Amity Business School

MBA Class of 2013, Semester II

Strategic Management Dr. Himani Sharma

What is Strategic Management

Strategic Management entails three ongoing processes: 1.Analysis: - Analysis of strategic goals and the external and internal environments 2.Decisions: - What industries to compete? - How should we compete? 3.Actions: - Actions to implement decisions

Strategic Management
Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.

What is Strategy?
A unified, comprehensive, and integrated plan designed to ensure that the basic objectives of the enterprise are achieved. (Glueck, 1980:9)
The pattern or plan that integrates an organizations major goals, policies, and action sequences into a cohesive whole. (Quinn, 1980)

A pattern of resource allocation that enables firms to maintain or improve their performance. A good strategy neutralizes threats and exploits opportunities while capitalizing on strengths and avoiding or fixing weaknesses. (Barney, 1997:17)

Four Key Attributes of Strategic Management

Directs the organization toward overall goals and objectives Includes multiple stakeholders in decision making Needs to incorporate short-term and long-term perspectives Recognize trade-offs between efficiency and effectiveness

Common Elements in Successful Strategy

Successful Strategy

EFFECTIVE IMPLEMENTATION Long-term, simple and agreed objectives Profound understanding of the competitive environment

Objective appraisal of resources

 Strategy consists of competitive moves and business approaches used by managers to run the company Strategy involves making analysis and choices The hows that define a firm's strategy
How to grow the business How to please customers How to outcompete rivals How to manage each functional piece of the business (R&D, production, marketing, HR, finance, and so on) How to respond to changing market conditions How to achieve targeted levels of performance

Thinking Strategically Three Big Central Questions

1. Whats the companys present situation?

- industry conditions and competitive pressure

- current performance and market standing - resource strength and capabilities and competitive weaknesses

2. Where does the company need to go from here?

Business(es) to be in and market positions to stake out Buyer needs and groups to serve Direction to head

3. How should it get there?

A companys answer to how will we get there? is its strategy

Strategy as an Emergent Process

Strategy making in an unpredictable world
Creates the necessity for flexible strategic approaches.

Strategy making by lower-level managers

Strategy evolves through autonomous action.

Serendipity and strategy

Accidental discoveries and happenstances can have dramatic effects on strategic direction.

Intended and emergent strategies

Realized strategies are combinations of intended and emergent strategies.

Intended and Emergent Strategies

Source: Reprinted from Strategy Formation in an Adhocracy, by Henry Mintzberg and Alexandra McGugh, published in Administrative Science Quarterly, Vol. 30, No. 2, June 1985, by permission of Administrative Science Quarterly.

The Strategic Management Process for Intended and Emergent Strategies

Strategy Making : Design or Process?

Strategy as Design Planning and rational choice Strategy as Process Many decision makers responding to multitude of external and internal forces EMERGENT STRATEGY

INTENDED STRATEGY

REALIZED STRATEGY
Mintzbergs Critique of Formal Strategic Planning: The fallacy of prediction the future is unknown The fallacy of detachment -- impossible to divorce formulation from implementation The fallacy of formalization --inhibits flexibility, spontaneity, intuition and learning.

Strategy Making Processes within the Company: Multiple Roles of Strategy

Strategy as Decision Support Improves the quality of decision making

Strategy as Coordination and Communication

Creates consistency and unity

Strategy as Target

Improves performance by setting high aspirations

Strategic Problem-Solving Model

Managing
Team Client Self

Leadership
Vision Inspiration Delegation

Business Need
Competitive Organizational Financial Operational

Implementation Problem Intuition Data Analyzing

Framing Designing Gathering Interpreting

Solution

Dedication Reaction Completion Iteration

Presenting
Structure Buy-in

Strategic Planning in Practice Planning under uncertainty

Scenario planning for dynamic environmental change

Ivory tower planning

Lack of contact with operational realities The importance of involving operating managers Procedural justice in the decision-making process
Engagement, explanation, and expectations

Strategic Intent: Planning for the present

Recognition of the static nature of the strategic fit model Strategic intent in focusing the organization on winning by achieving stretch goals

The Evolution of Strategic Management

1950s
DOMINANT THEME

1960s-early 70s

Mid-70s-mid-80s Competitive

Late 80s 1990s Strategic advantage

2000s

BudgetaryCorporate Positioning planning & planning control

innovation

MAIN ISSUES

Financial Planning Selecting Focusing on Reconciling control growth &sectors/markets. sources of diversification Positioning for competitive leadership advantage Capital Forecasting. Industry analysis budgeting. Corporate Segmentation Financial planning. Experience curve Shareholder planning Synergy Portfolio analysis value.

size with flexibility & agility

KEY CONCEPTS& TOOLS

Resources & Cooperative capabilities. strategy. Complexity. Owning E-commerce. standards. Knowledge Management

MANAGEMENT IMPLICATIONS

Coordination Corporate Diversification. Restructuring. Alliances & & control by planning depts. Global strategies. Reengineering. networks Budgeting created. Rise of Matrix structures Refocusing. Self -organiz systems corporate Outsourcing. ation & virtual planning organization

Basic Model of Strategic Management

Four Basic Elements

Feedback

Strategic management process

Strategy formulation creating strategies Strategy implementation putting strategies into action

Identifying and analyse current: Mission Objective Strategies

Analyse external and internal environments: Industry and external environment (opportunities and threats) Organisational resources and capabilities (strengths and weaknesses)

Revise mission and objectives & select new strategies: Corporate Business Functional

Implement strategies: Corporate governance Management systems and practices Strategic leadership

Evaluate results: Strategic control Renew strategic management process

Strategic management model

External Audit

Vision & Mission

Long-Term Objectives

Generate, Evaluate, Select Strategies

Implement Strategies: Mgmt Issues

Implement Strategies: Marketing, Fin/Acct, R&D, CIS

Measure & Evaluate Performance

Internal Audit

The Basic Framework Strategy: the Link between the Firm and its Environment
THE FIRM
Goals & Values Resources & Capabilities Structure & Systems

STRATEGY

THE INDUSTRY ENVIRONMENT

Competitors Customers Suppliers

A Framework for Analyzing Organizations

External Analysis
Strategy Internal Analysis

People Systems

Structure Culture

Performance
Figure 16.1

Environmental Scanning

Crafting the Organizations Mission Statement

Provides a framework or context within which strategies are formulated, including: Mission
The reason for existence what an organization does

Vision
A statement of some desired future state

Values
A statement of key values that an organization is committed to

Major Goals
The measurable desired future state that an organization attempts to realize

Casting the Vision for the Organization

The development of a vision for the organization is central to any strategic plan. Vision versus Mission
A vision statement describes what the organization aspires to be in the long run.
A mission statement describes the products, services, and target markets for an organization.

