MGT 2400 – Strategic Management Strategy Formulation : Situation Analysis and

Business Strategy

Dr. B.NishanthaDepartment of Management &

Organization StudiesUniversity of Colombo

Strategy

• The plan of action that prescribe resource allocation and other activities for dealing with the environment , achieving a competitive advantage , and attaining organizational goals.

- Richard L.Daft-

Strategy Formulation

• Strategic planning or long –range planning. The process of finding a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses.

• The firm's present strategies, objectives, and mission coupled with the external and internal audit information, provide a basis for generating and evaluating feasible alternative strategies.

• Strategy formulation begins with situation analysis (SWOT analysis)

SWOT Analysis

• SWOT analysis use to identify ;

a)Firms distinctive competencies and superior ways in which they can be used.

b)Opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources.

The SWOT analysis

The essence of strategy is

opportunity divided by capacity

• An opportunity by itself has no real value unless a company has the capacity (resources) to take advantage of that opportunity

• Weaknesses in other resource areas can prevent a strategy from being successful.

SA=O/(S-W)

The SWOT matrixSTRENGTHS WEAKNESSES

OPPORTUNITIES THREATS

Strengths: Weaknesses:

1. R and D almost complete 2. Basis for strong management team 3. Key first major customer acquired 4. Initial product can evolve into range

of offerings 5. Located near a major centre of

excellence 6. Very focused management/staff 7. Well-rounded and managed

business

1. Over dependent on borrowings - Insufficient cash resources

2. Board of Directors is too narrow 3. Lack of awareness amongst

prospective customers 4. Need to relocate to larger premises 5. Absence of strong sales/marketing

expertise 6. Overdependence on few key staff 7. Emerging new technologies may

move market in new directions

Threats: Opportunities:

1. Major player may enter targeted market segment

2. New technology may make products obsolescent

3. Economic slowdown could reduce demand

4. $ may move against Rs.5. Market may become price sensitive 6. Market segment's growth could

attract major competition

1. Market segment is poised for rapid growth

2. Export markets offer great potential 3. Distribution channels seeking new

products 4. Scope to diversify into related

market segments

Criticism of the SWOT analysis

• It generates lengthy lists

• It uses no weights to reflect priorities

• It uses ambiguous words and phrases

• The same factor can be placed in 2 categories

• There is no obligation to verify opinions with data or analysis

• It requires only a single level of analyses

• There is no logical link to strategy implementation

SFAS matrix

• Strategic Factor Analysis Summary (SFAS) matrix includes only the most important factors gathered from environmental scanning – thus provides info essential for strategy formulation.

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Internal Factor Analysis Summary (IFAS) – Maytag as Example

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External Factor Analysis Summary EFAS – Maytag as Example

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Strategic Factor Analysis Summary (SFAS) Matrix

The TOWS matrix

• SWOT can be also used to generate a number of possible alternative strategies.

• The TOWS Matrix illustrates how the external opportunities and threats facing a corporation can be matched with the company’s internal strengths and weaknesses to result in four sets of possible strategic alternatives.

SO Strategies

Use a firm’sinternal strengthsto take advantage

of external opportunities

SOStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

WO Strategies

Improving internalweaknesses by

taking advantageof external

opportunities

WOStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

ST Strategies

Use a firm’s strengthsto avoid or

reduce the impactof external

threats

STStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

WT Strategies

Defensive tacticsaimed at reducing

internal weaknesses &

avoidingenvironmental

threats

WTStrategies

StrengthsWeaknesses

OpportunitiesThreats

SWOT

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The TOWS Matrix help you generate strategic alternatives by Matching S-W-O-T

Strategy Formulation – Using the TOWS Matrix

TOWS Matrix for Maytag Corporation

Strengths – SQuality Maytag Culture

Experienced Top Manag-t

Vertical Integration

Employee Relation

Hoover’s international orientation

Weaknesses – WProcess-oriented R&D

Distribution channels

Financial position

Global positioning

Manufacturing facilities

Opportunities – O Economic integration of European Community

Demographic favor quality

Economic devel-t of Asia

Opening of Eastern Europe

Trend toward super stores

SO StrategiesUse worldwide Hoover distribution channels to sell both Hoover & Maytag major products.

Find joint venture partners in Eastern Europe and Asia

WO StrategiesExpand Hoover’s presence in continental Europe by improving quality and reducing Man. And distri. Costs.

