Strategy Formulation 4w6g3y

STRATEGY FORMULATION: SITUATION ANALYSIS AND BUSINESS STRATEGY

Situational Analysis: SWOT Approach 

Strategy formulation  concerned

with developing a corporation’s mission, objectives, strategies and policies

 It



begins with situation analysis. Situation analysis  the

process of finding a strategic fit between external opportunities and internal strengths while working around external and internal weaknesses

Situational Analysis: SWOT Approach 

SWOT  acronym

used to describe the particular Strengths, Weaknesses, Opportunities and Threats that are potential strategic factors for a specific company

 

Strategy = opportunity/capacity Opportunity has no real value unless a company has the capacity to take advantage of that opportunity.

Criticisms of SWOT analysis 

 







SWOT analysis, by itself, is not a panacea. SWOT, by itself, is just a start to a strategic analysis. Some of the primary criticisms of SWOT are: It is simply the opinions of those filling out the boxes. Virtually everything that is a strength is also a weakness. Virtually everything that is an opportunity is also a threat. Adding layers of effort does not improve the validity of the list.

It generates lengthy lists.

Criticisms of SWOT analysis   

It uses a single point in time approach. There is no tie to the view from the customer. There is no validated evaluation approach.

Generating a Strategic Factors Analysis Summary (SFAS) Matrix 

SFAS (Strategic Factors Analysis Summary) Matrix  summarizes

an organization’s strategic factors by combining the external factors from the EFAS Table with the internal factors from the IFAS Table.

Strategic Factor Analysis Summary (SFAS) Matrix

Finding a Propitious Niche 

Propitious niche  One desired outcome of analyzing strategic factors is identifying a niche where an organization can use its core competencies to take advantage of a particular market opportunity.  A niche is a need in the marketplace that is currently unsatisfied.  The goal of strategic factor analysis is to find a propitious niche—an extremely favorable niche—that is so well-suited to the firm’s internal and external environment that other corporations are not likely to challenge or dislodge it



Strategic window   

a unique market opportunity that is available for a particular time. The first firm through a strategic window can occupy a propitious niche and discourage competition (if the firm has the required internal strengths). Such a niche may also be called a strategic sweet spot.

Review of Mission and Objectives 



A re-examination of an organization’s current mission and objectives must be made before alternative strategies can be generated and evaluated. Performance problems can derive from inappropriate (narrow or too broad) mission statements and objectives.

Business Strategies 

Business strategy  focuses

on improving the competitive position of a company’s or business unit’s products or services within the specific industry or market segment that the company or business unit serves  Business strategy can be competitive and/or cooperative

Porter’s Competitive Strategies Competitive strategy raises the following questions:  Should we compete on the basis of lower cost (and thus price), or should we differentiate our products or services on some basis other than cost, such as quality or service? 

Should we compete head to head with our major competitors for the biggest but most sought-after share of the market, or should we focus on a niche in which we can satisfy a less sought-after but also profitable segment of the market?

Porter’s Competitive Strategies 



Michael Porter proposes three “generic” competitive strategies for outperforming other corporations in a particular industry: lower cost, differentiation and focus. Cost leadership  ability

of a company or a business unit to design, produce and market a comparable product more efficiently than its competitors



Differentiation  ability

of a company to provide unique and superior value to the buyer in of product quality, special features or after-sale service

Porter’s Competitive Strategies 

Focus  ability

of a company to provide unique and superior value to a particular buyer group, segment of the market line or geographic market





When the lower-cost and differentiation strategies have a broad mass-market target, they are simply called cost leadership and differentiation. When the lower-cost and differentiation strategies are focused on a market niche (narrow target), however, they are called cost focus and differentiation focus.

Porter’s Competitive Strategies 



Porter proposed that a firm’s competitive advantage in an industry is determined by its competitive scope—that is, the breadth of the company’s or business unit’s target market. Before using one of the two generic competitive strategies (lower cost or differentiation), the firm or unit must choose: range of product varieties it will produce,  distribution channels it will employ,  types of buyers it will serve,  geographic areas in which it will sell, and  array of related industries in which it will also compete. 

