BA460-Week #2: Strategic Planning

“If you don’t know where you are going any route will get you there.” Chris Bartlett, Harvard Business School

Strategic Thinking : The Big-3 Questions: 1.Where do we want to go? – What business(es) should be in – Market positions to stake out? – Consumer needs & segments serve? – Outcomes to achieve? 2.Where are we now? 3.How do we get there?

Consumers Company Competitors Conditions You have begun … Situation & SWOT Analysis External Opportunities & Threats Internal Strengths & Weaknesses

You are finding answers re:  How the market is segmented & the relevant criteria that influence consumers use in their purchasing decisions  The nature & magnitude of the competition  Existing & emerging Economic & Technological trends that will impact demand, pricing, product design & positioning Consumers Competitors Conditions

After- SWOT analysis of the situation… the next & most critical step in strategy development…oddly enough is –thinking– Specifically-thinking about the way things have been & are now… AND- the way things could/should be After- SWOT analysis of the situation… the next & most critical step in strategy development…oddly enough is –thinking– Specifically-thinking about the way things have been & are now… AND- the way things could/should be

Need to start thinking abt: Where you want to go? * Your Mission & Vision We will produce outstanding financial returns by providing totally reliable, competitively superior, global, air- ground transportation of high-priority goods and documents that require rapid, time- certain delivery."

M ission or Purpose is a precise description of what an organization does. It should describe the business the organization is in. It is a definition of “why” the organization exists A vision is a statement about what your organization wants to become … A compelling description of the state and function of the organization once it has implemented and achieved the strategic plan… A vision is a statement about what your organization wants to become … A compelling description of the state and function of the organization once it has implemented and achieved the strategic plan…

>Strategy & Vision StatementsStrategy & Vision Statements >Strategy & Vision StatementsStrategy & Vision Statements Valuable Strategies & Mission Statements

Then decide-- How you will get there? *Growth, Competitive & Functional Strategies

3 Levels of Strategy In what business do we compete? Corporate-Level : In what business do we compete? Corporation How do we compete? Business-Level : How do we compete? Sensors Unit Nano-Tech Unit Cons.Elec. Unit How do we coordinate? Functional-Level : How do we coordinate? Finance HR / R&D ProductionMarketing

Business Unit Competitive Strategy Corporate Growth Strategy Corporate Growth Strategy Marketing Positioning R&D Finance Production Human Resources Functional Strategies

Corporation Level 1-Corporate Strategy In which businesses do we compete? Corporation ?

Growth Strategy Deciding on what Products & Markets to compete with & in…

Market Penetration Product Development Market Development PresentNew P R O D U C T New M A R K E T Present Growth Strategies Diversification

Attract new customers to existing products Market Development Increase market share among existing customers. Market Penetration Create new products for present markets Product Development Product Development Concentrate on your primary line of business & look for ways to meet growth objectives thru increasing your level of operation in your primary business

Level 2: Business Unit Strategy How do we compete ? Price?Quality? Focus?

Also need to decide-- how you are going to compete…

 w/ what Competitive Advantage Cost Advantage- Thru Cost Advantage- Offer same benefit as competitor but at lower cost Differential Advantage- Thru Differential Advantage- Offer benefits which exceed competitors  w/ what Competitive Advantage Cost Advantage- Thru Cost Advantage- Offer same benefit as competitor but at lower cost Differential Advantage- Thru Differential Advantage- Offer benefits which exceed competitors  w/in which Market Segments All market segments Niche segments Evolving segments  w/in which Market Segments All market segments Niche segments Evolving segments

Competitive Strategy is the creation of a unique & valuable position- Competitive Strategy is the creation of a unique & valuable position- The position is based on- – Performing the same activities as competitors, but differently or performing a different set of activities Porters Generic Strategies Strategies & Mission Statements

You can also Formulate Strategy by what dimension you compete on: Differentiation: Deliver u nique & superior value in terms of product quality, features, service Cost: Design, produce, market more efficiently than competitors

You can Formulate Strategy by the- Number & nature of segments Number & nature of segments compete w/in- Undifferentiated Differentiated Niche Strategy

& You can Formulate Strategy by- Riding A Products Life Cycle Adjust Marketing Mix according to natural Adjust Marketing Mix according to natural Drift of products w/in segments-

