Strategy Development Week 3. Objectives Week 3 Develop strategic objectives. Create organizational objectives and goals. Articulate value proposition,

Strategy DevelopmentStrategy Development

Week 3Week 3

Objectives Week 3Objectives Week 3

Develop strategic objectives.Develop strategic objectives.

Create organizational objectives and Create organizational objectives and goals.goals.

Articulate value proposition, key activities, Articulate value proposition, key activities, resources, and channels to market.resources, and channels to market.

Quote……Quote……

““Successful business strategy is Successful business strategy is about actively shaping the game you about actively shaping the game you play, not just playing the game you play, not just playing the game you

find.” find.”

Adam M. Brandenburger and Barry J. Nalebuff


““The essence of strategy lies in The essence of strategy lies in creating tomorrow’s competitive creating tomorrow’s competitive

advantage faster than competitors advantage faster than competitors mimic the ones you posses today” mimic the ones you posses today”

Gary Hamel and C.K. Prahalad


““Competitive strategy is about being Competitive strategy is about being different. It means deliberately different. It means deliberately choosing to perform activities choosing to perform activities

differently or to perform different differently or to perform different activities than rivals to deliver a activities than rivals to deliver a

unique mix of value”unique mix of value”..——Michael E. PorterMichael E. Porter


““Winners in business play rough and Winners in business play rough and don’t apologize for it. The nicest part don’t apologize for it. The nicest part of playing hardball is watching your of playing hardball is watching your

competitors squirm”competitors squirm”——George Stalk, Jr., and Rob George Stalk, Jr., and Rob

LachenauerLachenauer””

Long-Term ObjectivesLong-Term Objectives

Strategic managers recognize that short-run profit maximization is rarely the Strategic managers recognize that short-run profit maximization is rarely the best approach to achieving sustained corporate growth and profitability.best approach to achieving sustained corporate growth and profitability.

Strategic decision makers confronts: Strategic decision makers confronts: Should they eat the seeds to improve the near-term profit picture and make large dividend Should they eat the seeds to improve the near-term profit picture and make large dividend

payments through cost-saving measures such as laying off workers during periods of slack payments through cost-saving measures such as laying off workers during periods of slack demand, selling off inventories, or cutting back on research and development?demand, selling off inventories, or cutting back on research and development?

Or should they sow the seeds in the effort to reap long-term rewards by reinvesting profits Or should they sow the seeds in the effort to reap long-term rewards by reinvesting profits in growth opportunities, committing resources to employee training, or increasing in growth opportunities, committing resources to employee training, or increasing advertising expenditures?advertising expenditures?

Long-Term ObjectivesLong-Term Objectives

To achieve long-term prosperity, strategic planners To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven commonly establish long-term objectives in seven areas: areas:

ProfitabilityProfitability Competitive PositionCompetitive Position Employee RelationsEmployee Relations Technological Technological

LeadershipLeadership

Productivity – In-OutProductivity – In-Out Employee Employee

DevelopmentDevelopment Public ResponsibilityPublic Responsibility

Qualities of Long-Term Qualities of Long-Term ObjectivesObjectives

What distinguishes a good objective from a bad What distinguishes a good objective from a bad one? What qualities of an objective improve its one? What qualities of an objective improve its chances of being attained?chances of being attained?

There are five criteria that should be used in There are five criteria that should be used in preparing long-term objectives: preparing long-term objectives:

FlexibleFlexible Measurable Measurable MotivatingMotivating SuitableSuitable UnderstandableUnderstandable

The Balanced ScorecardThe Balanced Scorecard

The The balanced scorecardbalanced scorecard is a set of measures that are is a set of measures that are directly linked to the company’s strategydirectly linked to the company’s strategy Developed by Robert S. Kaplan and David P. Norton, it Developed by Robert S. Kaplan and David P. Norton, it

directs a company to link its own long-term strategy with directs a company to link its own long-term strategy with tangible goals and actions. tangible goals and actions.

The scorecard allows managers to evaluate the company The scorecard allows managers to evaluate the company from four perspectives: from four perspectives:

financial performancefinancial performance customer knowledgecustomer knowledge internal business processesinternal business processes learning and growth learning and growth

The Balance ScorecardThe Balance Scorecard



Perspective Objective KPI Goal for 2014

Finance

Become industry Cost Leader % Reduction in Cost per Unit 20%

Utilization of Assets Utilization Rate 7%Increase Market Share Market Share 30%

Customer

Customer Retention % Retention 75%On Time Delivery % of On Time Delivery 90%

Zero Defects % of Good Quality First Time 100%

Process

Improve Quality # Warranty Claims 200Reduce Inventory Obsolescence Inventory Turnover 12

Reduce Customer Backlog % Order Backlog 10%

Learning & Growth

Create Innovative Culture % of new Products this year 10%

Employee Satisfaction Survey Index 75%Develop Quality Improvement

Skills% Trained in SPC 75%


1.1. EHSEHS

2.2. Customer ServiceCustomer Service

3.3. Quality and ComplianceQuality and Compliance

4.4. Product Development and new Product Development and new businessbusiness

5.5. Organizational developmentOrganizational development

6.6. BudgetBudget


Department Areas Finance Return On Investment

Cash Flow Return on Capital Employed Financial Results (Quarterly/Yearly)

Internal Business Processes Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automation

Learning & Growth Is there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunities

Customer Delivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate


Radar ChartRadar Chart DashboardDashboard

What Is “What Is “Competitive Competitive Strategy”?Strategy”?