Treats – T Increasing government regulation

Strong U.S. competition

Whirlpool & Electrolux positioned for global economy

New products advances

Japanese appliance companies

ST StrategiesAcquire Raytheon’s appliance business to increase US market share.

Merge with Japanese major ho. Appliance company

WT Strategiessell off Dixie- Narco Division to reduce debt.

Emphasize cost reduction to

reduce break-even point.

Levels of Strategy

Division A

R & D Personnel Finance Production Marketing/Sales

Division B

R & D Personnel Finance Production Marketing/Sales

FUNCTIONALSTRATEGIES

BUSINESSSTRATEGY

CORPORATESTRATEGY

CORPORATEHEAD OFFICE

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•...

Business Strategy

• is concerned with how the firm competes within a particular industry or market. to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals.

• It is a plan of action to use the firm’s resources/capabilities and distinctive competencies to gain competitive advantage.

• Strategic decisions include amount of advertising, direction and extend of R & D, product changes, new product development, equipment and facilities, expansion or contraction of product lines.

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Porter’s Competitive Strategies

Generic Competitive Strategies --

–Lower Cost strategyAbility of a company or business unit to design , produce, and

market a comparable product at greater efficiencies than competitors. The objective is for a company to have a low-cost structure as compared with its competitors.

–Differentiation strategyAbility of company to provide unique and superior value to the

buyer in terms of product quality, special features, or after sales service.

- Focused StrategyRather than serving the entire market with its products or services

an enterprise may emphasize a specific segment of the market. A low cost strategy, differentiation, or both may be accomplish this.

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Porter’s Competitive Strategies

Cost leadership, How ?• For broad mass market• Construction of efficient –scale facilities• Cost reduction from experience• Tight control on cost and overhead• Cost minimizing in areas like R&D, sales force,

advertising, ….ect…. • Maintains standard operating procedurs

The cost leader is able to charge lower price for its products than its competitors and still make satisfactory profit

Differentiation• For broad mass market• Creation of a product or service that is perceived

throughout its industry as unique and charging a premium for its product to earn above average returns.

• This specialty can be grained through design or brand image, technology, features, a dealer network , or customer service.

• Increased cost pass on to the buyers.

Brand loyalty lowers customers’ sensitivity to price.

Focus

• Application of differentiation or low-cost strategy for narrow target market.

1. Cost Focus- become the low cost producer in particular segment.

• Suits for start ups to compete with MNCs

2. Differentiation focus – perceived added value to particular segment, warranting price premium.

• Serve special needs of a narrow strategic target more effectively than competitors.

Risks of Generic Strategies

Risks of Cost LeadershipCost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost leadership erode.Proximity in differentiation is lost.Cost focusers achieve even lower cost in segments.

Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation become less important to buyers.Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.

Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Structure erodes.• Demand disappears.Broadly targeted competitors overwhelm the segment:• The segment’s differences from other segments narrow.• The advantages of a broad line increase.New focusers subsegment the industry.

Risks of Cost LeadershipCost leadership is not sustained:• Competitors imitate.• Technology changes.• Other bases for cost leadership erode.Proximity in differentiation is lost.Cost focusers achieve even lower cost in segments.

Risks of DifferentiationDifferentiation is not sustained:• Competitors imitate.• Bases for differentiation become less important to buyers.Cost proximity is lost.Differentiation focusers achieve even greater differentiation in segments.

Risks of FocusThe focus strategy is imitated:The target segment becomes structurally unattractive:• Demand disappears.Broadly targeted competitors overwhelm the segment:• The segment’s differences from other segments narrow.• The advantages of a broad line increase.New focusers sub-segment the industry.

Issues in Competitive Strategies• According to Porter, to be successful , a company must

achieve one of the generic competitive strategies.• Some researchers suggest that combination of the two

competitive strategies may also successful.

eg : Toyota, Honda• One company in industry has only possibility pursue

mass market cost-leadership strategy• One company has possibility to pursue number of

differentiation and focus strategies (Based on desirable features and number of market niches )

Source: Based on the work of Cliff Bowman. See C.Bowman and D.Faulkner. Competitive and Corporate Strategy, Irwin, 1996.

