1. 1 Mgmt 371 Chapter Eight Managing Strategy and Strategic Planning Much of the slide content was created by Dr, Charlie Cook, Houghton Mifflin, Co.©

2. 2 The Nature of Strategic Management Strategy A comprehensive plan for accomplishing an organization’s goals. Strategic Management A way of approaching business opportunities and challenges aimed at formulating and implementing effective strategies. Effective Strategies Strategies that promote a superior alignment between the organization and its environment and the achievement of its goals.

3. 3 Components of Strategy Distinctive Competence Something an organization does exceptionally well. Scope The range of markets in which an organization will compete. Resource Deployment How an organization will distribute its resources across the areas in which it competes.

4. 4 Classifications of Strategic Alternatives Business-Level Strategy particular industry or a particular market. The set of strategic alternatives that an organization chooses from as it conducts business in a particular industry or a particular market. Corporate-Level Strategy across several industries and several markets. The set of strategic alternatives that an organization chooses from as it manages its operations simultaneously across several industries and several markets.

5. 5 Strategy Formulation and Implementation Strategy Formulation The set of processes involved in creating or determining the organization’s strategies; it focuses on the content of strategies. Strategy Implementation The methods by which strategies are operationalized or executed within the organization; it focuses on the processes through which strategies are achieved.

6. 6 Strategy Formulation and Implementation (cont’d) Deliberate Strategy A plan, chosen and implemented to support specific goals, that is the result of a rational, systematic, and planned process of strategy formulation and implementation. Emergent Strategy A pattern of action that develops over time in the absence of goals or missions, or despite goals and missions.

7. 7 SWOT Analysis

8. 8 SWOT Analysis: Environmental Scanning Internal Environment Strengths Weaknesses External Environment Opportunities Threats The process of studying the environment of the organization to identify strengths, weakness, opportunities, and threats.

9. 9 Internal Environment Strengths Strengths – those internal factors that give the organization a competitive advantage and help it seize an opportunity or reduce a threat from its external environment. Proprietary technology Pharmaceutical cure for autism. Touch screen technology Financial resources KSA that creates a competitive advantage

10. 10 Internal Environment Weaknesses Weaknesses – those internal factors that place the organization at a disadvantage and preclude it from seizing an opportunity or avoiding a threat from its external environment. Obsolete skills Financial constraints Poor planning & forecasting Lack of management skills Shortage of critical KSA

11. 11 External Environment Opportunities Opportunities –factors in the organization’s external environment that, if exploited, may generate higher organizational performance. New markets New Technologies Product Production Research subsidies

12. 12 External Environment Threats Threats –factors in the organization’s external environment that increase the difficulty of that organization performing at a higher level, or threaten the organization’s very existence. New entrants Government regulation Increase energy costs Change in consumer demand

13. 13 Using SWOT Analysis to Formulate Strategy Evaluating Organizational Strengths Organizational strengths enable an organization to conceive of and implement strategies? Considerations in Classifying Strengths Considerations in Classifying Strengths Common organizational strengths Common organizational strengths are organizational capabilities possessed by numerous competing firms (good credit). Distinctive competencies Distinctive competencies are useful for competitive advantage and superior performance (state-of-the-art production facilities). Imitation of distinctive competencies Imitation of distinctive competencies is duplicating another firm’s distinctive competence.

14. 14 Using SWOT Analysis to Formulate Strategy (cont’d) Evaluating Organizational Strengths : Sustained competitive advantage cannot be easily duplicated Sustained competitive advantage occurs when a distinctive competence cannot be easily duplicated. It is what remains after all attempts at strategic imitations have ceased. Strategic imitation Strategic imitation is difficult when: Distinctive competence is based on unique historical circumstances [economies of scale, e.g.]. Competitors do not understand the nature or character of a firm’s competence (George Lucas’ Industrial Light & Magic safeguards its special effects). The competence is based on a complex phenomenon, such as organizational culture (Southwest Airlines – employee centric; Ikea - thrift and teamwork, e.g.).

15. 15 Using SWOT Analysis to Formulate Strategy (cont’d) Evaluating Organizational Weaknesses Organizational weaknesses Skills and capabilities that do not enable an organization to choose and implement strategies that support its mission. Weaknesses can be overcome by Weaknesses can be overcome by: Investments to obtain the strengths needed. Modification of the organization’s mission so it can be accomplished with the current workforce. Competitive disadvantage Competitive disadvantage A situation in which an organization fails to implement strategies being implemented by competitors. May result in entropy (think Blockbuster Video).

16. 16 Michael Porter’s Generic Strategies (Business Level) Cost Leadership Cost Leadership – focus on efficiency, stability, and cost control. Low cost producer of its good or service. Marketing and sales focus on simple product attributes and how these product attributes meet customer needs in a low-cost and effective manner, Differentiation Differentiation – distinguishing your product or service from your competition usually by quality). Marketing and sales must emphasize high-quality, high- value image of the organization’s products or services. Focus Focus – concentrating on a specific regional market, market segment, or set of customers.

17. 17 Business Level Strategies Strategy Scope (number of market segments) Many Few Cost Leadership Focused Cost Differentiation Focused Differentiation X

18. 18 Miles & Snow’s Typology Prospector Prospector - innovative and growth oriented firm, strategies focus on identifying and entering new markets. Risk taker. Defender Defender – operating in a stable environment, strategies. Focus on protecting current markets and maintaining stable growth. Risk averse. Analyzer Analyzer – a firm wishing to maintain current markets but also enter new ones. Has elements of prospectors and defenders. Reactor Reactor – no strategy or plan.

