Chapter #7: Strategy and Strategic Management Strategic Management

- Competitive Advantage o The ability to do something so well that one outperforms competitors o Cost and Quality- where strategy drives an emphasis on operating efficiency and product or service quality o Knowledge and Speed- where strategy drives emphasis on innovation and speed of delivery to market for new

ideas o Barriers to Entry – where strategy drives an emphasis on creating a market stronghold that is protected from

entry by others o Financial Resources – where strategy drives on investments or loss absorption that competitors cannot match o Example: Wal-Mart’s CA is cut costs or “drive them out of the system”; where they make aggressive use of the

latest computer tech. to gain efficiencies in its supply chains, track sales, and quickly adjust orders to inventories to match buying trends

o Sustainable Competitive Advantage: the ability to outperform rivals in ways that are difficult or costly to imitate

- Strategy o A comprehensive plan guiding resource allocation to achieve long-term organization goals o “best guess” about what must be done in the future to outperform its rivals and changing conditions

- Strategic Intent o Focuses and applies organizational energies on a unifying and compelling goal o Helps ensure that resources are used with consistent strategic intent o Example: Coca-Cola – “to put a Coke within ‘arms reach’ of every consumer in the world”

Goal of strategic management is to create above-average returns for investors. - Returns exceeding those for alternative opportunities at equivalent risk. - Earning above-average returns depends in part on the organization’s competitive environment.

Strategic Management - The process of formulating and implementing strategies - Strategic Analysis: the process of analyzing the organization, the environment, and the organization’s competitive

position and current strategies - Strategic Formulation: the process of crafting strategies to guide the allocation of resources - Strategy Implementation: the process of putting strategies into action

- - Strategic Constituencies Analysis: assesses interests of stakeholders and how well the organization is responding to

them

What are the useful planning tools and techniques? - SWOT

Core competency is a special strength that gives an organization competitive advantage Important goal of assessing core competencies. Potential core competencies:

Special knowledge or expertise.

Superior technology.

Efficient manufacturing approaches.

Unique product distribution systems

- Porter’s Five Forces Model - BCG

Porter’s Model – Industry Analysis [Average return on invested capital (ROIC) 1992- 2006]

- Example of an Industry Analysis: Average ROIC % 1. Security brokers and dealers – 40.9 2. Soft Drinks - 37.6 3. Pharmaceuticals - 31.7 4. Household appliances - 19.7 5. Grocery Stores - 16.0 6. Book Publishing -13.4 7. Hotels - 10.4 8. Airlines - 5.8

Tools for External Environment Analysis- Porter’s Five Forces Model

- Potential Entry for new competitors

When a firm can easily enter a new industry, competition in that industry Increases

This threat is aggravated when new entrants can leverage their existing cash flows in other businesses

Example: Pepsi gained a major profit through the introduction of Aquafina (water company) Coca Cola introduced Dasani Universal, Sony BMG, Warner and EMI now overthrown by iTunes which is a successful music company

(totally different industries)

Increase barriers to entry through: Large economies of scale Strong brand preferences

- Threat of Substitutes

Industries with close competition with producers of substitute products have higher competition

Example: Eyeglasses were substituted Contact Lenses Newspaper Online News Mail E-mail Business Travel Video Conferencing

More pressure on pricing

As pricing for substitute products decline higher competitive pressure on the industry - Bargaining Power of Suppliers

Very large suppliers

Cost of switching raw materials is high

Example: Microsoft is a supplier to the Computer industry- Computer do not have a choice but to go to

Microsoft and purchase their software

If Microsoft increases their prices other computer industries do not have any other option

Airline Industry very short supply on pilots which puts pressure on your industry if the pilots go on strike (reason of high competition but low profits); hence high bargaining power of suppliers

- Bargaining Power of Consumers

When consumers are large and buy in bulk they enjoy more power

Bargaining power of consumers is also higher when Product is standard or undifferentiated They can easily switch to competing brands

Levels of Strategy

Business –Level Strategy

- Identifies how a division or strategic business unit will compete in its product or service domain - “how are we going to compete for customers in this industry and market?” - Decisions include; choices about product and service mix, facilities locations, new technologies - Business-level strategic decisions are driven by:

Market scope

Source of competitive advantage

Market scope and source of competitive advantage combine to generate four generic strategies. - Cost-Leadership

