Chapter 7: Managing Strategy and Strategic Planning

Strategy

Is a comprehensive plan for accomplishing an organization's goals

Strategic Management

Involves formulating and implementing strategies to take advantage of business opportunities and meet competitive challenges

Effective Strategies

Promote superior alignment between an organization, its environment, and its goals

Components of Strategy

- Distinctive Competence

- Scope

- Resource Deployment

Distinctive Competence

Something an organization does exceptionally well (Ex: Walmart known for low prices)

Scope

Range of markets in which an organization will compete

Resource Deployment

How an organization will distribute its resource across the areas in which it competes.

Types of Strategic Alternatives

- Business-Level Strategy (B to C)

- Corporate-Level Strategy (C to B)

Business-Level Strategy

- The set of strategic alternatives that an organization chooses from as it conducts business in a particular industry or a particular market

- Addresses how we compete

Corporate-Level Strategy

- The set of strategic alternatives that an organization chooses from as it manages its operations simultaneously across several industries and several markets

- Address what business are we in

Strategy Formulation

The set of processes involved in creating and 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

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

- A by-product from something

- Cons: They are just potentials

SWOT Analysis

- Strengths, Weaknesses, Opportunities, and Threats

- To formulate strategies that support the mission

Characteristics of Evaluating Organizational Strengths

Organizational strengths (unique), Common organizational strengths (common), Distinctive competencies, Imitation of Distinctive Competencies, Sustained Competitive Advantage

Organizational Strengths

Skills and abilities enabling an organization to conceive of and implement strategies (unique).

Common Organizational Strengths

Are organizational capabilities possessed by numerous competing firms (common).

Distinctive Competencies

Are useful for competitive advantage and superior performance

Imitations of Distinctive Competencies

Removes the competitive advantages of the competency

Sustained Competitive Advantage

- Occurs when a distinctive competence cannot be easily duplicated

- Is what remains after all attempts at strategic imitations cease

Strategic Imitation of a Distinctive Competence is difficult when:

- It is based on unique historical circumstances

- It is difficult for competitors to understand its nature or character

- It is based on a complex phenomenon (ex: organizational culture)

Good SWOT Strategies

Those that support the mission and exploit opportunities and strengths, neutralize threats, and avoid weaknesses

Organizational Weaknesses

Skills and capabilities that do not enable an organization to choose and implement strategies that support its mission

Weakness 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

Occurs when an organization fails to implement strategies being implemented by competitors

Organizational Opportunities

Are areas in the organization's environment that may generate high performance (Ex: Employers at a Career Fair)

Organizational Threats

Are areas in the organization's environment that make it difficult for the organization to achieve high performance (Ex: Other students competing for an internship at the Career Fair)

Porters Five Competitive Forces

- Threat of Substitute Products

- Competitive rivalry

- Power of Buyers

- Power of Suppliers

- Threat of New Entry

Beer Wars Video

- Showed Porters Five Competitive Forces

- Considered an Analyzer

- Busch, Coors, and Miller are the top 3 competitors

Porter's Generic Strategies

- Differentiation Strategy

- Overall Cost Leadership Strategy

- Focus Strategy

Differentiation Strategy

An organization seeks to distinguish itself from competitors through the quality of its products or services (Ex: Ben and Jerry's: Name Brand Product). Could never be paired with Overall Cost Leadership Strategy

Overall Cost Leadership Strategy

An organization attempts to gain competitive advantage by reducing its costs below the costs of competing firms (Similar product but cheaper like Walmart Brand). Could never be paired with Differentiation Strategy

Focus Strategy

An organization concentrates on a specific regional market, product line, or group of buyers (Geographic areas. Ex: Blue Bell: Only in the South)

Differentiation

An organization seeks to distinguish itself from competitors through the quality of its product or services

Overall Cost Leadership

Marketing and sales focus on simple product attributes and how these product attributes meet customer needs in a low-cost and effective manner

Focus

Either differentiation or cost leadership, depending on which one is the proper basis for competing in or for a specific market segment, product category, or group buyers

How to Implement Porter's Generic Strategies

Differentiation, Overall Cost Leadership, Focus

Miles and Snow's Strategy Types

Prospector, Defender, Analyzer, Reactor

Prospector

- Encourages creativity to seek out new market opportunities and to take risks

- Develops the flexibility to meet changing market conditions by decentralizing its organizational structure

- Continuously looking for new things

Defender

Focuses on defending its current markets by lowering its costs an/or improving the performance of its current products. Typically the first to market and then defending those who try to compete.

Analyzer

- Prospector and Defender

- Incorporates elements of both the prospector and the defender strategies to maintain business and to be somewhat innovative

Reactor

Has no clear strategy, reacts to changes and events (the environment)

Product Life Cycle

- Managers can use the framework to plot strategy

- Includes: Introduction Stage, Growth Stage, Mature Stage, and Decline Stage

Introduction Stage

Focus on getting the product out the door without sacrificing quality

Growth Stage

Focus on ensuring the quality and delivery, and begin to differentiate product

Mature Stage

Focus on low costs and new products. Essential stage if company is going to survive in the long-run. Needed if you want to be in business for long term.