Porter’s Competitive Strategies 

Cost leadership  lower-cost

competitive strategy that aims at the broad mass market and requires “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer s, and cost minimization”

  

Provides a defense against rivals Provides a barrier to entry Generates increased market share

Porter’s Competitive Strategies 

Differentiation  involves

the creation of a product or service that is perceived throughout the industry as unique.  can be associated with design, brand image, technology, features, dealer network or customer service 

 

Lowers customers sensitivity to price Increases buyer loyalty Can generate higher profits

Porter’s Competitive Strategies 

Cost focus  low-cost

competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche to the exclusion of others



Differentiation focus  concentrates

on a particular buyer group, product line segment or geographic market to serve the needs of a narrow strategic market more effectively than its competitors

Risks in Competitive Strategies 



No one competitive strategy is guaranteed to achieve success. For example, a company following a differentiation strategy must ensure that the higher price it charges for its higher quality is not too far above the price of the competition, otherwise customers will not see the extra quality as worth the extra cost.

Issues in Competitive Strategies 





A company or business unit must achieve one of the previously mentioned generic competitive strategies. Otherwise, the company or business unit is stuck in the middle. Stuck in the middle 

when a company has no competitive advantage and is doomed to below-average performance.

Issues in Competitive Strategies 



Successful entrepreneurial ventures follow focus strategies. They differentiate their product or service from those of others by focusing on customer wants in a segment of the market, thereby achieving a dominant share of that part of the market.

Industry Structure and Competitive Strategy 

Fragmented industry  many

small- and medium-size companies compete for relatively small shares of the total market





Products are typically in early stages of product life cycle Focus strategies are used

Industry Structure and Competitive Strategy 



As an industry matures, fragmentation is overcome, and the industry tends to become a consolidated industry. Consolidated industry  domination

by a few large companies  on a firm’s ability to achieve cost leadership

Hyper-Competition and Competitive Advantage Sustainability 

Competitive advantage in a hyper-competitive market is characterized by a continuous series of multiple short-term initiatives that replace current products with new products before competitors can do so.

Hyper-Competition and Competitive Advantage Sustainability 

Sustained competitive advantage is increasingly a matter not of a single advantage maintained over time, but more a matter of sequencing advantages over time.

Cooperative Strategies 

Cooperative strategies  used

to gain a competitive advantage within an industry by working with other firms



The two general types of cooperative strategies are collusion and strategic alliances.

Cooperative Strategies 

Collusion  the

active cooperation of firms within an industry to reduce output and raise prices to avoid economic law of supply and demand



Collusion may be explicit or tacit

Cooperative Strategies 

Strategic alliances a

long-term cooperative arrangement between two or more independent firms or business units that engage in business activities for mutual economic gain

 Cooperative

arrangements fall along a continuum from weak and distant to strong and close.

Reasons to Form an Alliance Obtain or learn new capabilities

Obtain access to specific markets Reduce financial risk

Reduce political risk

Types of Alliances 

Mutual service consortium  partnership

of similar companies in similar industries that pool their resources to gain a benefit that is too expensive to develop alone, such as access to advanced technology

Types of Alliances 

t venture  cooperative

business activity, formed by two or more separate organizations for strategic purposes, that creates an independent business entity and allocates ownership, operational responsibilities and financial risks and rewards to each member, while preserving their separate identity/autonomy

Types of Alliances 

Licensing arrangement  agreement

in which the licensing firm grants rights to another firm in another country or market to produce and/or sell a product

Types of Alliances 

Value-chain partnership a

strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage

Strategic Alliance Success Factors Strategic alliance success factors

Chapter end questions 



1. Is it possible for a company or business unit to follow a cost leadership strategy and a differentiation strategy simultaneously? Why or why not? 2. Is it possible for a company to have a sustainable competitive advantage when its industry becomes hypercompetitive?