Vision vs. Mission

The vision is more broad and future oriented the goal on the horizon The mission is more focused how you will get to the horizon

Vision/Mission Statements
Statements that explain who we are Type of organization
Products/services Needs we fill

Statements that explain our direction, our purpose, our reason for being
What difference do we make?

Statements that explain what makes us unique

Values People Combination of products and services

Vision Statement
A statement that clearly defines the firms reason for being in business
Should significantly stretch the resources and capabilities of the farm Should inspire people in the organization to achieve things they never thought possible Should unite people in the organization toward the pursuit of one common goal

Vision Statement
A guiding philosophy Consistent with organizational value Influenced by the strengths and weaknesses of the business

Components of a Vision Statement

Core ideology
Core Values - timeless guiding principles Core Purpose - reason for being

Envisioned future
Big Hairy Audacious Goals (BHAG) clearly articulated goals Vivid description - a graphic description of what success and the future will be like

Recognition of service to stakeholders

Owners/creditors Employees Customers

Mission Statements
The mission statement of an organization is normally short, to the point, and contains the following elements:
Provides a concise statement of why the organization exists, and what it is to achieve; States the purpose and identity of the organization; Defines the institution's values and philosophy; and Describes how the organization will serve those affected by its work.

Customers

Products Services

Markets

Technology Employees

Mission Elements
Survival Growth Profit Self-Concept Philosophy

Public Image

Stakeholders and the mission statement

Employees We respect the individuality of each employee creativity and productivity are encouraged, valued and rewarded
Mission Create value for our stakeholders

Communities We are committed to being caring and supportive corporate citizens within the worldwide communities in which we operate

Shareholders We are dedicated to performing in a manner that will enhance returns on investments

Customers We are committed to providing superior value in our products and services

Suppliers We think of our suppliers as partners who share our goal of highest quality

PepsiCo Mission
PepsiCos mission is to increase the value of our shareholders investment. We do this through sales growth, cost controls, and wise investment resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound; and providing a fair return to our investors while adhering to the highest standards of integrity.

Ben & Jerrys Mission

Ben & Jerrys mission is to make, distribute and sell the finest quality all-natural ice cream and related products in a wide variety of innovative flavors made from Vermont dairy products. To operate the Company on a sound financial basis of profitable growth, increasing value for our shareholders, and creating career opportunities and financial rewards for our employees. To operate the Company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of a broad communitylocal, national and international.

Mission Statement Evaluation Matrix

COMPONENTS Concern for Survival, Growth, Profitabilit y

Organization

Customers

Products Services

Markets

Technology

PepsiCo Ben & Jerry's

Yes No

No Yes

No Yes

Yes Yes

No No

Mission Statement Evaluation Matrix

COMPONENTS

Organization

Philosophy

SelfConcept

Concern for Public Image

Concern for Employees

PepsiCo Ben & Jerry's

Yes No

No Yes

No Yes

No Yes

The Mission
The mission is a statement of a companys raison
detre, its reason for existence today.

What is it that the company does? What is the companies business?

Who is being satisfied? (what customer groups)? What is being satisfied (what customer needs)? How customer needs are being satisfied (by what skills, knowledge, or distinctive competencies)?

A companys mission is best approached from a customer-oriented business definition.

The Mission Customer-Oriented Examples

The mission of Kodak is to provide customers with the solutions they need to capture, store, process, output, and communicate images anywhere, anytime.

Ford Motor Company describes itself as a company that is passionately committed to providing personal mobility for people around the world.We anticipate consumer need and deliver outstanding produces and services that improve peoples lives.

Abells Framework Defining the Business

for

Source: D. F. Abell, Defining the Business: The Starting Point of Strategic Planning (Englewood Cliffs, Prentice Hall, 1980), p. 7.

The Vision
What would the company like to achieve?
A good vision is meant to stretch a company by articulating an ambitious but attainable future state.

The vision of Ford is to become the worlds leading consumer company for automotive products and services.

Nokia is the worlds largest manufacturer of mobile phones and operates with a simple but powerful vision: If it can go mobile, it will!

Values
The values of a company should state:
How managers and employees should conduct themselves How they should do business What kind of organization they need to build to help achieve the companys mission Organizational culture
The set of values, norms, and standards that control how employees work to achieve an organizations mission and goals Often seen as an important source of competitive advantage

In high-performance organizations, values respect the interests of key stakeholders.

Values at Nucor
Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity.
Employees should be able to feel confident that if they do their jobs properly, they will have a job tomorrow. Employees have the right to be treated fairly and must believe that they will be. Employees must have an avenue of appeal when they believe they are being treated unfairly. At Nucor, values emphasizing pay for performance, job security, and fair treatment for employees help to create an atmosphere that leads to high employee productivity.

Vision & Mission

Research results are mixed, however, firms with formal mission statements generally see a:

2x average return on shareholders equity Positive relationship to company performance 30% higher return on certain financial measures

Setting Strategic Objectives

Objectives Are very broad statements of the results that an organization wishes to achieve in the long run. Relate to the mission and vision of the organization and specify the level of performance that the organization wants to achieve. SMART Objectives are: SpecificMeasurableAchievableResultsorientedTime-bound.

