HND

BUSINESS STRATEGY
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Functional Strategies
Functional strategies or operational strategies are goal oriented plans and actions of the functional areas of an organization, they include:
Production-Operations Marketing Research & Development Human Resources Financial-Accounting Information Technology & Support

Competitive Strategies
Competitive strategies or business strategies are goal directed plans and actions concerned with how an organization competes in a specific business or industry
Looks at all aspects of strategies and actions Seeks to determine what the company currently can do and what it wants to do Focus is on how it might more effectively compete

CORPORATE STRATEGY
Corporate strategies are goal directed plans and actions that are concerned with what business or businesses a firm wants to be in and what to do with those businesses; for example
FedExs decision to acquire Kinko's PepsiCos decision to spin off their fast-food division

STRATEGY IMPLEMENTATION
It is not enough to formulate great strategies, they must be implemented
Strategy implementation is putting the various stages of strategies into action How a strategy is implemented must be considered

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Competitive Advantage
The key to strategic management, the challenge is getting and keeping competitive advantage
It is about doing something others cannot or doing it better (distinctive capability) Or, the organization has something others do not (unique resource)

An organizations competitive strategies are

designed to exploit its competitive advantage However, other organizations are attempting to develop their own competitive advantage in order to compete. Competition is in all markets and industries

What an External Analysis Is?

External analysis is the process of scanning and evaluating an organizations external environment
It is how strategic managers evaluate the threats and opportunities facing their organization

Opportunities
Positive external trends or changes that may help an organization improve performance

Threats
Are negative external trends or changes that may hinder an organizations performance

Understanding the external environment is essential to creating adaptive strategies

What an External Analysis Is?

Opportunities
Positive external trends or changes that may help an organization improve performance

Threats
Are negative external trends or changes that may hinder an organizations performance

Understanding the external environment is essential to creating adaptive strategies

WHAT IS AN EXTERNAL ANALYSIS?

An external analysis is the process of scanning and evaluating an organization's external environment to determine the opportunities and threats facing their organizations. Opportunities are positive external trends or changes that may help an organization improve its performance. Threats are negative external trends or changes that may hinder an organization's performance. Its important to know whats happening in the external environment so new strategies can be formulated or current strategies changed in response to the opportunities or threats.
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Environmental Scanning and External Analysis

Environmental scanning allows strategic decision makers to know what's happening in the external environment so they can identify and anticipate environmental changes. This means scanning the environment and evaluating what the various data and trends mean to the organization. Note that it's not enough just to know what's happening in an organization's environmentthe informational needs of an organization also need to be assessed. In other words, an external analysis is needed to determine the opportunities and threats facing the organization. 10

An Organizations External Environment

General environment refers to those external environmental sectors that indirectly affect the organizations strategic decisions and actions and may pose opportunities or threats (e.g., economic, demographic, sociocultural, political-legal and technological sectors). Specific environment describes those external environmental sectors that directly impact the organization's decisions and actions by opening up opportunities or threats. (e.g., customers, competitors, suppliers and other industry-competitive variables). 11

An Organizations External Environment

Identifying environmental influences PESTEL

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General Environment
The general environment includes those external environmental sectors that indirectly affect the organization's strategic decisions and actions and may pose opportunities or threats. The five main general environment sectors:

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Economic
The economic sector encompasses all the macroeconomic data (i.e., current statistics, forecasted trends and changes) that reflect whats happening with the economy. It doesn't include the economic statistics of an organizations industry. For instance, industry sales forecasts and trends aren't part of the general economic sector. However, you would look at those statistics in evaluating the industry and competitive environment.

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Economic
The economic sector includes:
Interest rates Exchange rates and the value of the dollar Budget deficit or surplus Trade deficit or surplus Inflation rates Gross National Product (GNP) or Gross Domestic Product (GDP) levels and resulting stage of the economic cycle Consumer income, spending and debt levels Employment-unemployment levels Consumer confidence levels Workforce productivity rates
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Evaluating the effect on the organization:

Look at current information as well as forecasted trends, and determine how the change may or may not affect your organization. International considerations: An additional challenge is to find convenient and reliable information. Most critical economic information may be the inflation rates, interest rates, currency exchange rates, and consumer-income-spending-debt levels because these tend to be the most volatile economic factors. 17

Demographics
The demographic sector evaluates current statistical data and trends in population characteristics. Gender Age Income levels Ethnic makeup Education Family composition Geographic location Birthrates Employment status
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Demographics
Evaluate changes and trends, and how the trends would affect the organization. Also consider the interaction of these variables, e.g., What is the trend of the geographic location of baby boomers? Will this affect marketing? International considerations: Demographics on current or target customers is relevant regardless of location. It may be difficult to find this information in some of the semi-industrialized countries, but industrialized and most larger semi-industrialized countries collect census data. 19

Demographics
What the country's culture is like and is it changing? What are society's traditions, values, attitudes, beliefs, tastes, patterns of behavior and how are these changing? Evaluating shifts in beliefs, opinions, values, etc. to determine how these values may influence peoples behavior in shop, work, family rearing, etc. (e.g., How has the fear of terrorism influenced buyers? What about low carb diet fads?) International Considerations: Important to understand each countrys culture, and try to uncover any trends or changes within the culture.
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Political-Legal
The various laws, regulations, judicial decisions, and political forces that are currently in effect at the federal, state, and local levels of government.
It might also include regulations enacted by professional associations Potential legal, regulatory, and political changes, or pending judicial decisions that might take place and could impact your organization.

Evaluate the impact regulations may have on the organization and the industry. Also consider how consumer attitudes may change toward the industry/organization due to regulation (e.g., vices [tobacco, alcoholic beverages, gambling]). International Considerations: If operating in another country, your organization needs to know the relevant laws and regulations, and abide by them. It is also important to be aware 21 of political changes.

