Strategy Formulation And Implementation

Chapter 8

Story of KMART & Wal-MartHow did Wal-Mart founder Sam Walton

and his managers formulate and implement strategies that helped the company overtake Kmart

If you were stepping in as Kmart’s new CEO, what strategies might you adopt to help chain survive?

Wal-Mart formulated & implemented strategies that have made it one of America’s most successful companies

WhileKmart failed to cope with increased

competition and changing customer expectations “Kmart’s new CEO and other top executives analyze the situation to formulate a strategy that will suit Org strengths

as well as fit changing economic times if the chain is to survive in competitive market”

All the Organizations are involved in Strategic Management

finding ways to respond to competitorsCope up with environmental changesEffectively use available resources

Thinking Strategically

Strategic management is considered to be one specific type of planning

Some Companies hire Strategic Planning Experts

Thinking Strategically Continue

Strategic thinking means to take the long term view and to see the big picture, including the Organization and the

competitive environment and how they fit together

What is Strategic Management ?

The set of decisions and actions used to formulate and implement strategies that will provide a competitively superior fit

between the organization and its environment so as to achieve

organizational goals

It is a process to help managers answer questions such as

where is the organization nowWhere does the organization want to beWhat changes and trends are occurring in

the competitive environment?What courses of action will help us achieve

our goals? What happens after answering these

questions!!

Grand StrategyGeneral plan of major action by which a firm intends to achieve its long-

term goals

Growth

Stability

Retrenchment

Growth Strategy

Promoting internally by investing in expansion or externally by acquiring additional business divisions

Diversification : acquisition of business that are related to current product lines or that take the corporation into new areas: Joint Ventures

Strategy of expanding operations into new business or industry and producing new goods or services

Examples: PepsiCo’s diversification into snack food business

Phillip Morris’s tobacco giant diversification with brewing industry with the acquisition of Miller Beer

GE move into broadcasting with its acquisition of NBC

Stability

Pause strategy : Org wants to remain the same size or grow slowly and in a controlled fashion

The Corporation wants to stay in its current business

When Org undergone a turbulent period of rapid growth, managers focus on a Stability strategy to integrate strategic business units & ensure that Org is working efficiently

Example: Allied Tire Stores; motto is “ We just sell tires”

Retrenchment

Org goes through a period of forced decline by either shrinking current business units or selling off or liquidating entire businesses

LiquidationDivestitureDownsizing / Retrenchment

Divestiture: involves selling off businesses that no longer seem central to the Corporation

When GE sold its family financial services, corporation were going through periods of retrenchment, also called downsizing

Liquidation : Selling off a business unit for the cash value of assets, thus termination its existence

Dissolve the Co. & sell off all its assets & is usually done when the company is facing bankruptcy & needs to repay Loans

Global Strategy

Companies might pursue a separate grand strategy as the focus of global business

How to compete internationally? A basic question confronts the managers of

any org that competes in more than one national market:

To what extent should the org customize features of its products and marketing campaign to different national conditions?

Companies Strategic Delima

Global / Globalization Strategy

The standardization of product design & advertising

strategies throughout the world

Very little , if any customization to suit the specific needs of customers in different countries

The theory is that people everywhere want to buy the same products and live the same way: people everywhere want to drink Coca Cola & wear Levi blue jeans

Example: Levi paid an advertising agency $500,000 to produce a series of TV commercial to promote its 501 jeans: using same series in many countries & simply changing the language: saved money & keep prices low

Colgate-Palmolive Co. toothpaste sells in 40 countries by running same commercial: saving $1M-2M in production cost alone

Multi-Domestic Strategy Competition in each country is handled

independently of industry competition in other countries

A multinational company is present in many countries, but it encourages marketing, advertising and product design to be modified and adapted to the specific needs of each country

Managers decide to customize products & marketing strategies to specific national conditions

Companies reject the idea of a single global market

Example of Multi-domestic Strategy

Unilever :European food & household products Co. sells a different range of food products and uses a different marketing approach than its North American division French do not drink orange juice for breakfast spicy toothpaste preferred in the Middle East

Transnational Strategy

To achieve both global integration & national responsiveness

Difficult to achieve, because one goal requires close global coordination while the other goal requires local flexibility

