Chapter 8

Strategy Formulation and Execution

 Strategy

• Every company is concerned with strategy

– It determines which organizations succeed and
which ones struggle
– Strategic blunders‫ ا الخطاء‬can hurt a company

• Strategic management is a specific type of

planning

2
 Thinking Strategically

• THINKING STRATEGICALLY
• Strategic planning:
1- in for-profit organizations pertains to
competitive actions in the marketplace.
2- In nonprofit organizations, strategic planning
pertains to events in the external environment.

• Strategic thinking means to take the long-term

view and to see the big picture of the
organization and its environment to achieve
organizational goals. 3
• Understanding the strategy concept, the levels of
strategy, and strategy formulation versus
implementation is an important start toward
strategic thinking.
• The long-term view of the organization and
competition
• Thinking strategically impacts performance and
financial success
• Today’s environment requires everyone to think
strategically
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
4
 Strategic Management

The set of decisions and actions used to formulate

and execute strategies that will provide
competitively superior fit (= competitive
advantage) between the organization and its
environment to achieve organizational goals

5
• Strategic management helps managers answer
questions such as:
• What changes and trends are occurring in the
competitive environment?
• What products or services should we offer?
• How can we offer those products and services most
efficiently?
• Answers to questions help managers make choices
about how to position their organization in the
environment with respect to rival companies.

6
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
 Purpose of Strategy
• Explicit strategy is the plan of action that describes
resource allocation and activities for dealing with the
environment, achieving a competitive advantage,
and attaining the organization’s goals
• Competitive advantage is the organization’s
distinctive edge for meeting customer needs
• Strategies should:
 Exploit Core Competencies
 Build Synergy
 Deliver Value
 Target Customers 7
• Exploit Core Competence.
A company’s core competence is something the
organization does especially well in comparison to
its competitors. A core competence represents a
competitive advantage because the company
acquires expertise that competitors do not have. A
core competence may be in the area of superior
research and development, expert technological
know-how, process efficiency, or exceptional
customer service.
8
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
Build Synergy
Synergy occurs when organizational parts interact to
produce a joint effect that is greater than the sum of
its parts acting alone.
The organization may attain a special advantage with
respect to cost, market power, technology, or
management skill.
When properly managed, synergy can create
additional value with existing resources, providing a
big boost to the bottom line.
9
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
 Deliver Value.
Delivering value to customers should
be the heart of strategy. Value can
be defined as the combination of
benefits received and costs paid.
Managers help their companies
create value by devising‫وضع‬
strategies that exploit core
competencies and attain synergy.

10
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
3 Levels of Strategy in Organizations

11
 – Levels of Strategy
•  What business are we in?
Corporate‑level strategy pertains to the
organization as a whole and the combination of
business units and product lines that make up the
corporate identity.
• Strategic actions at this level usually relate to
acquisition of new businesses, additions or
divestment‫ ت صفية ا الستثمارات‬of business units,
plants, or product lines, and joint ventures with
other corporations in new areas.
12
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
 How do we compete?
Business‑level strategy pertains to each business unit
or product line within the organization. Strategic
decisions focus on advertising, direction and extent of
R&D, product changes and development, equipment
and facilities, and expansion or contraction of product
and service lines.
How do we support the business‑level competitive strategy?
Functional‑level strategy pertains to the major functional
departments within the business unit. Functional strategies
involve all of the major functions, including finance, research
and development, marketing, and manufacturing. 13
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
The Strategic Management Process

14
Strategy Formulation vs. Execution

Formulation: Execution:
Assessing the The use of
external managerial and
environment and organizational
internal problems tools to direct
to create goals resources
and strategy toward
accomplishing
strategic results
15
 SWOT Analysis

• Formulating strategy often begins with an

audit of internal and external factors
– Internal Strengths and Weaknesses
– External Opportunities and Threats

• Information is acquired from reports,

surveys, discussions, and meetings

16
• Situation analysis typically includes a search for SWOT—strengths,
weaknesses, opportunities, and threats—that affect organizational
performance.
• External information about opportunities is obtained from
customers, government reports, professional journals, suppliers,
bankers, friends, and consultants. Internal information comes from
reports, budgets, financial ratios, surveys of employee attitudes,
and meetings.
Internal Strengths and Weaknesses
•  Strengths are positive internal characteristics
organizations can exploit to achieve strategic
performance goals.
Weaknesses are internal characteristics that may
inhibit or restrict the organization’s performance.  
17
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
 – External Opportunities and Threats
• Opportunities are characteristics of the external
environment that have the potential to help the
organization achieve or exceed its strategic goals.
• Threats are characteristics of the external
environment that may prevent the organization
from achieving its strategic goals.
• The task environment sectors are the most
relevant to strategic behavior and include the
behavior of customers, competitors, suppliers, and
the labor supply. The general environment
includes technological developments, the
economy, legal-political and international events,
and sociocultural changes. 18
Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.
SWOT: Audit Checklist