In class exercise 





Small- Group Exercise: How to Keep the Salsa Hot Break up into groups of three to five people, and discuss the following scenario. Appoint one group member as spokesperson for the group, who will communicate your findings to the class when called upon to do so by the instructor. You are the managers of a company that has pioneered a new kind of salsa for chicken that has taken the market by storm. The salsa’s differentiated appeal has been based on a unique combination of spices and packaging that has allowed you to charge a price. Within the last 3 years, your salsa has achieved a national reputation, and now major food companies, seeing the potential of this market segment, are beginning to introduce salsas of their own, imitating your product.  1. Describe the generic business- level strategy you are pursuing.  2. Describe the industry environment in which you are competing.  3. What kinds of competitive tactics and maneuvers could you adopt to protect your generic strategy in this kind of environment?  4. What do you think is the best strategy for you to pursue in this situation?

36

STRATEGY FORMULATION: CORPORATE STRATEGY

Corporate Strategy 37



Corporate strategy  the

choice of direction of the firm as a whole and the management of its business or product portfolio

Corporate Strategy 38





Corporate strategy addresses three key issues facing the corporation as a whole: Directional strategy 



Portfolio analysis 



the firm’s overall orientation toward growth, stability or retrenchment industries or markets in which the firm competes through its products and business units

Parenting strategy 

the manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units

Corporate Directional Strategies 39



Every corporation must decide its orientation toward growth by asking the following three questions: 1. Should we expand, cut back, or continue our operations unchanged?  2. Should we concentrate our activities within our current industry, or should we diversify into other industries?  3. If we want to grow and expand nationally and/or globally, should we do so through internal development or through external acquisitions, mergers, or strategic alliances? 

Corporate Directional Strategies 40

Directional Strategy 41



Growth strategies  expand



Stability strategies  make



the company’s activities

no change to the company’s current activities

Retrenchment strategies  reduce

the company’s level of activities

Growth Strategies 42





A corporation can grow internally by expanding its operations both globally and domestically, or it can grow externally through mergers, acquisitions, and strategic alliances. Merger a

transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives



Acquisition  100%

purchase of another company

Concentration Strategies 43







The two basic growth strategies are concentration on the current product line(s) in one industry and diversification into other product lines in other industries. If a company’s current product lines have real growth potential, concentration of resources on those product lines makes sense as a strategy for growth. The two basic concentration strategies are vertical growth and horizontal growth.

Concentration Strategies 44



Vertical growth  achieved

by taking over a function previously provided by a supplier or distributor  Vertical growth results in vertical integration. 

Vertical integration  the

degree to which a firm operates vertically in multiple locations on an industry’s value chain from extracting raw materials to manufacturing to retailing

Vertical Integration 45



Backward integration  assuming

a function previously provided by a supplier



Forward integration  assuming

a function previously provided by a distributor

Concentration Strategies 46



Horizontal growth  expansion

of operations into other geographic locations and/or increasing the range of products and services offered to current markets



Horizontal growth results in horizontal integration



Horizontal integration  the

degree to which a firm operates in multiple geographic locations at the same point on an industry’s value chain

Diversification Strategies 47



Concentric (Related) diversification  growth

into a related industry when a firm has a strong competitive position but attractiveness is low  The search is for synergy. 

Synergy 

the concept that two businesses will generate more profits together than they could separately

Diversification Strategies 48



Conglomerate (Unrelated) diversification  diversifying





into an industry unrelated to its current one

Management realizes that the current industry is unattractive. Firm lacks outstanding abilities or skills that it could easily transfer to related products or services in other industries.

Controversies in Directional Strategies 49

  

Is vertical growth better than horizontal growth? Is concentration better than diversification? Is concentric diversification better than conglomerate diversification?

