Strategic Mangement

Introduction to Strategy

Kelley Summer 2009 GM 105 Strategic Management


What is a Strategy?
Examples of Corporate Strategy in 2009GM files for Chapter 11 bankruptcyChrysler is sold to Fiat and leaving bankruptcyBest Buy is adding patio furniture to its product assortmentA strategy is a business approach to a set of competitive moves that are designed to generate a successful outcomeA strategy is managements game plan forStrengthening the organizations competitive positionSatisfying customersAchieving performance targetsThree big questions involved in a strategyWhere are we now?Where do we want to go?How will we get there?How do we know if we got there?


Tasks Involved in Strategic Management
Defining business and stating a mission Setting measurable objectivesCrafting a strategy to achieve objectivesImplementing a strategyEvaluating performance of the strategy, reviewing new developments and taking corrective action


Developing a Mission & Objectives
An organizations MissionReflects managements vision of what the organization seeks to do and becomeProvides a clear view of what the organization is trying to accomplish for its customersIndicates intent to take a business positionAn organizations ObjectivesConvert the mission into performance targetsTrack performance over timeMust be achievableTwo typesFinancial outcomes that relate to improving financial performanceStrategic outcomes that will result in greater competitiveness & stronger long-term market position


Examples of Types of Objectives
FinancialIncrease earnings growth from 10 to 15% per yearBoost return on equity investment from 15 to 20% in 2009Achieve and maintain a AAA bond ratingStrategic Increase market share from 18 to 22% in 2009Overtake rivals on quality or customer service by 2010Attain lower overall costs that rivals by 2011Become leader in new product introductions by 2010Achieve technological superiority by 2012


What Does a Strategy Include?
How to satisfy customersHow to grow the businessOrganic growthAcquisitionHow to respond to changing industry and market conditionsHow to best capitalize on new opportunitiesHow to manage each functional piece of businessHow to achieve strategic and financial objectives


What is a Strategic Plan
A strategic plan mapsWhere the organization is headedShort and long range performance targetsActions of management to achieve desired outcomesA strategic plan consists of Mission statementStrategic and financial performance objectivesComprehensive strategy for achieving the objectives


Implementing Strategy
Implementing a strategy involvesCreating fits between the way things are done and what it takes for effective strategy executionExecuting strategy efficiently and effectivelyProducing desired results on timeThe most important fit is between a strategy and Organizational capabilitiesA reward structureInternal support systemsOrganizational culture


Evaluating Performance
The tasks of strategic management are not one-time only exercises becauseTimes and conditions changeEvents change over timeNew ways to do things surfaceNew managers have different ideas take overManagers mustConstantly evaluate performanceMonitor situation and decide how well things are workingMake necessary adjustmentsAlter organizations long-term directionRaise or lower performance objectivesModify strategy


A Situation Analysis
A situation analysis identifies strategic options and opportunitiesA situation analysis involvesExternal factors: Macroenvironment (industry and competitive conditions)Internal factors: Microenvironment (organizations internal situation and competitive position)External factorsIndustrys dominant economic traitsCompetitive forcesCompetitive moves of rivalsKey success factorsAttractiveness of the industry


SWOT

Internal Factors

StrengthsWeaknesses

E

x F Opportunities

t a

e c

r t Threats

a o

l r

s



Five Forces Model

Rivalry among sellers

Substitute

Products

Buyers

Potential Entrants

Suppliers



Analysis of Competitive Forces
The analysis is designed to identify the main sources of competitive forces and the strength of the pressureSources of competitive pressures are defined byRivalry among competitorsSubstitute productsPotential entryBargaining power of suppliersBargaining power of buyersRate the strength of each competitive forceExplain how each competitive force works and its role in the overall competitive picture


Environmental Scanning
A way to monitor and interpret social, political, economic, ecological and technological events in an effort to spot trends and conditions that could eventually impact the industry and the organization.The purpose of environmental scanning is to raise the consciousness of managers about potential developments that could have an important impact on industry conditions and pose new opportunities and threats


Assessing Competitive Positions: Strategic Groups
A Strategic Group consists of those rival firms with similar competitive approaches and positions in an industryA Strategic Group displays different competitive positions that rival firms occupyOrganizations in the same strategic group have one or more competitive characteristics in commonSell in the same price/quality rangeCover same geographic areasBe vertically integrated to same degreeEmphasize same types of distribution channelsOffer buyers similar servicesUse identical technological approaches


Competitor Analysis
An organizations strategy is affected byCurrent strategies of competitorsActions competitors are likely to take Profile of key competitors involves studyingCurrent position in the industry of each competitorStrategic objectives and recent business plans of each competitorBasic competitive approach of each competitorSuccessful strategies take into accountUnderstanding competitor strategiesEvaluating their vulnerability to driving forces and competitive pressuresSizing strengths and weaknesses of each competitorAnticipating each competitors next move