Setting Objectives
Objectives are used to drive behavior that benefits the company
Implies the company should know what behavior it wants Implies the company knows what outcomes it wants

Objectives are used as a standard for measuring performance and awarding bonuses
Implies the objectives are attainable Implies the objectives are fair

A Common Objective Setting Method

Objectives are set at the highest level of the company and rolled down to lower levels. Subordinate managers set the goals for their organizations to fit with the company goal If some portion of a managers compensation depends on making the objective, then every lower level manager has an incentive for raising the objectives of sub-units below him or her.

Example 1 The Outcomes: Year I

Organization Objective Company 80.0% Region A 80.5% District 1 81.0% District 2 81.0% Region B 81.0% District 3 82.0% District 4 82.0% Year I 81.0% 80.5% 80.8% 80.2% 81.5% 80.0% 82.9% Pass Pass Fail Fail Pass Fail Pass

Objectives and outcomes are stated in terms of the Top Two Boxes on a Five-point satisfaction rating scale

Example 2 Objectives and Outcomes: Year II

Organization Objective Company 82.0% Region A 82.5% District 1 83.0% District 2 83.0% Region B 83.0% District 3 84.0% District 4 84.0% Year II 85.3% 86.2% 87.1% 85.3% 84.4% 86.2% 82.6% Pass Pass Pass Pass Pass Pass Fail

The Consequences of Objective Setting

Without careful attention to the interaction of objectives and the behavior they are meant to promote
Actual consequences may be different from intended consequences The purpose of the incentive program may be subverted The Company could end up spending its resources in the wrong places

Three Types of Objective Setting

Uniform objectives Performance-based objectives Potential-based objectives

Uniform Objectives Definition

A single Objective is set for all organizations within the Company. Every organization is expected to meet the same Objective.

 Advantages

Uniform Objectives Implications

The method stretches the poor performers The method is easy to understand The method is apparently fair since all organizations are treated equally

Disadvantages
Some of the stretches may be too big The method does not recognize the differential potential of different organizations to meet the company objective

Performance-based Objectives Definition

Every organization is given a goal that reflects an increment on last years performance Increments are chosen to represent equal effort for organizations at different starting points

Performance-based Objecticves Implications

Advantages
All organizations are treated equally The method is easy to understand

Disadvantages
Improvement is required where it may not be warranted Poor performers are rewarded with easy goals Good performers are punished with difficult goals

Potential-based ObjectivesDefinition
An external criterion is used to assess a suborganizations potential
Demographics can be related to rating styles, e.g.,
Urban vs rural customers Women vs Men, Old vs Young

Competitive pressures may limit the potential of a sub-organization Geographic characteristics may limit or promote an organizations effectiveness

Potential-based Objectives Implications

Advantages
Objectives are fair because they are set against potential The method provides a definition of good and poor performance free of rating scale bias
70% could be poor where there is high potential 70% could be good where there is low potential

The method can be used to direct the application of scarce resources

Disadvantages
The method is hard for managers to understand

What Does the Company Want?

Picking the right method means carefully considering what the Company is after The Company wants to improve revenues through
Increased sales Increased customer loyalty

But it also wants to reduce costs through

Focusing resources in those places where they will do the most good

Method and Outcome

Requiring uniform behavior (uniform) is insensitive to opportunities and liabilities Stretching everyone (performance-based) implies resources are uniformly spread over organizations Emphasizing fairness (potential-based) may be insensitive to external pressures such as competition

Conclusions
Objectives have to be fair, especially if compensation rides on their attainment Objectives have to be attainable, otherwise they can be discouraging Objectives have to serve the interests of the company, else they can ultimately cost the company more than it gains through quality improvements

Strategy Formulation
Selecting Strategy Corporate strategy (Stability, Growth, Retrenchment) Business strategy (Competitive, Cooperative) Functional strategy (Technological Leadership, Technological Followership) Defining Policies
Guidelines for decision making that links formulation to implementation

Strategy Implementation
Programs Strategy Implementation

Budgets
Procedures

Evaluation & Control Continuous

process

Strategy Implementation

Structure Task-Focus (Value) Decision Processes and Controls

Firm Strategy

Firm Performance

People

Reward Systems

Strategic Evaluation & control

Typically consists of three steps

Monitoring performance
Comparing performance to standards Taking corrective action where needed

Planning and Strategy Formulation

Figure 8.5

Levels of strategy in organisations

Corporate Strategy What business are we in? Functional strategy How do we best support each of our business DIVISION 1 strategies? Business Strategy How do we compete in each of our major business

CORPORATION

DIVISION 2

DIVISION 3

RESEARCH & DEVELOPMENT

HUMAN RESOURCES

MANUFACTURING

MARKETING

Crafting Corporate strategy

Choice of direction for the firm as a whole. 1. Directional Strategy/Grand Strategy
The firms overall orientation towards growth, stability or retrenchment. The industries or markets in which the firm competes through its products and business units.

2. Portfolio Strategy

3. Parenting Strategy
The manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units.

Corporate Strategy
Directional Strategy:
Orientation toward growth
Expand, cut back, status quo? Concentrate within current industry, diversify into other industries? Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?

Identifying Strategic Alternatives at the corporate Level

Strategic Alternatives Are developed in light of the organizational mission considering its strengths, weaknesses, opportunities, and threats, and its vision and strategic goals. Grand Strategies Stability strategies: intended to ensure continuity in the operations and performance of the organization. Growth strategies: designed to increase the sales and profits of the organization. Retrenchment strategies: designed to reverse negative sales and profitability trends.