19. 19 Implementing Business-Level Strategies Implementing Miles and Snow’s Strategies Prospector Encourage creativity to seek out new market opportunities and to take risks. Develop the flexibility to meet changing market conditions by decentralizing its organizational structure. Defender Focus on defending its current markets by lowering its costs and/or improving the performance of current products. Analyzer Incorporate elements of both the prospector and the defender strategies maintain business and to be somewhat innovative.

20. 20 Formulating Corporate-Level Strategies Strategic Business Units (SBUs) Each business or group of businesses within an organization is engaged in serving the same markets, customers, or products. Diversification The number of businesses an organization is engaged in and the extent to which these businesses are related to one another

21. 21 Corporate Level Strategies Concentration Concentration in a single-product or industry (McDonalds) Diversification Diversification Related (a.k.a. concentric) diversification - similar industry (CSX= Chessie System and Seaboard Coast Line Industries) Common technology Common Distribution/marketing skills Common reputation Common customers Unrelated (a.k.a. conglomerate) diversification different industry (LTV: aerospace, electronics, steel manufacturing, sporting goods, airlines, meat packing, car rentals & pharmaceuticals,) International Expansion International Expansion

22. 22 Corporate Level Strategies: Related Diversification Reduces an organization’s dependence on any one of its business activities and thus reduces economic risk. Reduces overhead costs associated with managing any one business through economies of scale and economies of scope. Allows an organization to exploit its strengths and capabilities in more than one business. Synergy exists among a set of businesses when the businesses’ value together is greater than their economic value separately.

23. 23 Corporate-Level Strategies: Unrelated Diversification An organization operates multiple businesses that are not logically associated with one another. Advantages Stable of performance over time due to business cycle differences among the multiple businesses. Allocation of resources to areas with the highest return potentials to maximize corporate performance. Disadvantages Poor performance due to the complexity of managing a diversity of businesses. Failing to exploit key synergies puts the firm at a competitive disadvantage to firms with related diversification strategies.

24. 24 Corporate Level Strategies: International Expansion International Expansion Global strategy – product has transnational appeal Multi domestic – customizing product to meet local preferences.

25. 25 The Product Life Cycle

26. 26 Implementing Corporate-Level Strategies (Diversification) Becoming a Diversified Firm Becoming a Diversified Firm Internal development of new products Developing products and services within the boundaries of traditional business operations. Vertical Integration Vertical Integration – an organization becomes its own supplier and/or distributor. Backward vertical integration Backward vertical integration becoming ones own supplier (Gallo acquires own bottling). Forward vertical integration Forward vertical integration – becoming ones own distributor (Tandy and Radio Shack)

27. 27 Implementing Corporate-Level Strategies (Diversification) Becoming a Diversified Firm Merger Purchase of one firm by another firm of approximately the same size. Acquisition Purchase of a firm by another firm that is considerably larger. Purposes of mergers and acquisitions To diversify through vertical integration. To acquire complementary products or services linked by a common technology and common customers. To create or exploit synergies that reduce the combined organizations’ costs of doing business to increase revenues.

28. 28 Managing Diversification Major Tools for Managing Diversification Organization structure A detailed discussion of organization structure is contained in Chapter 12. Portfolio management techniques Methods that diversified organizations use to make decisions about what businesses to engage in and how to manage these multiple businesses to maximize corporate performance. Two important portfolio management techniques The BCG Matrix The GE Business Screen

29. 29 Managing Diversification: BCG Matrix A method of evaluating businesses relative to the growth rate of their market and the organization’s share of the market. The matrix classifies the types of businesses that a diversified organization can engage as: Dogs Dogs have small market shares and no growth prospects. Cash cows Cash cows have large shares of mature markets. Question marks Question marks have small market shares in quickly growing markets. Stars Stars have large shares of rapidly growing markets.

30. 30 Managing Diversification BCG Matrix StarsQuestion Marks Cash CowsDogs Relative Market Share Market Growth Rate

31. 31 Managing Diversification GE Business Screen A method of evaluating business in a diversified portfolio along two dimensions, each of which contains multiple factors: Industry attractiveness. Market growth rate & size Competitive position (strength) market share of each firm in the portfolio. In general, the more attractive the industry and the more competitive a business is, the more resources an organization should invest in that business.

32. 32 Industry Attractiveness Market growth Market size Capital requirements Competitive intensity

33. 33 Competitive Position Market Share Technological know-how Product quality Service network Price competitiveness Operating costs

34. 34 Managing Diversification GE Business Screen Competitive Position Industry Attractiveness Winner ? Average Business Loser Profit Producer Loser

35. 35 International and Global Strategies Incentives for International and Global Strategies Global efficiencies Location efficiencies—seeking lower input cost locations Economies of scale—larger facilities result in lower costs Economies of scope—broadening product offerings result in lower costs Multimarket flexibility International businesses may respond to a change in one country by implementing a change in another country. Worldwide learning The diverse operating environments of multinational corporations (MNCs) contribute to organizational learning that can be transferred to other operating environments.

36. 36 Strategic Alternatives for International Business Home Replication Utilizing a core competency or firm specific advantage developed at home as a main competitive weapon in foreign markets. (Bayer aspirin, e.g.) Multi-Domestic Strategy customize its products Managing a corporation as a collection of independent operating subsidiaries frees it to customize its products, its marketing campaigns, and operating techniques to meet local customer needs.

37. 37 Strategic Alternatives for International Business Global Strategy Viewing the world as a single marketplace and having as a primary goal the creation of standardized goods and services that will address the needs of customers worldwide. Note: differs from home replication in that there is NO home country. Transnational Strategy local responsiveness Attempting to combine the benefits of scale efficiencies pursued by a global corporation, with the benefits and advantages of local responsiveness of a multi- domestic corporation. Mix of centralization and decentralization with local subsidiaries.