Political-Legal
Various trade alliances among countries are easing political and economic restrictions on trade and creating numerous opportunities and threats. Trade alliances among countries include: the North American Free Trade Agreement (NAFTA), the European Union, the Central America Free Trade Agreement, the Association of Southeast Asian Nations (ASEAN) and the African Union

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Technological
Scientific or technological improvements, advancements and innovations create opportunities and threats for an organization, such as:
Communications Computing Transportation Manufacturing Robotics Biotechnology Medicine and medical Telecommunications Consumer electronics

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Technological
Two organizational areas impacted most by technological innovations concern the product research and development and organizational work processes. In evaluating this sector, consider how technological changes will affect your organizations products (positively or negatively) or how the changes will affect how you produce your product (the process) (e.g., computerization of an organizations activities). International Considerations: a countrys level of technological advancement is going to affect the assessment (e.g., Infrastructure required for telecommunications).
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Specific Environment
The specific environment consists of those external sectors with which the organization directly interacts. In other words, the specific environment includes industry and competitive variables. Industry is a group(s) of organizations producing similar or identical products. These organizations compete for customers to purchase their products and must secure the necessary resources that are converted into products. The strategic manager can use Porters model to determine external opportunities and threats by 25 evaluating the five forces.

Porter's Five Forces Model

Some industries are inherently more attractive than others (i.e., the profit potential for companies in those industries is greater). The strength and interaction of the five forces are what influence profit potential The existing firms in an industry are an organization's current competitors. The more intense the rivalry among existing firms, the more profitability will suffer.
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Business Strategy Unit 7a

External Analysis

The five forces of industry competition

Source : Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from COMPETITIVE STRATEGY: 27 Techniques for analyzing industries and competitors by Michael E. Porter. Copy right 1980,1998 by The Free Press. All rights reserved.

Current Rivalry Among Existing Firms

Porter lists eight conditions that contribute to intense rivalry among existing competitors:
1. Numerous or equally balanced competitors
a. I. a. a. a. a. Constant competitive turmoil , constantly jockeying for position Battle for the limited market share e.g., Price cutting strategy keeps profits low Commodity-like product leads to differentiation by price and service Adding capacity is costly so competitors will cut prices to attract customers Differing philosophies or circumstances between competitors make it difficult to predict strategies in the market, which increases rivalry. Short run profitability may be sacrificed to succeed Factors that keep companies competing even though they may be earning low or negative returns on investment. Extreme tactics may be used to compete 28

2. Slow industry growth 3. High fixed or storage costs 4. Lack of differentiation or switching costs 5. Addition of capacity in large increments 6. Diverse competitors

7. High strategic stakes

a. a.

8. High exit barriers

Potential Entrants
In addition to current competitors, organizations should also be on the lookout for organizations moving into their industry.
Why?: Bring new capacity to the industry Want to gain customers (market share) May possess substantial resources that can be used to launch attacks against current competitors

Threat of potential entrants depends on the barriers to entry and the reaction by current competitors to entrants
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Barriers to entry
Are obstacles to entering an industry. When barriers are high or current competitors can be expected to take significant actions to keep newcomers out, then the threat of entry is low. A low threat of potential entrants is positive for an industry because profitability wont be divided up among more competitors.

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What are the major entry barriers? Porter described seven:

1. Economies of scale 2. Cost disadvantages from other than scale (e.g., favorable access to raw materials, favorable location; government subsidies, human resource advantages from cumulative knowledge, learning and experience). 3. Product differentiation (e.g., brand loyalty with customers creates a high barrier). 4. Capital requirements: high initial investment will discourage newcomers. 5. Switching costs: One-time cost facing the buyer who switches from one suppliers product to anothers, may be monetary or psychological (e.g., mobile phone or Internet service providers; new software). 6. Access to distribution channels: costs associated with 31 distributing the product such as price breaks to distributors.

Barriers to entry
Government policy: Licensing and other standards can be costly in time and money. The more government regulations, the higher the barrier

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Bargaining Power of Buyers

Buyers are the seller's customers. If they have a lot of bargaining power, they can force prices down, bargain for higher quality or more services, or even play competitors against each other trying to see who will give them the best deal.

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The factors of buyer power are:

1. Large volume purchasescustomer is more important to the seller than seller is to the customer. 2. Products purchased represent a significant portion of the buyer's costs or purchasescustomer is more likely to bargain hunt. 3. Products are standard or undifferentiatedthe customer sees little difference in the sellers (competitors) products with customer likely to play one supplier against another to find the best deal. 4. Buyer faces few switching coststhis does not encourage brand loyalty. 5. Buyer has low profits (or has low income levels)if the customer is earning low profits, the customers will be looking for ways to reduce costs, hence reduce purchasing costs. 6. Buyer's ability and resources to produce the products themselvesif customer can make the product its buying, then its in a powerful position to ask for concessions from the supplier. 7. Product's quality isnt important to the quality of the buyer's products or services.
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The factors of buyer power are:

If buyers dont need the industrys products to get desired levels in their products or services, they have the power to bargain with the industry over prices and services offered.
Buyer has full information/knowledge about product demand, market prices, and supplier costsgives the customer good ammunition to get the best possible prices from suppliers.

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Bargaining Power of Suppliers

If an industry's suppliers have bargaining power, they can raise prices or reduce the quality of products that an industry purchases. An industry's suppliers include any of the providers of resources or inputs: raw materials sources, equipment manufacturers, financial institutions and even labor sources.

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The factors of supplier power are:

Domination by a few suppliers and more concentration than the industry Availability of substitute products (inputs) Multiple industries demanding the products of suppliers Importance of the product (input) to the industry Suppliers products are differentiated or if customer has switching costsavailability of substitute or undifferentiated products Ability of the supplier to enter the customer's industry and start making the product that the customer 37 makes

Substitute Products
The best way to evaluate the threat of substitute products is to ask whether other industries can satisfy the consumer need that our industry is satisfying.

