Chapter 5

Strategic Processes
 Nature of Strategy
 Defines the long-term plans, policies and
culture of an organization
 Strategic planning is a dynamic process that
requires inputs from all segments of the
organization
 Acquisition and restructuring policies and
decisions should be part of the company's
overall strategic plans and processes
 Ultimate responsibility for strategic planning
resides in the top executive group

Chapter 5-2
Successful Strategies
Low cost airfare
No meals, quick turnaround…
Made-to-order computers
Supplier system, online ordering…
Online retailing
Low inventory, no retail facilities…
High quality coffee experience
Many products, good locations…
Rural area department stores
Low prices, inventory controls…
Chapter 5-3
Importance of Economic Environment
 Business cycle not dead – stock prices
and merger activity overshoot on both
the up and downside
 Investment accelerator principle
• Small changes in consumer spending can
cause large changes in investment levels
• Example: Cisco’s rise and fall
 Sales-to-capacity relationships
• Investment may be excessive in relation
to sales
• Example: Telecom industry
Chapter 5-4
 Strategic Planning Processes
 Essential elements in strategic planning
• Assessment of changes in the environments
• Evaluation of company capabilities and
limitations
• Assessment of expectations of stakeholders
• Analysis of company, competitors, industry,
domestic economy and international economies
• Formulation of the missions, goals and policies
for the master strategy
• Development of sensitivity to critical
environmental changes

Chapter 5-5
 Strategic Planning Processes
 Essential elements in strategic planning
• Formulation of organization performance
measurements and benchmarks
• Formulation of long-range strategy programs
• Formulation of mid-range programs and short-
run plans
• Organization, funding and other methods to
implement all of the preceding elements
• Information flow and feedback system for
continued repetition of above activities and for
adjustments and changes at each stage
• Review and evaluation of above processes
Chapter 5-6
 Strategic Planning Processes
 Monitoring environments
• Should encompass both domestic and
international dimensions
• Include analysis of economic, social,
technological, political, and legal factors
 Strategy also deals with stakeholders – groups
with interests in the firm and its actions
 Organization cultures
• Firm cultures affect strategic thought and plans
• Failure to combine cultures is a key obstacle to
merger integration

Chapter 5-7
Alternative Strategy Methodologies
 SWOT or WOTS UP – inventory and analysis
of organizational strengths, weaknesses,
environmental opportunities and threats
 Gap analysis – assessment of goals versus
forecasts or projections
 Top-down or Bottom-up – relate to company
forecasts vs. aggregation segment forecasts
 Computer models – allow detail and complexity
 Logical incrementalism – well-supported moves
from current bases
 Comparative histories – learn from the
experiences of others
Chapter 5-8
Alternative Strategy Methodologies
 Competitive analysis – assess customers,
suppliers, new entrants, products, etc.
 Muddling through – incremental changes
selected from ongoing policy alternatives
 Delphi technique – iterated opinion reactions
from selected groups
 Discussion group technique – stimulating ideas
by discussions aimed at consensus decisions
 Synergy – look for complementarities
 Adaptive processes – periodic reassessment of
environmental opportunities and organization
capability adjustments required
Chapter 5-9
Alternative Strategy Methodologies
 Environmental scanning – continuous analysis
of all relevant environments
 Intuition – insights of brilliant managers
 Entrepreneurship – creative leadership
 Discontinuities – crafting strategy from
recognition of trend shifts
 Brainstorming – free-form repeated exchange
of ideas
 Game theory – logical analysis of competitor
actions and reactions
 Game playing – assign roles and simulate
alternative scenarios
Chapter 5-10
Alternative Analytical Frameworks
 Product life cycle – introduction, growth,
maturity, decline stages with changing
opportunities, threats
 Learning curve – costs decline with cumulative
volume experience (first mover advantage)
 Competitive analysis – industry, suppliers,
customers, complemetors, etc.
 Value chain analysis – seek to add product
characteristics valued by customers
 Niche opportunities – specialize in particular
needs or interests of customer groups
 Cost leadership – low-cost advantages
Chapter 5-11
Alternative Analytical Frameworks
 Product differentiation – develop products that
achieve customer preference
 Product breadth – carryover of organizational
capabilities
 Correlations with profitability – statistical
studies of factors associated with profitability
 Market share – high market share associated
with competitive superiority
 Product quality – customer allegiance and price
differentials for higher quality
 Technological leader – keep at knowledge
frontiers
Chapter 5-12
Alternative Analytical Frameworks
 Resource-based view – capabilities are
inimitable
 Relatedness matrix – unfamiliar markets and
products involve greatest risk
 Focus matrix – narrow versus broad product
families
 Growth/share matrix – aim for high market
share in high growth markets
 Attractiveness matrix – aim to be strong in
attractive industries
 Global matrix – aim for competitive strength in
attractive countries
Chapter 5-13
Alternative Analytical Frameworks
• Product-market matrix
Product
Present Related Unrelated
Market