Seeks to operate with low costs so that products can be sold at low prices

Low prices drive sales, the low cost structure allows them to still make profits even when selling t low prices that competitors cannot match

Success= a continuing search for innovation that increase operating efficiencies throughout purchasing, productions, distribution, and other organizational systems

Timex watchers, Bic, - Differentiation

Offers products that are different from the competition

When talking about differentiation, it is meant that the firm can charge over and above the actual value of the product (charging a premium) because they made their products unique

Rolex- gives time and date; expensive because it is a prestige brand

Have strengths in R&D, marketing, and advertising - Focus Strategy

Concentrates on serving a unique market segment better than anyone else

Focused Differentiation: strategy offers a unique product to a special market segment selling a unique product to a niche market

Focused Cost Leadership: strategy seeks the lowest costs of operations within a special market segment - Strategic Instrumentalism

Makes modest changes in strategy as experience builds over time

Emergent Strategies: unfolds over time as managers learn from and respond to experience Functional-Level Strategy

- Guides activities within one specific area of operations - “how can we best utilize resources with a function to implement our business strategy?”

Management practices with each function that improve operating efficiency, product or service quality, customer service, or innovativeness Corporate-Level Strategy

- Sets long-term direction for the total enterprise - “in what industries and markets should we compete?” - Set direction and guide resources allocations for the entire enterprise - Decisions include acquisitions, expansions, and cutbacks across this complex portfolio - Grand or Master Strategies

Growth Strategies Involves expansion of the organization’s current operations Expand the size and scope of operations in respect to such things as total sales, market shares, and

operating locations “expansion trap”- where growth outruns an organization’s capacity to run effectively

Stability Strategies Maintains current operations without substantial changes

Renewal Strategies (retrenchment strategies or defensive strategies) Tries to solve problems and overcome weaknesses that are hurting performance They often cut down the size and rearrange operations to improve performance Terms that are often used - “restructuring”, “bankruptcy”, and “divestiture” Liquidation: business operations cease and assets are sold to pay creditors

Combination Strategies Pursues growth, stability, and/or retrenchment in some combination

- Growth and Diversification Strategies

Concentration: is the growth within the same business area Pursue growth strategies while still concentrating on their primary business areas

Integrative Strategies Forward Integration

Gaining ownership or increased control over distributors or retailers

You decide to grow through distribution business

Example; McDonald’s and other Fast Food Chains o Owns 23% of its 32000 restaurants worldwide o Because they are concerned that the entrepreneurs who own the franchise earn a lot

of money and they are not making not earn as much profit as expected

Example; Boise Cascade o Forest products firm o Owns 2.3 million acres of timber-lands o Distributes the Cascade line of products to Office Depot, Staples and OfficeMax o Recently acquired OfficeMax o So they will lose Staples and Office Depot because they entered the retail business

Backward Integration

Seeking ownership or control of firm’s suppliers

Example; Arcelor Mittal o World’s largest steel o Presence in 60 countries o Own 47% of iron ore mines o Intends to increase it to 75% o Creates a Monopoly

Horizontal Integration

Strategy of seeking ownership of or increased control over a firm’s competitors

Mergers, acquisitions an takeovers among competitors

Example; Oracle o Oracle decided to take over Sun Microsystem

When an organization’s present distributors are especially expensive (Forward)

When increased economics of scale provide major competitive advantage (Horizontal) When the number of suppliers is small and the number of competitors is large (Backward)

- Intensive Strategies

Market Penetration

Seeks to increase market share for present products or services in present markets through greater marketing efforts

It includes increasing number of salespersons, advertising expenditures, sales promotions

Market Development Introducing present products or services into new geographic areas Example; GM and Ford have greater revenue and profits from businesses outside the U.S. Starbucks places to open thousands of stores in China Best Buy opened its first store in China

Product Development Seeks increased sales by modifying and improving present products or services into existing markets Entails large research and development expenditures Examples; Apple introducing iPhone RIM’s BlackBerry Pearl

When current markets are not saturated with a particular product or service (Market Penetration) When an organization competes in an industry characterized by rapid technological development (Product Development) When an organization has excess production capacity (Market Development)

- Restructuring Strategies

Changes the mix or reduces the scale of operations

Reverse or change an approach that is not working and reorganize to compete better in the future

Turnaround: strategy tries to dix specific performance problems MCD lost coffee sale to Tim Hortons but they implemented “Plan to Win” Encouraged ‘coffee house’ atmosphere and added WIFI and changed the décor

