FormulationFormulation

Formulation OverviewFormulation OverviewWant to create a sustainable competitive advantage

Grounded in current mission, objectives, and strategies

1. Identify rich range of strategic alternatives

2. Balanced evaluation of + and - of alternatives

3. Decide on alternatives to be implemented/recommended

Three Levels of StrategyThree Levels of Strategy

Corporate level strategyCorporate level strategy

Competitive (business level) strategyCompetitive (business level) strategy

Functional strategiesFunctional strategies

… …all need to be consistent and in all need to be consistent and in alignmentalignment

Corporate Level StrategyCorporate Level Strategy

Directional strategy (retrenchment through growth)

Portfolio strategy (what LOB’s for future)

Parenting strategy (allocation of resources + connections)

Directional Growth StrategiesDirectional Growth Strategies

ConcentrationConcentration

– Vertical integrationVertical integration

– Horizontal growthHorizontal growth

DiversificationDiversification

– Related (concentric)Related (concentric)

– Unrelated (conglomerate)Unrelated (conglomerate)

Mergers, acquisitions, strategic alliancesMergers, acquisitions, strategic alliances

Other Directional StrategiesOther Directional Strategies

StabilityStability

RetrenchmentRetrenchment

… …often more appropriate than growthoften more appropriate than growth

strategies, which tend to be overusedstrategies, which tend to be overused

Competitive StrategyCompetitive Strategy

(Sometimes called business level strategy)(Sometimes called business level strategy)

How we will compete within each line of business (LOB) or strategic business unit (SBU)

Porter’s four generic competitive strategies

Variations plus tactics

Generic Competitive StrategiesGeneric Competitive Strategies

Competitive Advantage

Lower cost

Differentiation

Broad Price leadership

Differentiation

Competitive Scope

Narrow Price focus

Differentiation Focus

Competitive AdvantageCompetitive Advantage

A firm’s ability to create value in a way that its A firm’s ability to create value in a way that its rivals cannotrivals cannot

When a firm has the potential to earn a When a firm has the potential to earn a persistently higher rate of profit than its rivalspersistently higher rate of profit than its rivals

Competitive advantage means a lack of Competitive advantage means a lack of equilibrium with rival firmsequilibrium with rival firms

Being distinctively better than rivals on 1-2 Being distinctively better than rivals on 1-2 key success factors usually translates into key success factors usually translates into competitive advantagecompetitive advantage

How does competitive advantage emerge?

External sources ofchange e.g.:•Changing customer demand•Changing prices•Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective

in exploiting change

Some firmshave greater creative

and innovativecapability

The Emergence of Competitive AdvantageThe Emergence of Competitive AdvantageThe Emergence of Competitive AdvantageThe Emergence of Competitive Advantage

Competitive Advantage from Competitive Advantage from Responsiveness Responsiveness toto External Change External Change

Any external change creates opportunitiesAny external change creates opportunities

Frequently, speed of response is criticalFrequently, speed of response is critical

Responsiveness requires:Responsiveness requires:

– One key resource: informationOne key resource: information

– One key capability: flexibilityOne key capability: flexibility

For example, Wal-Mart’s purchasing and For example, Wal-Mart’s purchasing and distribution driven by point-of-sale datadistribution driven by point-of-sale data

Competitive Advantage from Internally-Competitive Advantage from Internally-Generated Change: Strategic InnovationGenerated Change: Strategic InnovationCompetitive Advantage from Internally-Competitive Advantage from Internally-Generated Change: Strategic InnovationGenerated Change: Strategic Innovation

Characteristics of innovative strategies:Characteristics of innovative strategies:

– Associated with new entrants to an Associated with new entrants to an industry industry (e.g. IKEA in furniture, Home Depot(e.g. IKEA in furniture, Home Depot, Dell in , Dell in PCsPCs))

– Reconcile conflicting performance goalsReconcile conflicting performance goals (e.g. Toyota’s lean production system combines low (e.g. Toyota’s lean production system combines low cost, high quality, and flexibility)cost, high quality, and flexibility)