Corporate-Level Strategies
Valuable strengths

Concentric Diversification (Economies Corporate of Scope) growth strategies Conglomerate Diversification (Risk Mgt.) Corporate stability strategies Corporate retrenchment strategies Can still go for business-level growth (economies of scale) Environmental Status
Critical environmental threats

Firm Status

Critical weaknesses Abundant environmental opportunities

Corporate Directional Strategies

Directional or Grand Strategies

Grand Strategy

Growth
(aggressively expand size)

Stability
(remain the same or grow slowly)

Turnaround and Retrenchment

(reverse a negative trend and cut back))

Combination
(mix of other three)

Growth Strategies
Concentrationexpand existing line(s) of business Integrationexpand forward and/or backward within line(s) of business Diversificationadd related and/or unrelated products

Types of Growth Strategies

International Concentration

Organizational Growth
Diversification
Related Businesses Unrelated Businesses

Vertical Integration
Backward Horizontal Forward Integration: Along Value Chain

Concentration/Ansoffs Product Market Grid

Old New

Old

Product-Market Penetration

Product Development

New

Market Development

Product/Market Diversification

Concentration on a Single Business

Advantages
Operational focus on a single familiar industry or market. Current resources and capabilities add value. Growing with the market brings competitive advantage.

Disadvantages
No diversification of market risks. Vertical integration may be required to create value and establish competitive advantage. Opportunities to create value and make a profit may be missed.

Integration Strategies

Horizontal Integration
The process of acquiring or merging with industry competitors

Vertical Integration
Expanding operations backward into an industry that produces inputs for the company or forward into an industry that distributes the companys products

Strategic Outsourcing
Letting some value creation activities within a business be performed by an independent entity

Horizontal Integration Single-Industry Strategy

Horizontal Integration is the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

Staying inside a single industry a company to:

allows

Focus resources
Its total managerial, technological, financial and functional resources and capabilities are devoted to competing successfully in one area. Company stays focused on what it does best, rather than entering new industries where its existing resources and capabilities add little value.

Benefits of Integration

Horizontal

Profits and profitability increase when horizontal integration: 1. Lowers the cost structure
Creates increasing economies of scale Reduces the duplication of resources between two companies

2. Increases product differentiation

Product bundling broader range at single combined price Total solution saving customers time and money Cross-selling leveraging established customer relationships

3. Replicates the business model

In new market segments within same industry

4. Reduces industry rivalry

Eliminate excess capacity in an industry Easier to implement tacit price coordination among rivals

5. Increases bargaining power

Increased market power over suppliers and buyers Gain greater control

Vertical Integration Entering New Industries

A company may expands its operations backward into industries that produces inputs to its products or forward into industries that utilize, distribute or sell it products.

Backward Vertical Integration

Forward Vertical Integration

Full Integration

Company expands its operations into an industry produces inputs to the companys products. Company expands into an industry that uses, distributes, or sells the companys products.

that

Taper Integration

Company produces all of a partices from its own operations. Disposes of all of its completed products through its own outlets.
In addition to company-owned suppliers, the company will also use other suppliers for inputs or independent outlets in addition to company-owned outlets.

Stages in the Raw Material Consumer Value Chain

to

Full and Taper Integration

Strategic Outsourcing
Strategic Outsourcing allows one or more of a companys valuechain activities or functions to be performed by independent specialized companies that focus all their skills and knowledge on just one kind of activity.
Company is choosing to focus on a fewer number of value-creation activities In order to strengthen its business model Companys typically focus on noncore or nonstrategic activities In order to determine if they can be performed more effectively and efficiently by independent specialized companies Virtual Corporation Describes companies that have pursued extensive strategic outsourcing

Vertical and Horizontal Integrations

Textile producer Textile producer

Shirt manufacturer

Shirt manufacturer

Clothing store

Clothing store

Acquisitions or mergers of suppliers or customer businesses are vertical integrations

Acquisitions or mergers of competing businesses are horizontal integrations

Diversification and Corporate Strategy A company is diversified when it is in two or more lines of business Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business
A diversified company needs a multi-industry, multibusiness strategy A strategic action plan must be developed and implemented for several different businesses competing in diverse industry environment

Why Do Firms Diversify?

Risk reduction and/or spreading
Escape from unattractive or undesirable industries Stability of profit flows

To make use of surplus cash flows

Large cash balances Use cash balances to avoid hostile takeovers

To build shareholder value

Create synergy among the businesses of a firm Make 2 + 2 = 5: The whole should be greater than the sum of the parts

Why Do Firms Diversify

Synergy can be obtained in three ways
Exploiting economies of scale Exploiting economies of scope Efficient allocation of capital through the use of portfolio management techniques

Problems that prevent diversified firms from realizing synergies

A poor understanding of how diversification activities will fit or be coordinated with existing businesses Dangers or risks associated with the acquisition of businesses Problems with the development of internal businesses

When to Diversify
Competitive Position
Strong Weak

Market Growth

Strong competitive position, rapid market growth -- Not a good time to diversify
Strong competitive position, slow market growth -- Diversification is top priority consideration

Weak competitive position, rapid market growth -- Not a good time to diversify
Weak competitive position, slow market growth -Diversification merits consideration

Diversification Strategies
Concentric diversification Involves acquisition of businesses related to acquiring firm in terms of technology, markets, or products Conglomerate diversification Involves acquisition of a business because it represents a promising investment opportunity Primary motivation is profit pattern of venture Difference between the approaches Concentric diversification emphasizes commonality whereas conglomerate diversification emphasizes profits for each individual unit

Levels and Types of Diversification Low Levels of Diversification

Single business
> 95% of revenues from a single business unit A A B A B A B A C C

Dominant business

Between 70% and 95% of revenues from a single business unit

Moderate to High Levels of Diversification

Related constrained
< 70% of revenues from dominant business; all businesses share product, technological and distribution linkages < 70% of revenues from dominant business, and only limited links exist

Related linked (mixed)

Very High Levels of Diversification

Unrelated-Diversified
Business units not closely related B

Stability Strategies
A strategy where the organization maintains its current size and current level of business operations When is stability an appropriate strategy?
Industry is in a period of rapid upheaval with several key industry & external forces drastically changing, making future highly uncertain Industry is facing slow or no growth opportunities Many small business owners follow stability strategy indefinitely

Stability Strategies: Pause/proceed with caution- emphasis on

making incremental changes due to large internal/environmental uncertainties

No change- a choice to continue current

operations and strategies into the future, usually applied in stable/mature industries.