Deals exclusively with a company’sDeals exclusively with a company’sbusinessbusiness plansplans to to compete successfullycompete successfully

Specific Specific effortsefforts to to please customersplease customers

Offensive and defensive movesOffensive and defensive movesto to counter maneuverscounter maneuvers of rivalsof rivals

ResponsesResponses to prevailing to prevailing market conditionsmarket conditions

InitiativesInitiatives to to strengthen its market positionstrengthen its market position

Narrower in scopeNarrower in scope than business strategy than business strategy

Strategy and Competitive Strategy and Competitive AdvantageAdvantage

Competitive advantageCompetitive advantage exists when a firm’s exists when a firm’sstrategy gives it an edge instrategy gives it an edge in Attracting customers andAttracting customers and Defending against competitive forcesDefending against competitive forces

Convince customers firm’s product / service offers Convince customers firm’s product / service offers superior superior valuevalue An An acceptable productacceptable product at a at a bargain pricebargain price A A superior productsuperior product worth paying more for worth paying more for A A more-value-for-the-money product more-value-for-the-money product (an upscale product at a “low” (an upscale product at a “low”

priceprice

Key to Gaining a Competitive AdvantageKey to Gaining a Competitive Advantage

Generic StrategiesGeneric Strategies

A long-term or grand strategy must be based on a A long-term or grand strategy must be based on a core idea about how the firm can best compete in core idea about how the firm can best compete in the marketplace. The popular term for this core idea the marketplace. The popular term for this core idea is is generic strategygeneric strategy. .

3 Generic Strategies: 3 Generic Strategies: Striving for overall Striving for overall low-cost leadershiplow-cost leadership in the industry. in the industry. Striving to create and market unique products for varied customer Striving to create and market unique products for varied customer

groups through groups through differentiationdifferentiation. . Striving to have special appeal to one or more groups of consumers or Striving to have special appeal to one or more groups of consumers or

industrial buyers, industrial buyers, focusingfocusing on their cost or differentiation concerns. on their cost or differentiation concerns.

How to Achieve a Cost How to Achieve a Cost AdvantageAdvantage

Do a better job than rivals of Do a better job than rivals of

controlling the costs of performing controlling the costs of performing

value chain activitiesvalue chain activities

Approach 1Approach 1

Revamp value chain to eliminate Revamp value chain to eliminate

cost-producing activities that add cost-producing activities that add

little value from the buyer’s little value from the buyer’s

perspective perspective


Control Control costs!costs!

EliminateEliminate activities!activities!

Keys to Success in Achieving Keys to Success in Achieving Low-Cost LeadershipLow-Cost Leadership

Scrutinize each value chain activity to identify what Scrutinize each value chain activity to identify what factors drive the costs of performing the activity factors drive the costs of performing the activity

Use knowledge about cost drivers to manage costs of Use knowledge about cost drivers to manage costs of each activity down year after yeareach activity down year after year

Find ways to restructure value chain to eliminate Find ways to restructure value chain to eliminate nonessential work steps and low-value activities nonessential work steps and low-value activities

Aggressively pursue investments in resources and Aggressively pursue investments in resources and capabilities that promise to drive costs out of the capabilities that promise to drive costs out of the businessbusiness

Characteristics of a Low-Cost Characteristics of a Low-Cost ProviderProvider

Cost conscious corporate cultureCost conscious corporate culture

Broad employee participation in cost-control effortsBroad employee participation in cost-control efforts

Ongoing efforts to benchmark costsOngoing efforts to benchmark costs

Intensive scrutiny of budget requestsIntensive scrutiny of budget requests

Programs promoting continuous cost improvementPrograms promoting continuous cost improvement

Successful low-cost producers Successful low-cost producers championchampionfrugalityfrugality but wisely and aggressively but wisely and aggressivelyinvest in cost-saving improvements invest in cost-saving improvements !!

When Does a Low-CostWhen Does a Low-CostStrategy Work Best?Strategy Work Best?

Price competition is vigorousPrice competition is vigorous Product is standardized or readily availableProduct is standardized or readily available

from many suppliersfrom many suppliers There are few ways to achieve differentiation that have value There are few ways to achieve differentiation that have value

to buyersto buyers Most buyers use product in same waysMost buyers use product in same ways Buyers incur low switching costs Buyers incur low switching costs Buyers are large and have significant bargaining powerBuyers are large and have significant bargaining power Industry newcomers use introductory low prices to attract Industry newcomers use introductory low prices to attract

buyers and build customer basebuyers and build customer base

Pitfalls of Low-Cost StrategiesPitfalls of Low-Cost Strategies

Cutting price by an amount greater than size of cost advantage (having a Cutting price by an amount greater than size of cost advantage (having a $1 cost advantage and cutting price by $2)$1 cost advantage and cutting price by $2)

Low cost methods are easily imitated by rivalsLow cost methods are easily imitated by rivals

Becoming too fixated on reducing costsBecoming too fixated on reducing costsand ignoringand ignoring

Buyer interest in additional featuresBuyer interest in additional features

Declining buyer sensitivity to priceDeclining buyer sensitivity to price

Changes in how the product is usedChanges in how the product is used

Technological breakthroughs open up cost reductions for rivals, thus Technological breakthroughs open up cost reductions for rivals, thus allowing them to close cost gapallowing them to close cost gap

Differentiation StrategiesDifferentiation Strategies

Incorporate Incorporate differentiating featuresdifferentiating features that cause that cause buyers to buyers to preferprefer firm’s firm’s product or serviceproduct or service over over brands of rivalsbrands of rivals