1. Cost/Quality Differentiation 2. Number & nature of segments 2. Number & nature of segments compete w/in 3. Riding the Product Life Cycle Put them all together &…

Product Quality Competitive Strategy Matrix: Cost Broad Market Niche Mrkt Evolving Mrkt Compete on: #1 #2 #3 Number & nature of segments compete w/in Cost/Quality Differentiation Riding Product Life Cycle

Competitive Strategies Competitive Strategies Product Life-Cycle

Product Quality Competitive Strategy Matrix Overall Cost Leader Cost Leader- Lo -Tech Focus Cost Leader - PLC Lo+Trad+Hi Differentiator-Differentiator Hi- End Focus Differentiator- PLC Lo+Trad+Hi Cost Broad Mrkt Niche Mrkt Evolving Mrkt Compete on:

Cost Leadership Strategic Choices A cost leader does not try to be industry innovator A cost leader positions products to appeal to mainstream customers The overriding goal is- increased efficiency & lower costs relative to rivals

Generic Business-Level Strategy:Cost Leadership Advantages – If rivals charge similar prices, a cost leader achieves superior profitability – A cost leader is able to charge a lower price than competitors

An overall cost leader will attempt to be low-cost producer in every segment of the market. will have good profit margins on all sales while keeping prices low for price-sensitive customers. An overall cost leader will attempt to be low-cost producer in every segment of the market. will have good profit margins on all sales while keeping prices low for price-sensitive customers. Overall Cost Leader Cost Leader- Lo -Tech Focus Cost Leader - PLC Lo+Trad+Hi

-- seeks to dominate the price sensitive market segments. --sets prices below all competitors — and still be profitable -- seeks to dominate the price sensitive market segments. --sets prices below all competitors — and still be profitable Overall Cost Leader Cost Leader- Lo -Tech Focus Cost Leader - PLC Lo+Trad+Hi

-- Will seek to minimize costs in marketing & production Products will be allowed to age & change in appeal from High End, to Traditional, and eventually Low End buyers. -- Will seek to minimize costs in marketing & production Products will be allowed to age & change in appeal from High End, to Traditional, and eventually Low End buyers. Overall Cost Leader Cost Leader- Lo -Tech Focus Cost Leader - PLC Lo+Trad+Hi

Product Quality Competitive Strategy Matrix Overall Cost Leader Cost Leader- Lo -Tech Focus Cost Leader - PLC Lo+Trad+Hi Differentiator-Differentiator Hi- End Focus Differentiator- PLC Lo+Trad+Hi Cost Broad Mrkt Niche Mrkt Evolving Mrkt Compete on:

Generic Business-Level Strategy : Differentiation Create a product that customers perceive as different or distinct in an important way Advantages – Premium price – Increased revenues = superior profitability

Differentiator A differentiator will seek to create maximum awareness & brand equity. Wants to be well known as maker of high quality/highly desirable products A differentiator will seek to create maximum awareness & brand equity. Wants to be well known as maker of high quality/highly desirable products

Differentiation Advantages Customers develop brand loyalty : The greater the loyalty.. The less the price sensitivity… Differentiators can pass price increases on to customers Differentiation and brand loyalty are barriers to entry

Differentiation: Disadvantages Difficulty in maintaining long-term distinction in customers’ eyes – Agile competitors can quickly imitate – Patents & first-mover advantages are limited Difficulty/expense of maintaining premium pricing– requires greater marketing costs

DIFFERENTIATOR w/ HIGH-TECH FOCUS A high-tech differentiator seeks to be top producer of best performing leading-edge products

Competitive Strategies; Focused Differentiation: Focus on particular group or geographic market – Seek differentiation in targeted market segment – Serve special needs of narrow target market

DIFFERENTIATOR w/ PRODUCT LIFE-CYCLE FOCUS A product life-cycle differentiator seeks to be well-known as a top producer of good performing products in each of the targeted segments.

Level 3- Functional Strategy How do we coordinate?