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Evaluating the Five Forces

Evaluating the Five Forces

Finding Information on the External Environment and Evaluating it

Finding valuable information and interpreting it is essential to organizational success. Examples include:
Data specific to the context Statistics Analyses Trends Predictions and forecasts Inferences or statements by experts

Finding Information on the External Environment and Evaluating it contd

External information can be found using informal and unscientific observations; as well as formal and systematic searches Examples of informal approaches
Discussions with customers and suppliers Reading industry journals or news periodicals

Examples of formal approaches

Surveys Scientific analysis

Finding Information on the External Environment and Evaluating it contd

External information system
Is information system that provides managers with needed external information on regular basis Purpose is to identify potential trends and changes that might positively or negatively impact organizational performance Information is valuable because external environment is complex and dynamic The challenge: having enough, but not too much information

For Your Information

Spotting Trends: The art of picking up on what is hot or popular Suggestions for trend spotting:
Remember that valuable information can be found anywhere Gather information and file it away for later use Determine whether something is a fad or a trend; trends have staying power Trends are not obvious, require effective analysis

Responsibilities for External Analysis at Different Managerial Levels

In smaller and medium sized companies, all employees should monitor changes in the specific industry and competitive environment
In small companies, front line employees have the greatest interaction with customers and suppliers Such interactions provide valuable information for strategic decision makers

 In large organizations, doing a single analysis for the entire organization can be insufficient

Responsibilities for External Analysis at Different Managerial Levels contd

The large structure, with its many units and functions, creates varying needs for information The value of the information will depend on the organizational level and function The role of different level managers will vary based on whether their role is to gather, disseminate, or utilize the information gathered

For Your Information

Competitor Intelligence, a form of environmental scanning
Seeks to identify who competitors are, what they are doing, how their actions will affect your firm It does not involve spying or illegal actions It can involve buying competitors products to understand them, accessing published materials, interacting at trade shows

What role does this place in external analysis?

Learning Review:
What does the five-forces model look at and how is it used? What is examined in each of the five components and the general environment? How is external analysis done for a company that is doing business globally? How is information on the external environment found and evaluated? Describe the different responsibilities for doing an external analysis.

Benefits of Doing an External Analysis

Enables managers to be proactive, not reactive
Anticipate change Create plans for those changes Influence the organizational performance

External analysis is key

To providing information to use in planning, decision making, and strategy formulation

Benefits of Doing an External Analysis contd

External analysis enables strategies to
Adapt to opportunities and threats Neutralize competitor moves Improve organizational opportunities

Altering strategies should align the organization based on information about:

Markets Customers Technology

Benefits of Doing an External Analysis contd

Environment is a source of resource
The ability to acquire and control needed resources depends on understanding the environment and taking advantage of the resources available

Dynamic environment requires awareness of

Turbulent and fragmented markets Changing customer tastes Innovative technologies

Benefits of Doing an External Analysis contd

Intense global competition makes it imperative to complete an external analysis Research shows that firms doing an external analysis have higher performance
Performance evaluated on financial measures like return on assets or increased profit

Challenges of Doing an External Analysis

Rapidly changing environment
Keeping track of current situation and changing trends can be a challenge New technology New competitors New laws New customers

Challenges of Doing an External Analysis contd

Doing an external analysis is time consuming
Key is making the process efficient and effective Requires making value judgments about what to monitor and evaluate

No process of analysis provides perfect information

Forecasts are not fact Analysis that is flexible and open is more likely to be able to create adaptive strategies

Review
Describe what an external analysis is External analysis
Process of scanning and evaluating the external environment in order to identify opportunities and threats

Opportunities
Positive external trends or changes that may help to improve the organizations performance

Review
Threats
Negative trends or changes that may hinder the organizations performance

Open systems
The concept that organizations interact with and respond to their environment

Environmental uncertainty
The greater the change and complexity in the environment, the greater need for information

Review: Learning Outcome

Environment is a source of resources
The more hostile the environment, the greater the need to obtain and control resources Managers monitor the environment in order to acquire and control those needed resources

It is important to scan and evaluate the external environment

Review: Learning Outcome

Explain how to do an external analysis of an organizations specific and general environments Specific external environments include:
Customers Competitors Suppliers Other industry-competitive variables

Review: Learning Outcome contd

General external environments include:
Economic Demographic Sociocultural Political-Legal Technological

Review: Learning Outcome

Specific environment analyzed using Porters five-forces model
Current rivalry Potential entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitute products

Review: Learning Outcome contd

The general environment requires looking at:
Economic data Demographic characteristics Sociocultural values, attitudes, behavior Political-Legal regulations, decisions, forces Technological innovations

Review: Learning Outcome

External information
Includes data, analyses, trends, forecasts, inferences, expert opinions

External analysis
Formal or informal Provides managers with needed information In small companies, analysis done by all In larger companies, analysis more often done by management or special groups

Review: Learning Outcome

Discuss the benefits and challenges of doing an external analysis Benefits
Makes managers proactive, anticipating and planning for change instead of reacting Provides information for planning, decision making, and formulating strategy Helps get needed resources Helps cope with uncertainty

Review: Learning Outcome

Challenges
Rapidly changing environment is hard to keep up with The process of analysis is time consuming Forecasts and trend analysis are not perfect

Building Your Skills as Strategic Decision Maker

1. Looking at the US/UK Census data, how might this benefit strategic decision makers? 2. What is the value of the following questions/
What is happening in the world today? What does it mean for us? For others? What would have to happen for us to achieve the desired results? What do we have to do? Whats next? Is our external analysis good? Why?

Building Your Skills as Strategic Decision Maker contd

3. Find three different sources of online economic data. Are they valuable? Why? 4. What strategic implications (positive/negative) do trends toward a US/UK workforce that is smaller, move diverse, more mobile, and more vulnerable to global competition?

Building Your Skills as Strategic Decision Maker contd

5. What opportunities and threats might arise for companies, in light of the aging baby boomers and struggling financial markets? 6. Two of the major competitors in fast-food Wendys and McDonalds have positioned themselves differently. How would their unique interpretation of trends and changes affect their choice of strategy? Which might be better positioned? Why?