Downsizing: decreases the size of operations through reducing workforce

Divestiture: sells off parts of the organization to refocus attention on core business areas - Diversification Strategies

Diversification: growth by acquisition of or investment in new and different business areas Related diversification: growth by acquiring new businesses or entering business areas that are

related to what one already does Example;

AT&T got with BellSouth

Google acquiring YouTube Unrelated diversification: growth by acquiring businesses or entering business areas that are different

from what one already does Example;

GE acquisition with NBC

Very popular in the 1970s

Considered important to diversify risks

Lost importance in the 90s as shareholders themselves can diversify their risks by simply purchasing equity in different firms across different industries

Yet, it can still be a useful strategy to avoid relying only on one industry

Example; United Technologies Aviation: core business 18th largest US manufacturer (2009 list, Industry Week) Named #1 “Most Admired” aerospace and defense company (fortune, March 2009) $58.7 billion (2008) Got into air-conditioning business known as Carrier Got with an industry called Otis 0 building elevators

- Global strategies:

Globalization strategy. World is one large market; standardize products and advertising as much as possible. Ethnocentric view.

Multidomestic strategy. Customize products and advertising to local markets as much as possible. Polycentric view.

Transnational strategy. Balance efficiencies in global operations and responsiveness to local markets. Geocentric view.

- Cooperative strategies

Strategic alliances — two or more organizations partner to pursue an area of mutual interest.

Types of strategic alliances: Outsourcing alliances – contracting to purchase important services from another organization Supplier alliances – preferred supplier relationships guarantee a smooth and timely flow of quality

supplies among alliance partners Distribution alliances – firms join together to accomplish sales and distribution of products or services Co-opetition – the strategy of working with rivals on projects of mutual benefit

- E-business strategies

The strategic use of the Internet to gain competitive advantage.

Popular e-business strategies Business-to-business (B2B) strategies

Uses IT and web portals to link organizations vertically in supply chains Business-to-customer (B2C) strategies

Uses IT and web portals to link business - Strategic portfolio planning:

Portfolio planning seeks the best mix of investments among alternative business opportunities.

BCG Matrix analyzes business opportunities according to market growth rate and market share BCG Boston Consulting Group Matrix Strategic Business Unit (Commonly referred to as SBU)

- Boston Consulting Group - Describes a business focused on a particular product market - Example: GE (GE Healthcare, GE Aviation, GE Aplliances, GE Money, GE Security, NBC Universal, Clean Water, GE,

Energy)

GE is into 15 different businesses or SBUs; hence they are all separate and have different CEOs and Org. Culture

They are listed as separate entities in the stock exchange market - Conglomerates

Large organizations, companies operating in different industries

Hugely successful during 1960s

Hedge or disperse you risk

Japan calls it Keiretsu Examples:

Matsuhita

Toyota very complex Keiretsu

Mitsubihi Motors

South Korea calls it Chaebols Example:

Hyundai o Automobiles o Engineering, construction, shipbuilding and industrial activity o Finances

Samsung o Electronics o Petrochemicals o Constructions (Petronas Towers in Malaysia

LG o Home appliances and electronics o Petrochemicals and chemicals

Business Houses in India Example:

Aditya Birla Group (Minacs)

Tata Group

Reliance Group BCG Matrix How to construct a growth share matrix (also known as BCG matrix) Measuring the attractiveness of the market Market Growth Rate (2009) = 100 x (Total Market in 2009) – (Total Market in 2008) (Total Market in 2008) Relative Market Share (2009) = Business Sales in 2009________

Leading Competitor’s Sales in 2009 *value of 2.0 will mean that that you have twice as much market share compared to the next leading competitor Measuring the Contribution of each business to the firm It represents the area in the Matrix = Measured as the sales of the business

- Cash Cow

Declining Market Growth Rate

But it is still Dominant

Not much of competition

Expenditure is minimal but Profit is high

Own most of the Market Share

Large Positive Cash Flow

You can spend money through spend money towards Question Marks, Stars, or Dogs

Mar

ket

Gro

wth

Relative Market Share

HIGH

HIGH

LOW

LOW

A B

C

Best implication is to spend it on Stars but not Dogs however you can make a choice of spending it on Question Mark

