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Mgmt 371Chapter Eight

Managing Strategy and Strategic Planning

Much of the slide content was created by Dr, Charlie Cook, Houghton Mifflin, Co.©

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The Nature of Strategic Management

Strategy A comprehensive plan for accomplishing an

organization’s goals. Strategic Management

A way of approaching business opportunities and challenges aimed at formulating and implementing effective strategies.

Effective Strategies Strategies that promote a superior alignment between

the organization and its environment and the achievement of its goals.

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Components of Strategy

Distinctive Competence Something an organization

does exceptionally well. Scope

The range of markets in which an organization will compete.

Resource Deployment How an organization will

distribute its resources across the areas in which it competes.

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Classifications of Strategic Alternatives Business-Level Strategy

The set of strategic alternatives that an organization chooses from as it conducts business in a particular particular industry or a particular marketindustry or a particular market..

Corporate-Level Strategy The set of strategic alternatives that an organization

chooses from as it manages its operations simultaneously across several industries and several across several industries and several marketsmarkets..

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Strategy Formulation and Implementation Strategy Formulation

The set of processes involved in creating or determining the organization’s strategies; it focuses on the content of strategies.

Strategy Implementation The methods by which strategies are

operationalized or executed within the organization; it focuses on the processes through which strategies are achieved.

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Strategy Formulation and Implementation (cont’d) Deliberate Strategy

A plan, chosen and implemented to support specific goals, that is the result of a rational, systematic, and planned process of strategy formulation and implementation.

Emergent Strategy A pattern of action that develops over time in

the absence of goals or missions, or despite goals and missions.

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SWOT Analysis

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SWOT Analysis: Environmental Scanning

Internal EnvironmentStrengths

WeaknessesExternal Environment

OpportunitiesThreats

The process of studying the environmentof the organization to identify strengths, weakness, opportunities, and threats.

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Internal Environment

StrengthsStrengths – those internal factors that give the organization a competitive advantage and help it seize an opportunity or reduce a threat from its external environment. Proprietary technology

Pharmaceutical cure for autism. Touch screen technology

Financial resources KSA that creates a competitive advantage

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Internal Environment

WeaknessesWeaknesses – those internal factors that place the organization at a disadvantage and preclude it from seizing an opportunity or avoiding a threat from its external environment. Obsolete skills Financial constraints Poor planning & forecasting Lack of management skills Shortage of critical KSA

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External Environment

OpportunitiesOpportunities –factors in the organization’s external environment that, if exploited, may generate higher organizational performance. New markets New Technologies

Product Production

Research subsidies

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External Environment

ThreatsThreats –factors in the organization’s external environment that increase the difficulty of that organization performing at a higher level, or threaten the organization’s very existence. New entrants Government regulation Increase energy costs Change in consumer demand

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Using SWOT Analysis to Formulate Strategy Evaluating Organizational Strengths Organizational strengths enable an

organization to conceive of and implement strategies?

Considerations in Classifying StrengthsConsiderations in Classifying Strengths Common organizational strengths Common organizational strengths are

organizational capabilities possessed by numerous competing firms (good credit).

Distinctive competencies Distinctive competencies are useful for competitive advantage and superior performance (state-of-the-art production facilities).

Imitation of distinctive competencies Imitation of distinctive competencies is duplicating another firm’s distinctive competence.

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Using SWOT Analysis to Formulate Strategy (cont’d)

Evaluating Organizational Strengths : Sustained competitive advantage Sustained competitive advantage occurs when a

distinctive competence cannot be easily duplicatedcannot be easily duplicated. It is what remains after all attempts at strategic

imitations have ceased. Strategic imitation Strategic imitation is difficult when:

Distinctive competence is based on unique historical circumstances [economies of scale, e.g.].

Competitors do not understand the nature or character of a firm’s competence (George Lucas’ Industrial Light & Magic safeguards its special effects).