Business Strategy Unit 7b

Internal Analysis

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Three Learning Outcomes

1. Describe what an internal analysis is 2. Explain how to do an internal analysis 3. Discuss why an internal analysis is important

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Learning Outcome
Describe What an Internal Analysis Is To formulate appropriate and effective strategies, it is important to know what an organization can and cannot do particularly well and what assets it does or does not have
Internal analysis is the process of evaluating an organizations assets, skills, and work activities; what it does well or what is lacking
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Organizational Resources
Resources are simply the assets an organization has for doing whatever it is in business to do (e.g., make burgers, provide healthcare, create and sell greetings cards)
Resources can be financial, physical, human, tangible, intangible, structural-cultural Among the financial resources are debt capacity, credit lines, available equity, cash reserves
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Organizational Resources contd

Other examples of Resources
Human resources, which include experiences, knowledge, judgment, skills, accumulated wisdom, competencies of employees

The value of resources is context dependent; based on it seeks to do to make money

Resources can be a source of competitive advantage for a company
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The Strategic Role of Organizational Resources and Organizational Capabilities

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From Resources to Organizational Capabilities

An organizations resources are that which are needed to perform its work
For example: A top chef needs pots, pans, utensils, spices, raw food materials to do their job

To reach its goals an organization must generate value from its resources and does so through capabilities
Using the same example: A chef needs skills to combine ingredients to create a quality meal

From Resources to Organizational Capabilities contd

Organizational capabilities
Are the various routines and processes that transform resources (inputs) into products/services (outputs)

Organizational routines and processes

Are regular, predictable, sequential work activities done by organizational members Complex network of these routines and processes encompass all work activities
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From Resources to Organizational Capabilities contd Employees learn how to best use organizational
resources and processes, creating core competencies and distinctive organizational capabilities
Capabilities result from learning and are more than the mere possession of resources Some organizations do it better than others; they are unable to develop capabilities to survive in an increasingly dynamic and competitive marketplace

From Resources to Organizational Capabilities contd Southwest Airlines is an example of a firm

that has developed valuable capabilities and competitive advantages
Loading, unloading planes Reservations Safety inspections Customer service

 Capabilities are not self-sustaining in todays complex and dynamic environment

Future conditions and competitors change

From Resources to Organizational Capabilities contd

Todays environment demands dynamic capabilities

The ability to build, integrate, and reconfigure capabilities to address the rapidly changing environment
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Characteristics of Distinctive Organizational Capabilities

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From Capabilities to Core Competencies and Distinctive Capabilities

Core competencies
Value creating capabilities that an organization possesses that are essential to their business Contribute to improving and enhancing other organizational capabilities They are the result of accumulated knowledge and actual work activities

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From Capabilities to Core Competencies and Distinctive Capabilities contd

Examples of usable core competencies
Product design and customer research (Nokia)

Organizational capabilities
Are fundamental building blocks of core competencies that are created out of processes and routines

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From Capabilities to Core Competencies and Distinctive Capabilities contd

Distinctive organizational capabilities
These are special and unique organizational capabilities that distinguish an organization from its competitors

Examples of distinctive capabilities

Southwest Airlines: gate turnaround, ticketing, and employee-customer interactions Hallmark: creative product design
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Characteristics of Distinctive Capabilities

1. Must contribute to superior customer value and offer real benefits to customers
Being good at what customers value Requires adaptiveness

2. Must be difficult for competitors to imitate

Requires balancing a complex array of employee skills and knowledge Harnessing learning in the organization Utilizing cross-functional interaction
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Characteristics of Distinctive Capabilities

3. A distinctive capability should be used in a variety of ways
Organizational routines and processes developed in one area should be transferable to other areas

Examples of transferred capabilities

Reliable, fuel efficient drive trains for cars, motorcycles, boats, lawnmowers, snow blowers, power generators (Honda) Energy conservation (United Technologies) 4- 84

Competitive Advantage and Performance Results

Competitive advantage
Sets the organization apart from competitors Must come from unique resources or distinctive capabilities Will positively affect performance results Benefits may be short or long term Demands that decision makers know the strengths and weaknesses of its resources, capabilities, and competencies
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The Role of Strengths and Weaknesses

Strengths These are resources that the organization possesses and capabilities that is has developed
These can be exploited and developed into a sustainable competitive advantage Not all strengths will lead to competitive advantage, but they can be competitive weapons if nurtured and reinforced
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Weaknesses Are resources and capabilities that are lacking or deficient and prevent the organization from developing competitive advantage
Organizational weaknesses must be corrected if they are in critical areas that prevent the organization from competing effectively Organization with limited resources to correct the problem will simply seek to minimize the impact
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The Role of Strengths and Weaknesses contd

Value Chain Analysis

Every organization (for profit or not-forprofit) needs customers to survive
The premise is that there is a demand for some type of value in the goods/services they purchase or obtain

To assess the ability to provide value it is important that strategic decision makers use a systematic process to examine organizational activities and how they produce value
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Value Chain Analysis contd

Value chain activities are specific organizational routines and processes that create varying levels of customer value and organizational costs
The concern for organizations is that the value created outweighs the cost of creating that value (often referred to as the margin) The effort is to assess the organizations ability to create value through its work activities

Value Chain Analysis contd

Value chain analysis evaluates the internal environment, the organizations strengths and weaknesses Value chain analysis assesses nine activities
Five primary Four support

Value Chain Analysis

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Value Chain Analysis contd

Primary activities create customer value
Inbound logistics routines and processes that bring resources into the organization Operations processing the resources into goods and services Outbound logistics physically distributing these to customers Marketing/Sales appealing to customers Customer service serving customer needs 4- 92

Value Chain Analysis contd

Support activities support primary activities and each other
Procurement gathering resources Technology provide efficiencies and improve operational efforts Human Resources recruit, select, train, retain employees Infrastructure capabilities to identify external opportunities and threats
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Value Chain Analysis contd

Assessment of both primary and support activities is essential
The effective or efficient performance of these activities helps create potential competitive advantage This analysis is not easily done because organizational activities do not always fit nicely and neatly into the analytical framework

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Assessing the Primary Activities of the Value Chain

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Assessing the Support Activities of the Value Chain

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Product Life Cycle

The product life cycle is the natural life span of a particular product or service. There are five (5) stages of the product life cycle:
1. 2. 3. 4. 5. Introduction Growth Maturity Saturation Decline.
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The product lifecycle

Introduction

High costs, low sales and no profit is made Aim to recover development costs Successful new product will move to growth phase.