Low High
Present
Risk Risk

Related

High Highest
Unrelated
Risk Risk

• Competitive-position matrix
Product Cost
Differentiation Leadership

Narrow
Focus

Broad Range
of Markets

Chapter 5-14
Alternative Analytical Frameworks
• Growth-share matrix
Market Share

High Low

Market Growth Rate

Star
Question

High
Product
Marks
Performers

Cash

Low
Dogs
Cows

• Strength-market attractiveness matrix

Industry Attractiveness
High Medium Low

Invest /
High

Grow
Business Strengths

Medium

Harvest /
Low

Divest
Chapter 5-15
Alternative Analytical Frameworks
• Global strategy
Country Attractiveness
High Medium Low

Invest /

High
Grow
Business Strengths

Medium

Harvest /
Low

Divest

Chapter 5-16
Strategy Formulation Approaches
 Boston Consulting Group Approach
• Historical emphasis: experience curve, product
life cycle, product portfolio balance
• Recent approaches
– Impact of the Internet and other innovations
– Performance measurements - cash flow
return on investment (CFROI)
 Michael Porter Approach (1980, 1985, 1987)
• Select attractive industry using “Five Forces”
• Develop competitive advantage through cost
leadership, product differentiation, or focus
• Develop attractive value chains
Chapter 5-17
Evaluation of Strategic Approaches
 Strategy decisions are usually ill-structured
problems
 In practice, all approaches are eclectic
 Computers allow approaches to become more
closely tied
 Results of strategy viewed differently:
• Firms can develop and implement strategic
planning to obtain competitive advantage
• Adaptive process approach — competitive
advantage not permanent; planning as a
continual learning and adjustment process

Chapter 5-18
Evaluation of Strategic Approaches
 Steps taken in checklists and iterations:
• State objectives
• Define environment
• Analyze strengths/weaknesses relative to
environment
• Assess potential in environment
• Compare potential to objectives
• If gap, search for alternative ways to close gap
• Select alternatives for analysis
• Cost/benefit analysis of alternatives
• Tentative selection — formulate plans and
actions
Chapter 5-19
Evaluation of Strategic Approaches
 Steps taken in checklists and iterations:
• Repeat process from several viewpoints
(research, production, marketing, financial,
etc.) and all over system standpoint
• Commit resources to implement plan
• Competitive reactions
• Follow-up to compare performance to plan
• Repeat comparison of objectives and potential
• Goal is effective alignment to changing
environments

Chapter 5-20
 Formulating a Merger Strategy
 Requires continuing reassessment
• Industry analysis
• Competitor analysis
• Supplier analysis
• Customer analysis
• Substitute products
• Complementors
• Technology changes
• Societal factors
• Firm's strengths/weaknesses relative to
present/future industry conditions