– Reconfiguring the value chainReconfiguring the value chain (e.g. Southwest (e.g. Southwest Airlines’ simplification of the normal airline value chain)Airlines’ simplification of the normal airline value chain)

Sustaining Competitive AdvantageSustaining Competitive Advantage

Competitive advantage is subject to Competitive advantage is subject to erosion by competitorserosion by competitors

– ……by imitation or innovationby imitation or innovation

Competitive imitation requires:Competitive imitation requires:

– Identification of a competitive advantageIdentification of a competitive advantage

– Incentive to imitateIncentive to imitate

– Diagnosis of key featuresDiagnosis of key features

– Resource acquisitionResource acquisition

REQUIREMENT FOR IMITATION

Identification - Obscure superior performance

- Deterrence--signal aggressiveIncentives for imitation intentions to imitators

- Pre-emption--exploit all available investment opportunities

- Rely upon multiple sources of Diagnosis competitive advantage to create

“causal ambiguity”

- Base competitive advantage upon Resource acquisition resources and capabilities that are

immobile and difficult to replicate

ISOLATING MECHANISM

Sustaining Competitive Advantage Against ImitationSustaining Competitive Advantage Against ImitationSustaining Competitive Advantage Against ImitationSustaining Competitive Advantage Against Imitation

TRADING MARKETS

• None (efficient markets)• Imperfect information• Transaction costs• Systematic behavioral trends

• Overshooting

NoneInsider tradingCost minimizationSuperior diagnosis(e.g. chart analysis)Contrarianism

PRODUCTION MARKETS

• Barriers to imitation

• Barriers to innovation

Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them.

Difficult to influence or exploit.

MARKET TYPE

SOURCE OF IMPERFECTION OF

COMPETITION

OPPORTUNITY FOR COMPETITIVE

ADVANTAGE

Competitive Advantage in Different Industry Settings: Competitive Advantage in Different Industry Settings: Trading Trading Markets Markets and Productionand Production Markets Markets

Competitive Advantage in Different Industry Settings: Competitive Advantage in Different Industry Settings: Trading Trading Markets Markets and Productionand Production Markets Markets

Functional Level StrategyFunctional Level Strategy

More localized and shorter-horizon More localized and shorter-horizon

strategiesstrategies

Deal with how each functional area will Deal with how each functional area will

carry out its activities to be effective and carry out its activities to be effective and

maximize resource productivitymaximize resource productivity

Need to ensure that the set of Need to ensure that the set of

recommended strategies recommended strategies

address all the critical issues address all the critical issues

wellwell

International StrategiesInternational StrategiesLicensing

Management contracts

Exporting

Joint ventures, production sharing, subcontract arrangements

Turnkey construction contracts

BOT (build, operate, transfer) contracts

Acquisitions

Green-field development

ImplementationImplementation

ImplementationImplementation

Third stage in strategic management process

Vital, often neglected

Reread notes on implementation

Need a good implementation plan

“Then any path will do” (Cheshire Cat)

“If you don’t know where you’re going, you might wind up somewhere else!” (Yogi Berra)

BUT you have to work with the situation as your implementation proceeds

“Plans get you into things, but you got to work your way out.” (Will Rogers, Jr.)

Any implementation plan needs to answer:

What?

How?

Who?

When?

Where?

Why (are we doing it this way)?

An implementation plan is a An implementation plan is a sequence of action stepssequence of action steps

Action steps in an implementation plan may result from considering:– Basic steps necessary– Resources– Timing– Support– Reward systems– Organization structure– Culture– Tracking & control systems

Some problems in rewarding & Some problems in rewarding & measuring performancemeasuring performance

Lack of valid, measurable objectives

Can’t get timely, valid information

Side effects:

– Short-term orientation

– Goal displacement

Behavior substitution

Suboptimization

Behavior SubstitutionBehavior Substitution