Growth Steady costs, sales increase rapidly and high profits can be made by pioneering firms. Aim to attract first-time customers and build market share.

Maturity
Steady costs, sales increase more slowly and profits peak Aim to keep existing customers and persuade other consumers to switch from competing brands.

Saturation Steady costs, sales peak (no more growth) and reasonable profits Profit margins start to decline, owing to increased price competition.

Decline
Low costs, falling sales and falling profits maybe loss making Withdraw loss-making product Keep decline product if it makes a profit in a niche market.

Product lifecycle and extension strategies

Extending the product lifecycle (Continued)

product development which is minor product modification or improvement e.g. new model of a car Vauxhall Corsa.

Extending the product lifecycle (Continued) Aim to keep the product in the saturation phase of lifecycle as:
profits are reasonable sales peak costs are steady.

Customer growth matrix

Customer loyalty Customer extension Customer acquisition Customer diversification.

The customer growth matrix

Source: Jenkins, M (1997), The Customer Centred Strategy, Prentice Hall. Reproduced with permission

Customer loyalty Loyal customers will bring greater profitability by:

making frequent repeat purchases telling friends of the benefits of the companys products.

Customer extension

Customer extension is:

extending the range of products and services available to customers achieved via product development and diversification.

Customer extension (Continued) Product development is used by companies:

structured around product divisions with strong R & D and design functions.

Customer extension (Continued)

whose products have short lifecycles e.g. consumer electronic companies like SONY.

Customer extension (Continued) Product diversification occurs when a company moves away from current products Related diversification remains in same industry Unrelated diversification changes industry.

Customer acquisition Customer acquisition is:

expanding the number of customers for existing products easiest in growing markets difficult in mature markets.

Customer acquisition (Continued) If home markets are mature, then seek new customers in overseas markets Engage in IB activities, e.g. Exporting or locating production or marketing activities overseas.

Customer diversification

Customer diversification:
is achieved by selling a new product or service to new customers often involves innovative use of technology.

The BCG matrix

Question marks Stars Cash cows Dogs.

The Boston Consulting Group matrix

Source: Henderson, B (1970) The Product Portfolio, Boston Consulting Group. Used with permission of The Boston Consulting Group

Question marks High growth markets Low market share Another product is current market leader. Unlikely to be profitable High investment is required if a question mark is to become a market leader

Stars Successful question marks become stars. Stars are market leaders in growth markets.

require investment to maintain market leadership in a high growth market are marginally profitable

Cash cows Cash cows:

are mature products occupy slower growth markets need less investment are the most profitable products in a portfolio are used to fund products in other quadrants.

Dogs
Dogs:
occupy no growth markets have low market share may be previous cash cows may be marginally profitable should be withdrawn before they become loss making.

A successful / unsuccessful product

A successful product moves around the BCG matrix A question mark to a star to a cash cow to a dog or back to a question mark.

A less successful product remains in right-hand side of the BCG matrix, and is therefore a low cash generator. A question mark may move to a dog.

BCG matrix and product lifecycle links BCG ----------- plc

Q marks ------ Stars ---------- Cash cow ---- Dogs ---------introduction growth maturity and saturation decline.

Balanced BCG matrix

Tomorrow's products:
question marks and stars

Today's products:
cash cows

Yesterdays products
Dogs.

The Seven S Model

Describes the interconnectivity of an organisation by a series of seven elements within the organisation. These elements are mutually independent & serves as an trigger mechanism to the management to coordinate the whole organisation.

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The Seven S s Model

Structure

Strategy

Systems

Super-ordinate Goals

Skills

Style

Staff
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The Seven S s Model

Super-ordinate goals Aspirations of the organisation value, beliefs, principles & aims. Strategy The organisations future plans & directions. How it will overcome external factors & competition within the industry. Market it operates & products & services provided. Structure Organisation structural framework, decision making process (top down/bottom up), planning process. Systems The organisations internal process. (operating standards/ working procedures, etc)

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The Seven S s Model

Style
Culture of the organisation. Belief systems of its employees.

Skills
Core competence of the organisation and not skills of staff.

Staff
Human resources of an organisation.
Capabilities & competences internally.

HR management policies (bonuses/rewards, compensation, advancement, etc

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HND
Business Strategy Lesson 3

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SWOT
SWOT stands for Strength (internal), Weaknesses (internal), Opportunities (external) and Threats(External). The SWOT analysis points to the strategic issues organizational decision makers need to address in their pursuit of sustainable competitive advantage and high performance levels. A swot analysis allows managers to identify key internal and external issues they need to take into account in order to understand the context in which the organisation operates. By identifying key issues, it begins to focus managers on areas where they need to make choices and helps 131 to identify some of the constraints and risks involved.

Competitive Strategies
Competitive strategy is the way organizations set themselves apart to create a sustainable competitive advantage. The choice of a competitive strategy is based on the competitive advantage(s) that the organization has been able to develop.

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 Porters approach is based on an organizations competitive advantage. Competitive advantage can come from only one of two sources: 1. Having the lowest costs in the industry 2. Possessing significant and desirable differences from competitors Another important strategic factor is the scope of the product-market in which the organization wishes to competethat is, broad (i.e., all or most market segments) or narrow (i.e., only one segment or a few 133 segments).

