1. Business Strategy Formulation and Implementation
Chapter 4
Business Strategy Formulation
and Implementation
Foundations in Strategic Management, 2e.

2. Foundations in Strategic Management, 2e.
Learning Objectives
Understanding of:
Internal growth strategies and implications for organization scope and resource allocations
External growth strategies and implications for organization scope and resource allocations
The timing of growth moves
Generic competitive strategies and their risks
The implications of stages in the product life cycle for growth and competitive strategies.
Foundations in Strategic Management, 2e.

3. The Strategic Management Process
Internal and External Analysis
Strategy Formulation
(corporate and business level)
Strategic
Direction
Strategy Implementation
and Control
Strategic Restructuring
Foundations in Strategic Management, 2e.

4. Business-Level Strategy Formulation Responsibilities
Direction Setting--Mission, vision, ethics, goals
Situation Analysis--Compilation and assessment of information
Selection of Strategies--Generic Strategy (cost leadership, differentiation, best cost, focus) and Strategic Posture (specific strategies)
Management of Resources--Acquisition and/or development of resources leading to competitive advantage
Foundations in Strategic Management, 2e.

5. Business-Level Strategies
Growth Strategies
Competitive Strategies
Business managers are involved with developing two categories of strategies: growth strategies and competitive strategies.
1. Growth strategies are concerned with increasing the size and viability of the business over time. In planning growth strategies, managers are concerned with two key issues:
a) where do we allocate resources within our business in order to achieve growth,
b) what changes in business scope do we see as compatible with growth and overall strategic direction, and
c) how do we time our growth moves compared to competitors,?
2. Competitive strategies are concerned with how the firm intends to position itself to create value for its customers in ways that are different from those of competitors.
Foundations in Strategic Management, 2e.

6. Foundations in Strategic Management, 2e.
Growth Strategies
Involve investment in resources to achieve growth in sales (assuming the industry is attractive)
Investments over time may involve a redefinition/expansion of organizational scope
Three concerns:
what activities and resources to invest in
the implications for scope and complexity
the timing relative to competitors
Foundations in Strategic Management, 2e.

7. Foundations in Strategic Management, 2e.
Growth Strategies
Internal Strategies
Market penetration
Market development
Application development
Product development
External Strategies
Horizontal integration
Alliance formation
Vertical integration
Single businesses may choose to pursue growth through internal or external investment, or stabilize their growth through restricted investment.
Foundations in Strategic Management, 2e.

8. Internal Growth Strategies
Market penetration
Objective: Increase sales volume, share of market in existing markets with existing products
Invest: Advertising, promotion, sales force, capacity.
Scope: Scale may increase, but scope does not change
Market penetration entails investing in advertising, capacity expansion and/or the sales force with the intent of increasing market share in the current business. This strategy requires no changes in the scope of the organization.
Foundations in Strategic Management, 2e.

9. Foundations in Strategic Management, 2e.
Products
Function Served
Markets Served
This graphic illustrates the scope of the market penetration strategy. There is no effect on any of the dimensions of business definition.
Processes/Activities
Market Penetration
Foundations in Strategic Management, 2e.

10. Internal Growth Strategies
Market development
Objective: Cultivate new market segments (demographic, geographic, psychographic) for existing products
Invest: Marketing programs, new distribution channels, new sales staff, capacity...
Scope: Increases the number and type of markets served
Market development, in which the organization seeks new market segments, or, applications development, which involves creating new applications of its products, both require a broadened definition of the markets or functions served.
Foundations in Strategic Management, 2e.

11. Market Development Products Function Served Markets Served
With a market development strategy, the markets served dimension of organization scope increases. The other dimensions stay the same.
Processes/Activities
Market Development
Foundations in Strategic Management, 2e.

12. Internal Growth Strategies
Application development
Objective: Qualify the product for new applications, which will lead to more volume sold to new and existing market segments.
Invest: Applications development, testing, marketing programs, new distribution channels, new sales staff, capacity...
Scope: Increases the number and type of functions served, and possibly the number and type of markets served
Applications development strategies serve to qualify products for new applications, as when synthetic fibers are applied to apparel, industrial, and medical applications. In each situation, the the fiber stays the same, but its use and the targeted customer groups often changes.
Foundations in Strategic Management, 2e.