Stability Strategies 50







A Corporation may choose stability over growth by continuing its current activities without any significant change in direction. Some of the popular strategies are: Pause/Proceed with caution strategy 



No-change strategy 



an opportunity to rest before continuing a growth or retrenchment strategy decision to do nothing new—a choice to continue current operations and policies for the foreseeable future

Profit strategies 

decision to do nothing new in a worsening situation but instead to act as though the company’s problems are only temporary

Retrenchment Strategies 51



Retrenchment strategies  used

when the firm has a weak competitive position in some or all of its product lines from poor performance  management may follow one of several retrenchment strategies, ranging from turnaround or becoming a captive company to selling out, bankruptcy, or liquidation.

Retrenchment Strategies 52



Turnaround strategy  emphasizes

the improvement of operational efficiency when the corporation’s problems are pervasive but not critical.  the two basic phases of a turnaround strategy are contraction and consolidation 

Contraction 



effort to quickly “stop the bleeding” with a general, acrossthe-board cutback in size and costs.

Consolidation 

stabilization of the now -leaner corporation

Retrenchment Strategies 53



Captive company strategy  company

gives up independence in exchange for

security 

Sell-out strategy  management

can still obtain a good price for its shareholders and the employees can keep their jobs by selling the company to another firm



Divestment  sale

of a division with low growth potential

Retrenchment Strategies 54



Bankruptcy  company

gives up management of the firm to the courts in return for some settlement of the corporation’s obligations  the company will be stronger and better able to compete in a more attractive industry. In contrast to bankruptcy, which seeks to perpetuate a corporation 

Liquidation  management

terminates the firm  When the industry is unattractive and the company too weak to be sold as a going concern, management may choose to convert as many saleable assets as possible to cash

Portfolio Analysis 55



Portfolio analysis  management

views its product lines and business units as a series of investments from which it expects a profitable return  One of the most popular aids to developing corporate strategy in a multiple-business corporation is portfolio analysis.  Using the BCG (Boston Consulting Group) Growth-Share Matrix depicted in the Figure below is the simplest way to portray a corporation’s portfolio of investments.

BCG Growth—Share Matrix 7-56

BCG Matrix 57



Question marks  new

products with the potential for success but need a lot of cash for development



Stars  market

leaders that are typically at or nearing the peak of their product life cycle and are able to generate enough cash to maintain their high share of the market and usually contribute to the company’s profits

BCG Matrix 58



Cash cows  products

that bring in far more money than is needed to maintain their market share



Dogs  products

with low market share and do not have the potential to bring in much cash

BCG Matrix—Limitations 59











Use of highs and lows to form categories is too simplistic. Link between market share and profitability is questionable. Growth rate is only one aspect of industry attractiveness. Product lines or business units are considered only in relation to one competitor. Market share is only one aspect of overall competitive position.

Advantages and Limitations of Portfolio Analysis 60

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



Advantages Encourages top management to evaluate each of the corporation’s businesses individually and to set objectives and allocate resources for each Stimulates the use of externally oriented data to supplement management’s judgment Raises the issue of cash flow availability to use in expansion and growth

Advantages and Limitations of Portfolio Analysis 61

 





Limitations Defining product/market segments is difficult Suggest the use of standard strategies that can miss opportunities or be impractical Value-laden such as cash cow and dog can lead to self-fulfilling prophecies Lack of clarity on what makes an industry attractive or where a product is in its life cycle

Corporate Parenting 62



Corporate parenting  views

a corporation in of resources and capabilities that can be used to build business unit value as well as generate synergies across business units

Corporate Parenting 63



Generates corporate strategy by focusing on the core competencies of the parent corporation and the value created from the relationship between the parent and its businesses

Developing a Corporate Parenting Strategy 64



1.

2.

3.