Porters Generic Competitive Strategies (1980)

Porters Generic Competitive Strategies (1980)

He identifies three strategies: (1) cost leadership: a strategy in which an organization strives to have the lowest costs in its industry and produces products for a broad customer base; (2) differentiation: a strategy in which an organization competes by providing unique (different) products in the broad market that customers value, perceive as different, and are willing to pay a premium price for; the differentiator works hard to establish brand loyalty: customers consistently and repeatedly seek out, purchase, and use a particular brand; (3) focus: a strategy where an organization pursues either a cost or differentiation advantage in a limited customer segment.
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Cost Leadership
Cost leader Chooses to compete on the basis of having the lowest costs. The main goal is to have the lowest (total unit) costs in the industry (emphasis on costs, not prices). With the lowest costs in its industry, the cost leader: Can potentially charge the lowest prices and Still earn significant profits, even during a price war

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Cost Leadership
Successful pursuit of the cost leadership strategy Everything the cost leader doesevery strategic decision made, every strategic action takenis aimed at keeping costs as low as possible. Efficiency in all areas of operations is the main objective, and all resources, distinctive capabilities, and functional strategies are directed at that. The cost leader isnt going to have deep and wide product lines as providing these product or service variations is expensive. The cost leader has chosen to compete on the basis of low costs, not on being different than competitors. The cost leader will market products aimed at the average customer. Little or no product frills or differences will be available. No fancy artwork or plush office furniture at corporate headquarters and no corporate jets. Cost leader wont have an elaborate high-tech, multimedia interactive Web site unless its an extremely cost effective and efficient way to reach masses of potential customers. 136

Other characteristics of cost leaders include:

Strict attention to production controls Rigorous use of budgets Little product differentiationjust enough to satisfy what the mass market might demand Limited market segmentationproducts or services aimed at the mass market Emphasis on productivity improvements Resources, distinctive capabilities and core competencies found in production-operations 137 and materials management

Drawbacks of the cost leadership strategy:

The main danger is that competitors might find ways of lowering costs even further; taking away the cost leaders cost advantage. Competitors might be able to easily imitate what the cost leader is doing and erode the cost advantage. Cost leader, in its all-out pursuit of lowering costs, might lose sight of changing customer tastes and needs. 138

Differentiation Strategy
Organization competes by providing unique (different) products with features that: Customers value, Perceive as different, and Are willing to pay a premium price for The main goal of the differentiator is to provide products or services that are truly unique and different in the eyes of customers. Doing this, the differentiator can charge a premium price because customers perceive that the product or service is different and that it uniquely meets their needs. This premium price provides the profit incentive to compete on the basis of differentiation. 139

A Successful Differentiator
All its capabilities, resources and functional strategies are aimed at isolating and understanding specific market segments and developing product features valued by customers in those various segments. Has broad and wide product linesthat is, many different models, features, price ranges and so forth. Has countless variations of market segments and product features so that the customer perceives the product or service as different and unique and worth the extra price. Because the differentiation strategy can be expensive, the differentiator also needs to control costs to protect profits, but not to the extent that it loses its source of differentiation.
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Other characteristics of differentiators include:

Differentiating themselves along as many dimensions as possible and segmenting the market into many niches. Establish brand loyalty, where customers consistently and repeatedly seek out, purchase and use a particular brand. Brand loyalty can be a very powerful competitive weapon for the differentiator. The differentiators distinctive capabilities tend to be in marketing and research and development.
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Drawbacks of the differentiation strategy

Must remain unique in customers eyes, which may be difficult depending on competitors abilities to imitate and copy successful differentiation features. Customers might become more price sensitive, and product differences might become less important.

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Focus Strategy
A focuser:
Concentrates on serving a limited (narrow) customer group or segment known as a market niche
a. Geographical niche can be defined in terms of region or locality. b. Type of customer niche focuses on a specific group of customers. c. Product line niche would focus on a specific and specialized product line.

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Focus Strategy
Pursues either a cost or differentiation advantage

Cost focuser competes

By having lower costs than the overall industry cost leader in specific and narrow niches Also successful if an organization can produce complex or custom-built products that dont lend themselves easily to cost efficiencies by the industrys overall cost leaders

Differentiation focuser can use whatever forms of differentiation the broad differentiator might use, such as:
a. b. c. d. e. Product features Product innovations Product quality Customer responsiveness 144 Specializes in one or a few segments instead of all market segments.

Advantages of the focus strategy:

The focuser knows its market niche well and can build strong brand loyalty by responding to changing customers needs The focuser who can provide products or services that the broad competitors cant or wont, will have the niche all to itself.

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Drawbacks of the focus strategy

The focuser often operates on a small scale making it difficult to lower costs significantly. However, with technological advancements such as flexible manufacturing systems, this drawback is not as critical as it once was. As information and computer technology become more affordable, focusers have discovered that economies (cost efficiencies) dont necessarily have to come from large-scale production runs. The niche customers might change their tastes or needs. Because it is often difficult for a focuser to change niches easily and quickly, this could be a serious problem. In addition, any technological changes that might impact the niche can have a similar effect. 146

Stuck in the Middle

Happens when an organization is not successfully pursuing either a low-cost or a differentiation competitive advantage Occurs when an organizations:
a. Costs are too high to compete with the low-cost leader. b. Products and services arent differentiated enough to compete with the differentiator.

This is not a preferred or profitable strategic direction. Becoming unstuck means making consistent strategic decisions about what competitive advantage to pursue and then doing so by aligning resources, 147 distinctive capabilities and core competencies.