Profit strategies- employing a self-serving

strategy of rejecting change by viewing problems and change as temporary conditions

PROFIT Keep milking the cow, but dont feed it Artificially supporting profits by cutting costs Keeping up appearances that everything is still OK A temporary strategy for a worsening environment PAUSE Consolidate after recent rapid growth A temporary strategy to catch your breath PROCEED WITH CAUTION Environment looks scarywait to see what happens NO-CHANGE A very predictable environmentnothing uncertain ever happens Why tamper with success? What firms did before WalMart came

Retrenchment Strategies
Retrenchment - response to declining profitability usually brought about by increasing costs - needs redefinition of target market, selective cost elimination, and asset reduction. Decrease the size & scope of operations: Divestiture/sell off - operating strategic unit (or entire business) is sold as a result of a decision to permanently and completely leave the market. Liquidation - selling the assets of an organization, which cannot be sold as a viable and operational organization (assets still have value, but not the business). Turnaround: addressing critical long-term performance problems through the use of strong cost elimination measures and largescale organizational restructuring solutions Bankruptcy: Involves creditors temporarily freezing their claims while a firm reorganizes and rebuilds its operations more profitably. Proactive option offering maximum repayment of a firms debt in
the future if a recovery strategy is successful

Corporate Combination Strategies

Joint Ventures Involves establishing a third company (child), operated for the benefit of the co-owners (parents) Strategic Alliance Involves creating a partnership between two or more companies that contribute skills and expertise to a cooperative project
Exists for a defined period Does not involve the exchange of equity

Continuum of Partnership Strategies

Organizational Combination
Acquisitions

Mergers

Strategic Alliances

Joint Ventures

Strategic Business Partnering

Preferred Supplier Arrangements Low

Degree of Collaboration
95

High

Selecting Grand Strategy

Most agree that selecting a promising grand strategy is better guided by conditions during the planning period and by the company strengths and weaknesses. Two variables to consider are:
The principal purpose of the grand strategy (i.e. to overcome weakness or maximize strengths?) The choice of an internal or external emphasis for growth and profitability.

96

Stricklands Grand Strategy Selection Matrix

Rapid Market Growth

Strong Competitive Position Concentric Diversification Conglomerate Diversification Joint Venture

Concentrated Growth Vertical Integration Concentric Diversification

Reformulation Horizontal Integration Divestiture Liquidation

Weak Competitive Position

Turnaround or Retrenchment Concentric Diversification Conglomerate diversification Divestiture Liquidation

Slow Market Growth

97

Sources of Superior Performance

Above Normal Profits
(in Excess of the Competitive Level)

Avoid Competitors
Attractive Industry
Entry Barriers

Be Better Than Competition

Cost Advantage Differentiation Advantage

Attractive Strategic Group

Mobility Barriers

Attractive Niche

Isolating Mechanisms

Types of Competitive Actions

Strategic Actions
Example

Significant commitments of specific and distinctive organizational resources Difficult to implement Difficult to reverse

Major Acquisition
Undertaken to fine tune strategy Relatively easy to implement Relatively easy to reverse

Tactical Actions
Example

Price cut

Generic Business Strategy

No two strategies are exactly alike but Helps firms identify common strategic characteristics. A classification system for business-level strategies based on common strategic characteristics
Low-cost leadership vs. differentiation? Best Value Broad vs. Focus

Generic Strategies Matrix

Advantages of a Cost Leadership Strategy

Low-cost advantages reduce likelihood of pricing pressure from buyers Sustained low-cost advantages may push rivals into other areas, lessening price competition New entrants must face an entrenched cost leader without experience to replicate cost advantages Low-cost advantages should lessen attractiveness of substitutes Higher margins allow low-cost producers to withstand supplier cost increases

Advantages of a Differentiation Strategy

Rivalry is reduced when a business successfully differentiates itself Buyers are less sensitive to prices for effectively differentiated products Brand loyalty is hard for new entrants to overcome

Creating Competitive Advantage Based on Market Focus

Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market niche Allows a firm to
Learn its target customers Build up organizational knowledge of ways to satisfy its target market better than larger rivals

Risks of focus strategies

Can attract major competitors to the segment Believing a focus, by itself, creates success, rather than a form of low cost, differentiation.

Risks of Generic Competitive Strategies

Risks of Cost Leadership Cost leadership is not sustained: Competitors imitate. Technology changes. Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Differentiation Differentiation is not sustained: Competitors imitate. Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: Structure erodes. Demand disappears. Broadly targeted competitors overwhelm the segment: The segments differences from other segments narrow. The advantages of a broad line increase. New focusers sub segment the industry.

The Basis for Segmentation: Customer and Product Characteristics

Industrial buyers

Size Technical sophistication OEM/replacement

Demographics Lifestyle Purchase occasion Size Distributor/broker Exclusive/ nonexclusive General/special list

Characteristics of the Buyers

Household buyers

Distribution channel Opportunities for Differentiation Geographical location

Characteristics of the Product

Physical size Price level Product features Technology design Inputs used (e.g. raw materials) Performance characteristics Pre-sales & post-sales services

Competitive Landscape: Hypercompetition

Hypercompetition
Price-quality positioning A condition of rapidly escalating Competition to create competition based on new know-how and establish first-mover advantage

Hypercompetition

Competition to protect or invade established product or geographic markets

The Spectrum of Industry Structures

Perfect Competition Concentration Entry and Exit Barriers Product Differentiation Information Many firms No barriers Homogeneous Product Perfect Information flow Oligopoly Duopoly Monopoly

A few firms

Two firms

One firm High barriers

Significant barriers

Potential for product differentiation

Imperfect availability of information

The Objectives of Industry Analysis

To understand how industry structure drives competition, which determines the level of industry profitability. To assess industry attractiveness To use evidence on changes in industry structure to forecast future profitability To formulate strategies to change industry structure to improve industry profitability To identify Key Success Factors

Porter's 5 Forces Model

Potential Entrants
Threat of Entrants

Suppliers
Bargaining Power

Competitive Rivalry
Threat of Substitutes

Customers
Bargaining Power

Substitutes

A supplier has bargaining power if,

There is domination of supply by a few companies. Its product is unique or at least differentiated. It has built up switching costs. It provides benefits through geographic proximity to its customers. It poses a definite threat to forward integrate into its customers business. A long time working relationship provides unique capabilities

A buyer has bargaining power if,

It has large, concentrated buying power that enables it to gain volume discounts and/or special terms or services. What it is buying is standard or undifferentiated and there are multiple alternative sources. The product is unimportant to the quality of the buyers products or services. It has a strong potential to backward integrate.

