Topic 3.2: Chapter 7: Managing Strategy and Strategic Planning

The Nature of Strategic Management

• Strategy: a comprehensive plan for accomplishing an organization’s goals

• strategic management: a comprehensive and ongoing management process aimed at formulating and implementing effective strategies; a way of approaching business opportunities and challenges

• Effective strategies: a strategy that promotes a superior alignment between the organization and its environment and the achievement of strategic goals

The Components of Strategy

• distinctive competence: an organizational strength possessed by only a small number of competing firms

• scope: when applied to strategy, it specifies the range of markets in which an organization will compete

• resource deployment: how an organization distributes its resources across the areas in which it competes

Levels of Strategy

Most businesses today develop strategies at two distinct levels

1. business-level strategy: the set of strategic alternatives from which an organization chooses as it conducts business in a particular industry or market

2. corporate-level strategy: the set of strategic alternatives from which an organization chooses as it manages its operations simultaneously across several industries and several markets

Strategy Formulation and Implementation

• drawing a distinction between strategy formulation and strategy implementation is also instructive

• strategy formulation: the set of processes involved in creating or determining an organization’s strategies; it focuses on the content of strategies

• strategy implementation: the methods by which strategies are operationalized or executed within the origination; it focuses on the processes through which strategies are achieved

• deliberate strategy: a plan of action that an organization chooses and implements to support specific goals, rational, systematic, and planned

• emergent strategy: a pattern of action that develops over time in an organization in the absence of mission and goals, or despite mission and goals, allocating resources even though an organization has no explicitly chosen this strategy

Using SWOT Analysis to Formulate Strategy

• SWOT: an acronym that stands for strengths, weaknesses, opportunities, and threats

• it is a careful evaluation of an organization’s internal strengths and weaknesses as well as its environmental opportunities and threats

• in SWOT analysis, the best strategies accomplish an organization’s mission by 1. exploiting an organization’s opportunities and strengths while 2. neutralizing its threats and 3. avoiding (or correcting) its weaknesses

Evaluating an Organization’s Strengths

• Organizational Strengths:

• skills or capabilities enabling an organization to conceive of an implement its strategies

• SWOT analysis divides strengths into common strengths and distinctive competencies:

• a common strength is a skill or capability held by numerous competing firms

• competitive parity exists when large numbers of competing firms can implement the same strategy

• distinctive competence: strength possessed by a small number of firms

  -organizations that exploit these competencies often obtain a competitive advantage

• strategic imitation: duplicating another’s competence into a valuable strategy

• sustained competitive advantage: exists after all attempts at strategic imitation have ceased

Evaluating an Organization’s Weaknesses

• Organizational weaknesses: a skill or capability that does not enable an organization to choose and implement strategies that support its mission

  -organizational members reluctant to focus on weaknesses

  -reluctant to admit they do no possess all the skills and capabilities needed

• two ways to address: invest to obtain strengths or modify mission

• competitive disadvantage: organization is not implementing valuable strategies that are being implemented by competing organizations

Evaluating an Organization’s Opportunities and Threats

• organizational opportunity: an area in the environment that, if exploited, may generate higher performance

• organizational threat: an area that increases the difficultly of an organization performing at a high level

Porter’s Generic Strategies

• according to Harvard’s Michael Porter, organizations may pursue a differentiation, overall cost leadership, or focus strategy at the business level

• differentiation strategy: an organization seeks to distinguish itself from competitors through the quality of its products or services

• overall cost leadership strategy: an organization attempts to gain a competitive advantage by reducing its costs below the costs of competing firms

• focus strategy: an organization concentrates on a specifc regional market, product line, or group of buyers

The Miles and Snow Typology

• prospector strategy: a strategy in which the firm encourages creativity and flexibility and is often decentralized

• defender strategy: a strategy in which the firm focuses on lowering costs and improving the performance of current products

• analyzer strategy: a strategy in which the firm tries to maintain its current businesses and to be somewhat innovative in new businesses

• reactor strategy: a strategy in which a firm has no consistent approach to strategy

Strategies Based on the Product Life Cycle

• introduction stage: demand may be very high and sometimes outpaces the firm’s ability to supply the product

  -demand is high, and managers focus on getting products “out the door” without sacrificing quality

• growth stage: more firms begin producing the product, and sales continue to grow

  -threat to competitive advantage, and strategies to slow the threat of new competitors are important

• maturity stage: overall demand growth for the product begins to slow down, and the number of new firms producing the product begins to decline.