Top down
By definition, top managers are ultimately responsible for every decision and action of every organizational employee, therefore will need to be strategic leaders. Top managers can also be strategic leaders through their ability to anticipate, envision, maintain flexibility, think strategically and work with others in the organization to initiate changes that will create a viable and valuable future for the organization. Specifically top managers can be strategic leaders by:

Determining the organizations purpose or vision; Exploiting and maintaining the organizations core competencies; Developing the organizations human capital; Creating and sustaining a strong organizational culture; Emphasizing ethical organizational decisions and practices; and Establishing appropriately balanced organizational control. 148

Strategic Planning Techniques

PIMS (Profit Impact on Marketing Strategies) The Growth Share Matrix The scenario or Vision Building Approach

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PIMS (Profit Impact on Marketing Strategies)

The model is based on the belief that there are three major factors which determines a business unit performance; It strategy Its competitive position and Market or industry characteristics which it competes (Moore 1992) It collects information from member companies relating to such factors as market share, profitability, product quality and investment. PIMS, then answers questions such as:
What profit rate is normal for a given business? What strategic changes are likely to improve performance? 151 What are the likely effects of profitability, cash flow, etc, of adopting a particular strategy?

The Growth Share Matrix

The BCG is based on the relation between growth, investment and return. Growth-Shared Matrix is based on two concepts:
1. The company with the largest market share should also have the greatest competitive advantage and it follows the highest profit margin. 2. Also the companies with the highest rate of return on investment can theoretically growth the fastest. 152

BCG GROWTH-SHARE MATRIX

BCG GROWTH-SHARE MATRIX

The matrix pre-supposes that most organisations are composed of more than one business. The collection of businesses within an organisation is termed business portfolio. It posits that an organisation portfolio can be classified into stars, cash cows, dogs and problem children (Smith 1985)

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 A growth strategy is one that expands products offered or markets served or expands its activities or operations through current or new businesses
Growth helps achieve goals through increasing revenues, profits, or other measures

Growth Strategies

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Growth Strategies

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Possible Growth Strategies

Concentration
When an organization focuses on its primary line of business and looks for ways to meet its growth goals by expanding its core business

There are three concentration options

Product market exploitation Product development option Market development option

Concentration Strategies
Product-Market exploitation
Attempt to increase sales of current products in current markets and might include incentives or advertizing

Product development option

Creates new products or new features on current products, which would be sold in current markets

Market development option

When selling current products in new markets

Concentration Strategies contd

A concentration strategy is one that looks for ways to grow the core business using different combinations of products and markets
Product market diversification is not usually viewed as a concentration option as it involves expansion into both new products and new markets

 The advantage of a concentration strategy is an organization becomes good at what it does

The develop knowledge of the industry and of their competitors Functional and competitive strategies can be tuned to know what customers want and how to best provide it Everyone can concentrate on exploiting resources, competencies, and capabilities critical to success
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Concentration Strategies contd

Concentration Strategies contd

The main drawback is that the organization is vulnerable to changes in the industry and the external environment
The key is to recognize significant trends and adjusting the organizations direction

Concentration strategy may be effective for small companies, but larger often start off by this approach and may continue using it

Concentration Strategy Options

Vertical Integration
Is a strategy that grows by gaining control of its inputs (backward) or its outputs (forward) Backward integration
The organization becomes its own supplier Example: eBay bought an online payment business

Forward integration
The organization becomes its own distributor Example: Apple Computer opened retail outlets

Vertical Integration contd

Vertical integration strategy is a growth strategy because an organization expands its activities and operations by becoming a source of supply or distribution
However, expanding into industries connected to its primary business means it is still a single business organization It is taking another path to meeting growth goals by controlling different parts of the value chain

Horizontal Integration
This strategy is used to grow the organization by combining operations with its competitors
It keeps the organization in the same industry, but provides a way to expand market share and strengthen its competitive position

In the US, Federal Trade Commission and Department of Justice regulates such activities through antitrust laws, assessing the impact of such combinations to allow fair competition
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Horizontal Integration contd

The European Union regulates efforts toward horizontal integration within member countries As a growth strategy, horizontal integration an be appropriate if:
It enables the company to meet growth plans It can be strategically managed to attain competitive advantage It satisfies legal and regulatory guidelines

The Global Perspective

Horizontal integration knows no borders Coca-Cola sought to buy one of Chinas biggest beverage makers, Huiyuan Juice Group Ltd for $2.3 Billion
It would have given Coke a strong market presence The deal was rejected by the Chinese Ministry of Commerce, which indicated it would have hurt competition in the local market

Figure 7.4 Types of Related Diversification

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Diversification
This strategy enables a company to grow by moving into a different industry. There are two types of diversification
Related Unrelated

Related Diversification
Is diversifying into a different industry, but related to the companys current business

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Diversification contd
Unrelated diversification
Diversifying into a completely different industry, not related to the companys current business

Diversification is an attempt at a strategic fit

Effort is to transfer resources, distinctive capabilities, and core competencies to the new industry It is an attempt at synergy that seeks to enhance performance of both businesses

Diversification contd
Synergy occurs when shared resources, capabilities, and competencies enable greater performance by two entities when combined. Unrelated diversification is when an organization seeks growth by moving into industries in which there is no strategic fit.

Diversification contd
Unrelated diversification can occur when a company does not believe its core industry offers growth potential
This approach is challenging because of the need to develop an ability to effectively manage different businesses An example is Fortune Brands; which owns separate business that sell liquor, padlocks, cabinets, and golf balls
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Diversification contd
Research shows that related diversification is superior to unrelated diversification because it allows the effective use of current resources, capabilities, and core competencies
However, unrelated diversification can be a valuable strategy at times, depending on how effectively the diverse operations are managed
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Implementing the Growth Strategies

There are three basic ways that growth strategies can be implemented:
Mergers/Acquisitions Internal development Strategic partnering

Mergers-Acquisitions
Involves the purchase of an organization that enables a firm to combine operations with that company it has merged with or acquired

Implementing the Growth Strategies - contd

Merger is a legal transaction in which two parties combined operations through an exchange of stock to create a new entity
Usually they take place between organizations of similar size and it is considered friendly, it is acceptable to all parties

Acquisition is an outright purchase of one company by another

Can be hostile and involve different sized firms
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Implementing the Growth Strategies contd

The popularity of mergers and acquisitions go in cycles
The main feature of either effort is to implement growth strategies

Internal development involves creating and developing new business activities within
Rather than face risks and challenges of combining new businesses, a company seeks to develop crucial capabilities to meet desired goals

For Your Information

Thinking Small
IBM was reorganized into smaller, integrated global enterprise centers of expertise focused on industries and technical skills Rather than continuing to use massive divisions, the company create a more nimble global network that helped improve performance This effort also included decentralized decision making that was more conducive to creativity, collaboration, and innovation

Strategic Management in Action

General Electric (GE) entered the airport security market by purchasing firms
These acquisitions enabled GE to leverage its brand, size, and credibility with the acquired firms technology Why do you think GE chose acquisitions as its way to grow?