Transnational Strategy

Transnational Strategy

Example of Transnational Strategy

Caterpillar’s Tractor (world’s largest manufacturer of heavy earth-moving equipment):

Tailored the finished product to local needs by adding features such as diff colors of paint or steering wheels on right or left side: Price pressures in local market: Government regulations:

Differentiating its product among local markets

Local Customization

Purpose Of Strategy

The plan of action that prescribes resource allocation and other activities for dealing with the environment and helping the Organization attain its goals

A comprehensive plan for accomplishing an organizations goals

Core Competence

Value Creation

Synergy

Through this strategy; executives try to develop within the Org a core competence & Synergy, thus creating value for money

Core Competence

Something that Org does especially well in comparison to its competitors

Represents Competitive advantage because the company acquires expertise that competitors do not have

Core Competence maybe in the area of

Synergy

When Org parts interact to produce a joint effect that is greater than the sum of the parts acting alone, Synergy occurs

Performance gains that result when individuals and departments coordinate their actions

Team members share equipment, customer lists, and other information that enables these small companies to go after more business than they ever could have without the team approach

”

Example

AT&T synergy btw communication services & hardware “One-stop shop

Two or more divisions with in a diversified company can utilize the same manufacturing facilities, distribution channels, advertising campaigns

Share Resources Reduce Cost Charge lower Prices

Attract More Customers Competitors

Value Creation Value can be defined as the combination of

benefits received and paid by the customer

Exploiting core competencies & attaining synergy help companies create value for their customers

A product that is low in cost but does not provide benefits is not a good value

Delivering value to the customer should be at the heart of strategy

Managers need to understand which parts of the Co. operation create value & which do not – a Co. can be profitable only when the value it creates is greater than the cost of resources

Example: People Express Airlines initially made a splash-low prices, but traveler’s couldn’t tolerate consistently late takeoffs at any price

Macdonald’s used core competencies to create better value for customers, resulting in the introduction of “Extra value meals” & opening restaurants in different locations: Wal-Mart etc

Levels Of Strategy

Corporate Level Strategy

Business Level Strategy

Functional Level Strategy

Corporate Level Strategy

The level of strategy concerned with the question What business are we in?

Pertains to Org as a whole and the combination of business units and product lines

Strategic actions at this level relate to acquisitions of new businesses; additions or divestments of business units, plants or product lines and joint ventures

Examples: Book

Business Level Strategy

The question How do we compete?Pertains to each business level unit or product

lineIt focuses on how the business unit competes

within its industry for customersStrategic decisions at this level concern amount

of advertising, extent of R&D, product changes, expansion or contraction of product lines

Example: Cost reduction: To remain competitive Hyatt hotels trimmed MangT Staff & increased focus on Marketing & Advertising

Function Level Strategy

The question How do we support the business level competitive strategy ?

pertains to the major functional departments within the business unit

Includes all the major functions, marketing, manufacturing, finance

Example: Hyatt hotels marketing dept is to focus on frequent business traveler by putting fax machines & modems in rooms

Strategic Formulation Vs Implementation

Strategy Formulation

planning & decision making that lead to the establishment of the firm’s goals & the development of a specific strategic plan

include assessing external environment & internal problems & integrating results into goals & strategy

Strategy Implementation Use of managerial &

Organizational tools to direct resources towards accomplishing strategic results

Administration & execution of the strategic plan

Managers may use persuasion, new equipment, changes in Org structure or reward system to ensure that employees and resources are used to make formulate strategy in reality

Situation Analysis

Analysis of the strengths, weaknesses, opportunities and threats (SWOT) that affect organizational performance

Important to all companies but is crucial to those considering globalization because of the diverse environments in which they will operate

Info about Opportunities & Threats may be obtained from variety of sources, including customers, professional journals, suppliers, friends in other Org, association meetings

Firms use diff techniques to learn about competitors, such as asking potential recruits about their visits to other companies, hiring people away from competitors, taking plant tours posing as “innocent” visitors and even buying garbage

Situational Analysis Continue

Executives acquire info about Internal Strength & weaknesses executives from variety of reports, including budgets, profit & loss statements

Face to face discussions & meetings with people at all levels of the hierarchy, executives build an understanding of the Companies internal strength & weaknesses