The competence is based on a complex phenomenon, such as organizational culture (Southwest Airlines – employee centric; Ikea - thrift and teamwork, e.g.).

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Using SWOT Analysis to Formulate Strategy (cont’d)

Evaluating Organizational Weaknesses Organizational weaknesses

Skills and capabilities that do not enable an organization to choose and implement strategies that support its mission.

Weaknesses can be overcome byWeaknesses can be overcome by: Investments to obtain the strengths needed. Modification of the organization’s mission so it can be

accomplished with the current workforce. Competitive Competitive disdisadvantageadvantage

A situation in which an organization fails to implement strategies being implemented by competitors.

May result in entropy (think Blockbuster Video).

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Michael Porter’s Generic Strategies (Business Level)

Cost Leadership Cost Leadership – focus on efficiency, stability, and cost control. Low cost producer of its good or service. Marketing and sales focus on simple product attributes

and how these product attributes meet customer needs in a low-cost and effective manner,

DifferentiationDifferentiation – distinguishing your product or service from your competition usually by quality). Marketing and sales must emphasize high-quality, high-

value image of the organization’s products or services.

FocusFocus – concentrating on a specific regional market, market segment, or set of customers.

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Business Level Strategies

Strategy

Scope (number of market segments)

Many Few

Cost Leadership

Focused Cost

Differentiation

Focused Differentiation

X

X

X

X

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Miles & Snow’s Typology

Prospector Prospector - innovative and growth oriented firm, strategies focus on identifying and entering new markets. Risk taker.

DefenderDefender – operating in a stable environment, strategies. Focus on protecting current markets and

maintaining stable growth. Risk averse. Analyzer Analyzer – a firm wishing to maintain current

markets but also enter new ones. Has elements of prospectors and defenders.

Reactor Reactor – no strategy or plan.

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Implementing Business-Level Strategies Implementing Miles and Snow’s Strategies

Prospector Encourage creativity to seek out new market

opportunities and to take risks. Develop the flexibility to meet changing market

conditions by decentralizing its organizational structure.

Defender Focus on defending its current markets by lowering its

costs and/or improving the performance of current products.

Analyzer Incorporate elements of both the prospector and the

defender strategies maintain business and to be somewhat innovative.

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Formulating Corporate-Level Strategies Strategic Business Units (SBUs)

Each business or group of businesses within an organization is engaged in serving the same markets, customers, or products.

Diversification The number of businesses an organization is engaged

in and the extent to which these businesses are related to one another

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Corporate Level Strategies ConcentrationConcentration in a single-product or

industry (McDonalds) DiversificationDiversification

Related (a.k.a. concentric) diversification - similar industry (CSX= Chessie System and Seaboard Coast Line Industries)

Common technology Common Distribution/marketing skills Common reputation Common customers

Unrelated (a.k.a. conglomerate) diversification different industry (LTV: aerospace, electronics, steel manufacturing, sporting goods, airlines, meat packing, car rentals & pharmaceuticals,)

International ExpansionInternational Expansion

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Corporate Level Strategies: Related Diversification Reduces an organization’s dependence on any one

of its business activities and thus reduces economic risk.

Reduces overhead costs associated with managing any one business through economies of scale and economies of scope.

Allows an organization to exploit its strengths and capabilities in more than one business.

Synergy exists among a set of businesses when the businesses’ value together is greater than their economic value separately.

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Corporate-Level Strategies: Unrelated Diversification An organization operates multiple businesses that are

not logically associated with one another. Advantages

Stable of performance over time due to business cycle differences among the multiple businesses.

Allocation of resources to areas with the highest return potentials to maximize corporate performance.

Disadvantages Poor performance due to the complexity of managing

a diversity of businesses. Failing to exploit key synergies puts the firm at a

competitive disadvantage to firms with related diversification strategies.

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Corporate Level Strategies: International Expansion International Expansion

Global strategy – product has transnational appeal

Multi domestic – customizing product to meet local preferences.