PRICE HighLow

DifferentiationFocused

differentiation

Low price/low added value

Strategiesdestined for

ultimate failure

PERCEIVEDADDEDVALUE

4

5

6

8

Hybrid

Lowprice

7

High

Low

1

2

3

The strategy clock: Bowman’s competitive strategy options

1 Low price/low added value Likely to be segment specific2 Low price Risk of price war and low

margins/need to be cost leader

3 Hybrid Low cost base and reinvestment in low price and differentiation

4 Differentiation (a) Without price premium Perceived added value by user,

yielding market share benefits (b) With price premium Perceived added value sufficient to

bear price premium

5 Focused differentiation Perceived added value to a particularsegment, warranting price premium

6 Increased price/standard Higher margins if competitors do not value follow/risk of losing market share

7 Increased price/low value Only feasible in monopoly situation

8 Low value/standard price Loss of market share

The strategy clock

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Quality- with 8 dimensions - potential of providing a product with a com. ad.

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Industry Structure & Competitive Strategy

Industry Structure --Fragmented Industry

Many small and medium-sized local companies compete for small shares of total market

Focus strategies predominate

Consolidated industryMature industry dominated by a few large companies

Cost Leadership or Differentiation predominate

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Competitive TacticsTactic is a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action• they are viewed as the link between formulation and implementation of strategies.

Timing Tactics (When to Compete)–First mover: Reputation as industry leader, high profits, sets standards for subsequent products in the industry–Late movers: Able to imitate technological advances of others. Allow to keep R&D costs and risks down

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Competitive Tactics

Market Location Tactics (Where to compete) To protect or take market shareOffensive Tactics ( in an established competitors market location) 1. Frontal Assault (Head to Head)- the attacking firm goes head to head with its competitor. need superior resources and/or capabilities to persevere.2.Flanking Maneuver- a firm may attack a part of the market where the competitor is weak. Attack the enemy at its weak points or blind Attack the enemy at its weak points or blind spots i.e. its flanksspots i.e. its flanks3.Bypass Attack – change the rules of the game. By diversifying By diversifying into unrelated products or markets neglected by the leader. Could into unrelated products or markets neglected by the leader. Could overtake the leader by using new technologies. Usually use to overtake the leader by using new technologies. Usually use to precede a stronger attack precede a stronger attack

Competitive Tactics

• Offensive Tactics………..4. Encirclement • Attack the enemy at many fronts at the same timeAttack the enemy at many fronts at the same time• Ideal for challenger having superior resourcesIdeal for challenger having superior resources5. 5. Guerrilla warfareGuerrilla warfare • By launching small, intermittent hit-and-run attacks By launching small, intermittent hit-and-run attacks

to harass and destabilize the leaderto harass and destabilize the leader• Usually use to precede a stronger attack eg: price Usually use to precede a stronger attack eg: price

cuts, hiring the opposition's best staffcuts, hiring the opposition's best staff • e.g. airlines use short promotions to attack the e.g. airlines use short promotions to attack the

national carriers especially when passenger loads in national carriers especially when passenger loads in certain routes are lowcertain routes are low

Market Location Tactics (Where to compete)–Defensive Tactics – aim to lower the probability of attack.

1.Raise structural barriersEntry barriers act to block a challenger’s logical avenues of attack. exclusive agreements, e of scale 2. Increase expected retaliation

Defend any possible erosion of market share through

• Price cuts or

• Matching competitor’s promotional activities3. Lower the inducement for attack

Keep industry profits low (Southwest Airlines)Reduce challenger's expectations of future profits in the industry.

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Cooperative Strategies

•Collusion -- Active cooperation of firms to reduce output and raise prices: explicit or tacit

–Normally Illegal Practice

•Strategic Alliances -- Partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial

– Mutual Service Consortia– A Joint Venture– Licensing Arrangements– Value Chain Partnership

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Mutual Service

Consortia

Joint Venture

Licensing Arrangement

Weak and Distant

Value-Chain

Partnership

Strong and Close

Source: Suggested by R. M. Kanter, “Collaborative Advantage: The Art of Alliances,” Harvard Business Review (July-August 1994), pp. 96–108.

Continuum of Strategic Alliances

Strategic Alliances……

• Mutual Service Consortia: similar companies in similar industries pool their resources to gain a benefit too expensive to acquire alone.

• Joint Venture : pursue an opportunity that needs a capability from each of them

• Value Change Partnerships : companies in different industries with different but complimentary skills link their capabilities to create value for ultimate users.

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Drivers of Strategic Alliances

StrategicAlliance

Access to markets

Achieve competitiveadvantage

Obtain technology

Reduce financial risk

Reduce political risk