Finding ways to differentiate that Finding ways to differentiate that create valuecreate value for for buyers and that are buyers and that are not easily matchednot easily matched oror cheaply cheaply copiedcopied by rivalsby rivals

Not spending moreNot spending more to achieve differentiation to achieve differentiation thanthan the the price premium that customers are willing to price premium that customers are willing to pay for all the differentiating extraspay for all the differentiating extras

Keys to SuccessKeys to Success

ObjectiveObjective

Benefits of Successful Benefits of Successful DifferentiationDifferentiation

A product / service with unique, appealing A product / service with unique, appealing attributes allows a firm toattributes allows a firm to

Command a Command a premium pricepremium price and/orand/or

Increase unit salesIncrease unit sales and/or and/or

BuildBuild brand brand loyaltyloyalty

= = Competitive AdvantageCompetitive Advantage

WhichWhichhat is hat is

unique?unique?

Types of Differentiation Types of Differentiation ThemesThemes

Unique tasteUnique taste – Dr. Pepper and Listerine – Dr. Pepper and Listerine Multiple featuresMultiple features – Microsoft Windows and Office – Microsoft Windows and Office Wide selection and one-stop shoppingWide selection and one-stop shopping – Home Depot and Amazon.com – Home Depot and Amazon.com Superior serviceSuperior service – FedEx – FedEx Spare parts availabilitySpare parts availability – Caterpillar – Caterpillar Engineering design and performanceEngineering design and performance – Mercedes and BMW – Mercedes and BMW PrestigePrestige – Rolex – Rolex Product reliabilityProduct reliability – Johnson & Johnson – Johnson & Johnson Quality manufactureQuality manufacture – Karastan, Michelin, and Honda – Karastan, Michelin, and Honda Technological leadershipTechnological leadership – 3M Corporation – 3M Corporation Complete line of productsComplete line of products – Campbell’s – Campbell’s Top-of-line imageTop-of-line image – Ralph Lauren and Starbucks – Ralph Lauren and Starbucks

Sustaining Differentiation: Keys Sustaining Differentiation: Keys to Competitive Advantageto Competitive Advantage

Most Most appealing approachesappealing approaches to differentiation to differentiation Those Those hardest for rivals to duplicatehardest for rivals to duplicate Those Those buyers will find most appealingbuyers will find most appealing

Best choicesBest choices to to gaingain a longer-lasting, more profitable a longer-lasting, more profitable competitive edgecompetitive edge New product innovationNew product innovation Technical superiorityTechnical superiority Product quality and reliabilityProduct quality and reliability Comprehensive customer serviceComprehensive customer service Unique competitive capabilitiesUnique competitive capabilities

Where to Find DifferentiationWhere to Find DifferentiationOpportunities in the Value ChainOpportunities in the Value Chain

Purchasing and procurement activitiesPurchasing and procurement activities

Product R&D and product design activitiesProduct R&D and product design activities

Production process / technology-related activitiesProduction process / technology-related activities

Manufacturing / production activitiesManufacturing / production activities

Distribution-related activitiesDistribution-related activities

Marketing, sales, and customer service activitiesMarketing, sales, and customer service activities

Activities, Activities, Costs, &Costs, &

Margins ofMargins ofForwardForward

Channel AlliesChannel Allies

InternallyInternallyPerformedPerformedActivities, Activities, Costs, &Costs, &MarginsMargins


Margins ofMargins ofSuppliersSuppliers

Buyer/UserBuyer/UserValueValue

ChainsChains

Pitfalls of Differentiation Pitfalls of Differentiation StrategiesStrategies

Buyers see little value in a product’s unique attributes Buyers see little value in a product’s unique attributes

Appealing product features are easily copied by rivalsAppealing product features are easily copied by rivals

Differentiating on a feature buyers do not perceive as Differentiating on a feature buyers do not perceive as lowering their cost or enhancing their well-beinglowering their cost or enhancing their well-being

Over-differentiating such that productOver-differentiating such that productfeatures exceed buyers’ needsfeatures exceed buyers’ needs

Charging a price premiumCharging a price premiumbuyers perceive is too highbuyers perceive is too high

SpeedSpeed

Speed-based strategiesSpeed-based strategies, or rapid , or rapid response to customer requests or market response to customer requests or market and technological changes, have become and technological changes, have become a major source of competitive advantage a major source of competitive advantage for numerous firms in today’s intensely for numerous firms in today’s intensely competitive global economycompetitive global economy

Focus Focus

A focus strategy, whether anchored in a low-cost base or a A focus strategy, whether anchored in a low-cost base or a differentiation base, attempts to attend to the needs of a differentiation base, attempts to attend to the needs of a particular market segmentparticular market segment

A firm pursuing a focus strategy is willing to service A firm pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the needs of isolated geographic areas; to satisfy the needs of customers with special financing, inventory, or servicing customers with special financing, inventory, or servicing problems; or to tailor the product to the somewhat unique problems; or to tailor the product to the somewhat unique demands of the small- to medium-sized customer demands of the small- to medium-sized customer

The focusing firms profit from their willingness to serve The focusing firms profit from their willingness to serve otherwise ignored or underappreciated customer segments otherwise ignored or underappreciated customer segments

Focus Focus

Involve concentrated attention on a narrow pieceInvolve concentrated attention on a narrow pieceof the total marketof the total market

Serve needs of niche buyers better than rivalsServe needs of niche buyers better than rivals

