Planning, Strategy and Competitive Advantage Lecture 5 Planning, Strategy and Competitive Advantage

Planning and Strategy Planning Strategy Identifying and selecting appropriate goals and courses of action for an organization Strategy A cluster of decisions about what goals to pursue, what actions to take, and how to use resources to achieve goals

Three Steps in Planning

Why Planning is Important Planning is necessary to give the organization a sense of direction and purpose. Planning is a useful way of getting managers to participate in decision making about the appropriate goals and strategies for an organization.

Why Planning is Important A plan helps coordinate managers of the different functions and divisions of an organization to ensure that they all pull in the same direction and work to achieve its desired future state. A plan can be used as a device for controlling managers within an organization.

Levels of Planning at General Electric

Levels and Types of Planning Corporate-Level Plan Top management’s decisions pertaining to the organization’s mission, overall strategy, and structure. Corporate-Level Strategy A plan that indicates in which industries and national markets an organization intends to compete.

Levels of Planning and Strategy Business-Level Plan Divisional managers’ decisions pertaining to divisions long-term goals overall strategy, and structure Business-Level Strategy outlines the specific methods a division, business unit, or organization will use to compete effectively against its rivals in an industry

Levels and Types of Planning Functional-Level Plan Functional managers’ decisions pertaining to the goals that they propose to pursue to help the division attain its business-level goals Functional-Level Strategy A plan of action to improve the ability of each of an organization’s functions to perform its task-specific activities in ways that add value to an organization’s goods and services.

Types of Plans Standing Plans Single-Use Plans Use in programmed decision situations Policies: general guides to action Rules: formal written specific guides to action Standard operating procedures (SOP): specify an exact series of actions to follow Single-Use Plans Developed for a one-time, non-programmed issue Programs, budget

Standing versus Single-Use Plans

Determining the Organization’s Mission and Goals Defining the Business Who are our customers? What customer needs are being satisfied? How are we satisfying customer needs?

Determining the Organization’s Mission and Goals Establishing Major Goals Provides the organization with a sense of direction Stretches the organization to higher levels of performance Goals must be challenging but realistic with a definite period in which they are to be achieved Strategic leadership the ability of the CEO and top managers to convey a compelling vision of what they want the organization to achieve to their subordinates

Planning and Strategy Mission Statement A broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors

Planning and Strategy Formulation

Formulating Strategy SWOT Analysis A planning exercise in which managers identify internal organizational strengths and weaknesses, and external opportunities and threats organizational strengths and weaknesses. Strengths (e.g., superior marketing skills) Weaknesses (e.g., outdated production facilities) external opportunities and threats. Opportunities (e.g., entry into new related markets). Threats (increased competition)

SWOT Analysis for Starbucks Coffee

Industry and Competitive Situation Analysis Draws out those features in a company’s environment that most directly frame its strategic window of options and opportunities. Five Competitive Forces (Porter) Rivalry among competing sellers in the industry Threat of substitute products and services Potential new entrants Power of suppliers Power of buyers

The Five Forces

Starbuck’s Five-Force Competitive Analysis

Five-Force Competitive Analysis The bargaining power of customers buyer concentration to firm concentration ratio bargaining leverage buyer volume Buyer switching costs relative to firm switching costs buyer information availability ability to backward integration availability of existing substitute products buyer price sensitivity price of total purchase The bargaining power of suppliers supplier switching costs relative to firm switching costs degree of differentiation of inputs presence of substitute inputs supplier concentration to firm concentration ratio threat of forward integration by suppliers relative to the threat of backward integration by firms cost of inputs relative to selling price of the product importance of volume to supplier The threat of substitute products buyer propensity to substitute relative price performance of substitutes buyer switching costs perceived level of product differentiation The threat of new entrants the existence of barriers to entry Economies of product differences Brand equity switching costs capital requirements access to distribution absolute cost advantages learning curve advantages expected retaliation government policies The intensity of competitive rivalry number of competitors rate of industry growth intermittent industry overcapacity exit barriers diversity of competitors informational complexity & asymmetry brand equity fixed cost allocation per value added level of advertising expense

Business-Level Strategies Low-cost Strategy (Cost Leadership Strategy) The firm with the lowest total overall costs has a competitive advantage in price-sensitive markets. Driving the organization’s total costs down below the total costs of rivals Differentiation Distinguishing an organization’s products from the products of competitors on dimensions such as product design, quality or after-sales service Competing on the basis of features that distinguish one firm’s products or services from those of another.

Business-Level Strategies Focus Strategy: Concentrating competitive efforts on a particular market segment, product line, or buyer group. 1.Focused Low-cost Strategy Serving only one segment of the overall market and trying to be the lowest-cost organization serving that segment 2. Focused Differentiation Strategy Serving only one segment of the overall market and trying to be the most differentiated organization serving that segment

Corporate-Level Strategies Growth Strategies Concentration Vertical Integration: Backward / forward integration Related and Unrelated diversification 1. Concentration on a Single Industry reinvesting a company’s profits to strengthen its competitive position in its current industry

Corporate-Level Strategies 2.Vertical Integration (backward/forward ) expanding a company’s operations either backward into an industry that produces inputs for its products or forward into an industry that uses, distributes or sells its products.

Corporate-Level Strategies 3. Diversification expanding a company’s business operations into a new industry in order to produce new kinds of valuable goods or services Related Diversification entering a new business or industry to create a competitive advantage in one or more of an organization’s existing divisions or businesses Unrelated diversification entering a new industry or buying a company in a new industry that is not related in any way to an organization’s current businesses or industries

Formulating Corporate-Level Strategies International Expansion Basic question: To what extent do we customize products and marketing for different national conditions? Global strategy Selling the same standardized product and using the same basic marketing approach in each national market Standardization provides for lower production cost. Ignores national differences that local competitors can address to their advantage.

Four Ways of Expanding Internationally

International Expansion Exporting making products at home and selling them abroad Importing selling at home products that are made abroad

International Expansion Licensing allowing a foreign organization to take charge of manufacturing and distributing a product in its country in return for a negotiated fee Franchising selling to a foreign organization the rights to use a brand name and operating know-how in return for a lump-sum payment and a share of the profits

International Expansion Joint venture strategic alliance among companies that agree to jointly establish and share the ownership of a new business Wholly Owned Foreign Subsidiary managers invest in establishing production operations in a foreign country independent of any local direct involvement