLMs in ophthalmology, as development is eliminating weaknesses rather than optimising in narrow domains. This study shows that well-rounded LLM performance compares well with expert ophthalmologists, providing clinically relevant evidence that LLMs may be used to provide medical advice and assistance. Further improvement is expected as multimodal foundation models, perhaps based on LLMs such as GPT-4, emerge and facilitate compatibility with image-rich ophthalmological data [ 3 , 23 , 24 ].

Limitations

This study was limited by three factors. First, examination performance is an unvalidated indicator of clinical aptitude. We sought to ameliorate this limitation by employing expert ophthalmologists, ophthalmology trainees, and unspecialised junior doctors answering the same questions as clinical benchmarks; and compared LLM performance to real cohorts of candidates in recent FRCOphth examinations. However, it remains an issue that comparable performance to clinical experts in an examination does not necessarily demonstrate that an LLM can communicate with patients and practitioners or contribute to clinical decision making accurately and safely. Early trials of LLM chatbots have suggested that LLM responses may be equivalent or even superior to human doctors in terms of accuracy and empathy, and experiments using complicated case studies suggest that LLMs operate well even outside typical presentations and more common medical conditions [ 4 , 25 , 26 ]. In ophthalmology, GPT-3.5 and GPT-4 have been shown to be capable of providing precise and suitable triage decisions when queried with eye-related symptoms [ 22 , 27 ]. Further work is now warranted in conventional clinical settings.

Second, while the study was sufficiently powered to detect a less than 10% difference in overall performance, the relatively small number of questions in certain categories used for stratification analysis may mask significant differences in performance. Testing LLMs and clinicians with more questions may help establish where LLMs exhibit greater or lesser ability in ophthalmology. Furthermore, researchers using different ways to categorise questions may be able to identify specific strengths and weaknesses of LLMs and doctors which could help guide design of clinical LLM interventions.

Finally, experimental tasks were ‘zero-shot’ in that LLMs were not provided with any examples of correctly answered questions before it was queried with FRCOphth questions from the textbook. This mode of interrogation entails the maximal level of difficulty for LLMs, so it is conceivable that the ophthalmological knowledge and reasoning encoded within these models is actually even greater than indicated by results here [ 1 ]. Future research may seek to fine-tune LLMs by using more domain-specific text during pretraining and fine-tuning, or by providing examples of successfully completed tasks to further improve performance in that clinical task [ 3 ].

Future directions

Autonomous deployment of LLMs is currently precluded by inaccuracy and fact fabrication. Our study found that despite meeting expert standards, state-of-the-art LLMs such as GPT-4 do not match top-performing ophthalmologists [ 28 ]. Moreover, there remain controversial ethical questions about what roles should and should not be assigned to inanimate AI models, and to what extent human clinicians must remain responsible for their patients [ 3 ]. However, the remarkable performance of GPT-4 in ophthalmology examination questions suggests that LLMs may be able to provide useful input in clinical contexts, either to assist clinicians in their day-to-day work or with their education or preparation for examinations [ 3 , 13 , 14 , 27 ]. Further improvement in performance may be obtained by specific fine-tuning of models with high quality ophthalmological text data, requiring curation and deidentification [ 29 ]. GPT-4 may prove especially useful where access to ophthalmologists is limited: provision of advice, diagnosis, and management suggestions by a model with FRCOphth Part 2-level knowledge and reasoning ability is likely to be superior to non-specialist doctors and allied healthcare professionals working without support, as their exposure to and knowledge of eye care is limited [ 27 , 30 , 31 ].

However, close monitoring is essential to avoid mistakes caused by inaccuracy or fact fabrication [ 32 ]. Clinical applications would also benefit from an uncertainty indicator reducing the risk of erroneous decisions [ 7 ]. As LLM performance often correlates with the frequency of query terms’ representation in the model’s training dataset, a simple indicator of ‘familiarity’ could be engineered by calculating the relative frequency of query term representation in the training data [ 7 , 33 ]. Users could appraise familiarity to temper their confidence in answers provided by the LLM, perhaps reducing error. Moreover, ophthalmological applications require extensive validation, preferably with high quality randomised controlled trials to conclusively demonstrate benefit (or lack thereof) conferred to patients by LLM interventions [ 34 ]. Trials should be pragmatic so as not to inflate effect sizes beyond what may generalise to patients once interventions are implemented at scale [ 34 , 35 ]. In addition to patient outcomes, practitioner-related variables should also be considered: interventions aiming to improve efficiency should be specifically tested to ensure that they reduce rather than increase clinicians’ workload [ 3 ].