Choose a market niche where buyers have Choose a market niche where buyers have distinctive preferences, special requirements, or distinctive preferences, special requirements, or unique needsunique needs

Develop unique capabilities and product attributes Develop unique capabilities and product attributes to serve needs of target buyer segmentto serve needs of target buyer segment

ObjectiveObjective

Keys to SuccessKeys to Success

Approaches to Defining Approaches to Defining a Market Nichea Market Niche

Geographic uniquenessGeographic uniqueness

Specialized requirements inSpecialized requirements inusing product/serviceusing product/service

Special product attributes appealing only to Special product attributes appealing only to niche buyersniche buyers

Examples of Focus Examples of Focus StrategiesStrategies

eBayeBay Online auctionsOnline auctions

PorschePorsche Sports carsSports cars

Jiffy Lube InternationalJiffy Lube International Quick maintenance for motor vehiclesQuick maintenance for motor vehicles

Pottery Barn KidsPottery Barn Kids Children’s furniture and accessoriesChildren’s furniture and accessories

BandagBandag Specialist in truck tire recappingSpecialist in truck tire recapping

Focus and Competitive Focus and Competitive AdvantageAdvantage

Achieve lower costs than rivals in serving Achieve lower costs than rivals in serving the segment --the segment --

A A low-costlow-cost strategy strategy

Offer niche buyers something different from rivals --Offer niche buyers something different from rivals --

A A differentiationdifferentiation strategy strategy



Risks of a Focus StrategyRisks of a Focus Strategy

Competitors find effective ways to match aCompetitors find effective ways to match afocuser’s capabilities in serving nichefocuser’s capabilities in serving niche

Niche buyers’ preferences shift towards product Niche buyers’ preferences shift towards product attributes desired by majority of buyers - niche attributes desired by majority of buyers - niche becomes part of overall marketbecomes part of overall market

Segment becomes so attractive it becomes crowded Segment becomes so attractive it becomes crowded with rivals, causing segment profits to be splinteredwith rivals, causing segment profits to be splintered

Deciding Which Generic Deciding Which Generic Competitive Strategy to UseCompetitive Strategy to Use

Each positions a company differently in its marketEach positions a company differently in its market

Each establishes a central theme for how a company will Each establishes a central theme for how a company will endeavor to outcompete rivalsendeavor to outcompete rivals

Each creates some boundaries for maneuvering as market Each creates some boundaries for maneuvering as market circumstances unfoldcircumstances unfold

Each points to different ways of experimenting with the Each points to different ways of experimenting with the basics of the strategybasics of the strategy

Each entails differences in product line, production emphasis, Each entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategymarketing emphasis, and means to sustain the strategy

TheThe big riskbig risk – – Selecting aSelecting a “stuck in the middle”“stuck in the middle” strategy! strategy! This This rarely producesrarely produces a a sustainable competitivesustainable competitive

advantageadvantage or aor a distinctive competitive position!distinctive competitive position!

The Value DisciplinesThe Value Disciplines

Operational ExcellenceOperational Excellence This strategy attempts to This strategy attempts to

lead the industry in price lead the industry in price and convenience by and convenience by pursuing a focus on lean pursuing a focus on lean and efficient operationsand efficient operations

Customer IntimacyCustomer Intimacy Customer intimacy means Customer intimacy means

continually tailoring and continually tailoring and shaping products and shaping products and services to fit an services to fit an increasingly refined increasingly refined definition of the customerdefinition of the customer

Product LeadershipProduct Leadership Companies that pursue Companies that pursue

the discipline of product the discipline of product leadership strive to leadership strive to produce a continuous produce a continuous state of state-of-the-art state of state-of-the-art products and services products and services

Grand StrategiesGrand Strategies

Grand strategiesGrand strategies, often called master or business strategies, provide , often called master or business strategies, provide basic direction for strategic actions basic direction for strategic actions

Indicate the time period over which long-rang objectives are to be Indicate the time period over which long-rang objectives are to be achieved achieved

Any one of these strategies could serve as the basis for achieving the Any one of these strategies could serve as the basis for achieving the major long-term objectives of a single firm major long-term objectives of a single firm

Firms involved with multiple industries, businesses, product lines, or Firms involved with multiple industries, businesses, product lines, or customer groups usually combine several grand strategies customer groups usually combine several grand strategies

15 principals grand strategies.15 principals grand strategies.

Concentrated GrowthConcentrated Growth

Concentrated growthConcentrated growth is the strategy of the firm is the strategy of the firm that directs its resources to the profitable growth that directs its resources to the profitable growth of a dominant product, in a dominant market, of a dominant product, in a dominant market, with a dominant technologywith a dominant technology

Concentrated growth strategies lead to Concentrated growth strategies lead to enhanced performance enhanced performance

Specific conditions favor concentrated growthSpecific conditions favor concentrated growth The risks and rewards varyThe risks and rewards vary

Concentrated GrowthConcentrated Growth

Market developmentMarket development commonly ranks second commonly ranks second only to concentration as the least costly and only to concentration as the least costly and least risky of the 15 grand strategies least risky of the 15 grand strategies

It consists of marketing present products, often It consists of marketing present products, often with only cosmetic modifications, to customers with only cosmetic modifications, to customers in related market areas by adding channels of in related market areas by adding channels of distribution or by changing the content of distribution or by changing the content of advertising or promotion advertising or promotion

Frequently, changes in media selection, Frequently, changes in media selection, promotional appeals, and distribution are used promotional appeals, and distribution are used to initiate this approach to initiate this approach