What makes a decision strategic? Multi-functional in scope & consequences Requires choice & trade-offs, integration & alignment R&D Prdtn Mrktg

In order to execute & achieve selected growth & competitive strategies--Need to coordinate decisions across all Functional domains Marketing Production Finance R&D HR

Functional Integration & Strategic Alignment

Getting In-Sync w/ Functional Planning The goal of functional planning is to achieve a state of Internal Strategic Alignment MARKETING PRODUCTION FINANC E

INTERNAL STRATEGIC ALIGNMENT MARKETING PRODUCTION FINANC E Achieved when : All Decisions made by & within all functional areas are in sync w/ one another, As well as with the overall strategic direction of the firm Achieved when : All Decisions made by & within all functional areas are in sync w/ one another, As well as with the overall strategic direction of the firm

Functional Planning Matrices Examples of: internal strategic alignment

Functional Alignment: In Achieving Cost Efficiency

Functional Alignment: Implementing Differentiation Strategy

Functional Alignment: In Achieving Superior Innovation

Functional Alignment: Superior Customer Rlshps

When all decisions made by & within all functional areas are in sync w/ one another, As well as w/ your overall strategic direction -- you achieve… When all decisions made by & within all functional areas are in sync w/ one another, As well as w/ your overall strategic direction -- you achieve… Distinctive Competencies Distinctive Competencies

Competitive Advantage* Distinctive Competencies *Achieved when you sustain profits above Industry Average Distinct competencies needed to achieve selected competitive strategy

Areas in which you can develop “Distinct Competencies” MARKETING: Awareness & Accessibility R&D: Product innovation & design PRODUCTION: Plant Automation & utilization Human Resources: Worker Expertise & Training MARKETING: Awareness & Accessibility R&D: Product innovation & design PRODUCTION: Plant Automation & utilization Human Resources: Worker Expertise & Training

Distinct Competencies Competencies in automation & human resources could lead to a competitive advantage in cost leadership.

Achieving Competitive Advantage thru Cost-Focused Strategy Allows for good profit margins on sales while keeping prices low especially in price-sensitive segments… Functional Alignment Production Automation - pursued early & aggressively Capacity improvements unlikely (may run overtime instead) Marketing Spend moderately on promotion & sales R&D Spend minimally on R&D

Distinct Competencies Competencies in awareness, accessibility & design could lead to a competitive advantage built upon differentiation

Differentiator Seeks to create maximum awareness & brand equity. Wants to be well known as a maker of high quality/highly desirable products Seeks to create maximum awareness & brand equity. Wants to be well known as a maker of high quality/highly desirable products Production Less likely to invest in increased automation or production capacity Marketing Spend heavy on advertising & sales to create maximum awareness & accessibility Prices tend to be higher R&D High R&D spending - keep products fresh Functional Alignment

Virtually all tactical mistakes that are made when implementing strategy are a consequence of the lack of synchronization of decisions made in at least two functional areas

R&D and Production breakdown You develop a new product but forget to buy plant & equipment for it…the year before it is to be launched…

Marketing, Production & Finance out of sync The company takes an emergency loan because inventory levels increase…

Marketing, R&D, and Production out of sync You reposition a product from the High End to the Traditional segment, but do not address their material & labor costs…

Everybody is out of sync! Financial decisions are made before knowing the budget demands of all R&D, Marketing and Production decisions…

Functional alignment- decisions matrix Competitive Strategy :______ Strategic Objectives Brand Rnd1 Tactics Rnd2 Marketing R&D Production HR Finance

EXAMPLE: Functional alignment- decisions matrix BRAND:_new Competitive Strategy : Niche Differentiation Strategic Objectives Tactics Rnd1 Tactics Rnd2 Marketing R&D Production HR Finance

Competitive Strategy:ND Strategic Objectives Marketing Spend aggressively in promotion & sales in Hitech segments…. make our products easy for customers to find... price at a premium. In the low tech segments we”ll exit gracefully, … as they exit the Low End R&D We will keep our existing HiTech products (HI, PRF, & SIZE), phase out TRAD and LO, and introduce a new brand in the High End segment. Our goal is to offer technology oriented customers products that match their ideal criteria for positioning, age, and reliability Production Grow capacity to meet demand … avoid overtime After products well positioned, investigate modest increases in automation levels to improve margins, but keep ability to reposition products HR Spend aggressively on recruitment, training; minimize labor T/O w/ +wage & benefit packages; Focus TQM & Process initiatives on reducing labor & material costs, R&D time and enhancing effectiveness of promo & sales budgets… Finance We”ll finance investments primarily thru stock issues, retained earnings, supplement w/ bond offerings as needed.. When our cash position allows- issue dividends & retire stock.-We are adverse to debt & prefer to avoid interest payments. We’ll keep assets/equity (leverage) betw We measure performance w/ ROS, Asset T/O,& ROA.

