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Lecture 6 & 7

Planning, Strategy and Competitive Advantage

S. ChanHead, Department of Business Administration

http://home.chuhai.hk/~charmaine/charmaine@chuhai.edu.hk

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Planning and Strategy

Planning Identifying and

selecting appropriate goals and courses of action for an organization

Strategy A cluster of decisions

about what goals to pursue, what actions to take, and how to use resources to achieve goals

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Three Steps in Planning

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Why Planning is Important

1. Planning is necessary to give the organization a sense of direction and purpose.

2. Planning is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization.

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Why Planning is Important

3. A plan helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction and work to achieve its desired future state.

4. A plan can be used as a device for controlling managers within an organization.

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Levels of Planning at General Electric

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Levels and Types of Planning

Corporate-Level Plan Top management’s decisions pertaining to the

organization’s mission, overall strategy, and structure.

Corporate-Level Strategy A plan that indicates in which industries and

national markets an organization intends to compete.

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Levels of Planning and Strategy

Business-Level Plan Divisional managers’ decisions pertaining to

divisions long-term goals overall strategy, and structure

Business-Level Strategy outlines the specific methods a division, business

unit, or organization will use to compete effectively against its rivals in an industry

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Levels and Types of Planning

Functional-Level Plan Functional managers’ decisions pertaining to the

goals that they propose to pursue to help the division attain its business-level goals

Functional-Level Strategy A plan of action to improve the ability of each of

an organization’s functions to perform its task-specific activities in ways that add value to an organization’s goods and services.

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Types of Plans

Standing Plans Use in programmed decision situations Policies: general guides to action Rules: formal written specific guides to action Standard operating procedures (SOP): specify an exact

series of actions to follow

Single-Use Plans Developed for a one-time, non-programmed issue Programs, budget

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Standing versus Single-Use Plans

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Determining the Organization’s Mission and Goals

Defining the Business1. Who are our customers?2. What customer needs are being satisfied?3. How are we satisfying customer needs?

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Determining the Organization’s Mission and Goals

Establishing Major Goals Provides the organization with a sense of direction Stretches the organization to higher levels of

performance Goals must be challenging but realistic with a definite

period in which they are to be achieved Strategic leadership

the ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates

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Planning and Strategy

Mission Statement A broad declaration of an organization’s purpose

that identifies the organization’s products and customers and distinguishes the organization from its competitors

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Planning and Strategy Formulation

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Formulating Strategy

SWOT Analysis A planning exercise in which managers identify

internal organizational strengths and weaknesses, and external opportunities and threats

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SWOT Analysis for Starbucks Coffee

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Industry and Competitive Situation Analysis

• Situation Analysis– Draws out those features in a company’s

environment that most directly frame its strategic window of options and opportunities.

• Five Competitive Forces (Porter)– Rivalry among competing sellers in the industry– Threat of substitute products and services– Potential new entrants– Power of suppliers– Power of buyers

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The Five Forces

Competitive Forces

Level of Rivalry Increased competition results in lower profits.

Potential for Entry Easy entry leads to lower prices and profits.

Power of Suppliers If there are only a few suppliers of important items, supply costs rise.

Power of Customers If there are only a few large buyers, they can bargain down prices.

Substitutes More available substitutes tend to drive down prices and profits.

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Starbuck’s Five-Force Competitive Analysis

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Five-Force Competitive Analysis•The bargaining power of customers • buyer concentration to firm concentration ratio • bargaining leverage • buyer volume • Buyer switching costs relative to firm switching costs • buyer information availability • ability to backward integration • availability of existing substitute products • buyer price sensitivity • price of total purchase • The bargaining power of suppliers • supplier switching costs relative to firm switching costs • degree of differentiation of inputs • presence of substitute inputs • supplier concentration to firm concentration ratio • threat of forward integration by suppliers relative to the

threat of backward integration by firms • cost of inputs relative to selling price of the product • importance of volume to supplier• The threat of substitute products • buyer propensity to substitute • relative price performance of substitutes • buyer switching costs • perceived level of product differentiation

•The threat of new entrants • the existence of barriers to entry• Economies of product differences• Brand equity• switching costs • capital requirements • access to distribution • absolute cost advantages • learning curve advantages • expected retaliation • government policies•The intensity of competitive rivalry • number of competitors • rate of industry growth • intermittent industry overcapacity • exit barriers • diversity of competitors • informational complexity & asymmetry • brand equity • fixed cost allocation per value added • level of advertising expense

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Business-Level Strategies

Low-cost Strategy (Cost Leadership Strategy) The firm with the lowest total overall costs has a competitive

advantage in price-sensitive markets. Driving the organization’s total costs down below the total costs

of rivals

Differentiation Distinguishing an organization’s products from the products of

competitors on dimensions such as product design, quality or after-sales service

Competing on the basis of features that distinguish one firm’s products or services from those of another.

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Business-Level Strategies

Focus Strategy: Concentrating competitive efforts on a particular market

segment, product line, or buyer group.

1.Focused Low-cost Strategy Serving only one segment of the overall market and trying

to be the lowest-cost organization serving that segment

2. Focused Differentiation Strategy Serving only one segment of the overall market and trying

to be the most differentiated organization serving that segment

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Corporate-Level Strategies

Growth Strategies Concentration Vertical Integration: Backward / forward integration Related and Unrelated diversification

1. Concentration on a Single Industry reinvesting a company’s profits to strengthen its

competitive position in its current industry

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Corporate-Level Strategies

2.Vertical Integration (backward/forward ) expanding a company’s operations either backward into an

industry that produces inputs for its products or forward into an industry that uses, distributes or sells its products.

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Corporate-Level Strategies

3. Diversification expanding a company’s business operations into a new

industry in order to produce new kinds of valuable goods or services

Related Diversification entering a new business or industry to create a competitive

advantage in one or more of an organization’s existing divisions or businesses

Unrelated diversification entering a new industry or buying a company in a new industry

that is not related in any way to an organization’s current businesses or industries

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Formulating Corporate-Level Strategies

International Expansion Basic question:

To what extent do we customize products and marketing for different national conditions?

Global strategy Selling the same standardized product and using

the same basic marketing approach in each national market

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Four Ways of Expanding Internationally

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International Expansion

Exporting making products at home and selling them abroad

Importing selling at home products that are made abroad

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International Expansion

Licensing allowing a foreign organization to take charge of

manufacturing and distributing a product in its country in return for a negotiated fee

Franchising selling to a foreign organization the rights to use a

brand name and operating know-how in return for a lump-sum payment and a share of the profits

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International Expansion

Joint venture strategic alliance among companies that agree to

jointly establish and share the ownership of a new business

Wholly Owned Foreign Subsidiary managers invest in establishing production

operations in a foreign country independent of any local direct involvement