Market DevelopmentMarket Development

Market DevelopmentMarket Development

Product DevelopmentProduct Development

Product developmentProduct development involves the involves the substantial modification of existing substantial modification of existing products or the creation of new but products or the creation of new but related products that can be marketed to related products that can be marketed to current customers through established current customers through established channels channels

Product DevelopmentProduct Development

InnovationInnovation

These companies seek to reap the initially high profits These companies seek to reap the initially high profits associated with customer acceptance of a new or greatly associated with customer acceptance of a new or greatly improved productimproved product

Then, rather than face stiffening competition as the basis Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or of profitability shifts from innovation to production or marketing competence, they search for other original or marketing competence, they search for other original or novel ideas novel ideas

The underlying rationale of the grand strategy of The underlying rationale of the grand strategy of innovation is to create a new product life cycle and innovation is to create a new product life cycle and thereby make similar existing products obsolete thereby make similar existing products obsolete

Horizontal AcquisitionHorizontal Acquisition

When a firm’s long-term strategy is based on When a firm’s long-term strategy is based on growth through the acquisition of one or more growth through the acquisition of one or more similar firms operating at the same stage of the similar firms operating at the same stage of the production-marketing chain, its grand strategy production-marketing chain, its grand strategy is called is called horizontal acquisitionhorizontal acquisition

Such acquisitions eliminate competitors and Such acquisitions eliminate competitors and provide the acquiring firm with access to new provide the acquiring firm with access to new markets markets

Vertical Integration StrategyVertical Integration Strategy

ExtendExtend a firm’s a firm’s competitive scopecompetitive scope within withinsame industrysame industry BackwardBackward into sources of supply into sources of supply

ForwardForward toward end-users of final product toward end-users of final product

Can aim at either Can aim at either fullfull or or partial integrationpartial integration

InternallyInternallyPerformedPerformedActivities, Activities, Costs, &Costs, &MarginsMargins


Margins ofMargins ofSuppliersSuppliers

Buyer/UserBuyer/UserValueValue

ChainsChains

Activities, Costs,Activities, Costs,& Margins of& Margins of

Forward ChannelForward ChannelAllies &Allies &

Strategic PartnersStrategic Partners

Advantages of a Vertical Advantages of a Vertical Acquisition StrategyAcquisition Strategy

Two Two reasonsreasons to to invest resourcesinvest resources in vertical acquisition in vertical acquisition

Strengthen a firm’s competitive position and/orStrengthen a firm’s competitive position and/or

Boost a firm’s profitabilityBoost a firm’s profitability

Potential benefitsPotential benefits of vertical acquisition of vertical acquisition

Produces sufficient cost savings and/or profit increases to justify Produces sufficient cost savings and/or profit increases to justify extra investmentextra investment

Adds materially to a firm’s technological and competitive Adds materially to a firm’s technological and competitive strengthsstrengths

Helps differentiate a firm’s product offeringsHelps differentiate a firm’s product offerings

Strategic AdvantagesStrategic Advantagesof Backward Acquisitionof Backward Acquisition

Generates cost savings only if volume needed isGenerates cost savings only if volume needed isbig enough to capture efficiencies equal to that of suppliersbig enough to capture efficiencies equal to that of suppliers

Potential to reduce costs exists whenPotential to reduce costs exists when Suppliers have sizable profit marginsSuppliers have sizable profit margins Item supplied is a major cost componentItem supplied is a major cost component Resource requirements are easily metResource requirements are easily met

Can produce a differentiation-based competitive advantage Can produce a differentiation-based competitive advantage when it results in a better quality partwhen it results in a better quality part

Reduces risk of depending on suppliers for crucial raw Reduces risk of depending on suppliers for crucial raw materials / parts / componentsmaterials / parts / components

Strategic AdvantagesStrategic Advantagesof Forward Acquisitionof Forward Acquisition

To gain better access to end users and betterTo gain better access to end users and bettermarket visibilitymarket visibility

To compensate for undependable distribution channels which To compensate for undependable distribution channels which undermine steady operationsundermine steady operations

To offset the lack of a broad product line, a firm may sell directly to To offset the lack of a broad product line, a firm may sell directly to end usersend users

To bypass regular distribution channels in favor of direct sales and To bypass regular distribution channels in favor of direct sales and Internet retailing which mayInternet retailing which may Lower distribution costsLower distribution costs Produce a relative cost advantage over rivalsProduce a relative cost advantage over rivals Enable lower selling prices to end usersEnable lower selling prices to end users

Strategic DisadvantagesStrategic Disadvantagesof Vertical Acquisitionof Vertical Acquisition

Boosts resource requirementsBoosts resource requirements Locks firm deeper into same industry which mayLocks firm deeper into same industry which may

Result in fixed sources of supply andResult in fixed sources of supply and Less flexibility in accommodatingLess flexibility in accommodating

buyer demand for product varietybuyer demand for product variety Poses all types of capacity-matching problemsPoses all types of capacity-matching problems May require radically different skills / capabilitiesMay require radically different skills / capabilities Reduces flexibility to make changes inReduces flexibility to make changes in

component parts which maycomponent parts which may Lengthen design time andLengthen design time and Delay new product introductionsDelay new product introductions

Vertical and Horizontal Vertical and Horizontal IntegrationIntegration

Merger and Acquisition Merger and Acquisition StrategiesStrategies

MergerMerger – Involves a pooling of equals, with newly created – Involves a pooling of equals, with newly createdfirm often taking on a new namefirm often taking on a new name