EXAMPLE: Functional alignment- decisions matrix Competitive Strategy : Niche Differentiation Strategic Objectives Tactics Rnd1 Tactics Rnd2 Marketing R&D Production HR Finance

Competitive Strategy:ND Tactics Year 1 Marketing TRAD – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: price $28.50, promotion budget $600, sales budget $600, and sales forecast LO – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: $23.50, promotion budget $600, sales $800, and sales forecast HI – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $39.50, promotion budget $1900, sales $1900, sales forecast 400. PRF – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1900, sales $1900, sales forecast 440. SIZ –increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1700, sales $1700, sales forecast 390. New HI – no action required because the product will not emerge from R&D until next year.

Competitive Strategy:ND Tactics Year 1 R&D TRAD – tweak positioning to reduce age. Reduce reliability to reduce material cost. Example: Increase Performance by 0.1 and reduce MTBF by 1000 hours. LO – leave positioning alone, allowing the product to age further. Reduce reliability to reduce material cost. Example: reduce MTBF by 1000 hours.. HI – improve positioning and reduce age. Hold reliability (MTBF) steady. Example: reduce Size by 1.2, and increase Performance by 1.2. PRF – improve positioning and reduce age. Improve reliability to enhance demand. Example: Increase Performance by 1.4, reduce Size by 0.5, and increase MTBF by 1000 hours. SIZE – improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Reduce Size by 1.4, and increase Performance by 0.5. New HI – Launch a new High End product, with a project length of 20 to 23 months (no later than December of next year.) Example: positioned at leading edge of High End segment, -- Performance 10.2, Size 9.8. Set MTBF in the middle of the High End reliability range: MTBF 23,000.

TACTICS -Example: decision matrix- to add a new High End product… R&D What= A New product- Size coordinate = 10. Performance coordinate = 11. MTBF = 25,000 hours. When Due out in 2007 MARKETING Competitively $35. Target 68% Awareness +18% will cost=$2M promo budget- allocate web, & Trade Shows) maintain hi- level Distribution w/ Sales budget = $1.4M…w/ appropo allocations- When PRODUCTION What Produce 75,000 units at automation level of 3. When Ready by second month of How Purchase capacity in HR What Investments in Concurrent Engineering & Quality Deployment- to reduce R&D Times When & How Much $2M-2005; $1.5M-2006;$1M-2007 FINANCE What Finance $11M. When NOW. How Issue long term debt.

Competitive Strategy:ND Tactics Year 1 Production For each product, schedule production using the formula: (UnitSalesForecast X 112%) – InventoryOnHand. Adam – sell 200 to 300 units of capacity. Adam has too much capacity, and given our new product it is unlikely that we will need 900 units of capacity in the future. Make no other plant improvements to capacity or automation UNTIL YEAR 2- WHEN New High End product DEVLOPMENT COMPLETE – buy 600 units of capacity at automation level 5.0.

Competitive Strategy:ND Tactics Year 1 HR Invest $1.5 million per selected – critical TQM ( Quality Function Deployment; CCE ) & Process Initiatives (CPI,JIT,QIT, Channel Support & Concurrent Engineering) Finance On proforma Balance Sheet-- add together Cash and Inventory accounts. -- Keep between 15% and 20% of balance sheet assets in Cash plus Inventory. Drive Cash position until it roughly equals your Inventory position. …. If you are cash poor, issue additional stock to cover the investment in new capacity. If you are cash rich, pay dividends. AVOID Short Term Debt.

M A R K E T I N G M A N A G E M E N T TODAY’S 1.Finish Situation Analysis 2.Draft Mission & Vision Statements 3.Select Growth & Competitive Strategies 1.Finish Situation Analysis 2.Draft Mission & Vision Statements 3.Select Growth & Competitive Strategies

To compete on cost or differentiation… that is the question

Also on Today’s Begin drafting “functionally aligned” strategic & tactical decisions matrices Competitive Strategy Strategic Objectives Brand Rnd1 Tactics Rnd2 Marketing R&D Production HR Finance

Need to begin to determine the basic objectives & specific tactical decisions that need to be made within & across each management domain …in order to successfully implement your growth & competitive strategies

Getting it together