Internal strengths & Weakness

Strengths: Positive internal characteristics that the organization can exploit to achieve strategic performance goals

Weaknesses : Internal characteristics that may restrict the Organization performance

Finance Marketing MangT & Org

Managers can determine their strengths or weaknesses via other companies based on the their understanding of these areas

•Profit Margin• Return on investment• Credit Rating

• Distribution channels• market share

• Customer Satisfaction•Product Quality

•Degree of Centralization• Planning, Information & control

System

External Opportunities & Threats

Threats: characteristics of external environment that may prevent the Org from achieving its strategic goals

Example: Executives evaluate the external environment with info about the nine sectors

Opportunities are characteristics of

the external environment that

have the potential to help the Org achieve or exceed its strategic

goals

S & W Kodak

Strengths Trusted Brand names70% Market shareSpent Millions on

Research into digital imaging Tech

Blessed with tech genius

Weaknesses Dispirited WorkforceCulture focused on

protecting current businesses rather then seeking new frontiers

Confused btw imaging business, healthcare & household products

Product & market developed ability ill-focused

O & T Kodak

OpportunitiesTech strength & digital

imaging will be fast growing market

Expansion in Asia while barely developed markets such as India, Brazil can keep traditional business for least next decade

“ Half of the people in the world have yet to take a their first pic”

Threats Increased competitionDigital imaging arena,

facing giant such as Canon, Casio, Sony & HP

Smaller competitors emerging In digital market

What does SWOT analysis suggest for Kodak’s

Strategy?

To capitalize on the Company’s Strength & Opportunities

………..How

Divest or liquidate

Communication & Leadership

Transform Culture

Autonomy at work place

Strategic Alliance

Sell other businesses to focus more on core imaging business

Improved communication & stronger leadership improved morale

Transform slow moving culture to prepare for digital future

Brought together disjointed talent into small autononomous division & hired former computer marketing executive to head it

Strategic alliances with IBM, HP, Microsoft so the new divisions can develop new products in partnership to be more competitive on global basis

Formulating Corporate Level Strategy

Portfolio Strategy Pertains to mix of business units and

product lines that fit together in logical way to provide synergy & competitive advantage for the corporation

Strategic Business Unit

?

The BCG Matrix

Star Has large market share

in a rapidly growing industry

It has additional growth potential & profits should be plowed into this business as investment for future growth n profits

Visible & attractive & will generate profits & positive cash flow even as the industry matures & market growth slows

Cash CowExits in mature, slow

growth industry but is a dominant business in the industry with a large market share

No heavy investments required (advertising & plant expansion)

Invest in other riskier businesses

Question Mark Exists in new, rapidly

growing industry but has only small market share

? Business is risky It could become a star,

but it could also fail Invest cash earned from

cash cows in ? With the goal that it will turn into future STAR

Dogs Poor performerSmall share in slow

growth marketProvides little profitTargeted for divestment

or Liquidation if turnaround is not possible

Gillette Company ?

Formulating Business Level

Strategy

Porter’s Competitive Forces And Strategies

Five Competitive Forces1. Potential New Entrants

2. Bargaining Power of buyers

3. Bargaining Power of suppliers

4. Threat of substitute products

5. Rivalry among competitors

Potential New Entrants

Capital Requirement & economies of the scale, example of two potential barriers to entry that keep out the new competitors

Threat is high for local hamburger restaurant than Ford & Toyota

Advent of internet has reduced costs & other barrier of entry in many market segments

Threat of new entrants has increased for many firms in recent years

Bargaining Power of buyers

Informed customers become empowered customers

Advertising & buyer info educate customers about full range of prices & product options available thus influence over Co. increases

This is true when Co. relies on one or Two large, powerful customers for majority of its sales

Example: Boeing 777– Delta, KLM

Bargaining Power of suppliers

To what extent to which suppliers have the ability to influence potential buyers

Other factors include whether a supplier can survive without a particular purchaser or whether the purchaser can threaten the supplier

Example: The sole supplier of engines to a manufacturer of small airplanes have great power

Example : Local electric co. is the only source of electricity in your community therefore it can charge what it wants for its product