Key Industry Success Factors
Key success factors spell the difference between Profit and lossCompetitive success or failureA key success factor can be A specific skill or talentCompetitive capabilitySomething an organization must do to satisfy customersBeing distinctively better than competitors on one or more key success factors produces a competitive advantageKey success factors consist of 3-5 major determinants of financial and competitive success in an industry


Competitive Strategy



Competitive Strategy
A competitive strategy consists of moves to Attract customersWithstand competitive pressuresStrengthen an organizations market positionThe objective of a competitive strategy is to generate a competitive advantage, increase the loyalty of customers and beat competitorsA competitive strategy is narrower in scope than a business strategyFive competitive strategies areOverall low-cost leadership strategyBest cost provider strategy Broad differentiation strategyFocused low-cost strategyFocused differentiation strategy


Overall Low-Cost Leadership Strategy
Strive to be the overall low-cost provider in an industryHow to achieve overall low-cost leadershipScrutinize each cost activityManage each cost lower year after yearReengineer cost activities to reduce overall costsCut some cost activities out of the value chainCompetitive strengths of a overall low-cost strategyOrganization in a better position to compete offensively on priceOrganization is better able to negotiate with large customersOrganization is able to use price as a defense against substitutesLow cost is a significant barrier to entryOrganization is more insulated from the power of suppliers


Overall Low-Cost Leadership Strategy

Carrier3Q 2008 (cents)Carrier3Q 2008 (cents)Northwest15.65Frontier11.92United14.64Delta11.82US Airways14.21Jet Blue10.06Continental12.74Southwest9.74American12.69AirTran9.66

When Does an Overall Low-Cost Strategy Work the Best
When price competition is a dominant competitive forceThe product is a commodityThere are few ways to differentiate the productMost customers have similar needs/requirementsCustomers incur low switching costs changing sellersCustomers are large and have significant bargaining power


When Doesnt a Overall Low-Cost Strategy Work
When technological breakthroughs open cost reductions for competitors, negating a low-cost providers efficiency advantageCompetitors find it relatively easy and inexpensive to imitate the leaders low cost methodsLow-cost leader focuses so much on cost reduction that the organization fails to respond toChanges in customer requirements for quality and serviceNew product developmentsReduced customer sensitivity to price


Broad Differentiation Strategies
Striving to build customer loyalty by differentiating an organizations products from competitors productsKeys to success includeFinding ways to differentiate to create value for customers that are not easily copiedNot spending more to differentiate than the price premium that can be chargedA successful differential strategy allows an organization toSet a premium priceIncrease unit salesBuild brand loyalty


Broad Differentiation Strategies
Where to look for differentiation opportunitiesSupply chainResearch and developmentProduction activitiesMarketing, sales and service activitiesStrengths of a Differentiation StrategyCustomers develop loyalty to the brandBrand loyalty acts as an entry barrierOrganization is better able to fend off threats of substitute products because of brand loyaltyReduces bargaining power of large customers since other brands are less attractiveSeller may be in a better position to resist efforts of suppliers to raise prices


Pitfalls of a Broad Differentiation Strategy
Trying to differentiate on an unimportant product feature that doesnt result in providing more value to the customerOver differentiating the product such that the product features exceed the customers needsCharging a price premium that buyers perceive as too highIgnoring need to signal value Not identifying what customers consider valuable


Best-Cost Provider Strategy
Striving to give customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiationCombines low-cost and differentiationThe objective is to create superior value by meeting or beating customer expectation on product attributes and beating their price expectationsKeys to successMatch close competitors on key product attributes and beat them on costExpertise at incorporating upscale product attributes at a lower cost than competitorsContain costs by providing customers a better product


Advantages of Best-Cost Provider Strategy
Competitive advantage comes from matching close competitors on key product attributes and beating them on priceMost successful best-cost providers have skills to simultaneously manage costs down and product quality upBest-cost provider can often beat an overall low-cost strategy and a broad differentiation strategy whereCustomer diversity makes product differentiation the norm Many customers are price and value sensitive


Focus Strategies
Focus strategy based on low-costConcentrate on a narrow customer segment beating the competition on lower costFocus strategy based on differentiationOffering niche customers a product customized to their needsOverall objective of both focus strategies is to do a better job of serving a niche target market than competitorsKeys to successChoose a niche were customers have a distinctive preference, unique needs or special requirementsDevelop a unique ability to serve the needs of a niche target market