The search for appropriate corporate strategy involves three analytical steps: Examine each business unit in of its strategic factors Examine each business unit in of areas in which performance can be improved Analyze how well the parent corporation fits with the business unit

Horizontal Strategy and Multipoint Competition 65



Horizontal strategy  Is

a corporate strategy that cuts across business unit boundaries to build synergy across business units and to improve competitive position in one or more business units

Horizontal Strategy and Multipoint Competition 66



Multipoint competition  large

multi-business corporations compete against other large multi-business firms in a number of markets  These multipoint competitors are firms that compete with each other not only in one business unit, but also in a number of business units.  Business units may sometimes need some help from its corporate parent, especially if the competitor business unit is getting heavy financial from its corporate parent.  In

this instance, corporate headquarters develops a horizontal strategy to coordinate the various goals and strategies of related business units.

Chapter End questions 67







1. How does horizontal growth differ from vertical growth as a corporate strategy? 2. What are the major advantages and disadvantages of an integrative strategy? 3. How is corporate parenting different from portfolio analysis? How is it alike? Is it a useful concept in a global industry?

68

STRATEGY FORMULATION: FUNCTIONAL STRATEGY AND STRATEGIC CHOICE

Functional Strategy 69



Functional strategy  the

approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity

Marketing Strategy 70



Marketing strategy  deals

with pricing, selling and distributing a product

Marketing Strategy 71



Market development strategy a

company or business unit can (1) capture a larger share of an existing market for current products through market saturation and market penetration or (2) develop new uses and/or markets for current products.

Marketing Strategy 72



Product development strategy a

company or unit can (1) develop new products for existing markets or (2) develop new products for new markets.

Marketing Strategy 73



Brand extension  using



a successful brand name to market other products

Push strategy  trade

promotions to gain or hold shelf space in retail outlets



Pull strategy  advertising

channels

to “pull” products through the distribution

Marketing Strategy 74





When pricing a new product, a company or business unit can follow one of two strategies. Skim pricing  offers

the opportunity to “skim the cream” from the top of the demand curve with a high price while the product is novel and competitors are few

Marketing Strategy 75



Penetration pricing  attempts

to hasten market development and offers the pioneer the opportunity to use the experience curve to gain market share with low price and then dominate the industry

Financial Strategy 76



Financial Strategy  examines

the financial implications of corporate- and business-level strategic options and identifies the best financial course of action



The management of dividends and stock price is an important part of a corporation’s financial strategy.

Financial Strategy 77



Leveraged buyout  company

is acquired in a transaction financed largely by debt usually obtained from a third party, such as

an insurance company or an investment banker.

Research and Development Strategy 78



Research and Development Strategy  deals

with product and process innovation and improvement  also deals with the appropriate mix of different types of R&D and question of how new technology should be accessed—through internal development, external

acquisition or strategic alliances.

Research and Development Strategy 79

 

The following are R & D choices: Technological leader  pioneering



Technological follower  imitating



an innovation

the products of competitors

Open innovation  firm

uses alliances and connections with corporate, government, academic labs and consumers to develop new products and processes

Operations Strategy 80



Operations Strategy  determines

how and where a product or service is to be manufactured, the level of vertical integration in the production process, the deployment of physical resources and relationships with suppliers

Purchasing Strategy 81



Purchasing Strategy  deals

with obtaining raw materials, parts and supplies needed to perform the operations function

 The

basic purchasing choices are multiple, sole and parallel sourcing.

Purchasing Strategy 82



Multiple sourcing  the

purchasing company orders a particular part from several vendors



Sole sourcing  relies



on only one supplier for a particular part

Parallel sourcing  two

suppliers are the sole suppliers of two different parts, but they are also backup suppliers for each other’s parts

Logistics Strategy 83



Logistics Strategy  deals

with the flow of products into and out of the manufacturing process



Three trends related to this strategy are evident:  Centralization  Outsourcing  The

use of Internet

HRM Strategy 84



HRM strategy  addresses

the issue of whether a company or business unit should hire a large number of low-skilled employees who receive low pay, perform repetitive jobs and will most likely quit after a short time (the fast-food restaurant strategy) or hire skilled employees who receive relatively high pay and are cross-trained to participate in self-managing work teams

Information Technology 85



Follow-the-sun management  Multinational corporations are finding that having a sophisticated intranet allows employees to practice follow-the-sun management, in which project team living in one country can their work to team in another country in which the work day is just beginning.