13. Processes/Activities Application Development
Products
Function Served
Markets Served
With an applications development strategy, new functions and new markets are served, which increases the scope and complexity of the organization beyond that found with market penetration and market development strategies.
Processes/Activities
Application Development
Foundations in Strategic Management, 2e.

14. Internal Growth Strategies
Product Development
Objective: Develop new products and modifications that will lead to sales in new and existing market segments, possibly for new applications.
Invest: Product development, process development, applications development, testing, marketing programs, new distribution channels, new sales staff, capacity...
Scope: Increases the number/type of products, processes, functions served, and possibly the number and type of markets served
Product/service development seeks to modify existing products or develop new products/services for the purpose of selling more to existing customers or creating new market segments. In addition to changes in the scope of products/services, this type of development may require expanded definitions in markets, functions served, or the resource conversion process.
Foundations in Strategic Management, 2e.

15. Product Development Products Function Served Markets Served
The product development strategy increases organizational scope more than any other internal growth strategy.
Processes/Activities
Product Development
Foundations in Strategic Management, 2e.

16. External Growth Strategies
Horizontal Integration
Objective: Intention is to accomplish the same end as the internal growth strategies. Acquire capacity, product lines, market channels, etc.
Invest: Acquire all or part of a competitor’s assets.
Scope: May increase scale and/or scope, similar to internal growth strategies.
External growth strategies involve investing organizational resources in another company or business to achieve growth targets.
Horizontal integration involves the acquisition of an organization in the same line of business. Typically, horizontal integration is accomplished for the purpose of gaining market share in a particular market, expanding a market geographically, or augmenting product or service lines.
Foundations in Strategic Management, 2e.

17. External Growth Strategies
Common in industries:
experiencing a leveling of growth and excess capacity:
$75.7 billion merger of Smith, Kline, Beecham with Glaxo Wellcome
acquisition of Western Airlines by Delta.
where rapid scale-up and access to new technologies are critical:
Cisco’s acquisition of 51 companies over 6 years, reshaping product line and repositioning in key technologies.
These examples illustrate the most common situations that lead to horizontal integration strategies: (1) slowing industry growth, which encourages industry consolidation through horizontal integration, and (2) fast growth in a rapidly changing industry, when first mover actions are likely to have value.
Foundations in Strategic Management, 2e.

18. External Growth Strategies
Strategic Alliances/Joint Ventures
Objective: To gain access to the capacity and/or capability of another firm for purposes of extending products, markets, processes, of function served.
Invest: In cooperative initiatives. Management team, project resources.
Scope: Provides a mechanism for extending scope.
Joint ventures or strategic alliances formed with other organizations are used to penetrate new domestic or foreign markets, develop new products and services, or improve existing processes for producing products and services.
Foundations in Strategic Management, 2e.

19. External Growth Strategies
Alliances between competitors for product and process development
E.g., GM -- an on-line marketplace for auto suppliers’ goods and services. Toyota, Isuzu, Suzuki, and Fuji involved.
E.g., GM -- an alliance with Honda for engine and transmission development and production.
And between a firm and its suppliers or channels for exclusive supply arrangements
Joint ventures and alliances are increasingly common among firms and their competitors, and between firms and their suppliers.
Discussion prompt: (which alludes to topics that will be covered later in the chapter) Why would a business choose an internal growth strategy rather than an external growth strategy? What industry conditions would be most likely to lead a firm to pursue external growth? How would the resources and capabilities of the business be considered in making the decision of which kind of growth strategy to follow?
Foundations in Strategic Management, 2e.

20. Foundations in Strategic Management, 2e.
Stability Strategies
Hard to defend for publicly-held organizations
May be acceptable if
All key stakeholders agree
Mature market with high exit barriers
Restructuring (temporary condition)
While most for-profit organizations actively seek growth, some choose to pursue stability strategies. They may be family-owned businesses, nonprofit organizations that are satisfied with the current level of operations, or they may simply be business organizations that are content with their share of a mature market.
There are many situations in which investing for the objective of growth is ineffective. For instance, a firm may find itself in a mature, declining, or rigidly segmented market in which efforts to increase sales would cost more than they are worth.
Foundations in Strategic Management, 2e.