What Makes a Niche Attractive?
Large enough to be profitableGood growth potentialNot critical to the success of major competitorsOrganization has the resources to effectively serve the nicheOrganization can defend itself against challengers through a superior ability to serve the nicheNo competitors are focusing on the niche


Strengths and Risks of Focus Strategies
StrengthsCompetitors dont have the motivation to meet specialized needs of the nicheOrganizations competitive advantage could be seen as a barrier to entryOrganizations competitive advantage provides an obstacle for substitutesOrganizations ability to meet the needs of customers in the niche can reduce the bargaining power of large niche buyersRisksBroad differentiated competitors may find effective ways to enter the nicheNiche customers preferences may move toward the product attributes desired by a larger market segmentProfitability may be limited if too many competitors enter the niche


From Single-Business to Diversification
Stage 1 - Single-business serves a local or regional marketStage 2 Geographic expansionStage 3 Vertical integrationStage 4 Growth slows so the business diversifies


The Growth Matrix

Products

Present New

M

a Present

r

k

e New

t

s

Market Product

Penetration Development

Market Diversification

Development



Market Penetration
Use when markets are not saturated with an organizations productsUse when the usage rate of present customers can be increasedUse when the market shares of the major competitors has been decliningUse when the relationship between sales and marketing expenses is highUse when increased economies of scale provide the opportunity for competitive advantages


Product Development
Use when the organization has successful products that are in the maturity stage of the product life cycle. The objective is to attract satisfied customers to try new, improved productsUse when an organization competes in an industry that is characterized by rapid technological changeUse when competitors offer better quality products at comparable pricesUse if the organization competes in a high-growth industryUse when the organization has strong research and development capabilities


Market Development
Use when channels of distribution are available, reliable and inexpensiveUse when the organization is very successful in what it doesUse when the organization has excess production capacityUse when the organization possesses the needed capital and human resources to manage the expanded operationsUse when unsaturated markets exist


Diversification
Use when entering new industriesAcquire an existing company in the target industryStart a new company internallyForm a joint ventureAcquiring an existing companyQuick entry into target marketAble to hurdle entry barriersTechnological inexperienceGain access to reliable suppliersBeing of a size to match competitors in terms of efficiency and costsGet distribution access


Start a New Company
Use when ample time exists to enter by starting from scratchUse if existing competitors are slow to respond to changes in the industryUse if it is more economical to start from scratch rather than acquiring an existing companyUse if the organization already has most of the needed skillsUse if additional capacity will not adversely impact the industryUse when the new company doesnt have to go head-to-head against powerful competitors


Joint Ventures
Use when it is too risky to go it aloneUse when pooling competencies of partners provides a stronger competitorDrawbacksWhich partner will do what Who has effective controlPotential conflictsSourcing of componentsControl over cash flows and profitsWhether operations should conform to one partner or the other


Linking the Budget to Strategy
Implementation of a strategy requiresEnough resources to support the strategyScreening of requests for new capital projects and bigger operating budgetsShifting resources to support new strategy priorities
- Downsizing some areas and upsizing other areas

- Eliminating activities that are no longer needed

How well budget allocations are linked to the needs of a strategy

can either promote or impede the implementation process.



Implementing Best Practices & Continuous Improvement
Implementing a strategy involves adopting best practicesBest practices means:Benchmarking is an integral part of a successfully implemented strategyContinuous improvement programsTotal quality management - TQM


Instituting Best Practices & Continuous Improvement
Quality improvement programs are linked to Defect-free manufactureSuperior product quality Superior customer serviceTotal customer satisfaction
Identifying & implementing best practices is a journey, not a

destination; its an exercise in doing things in a world-class

way.



Formal Reporting of Strategy-Critical Information
Accurate & timely information is essential to guide actionPrompt feedback on implementation initiatives are needed BEFORE actions are fully completedMonitoring early implementation actions serves two purposesQuick detection of the need to adjust the strategy or its implementationMaking sure things are moving in the planned directionCritical success variables must be track as needed


Formal Reporting of Strategy-Critical Information
Information systems should coverCustomer dataOperations dataEmployee dataFinancial data
Accurate information allows a strategy to be monitored and

corrective action to be taken promptly



Commitment to Chosen Strategy
Implementing rewards & incentives inducing employees to make the strategy workThe reward structure must motivate people to do the very things it takes to mjake the strategy work successfullyRequiring results, not intentionsKeys to implementing pay-for-performance programsMake performance targets the basis for structuring the incentive systemEnsure performance targets are clearly defined and every person/group is accountable for achieving themBe fair and impartial in comparing actual performance against targetsAvoid rewarding non-performersExplore reasons for deviations (poor individual performance or circumstances beyond the individuals control)


Documents

Strategic Mangement