If it turns into a Dog it is not an ideal sequence; they lost their dominance

- Star

High Growth Industry

Have a Dominant position in the Market Share sector

To maintain the Dominant position you have to have a lot expenditure

Modest Positive or Negative Cash Flow

The ideal sequence is to turn itself into Cash Cow

If it turns itself into a Question Mark it is perceived as a negative ideal sequence because they lose its dominance

Ex. RIM is moving toward question marks because they are losing its sales to Google and Apple - Question Marks

High Market Growth Rate

Have a very Weak position in the Market Share sector

Need to spend a lot of money in order to sustain and stay in the industry

Hence a lot of expenditure on advertising and try to move to stars

Large Negative Cash Flow

The ideal sequence is to turn itself into stars

If it turns into a Dog it is not good - Dogs

Low Market Growth Rate

Weak position in the Relative Market Share

Modest Positive or Negative Cash Flow How is this Matrix helpful?

- Graphic display offers a powerful and compact picture of the strengths of different businesses - Capacity of each business to generate cash - Suggests strategic directions

How will you select a cut-off? Step #1

Mar

ket

Gro

wth

Relative Market

Share

HIGH

HIGH

LOW

LOW

? choose among

the two

HIGH GROWTH

BUSINESS

LOW GROWTH

BUSINESS

SUGGESTIONS - If all business belong to one industry then,

o Find the average growth rate of the industry

- In a highly diversified firm o Find the growth of GNP (Gross National

Product) - In a highly competitive industry

o Find the weighted average of the growth rate of each individual business

- Corporate Growth Rate

CUT OFF

Step #2

Division Division Sales Sales of Top Co. % in the Industry % Growth Rate of the Industry

1 80 80 15

2 40 50 10

3 10 50 1

4 60 60 -20

5 5 25 -10

Consider relative market share cut off as 0.5 Market growth rate cut off as 0%

BCG Limitations - Only a snapshot - High market share is not the only success factor

for some company, a high market share is not really that important

They might want to just focus on profit margin - High market growth rate is not the only attraction for an industry - Sometimes it is difficult to define a ‘market’

Neutrogena a company with the purpose of medicated soap Hence it had a low market growth and low relative market share, hence it will be a dog However, it created a new target market for people with the need for medicated soaps With a niche market; they were placed as Stars

Strategy Implementation - A strategy requires supporting structures, a good allocation of tasks and workflow designs, and the right people to

staff all aspects of operations - Needs motivation, building individual performance commitments, and utilizing teams and teamwork to their best

advantage - Strategic planning failures that hinder strategy implementation:

Failures of substance

Inadequate attention to major strategic planning elements

Mar

ket

Gro

wth

Relative Market

Share

HIGH

HIGH

LOW

LOW Usually 0.5

*leading positions is usually 1.0

WEAK

POSITION

DOMINANT

POSITION

CU

T O

FF

0.5

0%

Market Growth

Relative Market Share

Division #1 Division #2

Division #4

Division #5

Division #3

Failures of process

Poor handling of strategy implementation

Lack of participation error - a failure to include key persons in strategic planning

Goal displacement error

- Corporate governance:

System of control and performance monitoring of top management.

Done by boards of directors and other major stakeholder representatives.

Controversies regarding roles of inside directors and outside directors.

Increasing emphasis on corporate governance in contemporary businesses.

- Strategic control

Making sure strategies are well implemented and that poor strategies are scrapped or modified.

The top leadership of a firm or organization is expected to exercise strategic control of the enterprise.

- Strategic leadership

The capability to inspire people to successfully engage in a process of continuous change, performance

enhancement, and implementation of organizational strategies.

Critical tasks of strategic leadership

Be a guardian of trade-offs – it is the leader’s job to make sure that the organization’s resources are

allocated in wars consistent with the strategy. This requires the discipline to sort through many

competing ideas and alternatives, stay on course, and not get sidetracked

Create a sense of urgency – not allowing the organization and its members to grow slow and

complacent. Even when doing well, the leader keeps the focus on getting better and being alert to

condition that require adjustments to the strategy

Ensure that everyone understands the strategy – unless strategies are understood, the daily task and

contributions of people lose context and purpose. Everyone might work very hard, but without

alignment to strategy the impact is dispersed and fails to advance common goals

Be a teacher – it is the leader’s job to teach the strategy and make it a ‘cause’. The strategy will work if it becomes an ever-present commitment throughout the organization. These that a strategic leader must be a great communicator. Everyone must understand the strategy and how it makes their organization different from others