21. Miles and Snow’s Strategic Categories
Prospectors
First mover
Analyzers
Follow the first mover when opportunity is proven
Defenders
Defensive strategy
Reactors
No distinct strategy
Prospectors pursue what could be termed an offensive strategy. They aggressively seek new market opportunities and are willing to take risks.
Defenders, on the other hand, are turf protectors that engage in little or no new product/market development. Their strategic actions are intended to preserve market share through reducing the impact of offensive moves by competitors.
Analyzers occupy a position in between prospectors and defenders. They attempt to maintain positions in existing markets, while waiting to see what happens when a competitor introduces a new product or enters a new market. They then follow when the opportunity and the parameters for success are clearer.
Reactors don't have a distinct strategy. They simply react to environmental situations.
Discussion Prompt: Many people argue that Microsoft, like Proctor and Gamble, is an analyzer. Do you agree? What are some other examples of analyzers?
Foundations in Strategic Management, 2e.

22. Porter’s Three Generic Business Strategies
Cost
Leadership
Differentiation
Broad
Target
Competitive Scope
Differentiation
Focus
Cost Focus
Generic Competitive Strategies
Firms seek a competitive advantage either by offering
1. products or services that are different from those of competitors and those differences are valued by customers, or
2. products/ services that are standard, but produced at lower cost, or
3. a combination of the first two options, a hybrid competitive strategy called “best cost”.
Firms pursuing cost leadership set out to become the lowest cost providers of a good or service. The broad scope of cost leaders means that they attempt to serve a large percentage of the total market. Firms pursuing cost leadership include McDonalds and Panasonic. Generally, low cost leadership allows a firm to compete by lowering prices when needed without becoming unprofitable. A low-cost leader can also price their products at the commodity or average industry price and reap larger profits than competitors.
Narrow
Target
Cost Efficiency
Preferred Product/Service
Foundations in Strategic Management, 2e.

23. Foundations in Strategic Management, 2e.
Cost Leadership
Accurate Demand Forecasting and High Capacity Utilization
Economies of Scale
Technological Advances
Learning/Experience Effects
To fully appreciate the significance of the low cost leadership strategy, it is important to understand the factors that underlie cost structures in firms.
1. High capacity utilization., through better demand forecasting, conservative capacity expansion policies or aggressive pricing, will help a firm maintain a lower cost structure than a competitor of equal size and capability.
2. Economies of Scale. Economies of scale are cost advantages associated with larger-sized facilities rather than with increased volume through an existing facility.
3. Companies that make investments in cost-saving technologies are often trading an increase in fixed costs for a reduction in variable costs.
4. Learning and Experience curve effects -- see next slide.
Companies that are able to achieve high capacity utilization, economies of scale, economies of technology and/or learning/experience effects may have lowest cost, but do not have to charge the lowest price. In other words, a cost leader does not have to be a price leader.
Discussion Prompt: Students often confuse the concepts of economies of scale and capacity utilization, by referring to both as “spreading fixed costs over more units.” Ask students to break into groups. Each group should be asked to write a paragraph explaining and contrasting the two concepts, illustrated with an example.
Foundations in Strategic Management, 2e.

24. Typical Learning/Experience Curve
unit
cost
4. The learning curve effect says that the time required to complete a task will decrease as a predictable function of the number of times the task is repeated. In theory, the time required to complete the task will fall by the same percentage each time cumulative production doubles.
total cumulative output
Foundations in Strategic Management, 2e.