According to comparisons with expert and trainee doctors, state-of-the-art LLMs are approaching expert-level performance in advanced ophthalmology questions. GPT-4 attains pass-worthy performance in FRCOphth Part 2 questions and exceeds the scores of some expert ophthalmologists. As top-performing doctors exhibit superior scores, LLMs do not appear capable of replacing ophthalmologists, but state-of-the-art models could provide useful advice and assistance to non-specialists or patients where access to eye care professionals is limited [ 27 , 28 ]. Further research is required to design LLM-based interventions which may improve eye health outcomes, validate interventions in clinical trials, and engineer governance structures to regulate LLM applications as they begin to be deployed in clinical settings [ 36 ].

Supporting information

S1 fig. chatgpt performance in questions taken from the whole textbook..

Mosaic plot depicting the overall performance of ChatGPT versions powered by GPT-3.5 and GPT-4 in 360 FRCOphth Part 2 written examination questions. Performance was significantly higher for GPT-4 than GPT-3.5, and was close to mean human examination candidate performance and pass mark set by standard setting and after adjustment.

https://doi.org/10.1371/journal.pdig.0000341.s001

S1 Table. Question characteristics and performance of GPT-3.5 and GPT-4 over the whole textbook.

Similar observations were noted here to the smaller mock examination used for subsequent experiments. GPT-4 performs to a significantly higher standard than GPT-3.5

https://doi.org/10.1371/journal.pdig.0000341.s002

S2 Table. Examination statistics corresponding to FRCOphth Part 2 written examinations sat between July 2017-December 2022.

https://doi.org/10.1371/journal.pdig.0000341.s003

S3 Table. Experience of expert ophthalmologists (E1-E5), ophthalmology trainees (T1-T3), and unspecialised junior doctors (J1-J2) involved in experiments.

https://doi.org/10.1371/journal.pdig.0000341.s004

S4 Table. Results of statistical tests of variation in performance between question subjects and types, for each trialled LLM, expert ophthalmologist, and trainee doctor.

Statistically significant results are highlighted in green.

https://doi.org/10.1371/journal.pdig.0000341.s005

S1 Protocol. Procedures followed by ophthalmologists to grade the output of GPT-3.5 and GPT-4 in terms of accuracy, relevance, and rater-preference of model outputs.

https://doi.org/10.1371/journal.pdig.0000341.s006

Acknowledgments

The authors extend their thanks to Mr Arunachalam Thirunavukarasu (Betsi Cadwaladr University Health Board) for his advice and assistance with recruitment.

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Case Study: How Aggressively Should a Bank Pursue AI?

• Thomas H. Davenport
• George Westerman

A Malaysia-based CEO weighs the risks and potential benefits of turning a traditional bank into an AI-first institution.

Siti Rahman, the CEO of Malaysia-based NVF Bank, faces a pivotal decision. Her head of AI innovation, a recent recruit from Google, has a bold plan. It requires a substantial investment but aims to transform the traditional bank into an AI-first institution, substantially reducing head count and the number of branches. The bank’s CFO worries they are chasing the next hype cycle and cautions against valuing efficiency above all else. Siti must weigh the bank’s mixed history with AI, the resistance to losing the human touch in banking services, and the risks of falling behind in technology against the need for a prudent, incremental approach to innovation.

Two experts offer advice: Noemie Ellezam-Danielo, the chief digital and AI strategy at Société Générale, and Sastry Durvasula, the chief information and client services officer at TIAA.

Siti Rahman, the CEO of Malaysia-headquartered NVF Bank, hurried through the corridors of the university’s computer engineering department. She had directed her driver to the wrong building—thinking of her usual talent-recruitment appearances in the finance department—and now she was running late. As she approached the room, she could hear her head of AI innovation, Michael Lim, who had joined NVF from Google 18 months earlier, breaking the ice with the students. “You know, NVF used to stand for Never Very Fast,” he said to a few giggles. “But the bank is crawling into the 21st century.”

