Strategy Formulation – Business Strategy Lecture 3 Strategy Formulation – Business Strategy

Outcome of strategic analysis The goal is to find a propitious niche that is so well suited to the firm’s internal and external environment that other corporations are not likely to challenge or dislodge it. Look for a strategic window – a unique market opportunity that is available only for a particular time. Occupy a propitious niche and discourage competition. Identify a market opportunity in which the firm can obtain and keep dominant market share. Niche can change faster than a firm can adapt to that change – thus the firm need to invest heavily in their capabilities to keep strong in a changing niche.

Propitious niche can disappear because of The environment/industry changes The market gets smaller because of factors beyond the control of the company/SBU. The company/SBU, through its own efforts, not only fills a demand but actually causes the market to expand. The company/SBU changes Due to demands for resources elsewhere in the corporation, the company/SBU may be forced to cut back its activities. Its own success in the niche may cause the company/SBU to move into nearby niches.

Mission and Objectives Focus on fulfilling a mission rather than on generating action possibilities Mission should be a common thread Gap between planned and achieved objectives Review of objectives

Generating alternative strategies Using TOWS matrix to generate alternative strategies Strengths – S List Strengths Weaknesses – W List Weaknesses Opportunities – O List 5-10 Opportunities SO Strategies Use strengths to take advantage of opportunities WO Strategies Overcoming weaknesses by taking advantage of opportunities Threats – T List 5-10 Threats ST Strategies Use strengths to avoid threats WT Strategies Minimize weaknesses and avoid threats

Porters Generic Strategies

Porters Generic Strategies Competitive Strategy Required Skills & Resources Organizational Elements Associated Risks Overall Cost Leadership Sustained capital investment and access to capital Tight cost control Technological change that nullifies past investments or learning Process engineering skills Frequent, detailed reports Low-cost learning by industry newcomers or followers through imitation, or through their ability to invest in state-of-the-art facilities   Intensive supervision of labor Structured organization and responsibilities Inability to see required product or marketing change because of the attention placed on cost Products designed for ease of manufacture Incentives based on meeting strict quantitative targets Inflation in costs that narrow the firm’s ability to maintain enough of a price differential to offset competitors’ brand images or other approaches to differentiation Low-cost distribution system

Strategic Business Planning for Commercial Producers Identifying Strategies Value Chain for a Low Cost Strategy Firm Infrastructure – cost-effective management information systems (MIS), few managerial layers, simplified planning practices. Human Resources: consistent policies to reduce turnover, intense focus on training employees to be efficient and multi-skilled. Technology: Easy-to-use production technologies, investment in technology that improves production efficiencies. Procurement: procedures to find the lowest cost inputs, frequent evaluation of suppliers’ performances. Inbound Logistics Efficient systems to link supplier products with production processes. Operations Use of Economies of scale. Construction of efficient scale facilities. Outbound Delivery schedule that reduces costs. Selection of low-cost carriers. Marketing & Sales Small, highly trained sales force. Products priced to generate sales volume. Service Efficient quality control to reduce buyer complaints. MARGIN © Purdue University, Center for Food and Agricultural Business, 2002

Porters Generic Strategies Competitive Strategy Required Skills & Resources Organizational Elements Associated Risks Differentiation Strong marketing abilities Strong coordination among functions in R&D, product development, and marketing The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings.   Product engineering Subjective measurement and incentives instead of quantitative measures Buyers’ need for the differentiating factor falls. This can occur as buyers become more sophisticated. Creative flair Amenities to attract highly skilled labor, scientists, or creative people Imitation narrows perceived differentiation, a common occurrence as industries mature. Strong capability in basic research Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels

Strategic Business Planning for Commercial Producers Identifying Strategies Value Chain for a Differentiation Strategy Firm Infrastructure – Highly developed MIS to capture customer preferences, firm-wide focus on high-quality products. Human Resources: Compensation encourages creativity, subjective performance measures, superior training. Technology: strong capability in basic research, investment in technologies that allow for production of highly differentiated products. Procurement: procedures to find the highest quality inputs, purchase of highest quality replacement parts, strict standards for suppliers. Inbound Logistics Superior handling to minimize damage and improve quality. Operations Consistent production of attractive products. Rapid response to customers’ production demands. Outbound Accurate and responsive order processing. Rapid and timely deliveries. Marketing & Sales Extensive granting of credit buying. Extensive personal relationships with buyers. Service Extensive buyer training to assure max. value from Product. MARGIN Value Chain – A framework that firms can use to identify and evaluate the ways in which their resources and capabilities can add value. The value of the analysis lies in being able to break the organization's operations or activities into primary (such as operations, marketing & sales, and service) and support ( staff activities including human resources management & procurement) activities. Analyzing the firm's value-chain helps to assess your organization and what you perceive your competitor’s value-chain to be will uncover ways to cut costs, and find ways add value that will provide a competitive advantage. Here we have a value chain for a low cost strategy that identifies some activities that are used to keep costs low. © Purdue University, Center for Food and Agricultural Business, 2002

Porters Generic Strategies Competitive Strategy Required Skills & Resources Organizational Elements Associated Risks Focus Combination of the above policies directed at the particular strategic target The cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus. The differences in desired products or services between the strategic target and the market as a whole narrows. Competitors find submarkets within the strategic target and outfocus the focuser.

Generic Strategies & 5 Forces Strategic rollup: a way to organize a fragmented industry

Which competitive strategy is best? Competitive Tactics: a tactic is a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action Timing Tactics (when) Market Location Tactics (where) Timing Tactics First Mover Late Mover

Which competitive strategy is best? Market Location Tactics Offensive Tactics Frontal Assault: generally expensive Flanking Maneuver: focus on an unguarded niche Bypass Attack: change the rules of the game Encirclement: use a broad product line to annihilate competition Guerrilla Warfare: patient enough to accept small gains and avoid pushing established competitors too far Defensive Tactics Raise structural barriers Increase expected retaliation Lower the inducement of attack

Which competitive strategy is best? Market Location Tactics Offensive Tactics: established competitors marketplace Frontal Assault: generally expensive Flanking Maneuver: focus on an unguarded niche Bypass Attack: change the rules of the game Encirclement: use a broad product line to annihilate competition Guerrilla Warfare: patient enough to accept small gains and avoid pushing established competitors too far Defensive Tactics: make competitive advantage sustainable, takes place in own market Raise structural barriers: offer full line off products, block channel access, raise buyer switching costs, raise the cost of gaining trial users, increase scale economies, foreclosure alternative technologies, limit outside access to facilities, tie-up suppliers, avoid suppliers serving competitors, Increase expected retaliation Lower the inducement of attack

Cooperative strategies Collusion Explicit mostly illegal Tacit favored in certain types of industries Strategic Alliances: 30% to 50% alliances perform unsatisfactorily Objectives: obtain technology/manufacturing capabilities, obtain access to specific markets, reduce financial risk, reduce political risk, achieve competitive advantage Types of alliances: Mutual Service Consortia Joint Venture Licensing Arrangement Value chain partnership

Strategic Postures Offensive Defensive 1. Concentration Growth 1. .Retrenchment/Turnaround A. Market Penetration A. Shallow B. Market Development B. Deep C. Product Development C. Bankruptcy D. Horizontal Merger 2. Divestiture E. Niching A. Sell-off 1. Low-cost Leadership("Functional Rationalization") B. Spin-off 2. Cost Focus C. Split-off 3. Differentiation 3. Liquidation 4. Focused Differentiation A. Voluntary Closure 2. Integrative Growth B. Assignment A. Backward B. Forward 4. Harvesting 3. Diversification Growth   A. Concentric B. Conglomerate 4. Joint Ventures