Mergers-Acquisitions or Internal Development

Strategic Partnering
Strategic alliance
Two or more organizations share different resources, capabilities, or competencies to pursue some business purpose; requires trust Different than joint venture because there is no separate legal entity formed The effort seeks to encourage product innovation, bring stability to cyclical businesses, expand product lines, or cement relationships with suppliers, distributors, or competitors

For Your Information

Why Alliances Make Sense
Flexibility and informality of arrangements promote efficiencies Provide access to new markets or technologies Less complexity when creating/disbanding Risks and expenses are shared Brand identification is kept and exploited Synergies created Avoids issues related to antitrust
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Strategic Management in Action

Not all alliances work out
Amazon.com and Toys R Us created an alliance in 2000 that combined the resources of a bricks and mortar business with an internet company It failed, each party claiming to be deceived by the other Amazon violated its promise to only sell those toys, games, and baby products on its site Toys R Us failed to provide certain items

Signs of Declining Performance

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Renewal Strategies
There are two main renewal strategies
Retrenchment Turnaround

Retrenchment
Short run strategy designed to address weaknesses that are leading to performance declines Not necessary to have negative financial returns, usually occurs if unable to meet strategic goals
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Renewal Strategies contd

Retrenchment (contd)
Is a military term refers to going back to the trenches to stabilize, revitalize, and prepare for entering battle again The point is to address issues before they lead to severe problems

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Renewal Strategies contd

Turnaround
Is designed for situations in which the organizations performance are more serious Often when the organization is facing severe external and internal pressures and must make strategic changes in order to remain viable There is no guarantee the turnaround will accomplish the desired results, but without it the organization will not survive
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Implementing Renewal Strategies

Cost cutting
Reducing costs to bring performance results back in line with expectations It can be across the board or selective The effort should avoid cutting costs in those areas critical to retain or exploit competitiveness Redundancies, inefficiencies, or waste in activities should be eliminated Restructuring/downsizing are severe 7- 187 approaches

Restructuring
This includes refocusing on the primary businesses and involve
Selling or divestment Spin off Liquidation Downsizing

Divestment might occur when the business is desired by another company and is no longer a strategic fit

Restructuring contd
Spin off
Involves removing a business unit and setting it up as a separate, independent business by distributing its shares of stock

Liquidation When no buyer exists or there is no possible spin off, a business unit will be discontinued
This is a strategic action of last resort

Restructuring contd
Downsizing
Is a quick way to cut costs by elimination jobs It can be effective when done strategically

BENCHMARKING
Benchmarking is the search for the best practices inside or outside an organization. Benchmarking is from other leading organizations (competitors or noncompetitors) that are believed to have contributed to their superior performance.

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Common Characteristics Of Contemporary Benchmarking

Its key purpose is to gather various types of business information about other companies; the purpose of this information is to create new business knowledge; new business knowledge is gained by analysing and comparing the specifics of various business factors of different companies; and on this basis, companies can make better business decisions and consequently enjoy more successful and more effective business.
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 Internal benchmarking focuses on activities within the organization. One area of the organization is compared with another. External benchmarking can either be competitive or functional. In competitive benchmarking, an organization focuses on companies within their own market, sometimes direct competitors, studying their business performance and processes. Functional benchmarking is performed by companies wanting to study a particular process. They choose organizations with 193 similar processes regardless of their industry.

Internal And External Benchmarking

 The goal of benchmarking of strategies is to create knowledge about the specifics of strategies used by competitors and other companies that lead to the successful achievement of objectives. The purpose is to use this knowledge in order to improve the effectiveness of strategies that lead to the realization of strategic objectives in the long run.
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Internal And External Benchmarking

The Benefits Of Benchmarking In Strategic Management (Bogan, 1994; Harrington, 1995; Karlof Et Al., 2001; Coers Et Al., 2001)
It enables more effective strategic planning and controlling; It lowers the costs of incorrect business decisions; It enables a companys efficiency to increase through the successful design and Implementation of restructuring business processes and their continuous improvement; It helps in solving business problems; It adds an important element to the continuous education of employees, encourages their Innovativeness, creativity and contributes to the creation of new ideas; It enables a relative assessment of the business success and effectiveness of diverse business factors; and It encourages changes and fosters special knowledge, which 195 enables greater flexibility and faster adaptation to the changing

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Planning
Effective plans can clarify direction, motivate people, use resources efficiently and allow people to measure progress towards objectives. Plans can be at strategic, tactical and operational levels; and in new businesses people prepare business plans to secure capital. Strategic business units also prepare plans relatively independently of the parent.

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The process of planning

Seven iterative tasks in making a plan

Planning
Planning is an iterative task, made up of seven main steps gathering information; developing a mission; setting goals; identifying actions and allocating resources; implementing plans; monitoring progress and evaluating results. Planners draw information from the competitive and general environments using tools such as Porters Five Forces analysis. They can do this within the framework of a SWOT analysis, and also use forecasting, sensitivity analysis, critical success factors and scenario 199 planning techniques.

 Goal-setting theory predicts that goals can be motivational if people perceive the targets to be difficult but achievable. Goals can be evaluated in terms of whether they are specific, measurable, attainable, rewarded and timed.

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