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The Product Life Cycle

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Implementing Corporate-Level Strategies (Diversification) Becoming a Diversified FirmBecoming a Diversified Firm

Internal development of new products Developing products and services within the

boundaries of traditional business operations. Vertical Integration Vertical Integration – an organization

becomes its own supplier and/or distributor.

Backward vertical integration Backward vertical integration becoming ones own supplier (Gallo acquires own bottling).

Forward vertical integrationForward vertical integration – becoming ones own distributor (Tandy and Radio Shack)

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Implementing Corporate-Level Strategies (Diversification)

Becoming a Diversified Firm Merger

Purchase of one firm by another firm of approximately the same size.

Acquisition Purchase of a firm by another firm that is considerably larger.

Purposes of mergers and acquisitions To diversify through vertical integration. To acquire complementary products or services linked by a

common technology and common customers. To create or exploit synergies that reduce the combined

organizations’ costs of doing business to increase revenues.

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Managing Diversification

Major Tools for Managing Diversification Organization structure

A detailed discussion of organization structure is contained in Chapter 12.

Portfolio management techniques Methods that diversified organizations use to make

decisions about what businesses to engage in and how to manage these multiple businesses to maximize corporate performance.

Two important portfolio management techniques The BCG Matrix The GE Business Screen

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Managing Diversification: BCG Matrix A method of evaluating businesses relative to the

growth rate of their market and the organization’s share of the market.

The matrix classifies the types of businesses that a diversified organization can engage as: DogsDogs have small market shares and no growth

prospects. Cash cowsCash cows have large shares of mature markets. Question marksQuestion marks have small market shares in

quickly growing markets. StarsStars have large shares of rapidly growing

markets.

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Managing DiversificationBCG Matrix

Stars Question Marks

Cash Cows Dogs

Relative Market Share

Mark

et

Gro

wth

Rate

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Managing Diversification

GE Business Screen A method of evaluating business in a diversified

portfolio along two dimensions, each of which contains multiple factors:

Industry attractiveness. Market growth rate & size

Competitive position (strength) market share of each firm in the portfolio.

In general, the more attractive the industry and the more competitive a business is, the more resources an organization should invest in that business.

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Industry Attractiveness

Market growth Market size Capital requirements Competitive intensity

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Competitive Position

Market Share Technological know-how Product quality Service network Price competitiveness Operating costs

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Managing DiversificationGE Business Screen

Competitive Position

Ind

ustr

y A

ttra

cti

ven

ess

Winner Winner ?

Winner Average

Business

Loser

Profit

Producer

Loser Loser

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International and Global Strategies

Incentives for International and Global Strategies Global efficiencies

Location efficiencies—seeking lower input cost locations Economies of scale—larger facilities result in lower costs Economies of scope—broadening product offerings result

in lower costs Multimarket flexibility

International businesses may respond to a change in one country by implementing a change in another country.

Worldwide learning The diverse operating environments of multinational

corporations (MNCs) contribute to organizational learning that can be transferred to other operating environments.

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Strategic Alternatives for International Business Home Replication

Utilizing a core competency or firm specific advantage developed at home as a main competitive weapon in foreign markets. (Bayer aspirin, e.g.)

Multi-Domestic Strategy Managing a corporation as a collection of

independent operating subsidiaries frees it to customize its productscustomize its products, its marketing campaigns, and operating techniques to meet local customer needs.

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Strategic Alternatives for International Business Global Strategy

Viewing the world as a single marketplace and having as a primary goal the creation of standardized goods and services that will address the needs of customers worldwide. Note: differs from home replication in that there is NO home country.

Transnational Strategy Attempting to combine the benefits of scale efficiencies

pursued by a global corporation, with the benefits and advantages of local responsiveness local responsiveness of a multi-domestic corporation.

Mix of centralization and decentralization with local subsidiaries.