CHAPTER 6 Strategy Formulation: Situation Analysis & Business Strategy STRATEGIC MANAGEMENT & BUSINESS POLICY 11TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER Prentice Hall, Inc. © 2006 Prentice Hall 2006

Strategy formulation -- Situational Analysis Strategy formulation -- Strategic planning or long-range planning (Develops mission, objectives, strategies, policies) Or process of finding a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses Prentice Hall, Inc. © 2006 Prentice Hall 2006

SWOT Criticism Generates lengthy lists No weighted priorities Situational Analysis SWOT Criticism Generates lengthy lists No weighted priorities Ambiguous wording Same factor can be in two categories No supporting data Single level analysis No link to strategy implementation Prentice Hall, Inc. © 2006

IFAS – Maytag as Example Prentice Hall, Inc. © 2006 Prentice Hall 2006

EFAS – Maytag as Example Prentice Hall, Inc. © 2006 Prentice Hall 2006

SFAS Matrix Prentice Hall, Inc. © 2006 Prentice Hall 2006

Niche – Corporate Goal – Situational Analysis Niche – Need in the marketplace that is currently unsatisfied Corporate Goal – Find propitious niche – market segment big enough for only one company Strategic window – opportunity available for a limited time Prentice Hall, Inc. © 2006 Prentice Hall 2006

TOWS Matrix Prentice Hall, Inc. © 2006 Prentice Hall 2006

Business Strategy Business Strategy Focuses on improving competitive position of company’s products or services within the specific industry or market segment Prentice Hall, Inc. © 2006 Prentice Hall 2006

Competitive Strategy – Porter’s Competitive Strategies Competitive Strategy – Lower Cost strategy Greater efficiencies than competitors Differentiation strategy Unique/superior value, quality, features, service Competitive Scope - Direct competition Focus on niche Prentice Hall, Inc. © 2006 Prentice Hall 2006

Porter’s Competitive Strategies Prentice Hall, Inc. © 2006 Prentice Hall 2006

Cost Leadership – Low-cost competitive strategy Broad mass market Porter’s Competitive Strategies Cost Leadership – Low-cost competitive strategy Broad mass market Efficient-scale facilities Cost reductions Cost minimization Potential Outcome Barriers to entry Higher ROI Prentice Hall, Inc. © 2006 Prentice Hall 2006

Differentiation – Broad mass market Unique product/service Porter’s Competitive Strategies Differentiation – Broad mass market Unique product/service Premiums charged Less price sensitivity Potential Outcome Increase Market Share Higher Profit Brand as barrier to entry Prentice Hall, Inc. © 2006 Prentice Hall 2006

Cost-Focus – Low-cost competitive strategy Porter’s Competitive Strategies Cost-Focus – Low-cost competitive strategy Focus on market segment/Niche Geographic Buyer Group Cost advantage in market segment Prentice Hall, Inc. © 2006 Prentice Hall 2006

Differentiation Focus – Porter’s Competitive Strategies Differentiation Focus – Specific group or geographic market focus Differentiation in target market Special needs of narrow target market Prentice Hall, Inc. © 2006 Prentice Hall 2006

Stuck in the middle – No competitive advantage Porter’s Competitive Strategies Stuck in the middle – No competitive advantage Below-average performance Prentice Hall, Inc. © 2006 Prentice Hall 2006

Risks of Generic Strategies Risks of Cost Leadership Cost leadership is not sustained: • Competitors imitate. • Technology changes. • Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Differentiation Differentiation is not sustained: • Competitors imitate. • Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • The advantages of a broad line increase. New focusers subsegment the industry. Risks of Cost Leadership Cost leadership is not sustained: • Competitors imitate. • Technology changes. • Other bases for cost leadership erode. Proximity in differentiation is lost. Cost focusers achieve even lower cost in segments. Risks of Differentiation Differentiation is not sustained: • Competitors imitate. • Bases for differentiation become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater differentiation in segments. Risks of Focus The focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • The advantages of a broad line increase. New focusers sub-segment the industry. Prentice Hall, Inc. © 2006 Prentice Hall 2006

Broad versus Focused Strategies Risks of Generic Strategies Broad versus Focused Strategies “Although there is generally room for only one company to successfully pursue the mass-market cost leadership strategy (requires dominant market share), there is room for an almost unlimited number of differentiation and focus strategies (depending on the range of possible features and market niches).” Prentice Hall, Inc. © 2006

8 Dimensions of Quality Prentice Hall, Inc. © 2006 Prentice Hall 2006

Industry Structure – Fragmented Industry Focus Consolidated Industry Competitive Strategy Industry Structure – Fragmented Industry Focus Consolidated Industry Cost/Differentiation through service Move toward commoditization Prentice Hall, Inc. © 2006 Prentice Hall 2006

Strategic Rollup (industry consolidation) Competitive Strategy Strategic Rollup (industry consolidation) Involve larger numbers of firms Acquired firms are typically owner operated Objective is not to gain incremental advantage but to reinvent an entire industry Prentice Hall, Inc. © 2006

Competitive Tactics Tactics A specific operating plan that details how a strategy is to be implemented in terms of when and where it is to be put into action. (Narrower in scope and shorter time horizons than strategies) Prentice Hall, Inc. © 2006

Timing Tactics – First mover advantages Late movers advantages Competitive Tactics Timing Tactics – First mover advantages Reputation for industry leadership Cost leadership as product matures Temporary high profits 10 years for CPG 12 years for Industrial Late movers advantages Imitate technology advances Lower R&D costs Lower risk Market segmentation opportunities Prentice Hall, Inc. © 2006 Prentice Hall 2006

Market Location Tactics -- Offensive Competitive Tactics Market Location Tactics -- Offensive Frontal Assault – match the competition Flanking Maneuver - segmentation Bypass Attack – change the rules Encirclement - variety Guerrilla Warfare – many small initiatives on small market segments Prentice Hall, Inc. © 2006 Prentice Hall 2006

Market Location Tactics -- Defensive Competitive Tactics Market Location Tactics -- Defensive Raise structural barriers Increase expected retaliation Lower the inducement for attack Prentice Hall, Inc. © 2006 Prentice Hall 2006

Cooperative Strategies Collusion active cooperation of firms within an industry to reduce output and raise prices to get around the economic laws of supply and demand Implicit or explicit Generally illegal Prentice Hall, Inc. © 2006 Prentice Hall 2006

Strategic Alliances (Why?) Cooperative Strategies Strategic Alliances (Why?) To obtain technology and/or manufacturing capability To obtain access to specific markets To reduce financial risks To reduce political risk To learn new capabilities Prentice Hall, Inc. © 2006

Mutual service consortia Joint ventures Cooperative Strategies Mutual service consortia Pooled services within an industry Joint ventures Creates an independent entity, allocates ownership, financial risk and reward (temporary with high failure rates) Licensing arrangements Rights are granted to a firm in another country to produce or sell products Value-chain partnerships Alliances among companies and their suppliers and/or distributors Prentice Hall, Inc. © 2006

Licensing Arrangement Cooperative Strategies Continuum of Strategic Alliances Mutual Service Consortium Joint Venture Licensing Arrangement Value Chain Partnerships Weak and Distant Strong and Close Prentice Hall, Inc. © 2006

CHAPTER 6 Strategy Formulation: Situation Analysis & Business Strategy STRATEGIC MANAGEMENT & BUSINESS POLICY 11TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER Prentice Hall, Inc. © 2006 Prentice Hall 2006