Rivalry among competitors

Nature of the competitive relationship btw dominant firms in the industry

Coke & Pepsi ( price wars, comparative advertising, new product introduction)

American Express & VisaFuji & Kodak

“ The more these companies compete against one another for customers the

lower is the level of industry profits( low prices means low profits)”

Threat of substitute products

The power of alternatives & substitutes for a Co. product may be affected by cost changes OR trends such as increased health consciousness that will deflect buyer loyalty to companies

Example : Sugar Co. suffered from the growth of sugar substitutes

Computers reduced demand for calculators, typewriters

DVD players for VCR’s

Competitive Strategies

Differentiation

Cost Leadership

Focus

Differentiation StrategyAn attempt to

distinguish a firm’s product or services from others in the industry

To gain competitive advantage, add value, through distinctive product features (design, quality, after sale service)

Pepsi & Coca cola Advertise to

differentiate & create new unique image

• Toyota Appeal customers in

all segments Basic transportation Middle of the market High income

“ Stuck in the Middle “Managers should choose btw Diff/CLS Exceptions to this rule : Example : Cott’s Corp. advertise more / costs will rise Toyota : Production system is the most efficient in the world Differentiated cars basis of superior design & quality

Cost LeadershipAttempts to gain

advantage by reducing cost below cost of competing firms

Keeping costs low, Org still able to sell its products at low prices & still make a profit

Cott’s corp. ( doesn’t advertise which allows Cott to under price both coke & Pepsi

Compaq to overtake IBM as the world no.1 PC supplier

Low-cost producer, provides a successful strategy to defend against five competitive forces

Focus

A type of competitive strategy that emphasizes concentration on a specific regional market or buyer group

The company will use either a differentiation or low-cost approach, but only for a narrow target market ????

Example: Enterprise Rent-A-Car

focused on market that major companies like Hertz don’t even play in

Low budget insurance replacement market

Focused-Low cost StrategyServe one or a few

segments of the overall market & aim to be the lowest Co. serving that segment

Example : Cott Corp. focus on large retail chains & strives to be the lowest-cost Co. serving that segment

Focused-Differentiation Strategy

Serve just one or few segments of the market & aim to be the most differentiated Co. serving that segment

Example : BMWPursue focused strategy &

make cars exclusively for high income customers

Product Life Cycle

1. Model that shows how sales volume changes over the life of products

2. Product Life cycle helps managers recognize that strategies need to evolve over time

3. Series of stages that a product goes through in its market acceptance

Formulating Functional-Level Strategy Differentiation strategy for new product

Human Resources

Marketing

Finance

•Recruiting & training middle managers for moving into new positions

Aggressive marketing campaigns

•How to borrow & handle large cash Investments•Authorize construction of new production facilities

Mature products / Low cost Strategy

Human Resources

Marketing

Finance

•Develop & retain stable Workforce•Transfers, advancements, incentives for efficiency

Stress on brand loyalty

•Focus on net cash-flows & positive cash balances

Putting Strategy Into Action

Leadership

Structural Design

Information & Control Systems

Human Resources

• Parts of firm that can be adjusted to put strategy

into action

•Once a new strategy is selected

its implemented through changes in

Leadership, Structure, Info &

Control System and HR

Tools for Putting strategy into Action

Organization

Strategy Performance

Leadership• persuasion• Motivation• Culture / Values

Info & Control System• Pay, reward system•Budget allocations•Info systems•Rules / procedures

Human Resource• Recruitment / Selection• Transfers / promotions /Training• Layoffs

Structural Design•Org Chart•Teams•Centralization / decentralization

Strategic Management Followed by

SWOT Analysis

Leads to

Formulation of Explicit Strategic Plans takes place at three levels a) Corporate

b) Business

c) Functional

Strategy Implementation

Evaluate Org Mission, goals, strategy

Strengths, Weakness, Opportunities, threats

Grand Strategy (growth, stability, Retrenchment, Global

Porter’s competitive strategies & Product Life Cycle

Support the above strategies made

Framework for accomplishing used BCG

Tools used : Leadership, structural design, information & system and HR

Evaluate current :• Mission•Goals•Strategies

________________________________

Define New__________________

Implement Strategy via Changes in :

•__________•__________•__________•__________