Lecture 3

Strategy Formulation Business Strategy

Outcome of strategic analysis

y

The goal is to find a propitious niche that is so well suited to the firms internal and external environment that other corporations are not likely to challenge or dislodge it.
Look for a strategic window a unique market opportunity that is available only for a particular time. Occupy a propitious niche and discourage competition. Identify a market opportunity in which the firm can obtain and keep dominant market share. Niche can change faster than a firm can adapt to that change thus the firm need to invest heavily in their capabilities to keep strong in a changing niche.

Propitious niche can disappear because of

y

The environment/industry changes

The market gets smaller because of factors beyond the control of the company/SBU. The company/SBU, through its own efforts, not only fills a demand but actually causes the market to expand.

The company/SBU changes

Due to demands for resources elsewhere in the corporation, the company/SBU may be forced to cut back its activities. Its own success in the niche may cause the company/SBU to move into nearby niches.

Mission and Objectives

Focus on fulfilling a mission rather than on generating action possibilities y Mission should be a common thread y Gap between planned and achieved objectives y Review of objectives
y

Generating alternative strategies

y

Using TOWS matrix to generate alternative strategies

Strengths S
List Strengths

Weaknesses W
List Weaknesses

Opportunities O
List 5-10 Opportunities

SO Strategies
Use strengths to take advantage of opportunities

WO Strategies
Overcoming weaknesses by taking advantage of opportunities

Threats T
List 5-10 Threats

ST Strategies
Use strengths to avoid threats

WT Strategies
Minimize weaknesses and avoid threats

Porters Generic Strategies

Porters Generic Strategies

Competitive Strategy Overall Cost Leadership Required Skills & Organizational Resources Elements Sustained capital Tight cost control investment and access to capital Process engineering skills Frequent, detailed reports Associated Risks Technological change that nullifies past investments or learning Low-cost learning by industry newcomers or followers through imitation, or through their ability to invest in state-of-the-art facilities

Intensive supervision of labor

Structured organization and responsibilities

Products designed for ease of manufacture

Inability to see required product or marketing change because of the attention placed on cost Incentives based on Inflation in costs that meeting strict quantitative narrow the firms ability to targets maintain enough of a price differential to offset competitors brand images or other approaches to differentiation

Low-cost distribution system

Value Chain for a Low Cost Strategy

Firm Infrastructure cost-effective management information systems (MIS), few managerial layers, simplified planning practices. Human Resources: consistent policies to reduce turnover, intense focus on training employees to be efficient and multi-skilled. Technology: Easy-to-use production technologies, investment in technology that improves production efficiencies. Procurement: procedures to find the lowest cost inputs, frequent evaluation of suppliers performances. Inbound Logistics Efficient systems to link supplier products with production processes. Operations Use of Economies of scale. Construction of efficient scale facilities. Outbound Logistics Delivery schedule that reduces costs. Selection of low-cost carriers. Marketing & Sales Small, highly trained sales force. Products priced to generate sales volume. Service Efficient quality control to reduce buyer complaints.

Porters Generic Strategies

Competitive Strategy Required Skills & Resources Organizational Elements Associated Risks

Differentiation

Strong marketing abilities

Strong coordination among functions in R&D, product development, and marketing

The cost differential between lowcost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings. Buyers need for the differentiating factor falls. This can occur as buyers become more sophisticated. Imitation narrows perceived differentiation, a common occurrence as industries mature.

Product engineering

Creative flair

Subjective measurement and incentives instead of quantitative measures Amenities to attract highly skilled labor, scientists, or creative people

Strong capability in basic research Corporate reputation for quality or technological leadership Long tradition in the industry or unique combination of skills drawn from other businesses Strong cooperation from channels

Value Chain for a Differentiation Strategy

Firm Infrastructure Highly developed MIS to capture customer preferences, firm-wide focus on high-quality products. Human Resources: Compensation encourages creativity, subjective performance measures, superior training. Technology: strong capability in basic research, investment in technologies that allow for production of highly differentiated products. Procurement: procedures to find the highest quality inputs, purchase of highest quality replacement parts, strict standards for suppliers. Inbound Operations Logistics Consistent Superior production of handling to attractive minimize products. damage andRapid response to improve customers quality. production demands. Outbound Logistics Accurate and responsive order processing. Rapid and timely deliveries. Marketing & Sales Extensive granting of credit buying. Extensive personal relationships with buyers. Service Extensive buyer training to assure max. value from Product.

Porters Generic Strategies

Competitive Required Skills & Strategy Resources Focus Combination of the above policies directed at the particular strategic target Organizational Associated Risks Elements Combination of The cost differential between the above policies broad-range competitors and directed at the the focused firm widens to particular strategic eliminate the cost advantages target of serving a narrow target or to offset the differentiation achieved by focus. The differences in desired products or services between the strategic target and the market as a whole narrows. Competitors find submarkets within the strategic target and outfocus the focuser.

Generic Strategies & 5 Forces

Strategic rollup: a way to organize a fragmented industry

Which competitive strategy is best?

y

Competitive Tactics: a tactic is a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action
Timing Tactics (when) Market Location Tactics (where)

Timing Tactics
First Mover Late Mover

Which competitive strategy is best?

y

Market Location Tactics

Offensive Tactics
x x x x Frontal Assault: generally expensive Flanking Maneuver: focus on an unguarded niche Bypass Attack: change the rules of the game Encirclement: use a broad product line to annihilate
competition

x Guerrilla Warfare: patient enough to accept small gains and

avoid pushing established competitors too far

Defensive Tactics
x Raise structural barriers x Increase expected retaliation x Lower the inducement of attack

Which competitive strategy is best?

y

Market Location Tactics

Offensive Tactics: established competitors marketplace
x x x x x Frontal Assault: generally expensive Flanking Maneuver: focus on an unguarded niche Bypass Attack: change the rules of the game Encirclement: use a broad product line to annihilate competition Guerrilla Warfare: patient enough to accept small gains and avoid
pushing established competitors too far

Defensive Tactics: make competitive advantage sustainable, takes

place in own market

x Raise structural barriers: offer full line off products, block channel x Increase expected retaliation x Lower the inducement of attack

access, raise buyer switching costs, raise the cost of gaining trial users, increase scale economies, foreclosure alternative technologies, limit outside access to facilities, tie-up suppliers, avoid suppliers serving competitors,

Cooperative strategies
y

Collusion
Explicit mostly illegal Tacit favored in certain types of industries

Strategic Alliances: 30% to 50% alliances perform

unsatisfactorily

Objectives: obtain technology/manufacturing capabilities,

obtain access to specific markets, reduce financial risk, reduce political risk, achieve competitive advantage

Types of alliances:
x x x x Mutual Service Consortia Joint Venture Licensing Arrangement Value chain partnership

Strategic Postures
Offensive
1. Concentration Growth A. Market Penetration B. Market Development C. Product Development D. Horizontal Merger E. Niching 1. Low-cost Leadership("Functional Rationalization") 2. Cost Focus 3. Differentiation 4. Focused Differentiation 2. Integrative Growth A. Backward B. Forward 3. Diversification Growth A. Concentric B. Conglomerate 4. Joint Ventures

Defensive
1. .Retrenchment/Turnaround A. Shallow B. Deep C. Bankruptcy 2. Divestiture A. Sell-off B. Spin-off C. Split-off 3. Liquidation A. Voluntary Closure B. Assignment C. Bankruptcy 4. Harvesting