25. Foundations in Strategic Management, 2e.
Differentiation
Create Value Through Uniqueness
Superior Quality
Innovations and Research
Speed and Flexibility
Reputation and Brand Name
Creative advertising
Customers Must Be Willing to Pay More for Uniqueness
Added costs vs. incremental price
In differentiation strategies, the emphasis is on creating value through uniqueness, as opposed to lowest cost.
1. Uniqueness can be achieved through product innovations, superior quality, superior service, creative advertising, better supplier relationships or in many other ways.
2. Customers must be willing to pay more for the uniqueness of a product or service than the firm paid to create it.
3. Firms pursuing differentiation strategies can't ignore their cost positions. When costs are too high relative to competitors, a firm may not be able to recover enough of these additional costs through higher prices.
Risks of a differentiation strategy include:
1. customers may be willing to sacrifice some of the features, services, or image possessed by a unique product or service because it costs too much.
2. customers may no longer perceive an attribute as differentiating.
3. successful differentiation will quickly become the target of imitative efforts by competitors. As competitors imitate, the formerly differentiating features will become commodity characteristics.
Foundations in Strategic Management, 2e.

26. Foundations in Strategic Management, 2e.
Best Cost
Combination of Cost Leadership and Differentiation
May Actually Be the Dominant Strategy Among the Most Successful Companies Today
Either:
The same resources/activities that allow cost reductions also allow differentiation. E.g., automation that lowers costs and improves speed and service.
Profits from cost reductions are used to invest in differentiating features, and vice versa.
A best cost strategy involves a combination of low cost leadership and differentiation. This is the essence of a best cost strategy--finding a level of differentiation that will bring a premium price while doing so at a reasonable cost.
In recent years, it has become apparent that many firms have been successful at pursuing cost leadership and differentiation simultaneously. In some situations, the two strategies complement rather than detract from each other.
Foundations in Strategic Management, 2e.

27. Foundations in Strategic Management, 2e.
Focus
Based on Differentiation or Lowest Cost
Key Is to Provide a Product or Service That Caters to a Particular Segment
Focus strategies can be based on differentiation (differentiation focus) or lowest cost (cost focus) or a combination of differentiation and lowest cost (best-cost focus). The key to a focus strategy is providing a product or service that caters to a particular segment in the market.
The risks of pursuing a focus strategy are the same as those of the pure strategies, with two important additions.
The desires of the narrow target market may become similar to the desires of the market as a whole, thus eliminating the advantage associated with focusing.
A competitor may be able to focus on an even more narrowly defined target and essentially "outfocus the focuser".
Discussion Prompt: Discuss some companies that provide examples of each kind of strategy: Liz Claiborne? Target? 3 Com? Nordstrom? Southwest Airlines?
Foundations in Strategic Management, 2e.

28. Foundations in Strategic Management, 2e.
The Product Life Cycle A
Growth B
Unit Sales Volume
Maturity C
The product life cycle describes the stages most products - and industries - evolve through from creation to maturation. Study of product life cycle concepts can help an organization understand the dynamic nature of strategy. As a product moves through the stages of the life cycle, different strategies and organizational resources are needed to compete effectively.
In the introduction stage, firms attempt to produce a product that is of sufficiently high quality that they will be able to establish a good reputation in the market. The emphasis is often on research and development. Early producers sometimes enjoy a "first-mover advantage.",
During the growth stage, as demand greatly expands and the number of competitors increases, existing competitors may attempt to erect entry barriers by building plants that are large enough to enjoy economies of scale, locking in contracts for supplies or distribution of products, or differentiating products through advertising and new features or service. At this stage, products are much more standardized and competition tends to focus on product quality and availability.
During the maturity stage, as demand continues to level off, efficient, high volume production tends to dominate manufacturing strategy. A dominant design for the product has probably emerged, and therefore consumers typically focus on price and dependability. Product differentiation becomes increasingly difficult. Marketing, distribution efficiency and low cost operations gain increasing importance during this stage.
Finally, during the commodity or decline stage, tight cost controls leading to efficiency are essential to success.
Discussion Prompt: How important is it for a firm to align with the dominant characteristics of each stage of the product life cycle? (Use this prompt to revisit the discussion of determinism versus enactment from earlier chapters). What if a company chooses NOT to align with the dominant design that emerges in the latter stages of the life cycle – but instead chooses to continue to pursue a form of differentiation in a niche segment of the market?
Commodity or Decline
Introduction
Time
Foundations in Strategic Management, 2e.