Decline Stage

- if done nothing, it will be a reactor

- Normal for every company

Strategic Business Units

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

Corporate-Level Strategies

Single-Product Strategy and Related Diversification

Single-Product Strategy

An organization manufactures one or more service and sells it in a single geographic market

Related Diversification

- A strategy in which an organization operates in several different businesses, industries, or markets that are somehow linked

- Basis of relatedness

Basis of Relatedness

Similar technology, common distribution and marketing skills, common brand name and reputation, common customers

Basis of Relatedness Examples

- Similar technology: Philips, Boeing, Westinghouse

- Common distribution and marketing skills: Kraft Heinz, Unilever, Procter & Gamble

- Common brand name and reputation: Disney, Universal

- Common customers: Merck, IBM, AMF-Head

Advantages of Related Diversification

- Reduces an organization's dependence on any one of its business activities and thus reduces economic risk. (Creates synergy)

- 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

Unrelated Diversified Organization

Operates multiple businesses that are not logically associated with one another

Advantages of Unrelated Diversified Organization

- Stable performance over time due to business cycle differences among the multiple businesses

- Allocation of resources to area with the highest return potentials to maximize corporate performance

Disadvantages of Unrelated Diversified Organization

- Poor performance due to complexity of managing a diversity of business

- Failing to exploit key synergies puts the firm at a competitive disadvantages to firms with related diversification strategies

Becoming a Diversified Firm Includes:

Internal Development of New Products, Replacement of Suppliers and Customers, Merger, Acquisition

Internal Development of New Products

Developing products and services within the boundaries of traditional business operations

Replacement of Suppliers and Customers

Backward Vertical Integration and Forward Vertical Integration

Backward Vertical Integration

Beginning a business that furnishes resources previously handled by a supplier. Ex: If Campbell Soups bought the cans in which the soup is in

Forward Vertical Integration

Beginning a business previously handled by an intermediary and selling more directly to customers. Ex: If Rubbermaid sells the products themself on a website, not in Walmart

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 diversity 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' cost of doing business to increase revenues

Major Tools for Managing Diversification

Organization Structure (Ch 11) and Portfolio Management Techniques (like The BCG Matrix and GE Business Screen)

Portfolio Management Techniques

Methods used by diversified firms to make decisions about what businesses to engage in and how to manage these businesses to maximize corporate performance

Two Important Portfolio Management Techniques

The BCG Matrix (Condensed 2x2 Matrix)

The GE Business Screen (3x3 Matrix)

BCG Matrix

- Stands for Boston Consulting Group

- 2x2 Matrix

- Evaluates a portfolio of businesses on the growth rate of their respective markets and each business's relative share of its market

- Different type of businesses in a diversified firm's portfolio as: Dogs, Cash Cows, Question Marks, and Stars

Steps of the BCG Matrix

- Enters as a Question Mark... moves to

- Star: Growth in the Market... moves to

- Cash Cow: Market stopped growing... ends up as

- Dog: Where you have to get rid of it

Dogs

Have small market shares and no growth prospects

Cash Cows

Have large shares of mature markets

Question Marks

Have small market shares in quickly growing markets

Stars

Have large shares of rapidly growing markets

GE Business Screen

- 3x3 Matrix

- A method of evaluating businesses in a diversified portfolio along two dimensions, each in which contains factors of: Industry attractiveness and a Competitive position (strength) 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

Example of the BCG Matrix

Example of the GE Business Screen

Competitive Position Qualities

- Market share

- Technological know-how

- Product quality

- Service network

- Price competitiveness

- Operating costs

Industry Attractiveness Qualities

- Market growth

- Market size

- Capital requirements

- Competitive intensity

Global Efficiencies

- Location efficiencies: Lower input cost locations

- Economies of Scale: Larger facilities result in lower cost

- Economies of Scope: Broadening product lines

Location Efficiencies

Seeking lower input cost locations

Economies of Scale

Larger facilities result in lower costs

Economies of Scope

Broadening product lines

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

Strategic Alternatives for International Businesses

Home Replication, Multi-Domestic Strategy, Global Strategy, and Transnational Strategy

Home Replication

- Utilizing a core competency or a firm-specific advantage developed at home as a main competitive weapon in foreign markets

- Works best when the firm's competencies are valuable in many different types of markets

Multi-Domestic Strategy

- Managing a corporation as a collection of independent operating subsidiaries frees a firm to customize its products, its marketing campaigns, and operating techniques to meet local customer needs

- Works best when national demands for customizations are high

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

- Works best for high commodity-like product or in an industry that demands high efficiency

Transnational Strategy

- Attempting to combine the benefits of scale efficiencies pursued by a global corporation, with benefits and advantages of local responsiveness of multi-domestic corporation