AcquisitionAcquisition – One firm, the acquirer, purchases – One firm, the acquirer, purchases

and absorbs operations of another, the acquiredand absorbs operations of another, the acquired

Characteristics of mergers and acquisitionsCharacteristics of mergers and acquisitions

Much-used strategic optionMuch-used strategic option

Especially suited for situations where alliances do not provide a firm with Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunitiesneeded capabilities or cost-reducing opportunities

Ownership allows for tightly integrated operations, creating more control Ownership allows for tightly integrated operations, creating more control and autonomy than alliancesand autonomy than alliances

Objectives of Mergers and Objectives of Mergers and Acquisitions Acquisitions

To pave way for acquiring firm to gain more market To pave way for acquiring firm to gain more market share and create a more efficient operationshare and create a more efficient operation

To expand a firm’s geographic coverageTo expand a firm’s geographic coverage To extend a firm’s business into new product categories To extend a firm’s business into new product categories

or international marketsor international markets To gain quick access to new technologiesTo gain quick access to new technologies To invent a new industry and lead the convergence of To invent a new industry and lead the convergence of

industries whose boundaries are blurred byindustries whose boundaries are blurred by Changing technologies andChanging technologies and New market opportunitiesNew market opportunities

Pitfalls of Mergers and Pitfalls of Mergers and AcquisitionsAcquisitions

Combining operations may result inCombining operations may result in

Resistance from rank-and-file employeesResistance from rank-and-file employees

Hard-to-resolve conflicts in management stylesHard-to-resolve conflicts in management stylesand corporate culturesand corporate cultures

Tough problems of integrationTough problems of integration

Greater-than-anticipated difficulties inGreater-than-anticipated difficulties in

Achieving expected cost-savingsAchieving expected cost-savings

Sharing of expertiseSharing of expertise

Achieving enhanced competitive capabilitiesAchieving enhanced competitive capabilities

TurnaroundTurnaround

The firm finds itself with declining profitsThe firm finds itself with declining profits Among the reasons are economic recessions, Among the reasons are economic recessions,

production inefficiencies, and innovative production inefficiencies, and innovative breakthroughs by competitors breakthroughs by competitors

Strategic managers often believe the firm can survive Strategic managers often believe the firm can survive and eventually recover if a concerted effort is made and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive over a period of a few years to fortify its distinctive competences. This is competences. This is turnaroundturnaround..

Two forms of retrenchment: Two forms of retrenchment: Cost reduction Cost reduction Asset reduction Asset reduction

Elements of TurnaroundElements of Turnaround

A A turnaround situationturnaround situation represents absolute and relative-to- represents absolute and relative-to-industry declining performance of a sufficient magnitude to industry declining performance of a sufficient magnitude to warrant explicit turnaround actions warrant explicit turnaround actions

The immediacy of the resulting threat to company survival is The immediacy of the resulting threat to company survival is known as known as situation severity situation severity

Turnaround responses Turnaround responses among successful firms typically among successful firms typically include two stages of strategic activities: retrenchment and the include two stages of strategic activities: retrenchment and the recovery response recovery response

The primary causes of the turnaround situation have been The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, associated with the second phase of the turnaround process, the the recovery responserecovery response



DivestitureDivestiture

A A divestiture strategydivestiture strategy involves the sale of a involves the sale of a firm or a major component of a firmfirm or a major component of a firm

When retrenchment fails to accomplish the When retrenchment fails to accomplish the desired turnaround, or when a nonintegrated desired turnaround, or when a nonintegrated business activity achieves an unusually high business activity achieves an unusually high market value, strategic managers often market value, strategic managers often decide to sell the firm decide to sell the firm

Reasons for divestiture varyReasons for divestiture vary

LiquidationLiquidation

When liquidation is the grand strategy, When liquidation is the grand strategy, the firm typically is sold in parts, only the firm typically is sold in parts, only occasionally as a whole—but for its occasionally as a whole—but for its tangible asset value and not as a going tangible asset value and not as a going concern concern

Planned liquidation can be worthwhile Planned liquidation can be worthwhile

BankruptcyBankruptcy

Liquidation bankruptcyLiquidation bankruptcy—agreeing to a complete —agreeing to a complete distribution of firm assets to creditors, most of distribution of firm assets to creditors, most of whom receive a small fraction of the amount they whom receive a small fraction of the amount they are owed are owed

Reorganization bankruptcyReorganization bankruptcy—the managers believe —the managers believe the firm can remain viable through reorganizationthe firm can remain viable through reorganization

Two notable types of bankruptcy Two notable types of bankruptcy Chapter 7Chapter 7 Chapter 11Chapter 11

BankruptcyBankruptcy

Company Filing Date Total Assets pre-filing

Assets Adjusted to Yr. 2012

Lehman Brothers Holding Inc.

2008-09-15 $639,063,000,800 $700 billion

Washington Mutal 2008-09-26 $327,913,000,000 $359 billion

Worldcom Inc. 2002-07-21 $103,914,000,000 $136 billion

General Motors Inc.