Chapter 5-21
 Formulating a Merger Strategy
 Goal/capability analysis
• Are current goals, policies appropriate?
• Do goals, policies match resources?
• Does timing of goals/policies reflect ability
of firm to change?
 Work out strategic alternatives
• May not include current strategy
• Choose best
• Mergers represent one set of alternatives
Chapter 5-22
 Formulating a Merger Strategy
 Grove (1996)
• Firm must adjust to six forces
– Existing competitors
– Potential competitors
– Complementors
– Customers
– Suppliers
– Industry transformation
• Eclectic adaptive processes approach to
strategy
Chapter 5-23
 Formulating a Merger Strategy
 Business goals - general or specific, but must be
quantifiable to facilitate progress assessment
• Size objectives
– Large enough to use fixed factors effectively
– Critical mass necessary to attain cost levels for
profitable operation at market prices
• Growth objectives - sales, assets, EPS, values
– To get favorable P/E multiple for shares
– To increase market to book value of shares

Chapter 5-24
 Formulating a Merger Strategy
 Business goals
• Stability objectives - two kinds of instability
– Large erratic fluctuations in total size and
abrupt program shifts (e.g., defense industry)
– Cyclical instability of durable goods industries
• Flexibility objectives - ability to operate in variety
of product markets and responsive to consumers
– Breadth of capabilities, e.g., research,
manufacturing, marketing
– Technological breadth
– Stay close to customers
Chapter 5-25
 Formulating a Merger Strategy
 Aligning firm to changing environments
• Gap between objectives and potential based
on current capabilities
• Various approaches:
– Choose products related to needs of
customer that provide large markets
– Focus on technological bottlenecks
– Be at frontier of technology and aim for
attractive product fallout
– Emphasize economic criteria – ex. value
Chapter 5-26
 Formulating a Merger Strategy
 Strategic planning and mergers
• Diversification strategy may be necessary if
firm must alter product-market mix or
capabilities to reduce or close strategic gap
• Both involve evaluation of current
capabilities relative to those needed to reach
objectives
• Related diversification involves lower risks

Chapter 5-27
 Strategy and Structure
President
 Unitary or U-Form

V.P. V.P. V.P. V.P.

Research Production Marketing Finance

• Highly centralized under the president

• Broken into functional departments - no
departments can stand alone
• No easy way to measure each department as a
profit center
• Allows rapid decision-making
• Only successful in small organizations
• Difficult to handle multiple products
Chapter 5-28
 Strategy and Structure
 Holding company or H-Form
President
Accounting and Finance

Autos Movies Toys Food

• Arranged around various unrelated operating

businesses
• Leadership can evaluate each unit individually
• Resources can be allocated according to
projected returns
Chapter 5-29
 Strategy and Structure
 Multidivisional organization (M-form)
President

Division 1 Division 2 Division 3 ...Division 10

Production Marketing

• Each division is autonomous enough to be judged

a profit center
• Divisions share some general staff assistance
• Can handle related product and geographic
market extensions
Chapter 5-30
 Strategy and Structure
President
 Matrix form

Product A Product B Product C

Research
Manager
Production
Manager
Marketing
Manager
• Managers of functional departments such as finance,
manufacturing and development
• Employees are assigned to subunits organized around
products, geography, or other criteria
• Effective in firms characterized by many new
products or projects
Chapter 5-31
Structure and Acquisition Strategy
Structure Strategy
U-Form Target likely fully consolidated
Usually closely related activities
H-Form Easier to acquire unrelated firms
Operations may remain somewhat
independent
M-Form Target may become separate division
served by existing functional groups
Matrix Best for geographic expansion of
related products
Chapter 5-32
 Strategy and Structure
 Virtual integration (Dell Computers)
• Links of value chain brought together by
informal arrangements among suppliers and
customers
– Effective customer ordering and services
– Arrangement of supply shipments and
customer needs facilitated by efficient
computer systems
• Represents a blurring of company boundaries
• Strengthen communication ties between
different firms in value chain creates a "form of
organization"
Chapter 5-33