19
 Strategic Business Unit (SBU)

 SBU – an autonomous‫ مستقل‬organization within a

firm:
 Budgeting authority

 Personnel authority

 Examples of SBU:
 ABC Television – one of four SBUs in Disney

 Division in Army – the division commander (two star

general)
20
 Formulating Corporate-Level Strategy:
Portfolio Strategy

 Strategic Business Units (SBUs) have a unique

mission, products, and competitors
 Companies manage the mix (portfolio) of SBUs
for synergy and competitive advantage
 Organizations should not become too dependent
on one business

21
 Agency Theory, Agency Cost

• The manager is supposed to work for the best

interest of the shareholders, that is, to maximize
shareholders’ wealth – increase the stock price, by
boosting the profit, increasing revenue and/or
decreasing cost.
• In reality, a manager works for his own best interest,
not for the shareholders.
• When this problem occurs, we call it “agency cost
(problem) .”

22
 M & A, Corporate Strategy, Agency Cost
• Merge & Acquisition is an example of corporate
strategy.
• Like any other strategy, M & A should focus on
synergy, efficiency, shareholders’ wealth
maximization.
• However, some M & As create Agency Cost.
• Cases in Point (Real World Applications):
• M & A b/w HP & Compaq

23
 Agency Cost, Stock Option
• How do shareholders know whether the
manager (CEO)’s corporate strategy works or
not?
o If the stock price does not go up after the M & A
announcement, the strategy is not working.
• Managing (Controlling) a manager: Shareholders
can use a carrot-and-stick approach to control
the manager.
o Carrot  Stock Option: A widely used carrot to
motivate the manager to work hard for the best
interest of shareholders.
o Stick  Termination
24
 Formulating Corporate-Level Strategy: The
BCG Matrix

• Organizes business along two dimensions

– Business growth rate
– Market share

• Four categories for corporate portfolio

– The combination of high/low market share
and high/low business growth

25
The BCG Matrix

26
 Formulating Corporate-Level Strategy:
Diversification Strategy

• Moving into new lines of business

– Expand into new valuable products and services
• Why does a firm attempt to diversify its business?
– Manage/control/minimize the risk

27
 Unrelated Diversification Strategy – Corporate
Strategy

• Expansion into new lines of business

• Can be a difficult strategy
• Many companies are giving up on unrelated
diversification
• Unattractive to investors; hard to value the firm
– Hard to measure the profit, cost of capital
– Hard to measure the firm value
– Hard to measure the firm’s stock price
• Hypothetical Example: GM enters a clothing business.

28
 Vertical integration (VI) – Corporate Strategy

• Vertical integration expands into businesses that

supply to the business or are distributors
• Benefits of VI: Securing supply & distribution
chains  cost savings  efficiency
• Limitations of VI: Less competition  less
productive  inefficiency [Soviet Economic Model]
• Hypothetical Examples:
– Starbucks in VI

29
 Formulating Business-Level Strategy

 Strategy within the business units (SBU): How do

we compete?
 Business-level strategies are developed by
Porter’s Five Forces
 Web technology is impacting all industries in
positive and negative ways

30
Porter’s Five Competitive Force Model

31
Porter’s Competitive Strategies

32
Formulating Functional-Level Strategy

Action plans used by major departments

 Marketing
 Production
 Finance
 Human Resources
 Research and Development

33
 New Trends in Strategy

• Strategic Flexibility – managers must be

prepared to change and adjust strategy
quickly
• Strategic Partnerships – collaboration with
other organizations is important
• Global Strategy – organizations pursue a
distinctive focus for global business
34
 Strategy Execution - The final step!
• “Strategy is easy, but execution is hard”
– Most important but most difficult part

• Strategy must be skillfully executed

• Alignment requires all aspects of the organization to focus
on strategy goals
– Everyone is moving in the same direction

• S.E. needs more dynamic approaches

• S. E. requires vision, intuition and employee participation
• S. E. is done through changes in leadership, org. structure,
information and control systems, and human resources. 35
Six Silent Killers of Strategy

36
Tools for Putting Strategy into Action

37