The threat of new entrants is large if,

Switching cost to new products is low. Economies of scale has not been built up. Access to distribution is easy.

The threat of substitutes is large if,

Relative price performance of substitutes is high Switching cost to new products is low. Buyer propensity to substitutes is large

Intra-industry rivalry is intense if,

Competitors are numerous or are roughly equal in size and power Industry growth is slow, precipitating fights for market share. The product or service lacks differentiation or switching costs.

 If companies overlap in a number of markets, multipoint competition--a situation where companies compete against each other simultaneously in a number of geographic or product markets--generally results. Interestingly, a high level of commonality reduces the likelihood of competitive interaction. Since the major airlines are in so many common markets, there generally is competitive peace. However, when one company makes a competitive move, the others are compelled to respond rapidly.

Generic Strategies and Industry Forces Generic Strategies Industry Force

Entry Barriers Cost Leadership Differentiation Focus
Focusing develops core competencies that can act as an entry barrier. Large buyers have less power to negotiate because of few alternatives.

Ability to cut price in retaliation deters potential entrants.

Customer loyalty can discourage potential entrants.

Buyer Power

Ability to offer lower price to powerful buyers.

Large buyers have less power to negotiate because of few close alternatives.

Supplier Power

Better insulated from powerful suppliers.

Better able to pass on supplier price increases to customers.

Suppliers have power because of low volumes, but a differentiation-focused firm is better able to pass on supplier price increases.

Threat of Substitutes Rivalry

Can use low price to defend against substitutes.

Customer's become attached to differentiating attributes, reducing threat of substitutes. Brand loyalty to keep customers from rivals.

Specialized products & core competency protect against substitutes. Rivals cannot meet differentiation-focused customer needs.

Better able to compete on price.

Identifying Key Success Factors

Pre-requisites for success Pre-requisites for success
What do customers want? How does the firm survive competition Analysis of competition Analysis of demand Who are our customers? What do they want? What drives competition? What drives main What are thecompetition? What are of main dimensions thecompetition? dimensions of competition? How intense is competition? How intense is competition? How can we obtain a How can we obtain a superior superior competitive competitive position? position? KEY SUCCESS FACTORS

Market Analysis
Submarkets
Are augmented products, emerging niches, trend toward systems, new applications, repositioned product classes, customer trends, or new technologies creating worthwhile submarkets? How should they be defined?

Size and Growth

Potentially important submarkets? Size and growth characteristics? Submarkets declining? How fast? Driving forces behind the trends?

Market Analysis
Profitability
How intense is the competition among existing firms? Threats from potential entrants and substitute products? Bargaining power of suppliers and customers? Attractive/profitable markets or submarkets?

Cost Structure
Major cost and value-added components for various types of competitors?

Market Analysis
Distribution Systems
Alternative channels of distribution? How are they changing?

Market Trends Key Success Factors

Key success factors, assets, and competencies to compete successfully? Can assets and competencies of competitors be neutralized?

Detecting Maturity and Decline

Price pressure caused by overcapacity and the lack of product differentiation Buyer sophistication and knowledge Substitute products or technologies Saturation No growth sources Customer disinterest

Establishing Strategic Business Units

A single business or a collection of related businesses that can be planned for separately from the rest of the company It has its own set of competencies It has a Key Manager who is responsible for strategic planning and profit performance

Evaluating and Choosing Strategy Portfolio Assessment

Provides a mechanism for evaluating an organizations portfolio of business, products and services.
Boston Consulting Group (BCG) Growth-Share matrix General Electric Industry AttractivenessBusiness Strength matrix

Decision Matrices
A decision matrix provides a method for evaluating alternative strategies according to the criteria that the organizations leaders consider more important.

Portfolio Strategy
Mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage
BCG Matrix

Strategic Types in the BCG Matrix

A star is a business unit that has both a high market growth rate and a relatively large share of the market. A cash cow has a large share of the market, but there is little growth. Question marks exist in a rapidly growing market but have a small market share. A dog is a poor performer because of little growth in the market and a small market share.

Implications of the Strategic Types

Stars typically need large amounts of cash to support rapid growth. Stars have the potential to increase sales and generate large amounts of profit in the future. Large amounts of cash can be milked from cash cows and channeled into stars. Managers must decide whether to invest more cash into question marks to take advantage of high growth opportunities (and transform them into stars) or to divest it to emphasize other business units and products in the portfolio. Management must sell dogs to another company or liquidate their assets.

The GE Matrix
Business Strength/Competitive Position Strong Long-Term Industry High Attractiveness Medium Average Weak

Low
Selective Investment

Investment Growth

Divestment

THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

TWO DIMENSIONS (Charles Hofer & A. D. Little, Co) Stage of industry / market evolution 1. Early development 2. Rapid growth / take-off 3. Shake-out 4. Maturity / saturation 5. Decline / stagnation Business strength / (competitive position) Same dimensions as used in the GE business screen Advantages 1. Can be used to identify and track developing winners 2. Illustrates how the firms businesses are distributed across the stages of industry evolution

THE HOFER LIFE-CYCLE MARKET EVOLUTION MATRIX

Business Strength / Competitive Position Strong Average Weak -------------------------Early Development

- - - - - - - - - - - - - - - - - - - - - - - - - -Stage Of Industry / Market Shake-out Evolution Rapid Growth / Take-off --------------------------

-------------------------Maturity / Saturation --------------------------Decline / Stagnation -------------------------- -

Only one dimension is different from the GE business screen Except For The Stage Of Market Evolution, This Model Is Identical To The GE Business Screen