  -essential for long-term survival. focus on product differentiation and search for new products

• decline stage: demand for the product or technology decreases, the number of organizations producing the product drops, and total sales drop

  -organizations can do well in this stage if costs are kept low

Implementing Porter’s Generic Strategies

Differentiation Strategy:

• marketing and sales emphasizes high quality, high value image of products or services

• accounting controls the flow of funds without discouraging creativity

• manufacturing emphasizes quality and meeting customer needs

• the culture must emphasize creativity, innovation, and response to customer needs

Overall Cost Leadership Strategy

Implementing Porter’s overall cost leadership strategy:

• marketing focuses on product attributes meeting customer needs in a low-cost, effective manner

• accounting reduces costs through tight controls

• manufacturing reduces per-unit costs by increasing volume of production

• culture focuses on improving efficiencies

Implementing Miles and Snow’s Strategy

• decentralization facilitates prospectors

• encourages creativity and flexibility

• prospectors often switch to defenders

• defenders downplay creativity, focusing on costs and improving performance

• analyzers maintain current business and must be somewhat innovative

• tight financial controls and high flexibility, efficient production, and customized products

Formulating Corporate-Level Strategies

• decisions about which businesses, industries, and markets an organization will enter, and how to manage these different businesses, are based on an organization’s corporate strategy

• the most important strategic issue at the corporate level concerns the extent and nature of organizational diversification

• diversification: the number of different businesses that an organization is engaged in an the extent to which these businesses are related to one another

• there are three types of diversification strategies:

  -single-product strategy

  -related diversification

  -unrelated diversification

Single-Product Strategy

• single-product strategy: a strategy in which an organization manufactures just one product or service and sells it in a single geographic market

• strength: by concentrating its efforts so completely on one product and market, a firm is likely to be very successful in manufacturing and marketing that product

• weakness: if the product is not accepted by the market or is replaced by a new one, the firm will suffer

Related Diversification

• related diversification: a strategy in which an organization operates in several businesses that are linked with one another

• it reduces an organization’s dependence on any one of its business activities and thus reduces economic risk

• by managing several businesses at the same time, an organization can reduce the overhead costs associated with managing any one business

• it allows for the exploitation of strengths and capabilities in more than one business

• when organizations do this successfully, they capitalize on synergy

Unrelated Diversification

• unrelated diversification: a strategy in which an organization operates multiple businesses that are not logically associated with one another

• advantages: achieve stable performance over time due to business cycle differences amount the multiple businesses

• resources can be allocated to areas with the highest return potentials to maximize corporate performance

• disadvantage: lack of knowledge of the unrelated businesses

• failure to exploit synergy, creating competitive disadvantage

Becoming a Diversified Firm

• some firms diversify by developing new products and services

• firms can also diversify by replacing former suppliers and customers

• backward vertical integration: an organization conducts activities formerly conducted by its suppliers

• forward vertical integration: an organization begins activities formerly conducted by its customers

• used to acquire complementary products or services, linked by common technology and common customers

• creation or exploitation of synergies

• merger: the purchase of one firm by another firm of approximately the same size

• acquisition: the purchase of a firm by a firm that is considerably larger, acquired firm’s “identity” often disappears altogether

Managing Diversification

• Portfolio management techniques: methods that diversified organizations use to determine which businesses to engage in and how to manage these businesses to maximize corporate performance

• two important portfolio management techniques:

  -BCG matrix

  -GE Business Screen

BCG Matrix

• BCG matrix: a framework for evaluating businesses relative to the growth rate of their market and the organization’s share of the market

  -dogs: businesses that have a very small share of a market that is not expected to grow

  -cash cows: businesses that have a large share of a market that is not expected to grow substantially

  -question marks: businesses that have only a small share of a fast-growing market

  -stars: businesses that have the largest share of a rapidly growing market

GE Business Screen

• GE Business Screen: a method of evaluating businesses along two dimensions

  1. industry attractiveness

  2. competitive position

• in general, the more attractive the industry and the more competitive the position, and more an organization should invest in a business

Developing International and Global Strategies

• managers of international firms face more complexity and uncertainty when formulating strategies

• however, they may exploit three sources of competitive advantage:

  -global efficiencies

  -multi market flexibility

  -worldwide learning

• Global efficiencies include:

  -location efficiencies allow firms to locate wherever they can obtain cost advantages

  -economies of scale lower the per unit cost of production due to large quantities

  -economies of scope lower the cost per unit by sharing expenses across product lines

• Market flexibility:

  -gives firms the ability to respond to change in one region by making changes in other regions

• worldwide learning:

  -gives firms the advantage of adopting best practices from wherever they originate

• firms are not usually able to exploit all three advantages simultaneously

Strategic Alternatives for International Business

• home replication strategy:

  -a company uses the core competency it developed at home as its main competitive weapon

• multi domestic strategy:

  -a company manages itself as a collection of subsidiaries, each with a domestic market

• global strategy:

  -a company views the world as a single marketplace, standardizing products to address the needs of customers worldwide