The Sourcing Decision: Location of Functions 86



Outsourcing  purchasing

from someone else a product or service that had been previously provided internally  the reverse of vertical integration 

Offshoring  the

outsourcing of an activity or a function to a wholly owned company or an independent provider in another country.

Disadvantages of Outsourcing 87

Customer complaints

Locked in to long-term contracts Lack of ability to learn new skills and develop new core competencies

Lack of cost savings Poor product quality

Errors in Outsourcing to Avoid 88



A study of 91 outsourcing efforts conducted by European and North American firms found seven major errors that should be avoided:  Outsourcing

the wrong activities  Selecting the wrong vendor  Writing a poor contracts  Overlooking personnel issues  Lack of control  Overlooking hidden costs  Lack of an exit strategy

Proposed Outsourcing Matrix 89

Strategies to Avoid 90

Managers who have made poor analyses or lack creativity may be trapped into considering some of the following strategies to avoid:

Follow the leader

Hit another home run

Do everything

Arms race

Losing hand

Stakeholder Priority Matrix 91

Stakeholders can be categorized in of their (1) interest in the corporation’s activities and (2) relative power to influence the corporation’s activities.

Questions to Assess Stakeholder Concerns 92

Strategic managers should ask four questions to assess the importance of stakeholder concerns in a particular decision:



1.

2.

3.

4.

How will this decision affect each stakeholder? How much of what stakeholders want are they likely to get under the alternative? What are the stakeholders likely to do if they don’t get what they want? What is the probability that they will do it?

Pressures from Stakeholders 93



Political strategy  plan

to bring stakeholders into agreement with a corporation’s actions

 Some

of the most commonly used political strategies are constituency building, political action committee contributions, advocacy advertising, lobbying and coalition building.

Pressures from the Corporate Culture 94

In evaluating a strategic alternative, strategy makers must consider pressures from the corporate culture and assess a strategy’s compatibility with that culture. If there is little fit, management must decide if it should: 

 Take

a chance on ignoring the culture.  Manage around the culture and change the implementation plan.  Try to change the culture to fit the strategy.  Change the strategy to fit the culture.

Process of Strategic Choice 95



Strategic choice  the

evaluation of alternative strategies and selection of the best alternative



Failure almost always stems from the actions of the decision maker, not from bad luck or situational limitations.

Avoiding the Consensus Trap 96







There is mounting evidence that the best strategic decisions are not arrived at through consensus when everyone agrees on one alternative. Two techniques help strategic managers avoid the consensus trap : Devil’s advocate assigned to identify potential pitfalls and problems with a proposed alternative strategy in a formal presentation  may be an individual or a group 



Dialectical inquiry 

requires that two proposals using different assumptions be generated for each alternative strategy under consideration

Process of Strategic Choice 97

Criteria for evaluating alternatives includes:  Mutual

exclusivity: Doing any one alternative would preclude doing any other.  Success: It must be feasible and have a good probability of success.  Completeness: It must take into all the key strategic issues.  Internal consistency: It must make sense on its own as a strategic decision for the entire firm and not contradict key goals, policies and strategies currently being pursued by the firm or its units.

Developing Policies 98

The selection of the best strategic alternative is not the end of strategy formulation. Policies define the broad guidelines for implementation. When crafted correctly, an effective policy accomplishes three things: 

 It

forces trade-offs between competing resource demands.  It tests the strategic soundness of a particular action.  It sets clear boundaries within which employees must operate, while granting them the freedom to experiment within those constraints.

Chapter End Questions 99

1.

2.

3.

Are functional strategies interdependent, or can they be formulated independently of other functions? Why is penetration pricing more likely than skim pricing to raise a company’s or a business unit’s operating profit in the long run? What is the relationship of policies to strategies?