2009-06-01 $82,300,000,000 $90.5 billion

CIT Group 2009-11-01 $71,019,200,000 $78.1 billion

Enron Corp. 2001-12-02 $63,392,000,000 $84.4 billion

Chrysler LLC 2009-04-30 $39,300,000,000 $43.2 billion

Texaco 1987-04-12 $35,892,000,000 $74.5 billion

Delta Air Lines 2005-09-14 $21,801,000,000 $26.3 billion

Outsourcing StrategiesOutsourcing Strategies

Involves Involves withdrawingwithdrawing from certain from certain value value

chain activitieschain activities and and relying on outsidersrelying on outsiders

to supply needed products, support to supply needed products, support

services, or functional activitiesservices, or functional activities

ConceptConcept

InternallyInternallyPerformedPerformedActivitiesActivitiesSuppliersSuppliers

Support Support ServicesServices

Functional Functional ActivitiesActivities

Distributors or Distributors or RetailersRetailers

What Factors Drive What Factors Drive Decisions to Outsource?Decisions to Outsource?

Outsiders can often perform certain activities better Outsiders can often perform certain activities better or cheaperor cheaper

Allows a firm to focus its entire energies on activities Allows a firm to focus its entire energies on activities that arethat are

At the center of its expertise – Core competenciesAt the center of its expertise – Core competencies

Most critical to its competitive and financial successMost critical to its competitive and financial success

When Does OutsourcingWhen Does OutsourcingMake Strategic Sense?Make Strategic Sense?

Activity can be performed better or more cheaply byoutside specialists

Activity is not crucial to achieve a sustainable competitive advantage Risk exposure to changing technology and/or changing buyer

preferences is reduced Firm’s ability to innovate is improved Operations are streamlined to

Improve flexibility Cut cycle time

Firm can assemble diverse kinds of expertise speedily and efficiently by using capable outside suppliers

If it helps a firm concentrate its full energies and resource strengths on better performing “core” value chain activities

Pitfalls of OutsourcingPitfalls of Outsourcing

Farming out Farming out too manytoo many or the or the wrongwrong a activities,ctivities, thus thus

Hollowing outHollowing out capabilities capabilities

Losing touchLosing touch with activities and expertise that determine overall with activities and expertise that determine overall long-term successlong-term success

Joint VenturesJoint Ventures

Occasionally two or more capable firms lack a Occasionally two or more capable firms lack a necessary component for success in a particular necessary component for success in a particular competitive environmentcompetitive environment

The solution is a set of The solution is a set of joint venturesjoint ventures, which are , which are commercial companies (children) created and commercial companies (children) created and operated for the benefit of the co-owners (parents)operated for the benefit of the co-owners (parents)

The joint venture extends the supplier-consumer The joint venture extends the supplier-consumer relationship and has strategic advantages for both relationship and has strategic advantages for both partnerspartners

When to Engage in a Joint Venture

Evaluating Evaluating the the

Potential for Potential for a Joint a Joint VentureVenture

Is the opportunity too complex, uneconomical, or Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone?risky for one firm to pursue alone?

Does the opportunity require a broader range of Does the opportunity require a broader range of competencies and know-how than the firm now competencies and know-how than the firm now

possesses? possesses?

Will the opportunity involve operations in a country Will the opportunity involve operations in a country that requires foreign firms to have a local minority or that requires foreign firms to have a local minority or

majority ownership partner?majority ownership partner?

Strategic AlliancesStrategic Alliances

Strategic alliancesStrategic alliances are distinguished from are distinguished from joint ventures because the companies involved joint ventures because the companies involved do not take an equity position in one anotherdo not take an equity position in one another

In some instances, strategic alliances are In some instances, strategic alliances are synonymous with licensing agreements synonymous with licensing agreements

Outsourcing arrangements varyOutsourcing arrangements vary

Why Cooperative Strategies Are Why Cooperative Strategies Are Integral to a Firm’s CompetitivenessIntegral to a Firm’s Competitiveness

Two Two demanding competitive challengesdemanding competitive challenges are faced by are faced by many companiesmany companies

Global race to build a market presenceGlobal race to build a market presencein many different national marketsin many different national markets

Race to seize opportunities on theRace to seize opportunities on thefrontiers of advancing technologyfrontiers of advancing technology

Collaborative arrangementsCollaborative arrangements can can

HelpHelp a company a company lower its costslower its costs and/or and/or

Gain accessGain access to to needed expertiseneeded expertise and and capabilitiescapabilities

Purposes of Strategic Alliances Purposes of Strategic Alliances

To acquire or improve market access via joint marketing To acquire or improve market access via joint marketing agreementsagreements

To pursue joint sales or distributionTo pursue joint sales or distribution

To gain economies of scale in productionTo gain economies of scale in production

To collaborate on the design of new productsTo collaborate on the design of new products

To engage in joint research and developmentTo engage in joint research and development

To form technology licensing agreementsTo form technology licensing agreements

What Factors Make an Alliance What Factors Make an Alliance ““Strategic”?Strategic”?

It is critical to a company’s achievement of an important It is critical to a company’s achievement of an important objectiveobjective

It helps build, sustain, or enhance aIt helps build, sustain, or enhance a

Core competence orCore competence or

Competitive advantageCompetitive advantage

It helps block a competitive threatIt helps block a competitive threat

It helps open up important new market opportunitiesIt helps open up important new market opportunities

It mitigates a significant risk to a company’s businessIt mitigates a significant risk to a company’s business

Why Are Strategic Alliances Why Are Strategic Alliances Formed?Formed?

To expedite development of promising new technologies To expedite development of promising new technologies or products or products

To fill gaps in technical or manufacturing expertiseTo fill gaps in technical or manufacturing expertise

To create desirable new skill sets and capabilitiesTo create desirable new skill sets and capabilities

To improve supply chain efficiencyTo improve supply chain efficiency

To gain economies of scale in production and/or marketingTo gain economies of scale in production and/or marketing

To acquire or improve market access via joint marketing To acquire or improve market access via joint marketing agreementsagreements

Why Do Alliances Fail?Why Do Alliances Fail?