Sustainable Competitive Advantage

The Way You Compete Product Strategy Positioning Strategy Manufacturing Strategy Distribution Strategy, etc. Basis of Competition Assets and Competencies Where You Compete Product-market Selection Whom You Compete Against Competitor Selection

SCA

The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities Help a firm neutralize threats or exploit opportunities Are not possessed by many others Historical: A unique and a valuable organizational culture or brand name Ambiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers No strategic equivalent

Rare Capabilities Costly-to-Imitate Capabilities

Nonsubstitutable Capabilities

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Value Chain Analysis

Allows the firm to understand the parts of its operations that create value and those that do not A template that firms use to:
Understand their cost position Identify multiple means that might be used to facilitate implementation of a chosen businesslevel strategy

Human Resource Management

Technological Development

The Basic Value Chain

Firm Infrastructure

Service Marketing and Sales Outbound Logistics

Procurement

Operations Inbound Logistics

Value Chain Analysis (contd)

Primary activities involved with:
A products physical creation
A products sale and distribution to buyers

The products service after the sale

Support activities
Provide the support necessary for the primary activities to take place

Value Chain Analysis (contd)

Value chain
Shows how a product moves from raw-material stage to the final customer

To be a source of competitive advantage, a resource or capability must allow the firm:

To perform an activity in a manner that is superior to the way competitors perform it, or

To perform a value-creating activity that competitors cannot complete

The Value-Creating Potential of Primary Activities

Inbound logistics
Activities used to receive, store, and disseminate inputs to a product (materials handling, warehousing, inventory control, etc.)

Operations
Activities necessary to convert the inputs provided by inbound logistics into final product form (machining, packaging, assembly, etc.)

Outbound logistics
Activities involved with collecting, storing, and physically distributing the product to customers (finished goods warehousing, order processing, etc.)

The Value-Creating Potential of Primary Activities (contd)

Marketing and sales
Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)

Service
Activities designed to enhance or maintain a products value (repair, training, adjustment, etc.)

Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior

The Value-Creating Potential of Primary Activities: Support

Procurement
Activities completed to purchase the inputs needed to produce a firms products (raw materials and supplies, machines, laboratory equipment, etc.)

Technological development
Activities completed to improve a firms product and the processes used to manufacture it (process equipment, basic research, product design, etc)

Human resource management

Activities involved with recruiting, hiring, training, developing, and compensating all personnel

The Value-Creating Potential of Primary Activities: Support (contd)

Firm infrastructure
Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.)
Effectively and consistently identify external opportunities and threats Identify resources and capabilities Support core competencies

Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior

Outsourcing Decisions
A firm may outsource all or only part of one or more primary and/or support activities.
Outsourced activity

Human Resource Management

Service Technological Development Marketing and Sales

Firm Infrastructure

Outbound Logistics

Procurement

Operations Inbound Logistics

Strategic Rationales for Outsourcing

Improve business focus Provide access to world-class capabilities Accelerate business re-engineering benefits Sharing risks Frees resources for other purposes

Strategic Outsourcing of Primary Value Creation Functions

Benefits of Outsourcing
1. Reducing the cost structure
The specialist company cost is less than what it would cost to perform the activity internally. The quality of the activity performed by the specialist is greater than if the activity were performed by the company. Distractions are removed. The company can focus attention and resources on activities important for value creation and competitive advantage.

2. Enhanced differentiation

3. Focus on the core business

Strategic outsourcing may be detrimental when:

Holdup company becomes too dependent on specialist provider Loss of information company loses important customer contact or competitive information

Corporate Strategy

Corporate Parenting Strategy -

Strategic factors Performance improvement Analyze fit

Corporate Parenting
Value creation only occurs under three conditions:

the parent sees an opportunity for a business to improve performance and a role for the parent in helping to grasp the opportunity the parent has the skills, resources and other characteristics needed to fulfill the required role the parent has sufficient understanding of the business and sufficient discipline to avoid other value-destroying interventions.

Corporate Parenting
According to Campbell, Good and Alexander the developing a corporate parenting strategy includes 3 steps:

To examine each BU in terms of its strategic factors. To examine each BU in terms of areas in which performance can be improved. To analyze how well the parent corporation fits with the BU.

Corporate Parenting

Heartland business has opportunity for improvement by the parent and priority for all corporate activities Edge-of Heartland business has some parenting characteristics fit the business, but others do not Ballast businesses fit very comfortably with the parent corporation but contain very few opportunities to be improved by the parent Alien territory businesses have little opportunity to be improved by the corporate parent Value trap businesses fit well with parenting opportunities, but misfit with parents understanding of the units strategic factors

Parenting-Fit Matrix
Low
Heartland Ballast Edge of the Heart Land

Alien Territory Value Trap High Low High

FIT between parenting opportunities and parenting characteristics

Value-creating Strategies of Diversification: Operational and Corporate Relatedness

Creating Value: Economies of Scope

Firm creates value by building upon or extending its:
Resources Capabilities Core competencies

Economies of scope
Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses

 Value is created from economies of scope through:

Operational relatedness in sharing activities

Corporate relatedness in transferring skills or corporate core competencies among units The difference between sharing activities and transferring competencies is based on how the resources are jointly used to create economies of scope

Sharing Activities
Operational Relatedness
Created by sharing either a primary activity such as inventory delivery systems, or a support activity such as purchasing Activity sharing requires sharing strategic control over business units Activity sharing may create risk because business-unit ties create links between outcomes

Transferring Corporate Competencies

Corporate Relatedness
Using complex sets of resources and capabilities to link different businesses through managerial and technological knowledge, experience, and expertise

Corporate Relatedness Creates value in two ways:

Eliminates resource duplication in the need to allocate resources for a second unit to develop a competence that already exists in another unit
Provides intangible resources (resource intangibility) that are difficult for competitors to understand and imitate
A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals

 Financial Economies
Are cost savings realized through improved allocations of financial resources
Based on investments inside or outside the firm

Create value through two types of financial economies:

Efficient internal capital allocations Purchasing other corporations and restructuring their assets

 Restructuring creates financial economies

A firm creates value by buying and selling other firms assets in the external market

Resource allocation decisions may become complex, so success often requires:

Focus on mature, low-technology businesses

Focus on businesses not reliant on a client orientation

Vision and Mission

Some thoughts and examples

Developing a Strategic Vision

Involves thinking strategically about
Firms future business plans Where to go

Tasks include
Creating a roadmap of the future Deciding future business position to stake out Providing long-term direction Giving firm a strong identity

Characteristics of a Strategic Vision

Charts a companys future strategic course Defines the business makeup for 5 years (or more) Specifies future technology-productcustomer focus Indicates capabilities to be developed Requires managers to exercise foresight

Entrepreneurial Challenges in Forming a Strategic Vision

How to creatively prepare a company for the future How to keep the company responsive to
Evolving customer needs Competitive pressures New technologies

New market opportunities

Growing or shrinking opportunities

Missions vs. Strategic Visions

A mission statement A strategic vision focuses on current concerns a firms future business activities -business path -- where who we are and what we are going we do Markets to be pursued

Current product and service offerings Customer needs being served Technological and business capabilities

Future technologyproduct-customer focus Kind of company that management is trying to create

 Highlights boundaries of current business Conveys

Who we are, What we do, and Where we are now

Characteristics of a Mission Statement Defines current business activities

Company specific, not generic so as to give a company its own identity

A companys mission is not to make a profit ! The real mission is alwaysWhat will we do to make a profit?

Defining a Companys Business/Business Definition

A good business definition incorporates three factors
Customer needs -- What is being satisfied Customer groups -- Who is being satisfied Technologies and competencies employed -How value is delivered to customers to satisfy their needs

Your MissionVision Statement

Should include the best of both

Communicating the Vision Mission

An exciting, inspirational vision
Challenges and motivates workforce

Arouses strong sense of organizational purpose

Induces employee buy-in Galvanizes people to live the business

Examples: Mission and Vision Statements

Microsoft Corporation

Empower people through great software anytime, anyplace, and on any device.

Examples: Mission and Vision Statements

Intel
Our vision: Getting to a billion connected computers

worldwide, millions of servers, and trillions of dollars of ecommerce. Intels core mission is being the building block supplier to the Internet economy and spurring efforts to make the Internet more useful. Being connected is now at the center of peoples computing experience. We are helping to expand the capabilities of the PC platform and the Internet.

Business Mission: FDX Corporation (a adiversified of companies: FedEx, firm) FDX is composed of powerful family
RPS, Viking Freight, FDX Global Logistics and Roberts Express.

These companies offer logistics and distribution solutions on a regional, national and global scale: fast, reliable, time-definite express delivery; . . . expedited same-day delivery; . . . ; and integrated information and logistics solutions
With all this expertise under one umbrella, the FDX companies can provide businesses with the competitive advantage they need by providing streamlined solutions that are on the cutting edge of technology.

Example: Mission Statement

Pfizer Inc.
Pfizer is a research-based, global pharmaceutical company. We discover and develop innovative, value-added products that improve the quality of life of people around the world and help them enjoy longer, healthier, and more productive lives. The company has three business segments: health care, animal health and consumer health care. Our products are available in more than 150 countries.

Example: Mission Statement

Apple Computer
Apple Computer, Inc., ignited the personal computer revolution in the 1970s with the Apple II, and reinvented the personal computer in the 1980s with the Macintosh. Apple is now committed to its original mission--to bring the best personal computing products and support to students, educators, designers, scientists, engineers, business persons and consumers in over 140 countries around the world.

Example: Mission Statement

The Gillette Company
The Gillette Company is a globally focused consumer products company that seeks competitive advantage in quality, value-added personal care and personal use products. We compete in four large, worldwide businesses: personal grooming products, consumer portable power products, stationery products and small electrical appliances. As a company, we share skills and resources among business units to optimize performance. We are committed to a plan of sustained sales and profit growth that recognizes and balances both short- and long-term objectives.

Example: Mission Statement

The Gillette Company
Our mission is to achieve or enhance clear leadership, worldwide, in the existing or new core consumer product categories in which we choose to compete. Current core categories are: Male grooming products - blades and razors, electric shavers, shaving preparations and deodorants . . . Female grooming products - wet shaving products, hair removal and hair care appliances and deodorants . . . Alkaline and specialty batteries and cells. Writing instruments and correction products. Certain areas of the oral care market - toothbrushes . . . Selected areas of the high-quality small household appliance business coffeemakers . . .

Vision & Mission

Research results are mixed, however, firms with formal mission statements --

2x average return on shareholders equity Positive relationship to company performance 30% high return on certain financial measures

Customers

Products Services

Markets

Technology Employees

Mission Elements
Survival Growth Profit Self-Concept Philosophy

Public Image

PepsiCo Mission
PepsiCos mission is to increase the value of our shareholders investment. We do this through sales growth, cost controls, and wise investment resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound; and providing a fair return to our investors while adhering to the highest standards of integrity.

Ben & Jerrys Mission

Ben & Jerrys mission is to make, distribute and sell the finest quality all-natural ice cream and related products in a wide variety of innovative flavors made from Vermont dairy products. To operate the Company on a sound financial basis of profitable growth, increasing value for our shareholders, and creating career opportunities and financial rewards for our employees. To operate the Company in a way that actively recognizes the central role that business plays in the structure of society by initiating innovative ways to improve the quality of life of a broad communitylocal, national and international.

Mission Statement Evaluation Matrix

COMPONENTS Concern for Survival, Growth, Profitability

Organization

Customers

Products Services

Markets

Technology

PepsiCo Ben & Jerry's

Yes No

No Yes

No Yes

Yes Yes

No No

Mission Statement Evaluation Matrix

COMPONENTS

Organization

Philosophy

SelfConcept

Concern for Public Image

Concern for Employees

PepsiCo Ben & Jerry's

Yes No

No Yes

No Yes

No Yes