• Thomas H. Davenport is the President’s Distinguished Professor of Information Technology and Management at Babson College, a visiting scholar at the MIT Initiative on the Digital Economy, and a senior adviser to Deloitte’s AI practice. He is a coauthor of All-in on AI: How Smart Companies Win Big with Artificial Intelligence (Harvard Business Review Press, 2023).
• George Westerman is a senior lecturer at MIT Sloan School of Management and a coauthor of Leading Digital (HBR Press, 2014).

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Dubai’s Extraordinary Flooding: Here’s What to Know

Images of a saturated desert metropolis startled the world, prompting talk of cloud seeding, climate change and designing cities for intensified weather.

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By Raymond Zhong

Scenes of flood-ravaged neighborhoods in one of the planet’s driest regions have stunned the world this week. Heavy rains in the United Arab Emirates and Oman submerged cars, clogged highways and killed at least 21 people. Flights out of Dubai’s airport, a major global hub, were severely disrupted.

The downpours weren’t a freak event — forecasters anticipated the storms several days out and issued warnings. But they were certainly unusual. Here’s what to know.

Heavy rain there is rare, but not unheard-of.

On average, the Arabian Peninsula receives a scant few inches of rain a year, although scientists have found that a sizable chunk of that precipitation falls in infrequent but severe bursts, not as periodic showers.

U.A.E. officials said the 24-hour rain total on Tuesday was the country’s largest since records there began in 1949 . But parts of the nation had experienced an earlier round of thunderstorms just last month.

Oman, with its coastline on the Arabian Sea, is also vulnerable to tropical cyclones. Past storms there have brought torrential rain, powerful winds and mudslides, causing extensive damage.

Global warming is projected to intensify downpours.

Stronger storms are a key consequence of human-caused global warming. As the atmosphere gets hotter, it can hold more moisture, which can eventually make its way down to the earth as rain or snow.

But that doesn’t mean rainfall patterns are changing in precisely the same way across every corner of the globe.

In their latest assessment of climate research , scientists convened by the United Nations found there wasn’t enough data to have firm conclusions about rainfall trends in the Arabian Peninsula and how climate change was affecting them. The researchers said, however, that if global warming were to be allowed to continue worsening in the coming decades, extreme downpours in the region would quite likely become more intense and more frequent.

The role of cloud seeding isn’t clear.

The U.A.E. has for decades worked to increase rainfall and boost water supplies by seeding clouds. Essentially, this involves shooting particles into clouds to encourage the moisture to gather into larger, heavier droplets, ones that are more likely to fall as rain or snow.

Cloud seeding and other rain-enhancement methods have been tried across the world, including in Australia, China, India, Israel, South Africa and the United States. Studies have found that these operations can, at best, affect precipitation modestly — enough to turn a downpour into a bigger downpour, but probably not a drizzle into a deluge.

Still, experts said pinning down how much seeding might have contributed to this week’s storms would require detailed study.

“In general, it is quite a challenge to assess the impact of seeding,” said Luca Delle Monache, a climate scientist at the Scripps Institution of Oceanography in La Jolla, Calif. Dr. Delle Monache has been leading efforts to use artificial intelligence to improve the U.A.E.’s rain-enhancement program.

An official with the U.A.E.’s National Center of Meteorology, Omar Al Yazeedi, told news outlets this week that the agency didn’t conduct any seeding during the latest storms. His statements didn’t make clear, however, whether that was also true in the hours or days before.

Mr. Al Yazeedi didn’t respond to emailed questions from The New York Times on Thursday, and Adel Kamal, a spokesman for the center, didn’t immediately have further comment.

Cities in dry places just aren’t designed for floods.

Wherever it happens, flooding isn’t just a matter of how much rain comes down. It’s also about what happens to all that water once it’s on the ground — most critically, in the places people live.

Cities in arid regions often aren’t designed to drain very effectively. In these areas, paved surfaces block rain from seeping into the earth below, forcing it into drainage systems that can easily become overwhelmed.

One recent study of Sharjah , the capital of the third-largest emirate in the U.A.E., found that the city’s rapid growth over the past half century had made it vulnerable to flooding at far lower levels of rain than before.

Omnia Al Desoukie contributed reporting.

Raymond Zhong reports on climate and environmental issues for The Times. More about Raymond Zhong