AbilityAbility of an of an alliancealliance to to endureendure depends on depends on How well partners work togetherHow well partners work together Success of partners in respondingSuccess of partners in responding

and adapting to changing conditionsand adapting to changing conditions Willingness of partners to renegotiate the bargainWillingness of partners to renegotiate the bargain

ReasonsReasons for for alliance failurealliance failure Diverging objectives and priorities of partnersDiverging objectives and priorities of partners Inability of partners to work well togetherInability of partners to work well together Emergence of more attractive technological pathsEmergence of more attractive technological paths Marketplace rivalry between one or more alliesMarketplace rivalry between one or more allies Costs of establishing the working arrangement Cultural and language barriers

Web Site Strategies:Web Site Strategies:Which One to Employ?Which One to Employ?

Strategic IssueStrategic Issue – What role should a firm’s Web – What role should a firm’s Web site play in its competitive strategy?site play in its competitive strategy?

ApproachesApproaches to using the Internet to using the Internet

Solely as a vehicle to disseminate product informationSolely as a vehicle to disseminate product information

Minor distribution channelMinor distribution channel

One of several importantOne of several importantdistribution channelsdistribution channels

Primary distribution channelPrimary distribution channel

Exclusive distribution channelExclusive distribution channel

Using the Internet to Disseminate Using the Internet to Disseminate Product InformationProduct Information

ApproachApproach – Website used to provide product information of – Website used to provide product information of manufacturers or wholesalers manufacturers or wholesalers Relies on click-throughs to websites of dealers for sales Relies on click-throughs to websites of dealers for sales

transactionstransactions Informs end-users of location of retail storesInforms end-users of location of retail stores

IssuesIssues – Pursuing online sales may – Pursuing online sales may Signal weak strategic commitment to dealersSignal weak strategic commitment to dealers Signal willingness to cannibalize dealers’ salesSignal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brandsPrompt dealers to aggressively market rivals’ brands

Avoids channel conflictAvoids channel conflict with dealers – important where strong with dealers – important where strong support of dealer networks is essentialsupport of dealer networks is essential

Web Site E-Stores as a Minor Web Site E-Stores as a Minor Distribution ChannelDistribution Channel

ApproachApproach – Use online sales to – Use online sales to Achieve incremental salesAchieve incremental sales

Gain online sales experienceGain online sales experience

Conduct marketing researchConduct marketing research

Learn more about buyer tastes and preferencesLearn more about buyer tastes and preferences

Test reactions to new productsTest reactions to new products

Create added market buzz about productsCreate added market buzz about products

Boost overall sales a few percentage pointsBoost overall sales a few percentage points

Unlikely to provoke much outcry from dealers Unlikely to provoke much outcry from dealers

Strategies for Online EnterprisesStrategies for Online Enterprises

ApproachApproach – Use Internet as exclusive channel of all – Use Internet as exclusive channel of all buyer-seller contactbuyer-seller contact

Strategic issuesStrategic issues How a firm will deliver unique value to buyersHow a firm will deliver unique value to buyers

Whether a firm pursues competitive advantage based on lower costs, Whether a firm pursues competitive advantage based on lower costs, differentiation, or better value for the moneydifferentiation, or better value for the money

Whether a firm will have a broad or narrow product offeringWhether a firm will have a broad or narrow product offering

Whether to perform order fulfillment activities internally or to outsource Whether to perform order fulfillment activities internally or to outsource themthem

How a firm will draw traffic to its Web siteHow a firm will draw traffic to its Web site

Consortia, Keiretsus, and Consortia, Keiretsus, and Chaebols Chaebols

ConsortiaConsortia are defined as large are defined as large interlocking relationships between interlocking relationships between businesses of an industrybusinesses of an industry

In Japan such consortia are known as In Japan such consortia are known as keiretsuskeiretsus, in South Korea as , in South Korea as chaebolschaebols

Their cooperative nature is growing in Their cooperative nature is growing in evidence as is their market success evidence as is their market success

Selection of Long-Term Objectives Selection of Long-Term Objectives and Grand Strategy Setsand Grand Strategy Sets

When strategic planners study their opportunities, When strategic planners study their opportunities, they try to determine which are most likely to result they try to determine which are most likely to result in achieving various long-range objectivesin achieving various long-range objectives

Almost simultaneously, they try to forecast whether Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of an available grand strategy can take advantage of preferred opportunities so the tentative objectives preferred opportunities so the tentative objectives can be metcan be met

In essence, then, three distinct but highly In essence, then, three distinct but highly interdependent choices are being made at one time interdependent choices are being made at one time

Sequence of Selection Sequence of Selection and Strategy Objectivesand Strategy Objectives

The selection of long-range objectives and The selection of long-range objectives and grand strategies involves simultaneous, grand strategies involves simultaneous, rather than sequential, decisions rather than sequential, decisions

While it is true that objectives are needed to While it is true that objectives are needed to prevent the firm’s direction and progress prevent the firm’s direction and progress from being determined by random forces, it from being determined by random forces, it is equally true that objectives can be is equally true that objectives can be achieved only if strategies are implemented achieved only if strategies are implemented

Documents

Strategy Development Week 3. Objectives Week 3 Develop strategic objectives. Create organizational objectives and goals. Articulate value proposition,