Strategic Mangement

Introduction to Strategy

Kelley Summer 2009 GM 105 Strategic Management

What is a Strategy?

Examples of Corporate Strategy in 2009 GM files for Chapter 11 bankruptcy Chrysler is sold to Fiat and leaving bankruptcy Best Buy is adding patio furniture to its product assortment

A strategy is a business approach to a set of competitive moves that are designed to generate a successful outcome

A strategy is management’s game plan for Strengthening the organization’s competitive position Satisfying customers Achieving performance targets

Three big questions involved in a strategy Where are we now? Where do we want to go? How will we get there? How do we know if we got there?


Tasks Involved in Strategic Management

Defining business and stating a mission Setting measurable objectives Crafting a strategy to achieve objectives Implementing a strategy Evaluating performance of the strategy, reviewing new developments and

taking corrective action


Developing a Mission & Objectives

An organization’s Mission Reflects management’s vision of what the organization seeks to do and become Provides a clear view of what the organization is trying to accomplish for its

customers Indicates intent to take a business position

An organization’s Objectives Convert the mission into performance targets Track performance over time Must be achievable Two types

Financial – outcomes that relate to improving financial performance Strategic – outcomes that will result in greater competitiveness & stronger long-term

market position


Examples of Types of Objectives

Financial Increase earnings growth from 10 to 15% per year Boost return on equity investment from 15 to 20% in 2009 Achieve and maintain a AAA bond rating

Strategic Increase market share from 18 to 22% in 2009 Overtake rivals on quality or customer service by 2010 Attain lower overall costs that rivals by 2011 Become leader in new product introductions by 2010 Achieve technological superiority by 2012


What Does a Strategy Include?

How to satisfy customers How to grow the business

Organic growth Acquisition

How to respond to changing industry and market conditions How to best capitalize on new opportunities How to manage each functional piece of business How to achieve strategic and financial objectives


What is a Strategic Plan

A strategic plan maps Where the organization is headed Short and long range performance targets Actions of management to achieve desired outcomes

A strategic plan consists of Mission statement Strategic and financial performance objectives Comprehensive strategy for achieving the objectives


Implementing Strategy

Implementing a strategy involves Creating fits between the way things are done and what it takes for effective

strategy execution Executing strategy efficiently and effectively Producing desired results on time

The most important fit is between a strategy and Organizational capabilities A reward structure Internal support systems Organizational culture


Evaluating Performance

The tasks of strategic management are not one-time only exercises because Times and conditions change Events change over time New ways to do things surface New managers have different ideas take over

Managers must Constantly evaluate performance Monitor situation and decide how well things are working Make necessary adjustments

Alter organization’s long-term direction Raise or lower performance objectives Modify strategy


A Situation Analysis

A situation analysis identifies strategic options and opportunities A situation analysis involves

External factors: Macroenvironment (industry and competitive conditions) Internal factors: Microenvironment (organization’s internal situation and

competitive position) External factors

Industry’s dominant economic traits Competitive forces Competitive moves of rivals Key success factors Attractiveness of the industry


SWOT

Internal Factors Strengths Weaknesses

Ex F Opportunitiest ae cr t Threatsa ol r s


Five Forces Model

Rivalry among sellers

SubstituteProducts

Buyers

Potential EntrantsSuppliers


Analysis of Competitive Forces

The analysis is designed to identify the main sources of competitive forces and the strength of the pressure

Sources of competitive pressures are defined by Rivalry among competitors Substitute products Potential entry Bargaining power of suppliers Bargaining power of buyers

Rate the strength of each competitive force Explain how each competitive force works and its role in the overall

competitive picture


Environmental Scanning

A way to monitor and interpret social, political, economic, ecological and technological events in an effort to spot trends and conditions that could eventually impact the industry and the organization.

The purpose of environmental scanning is to raise the consciousness of managers about potential developments that could have an important impact on industry conditions and pose new opportunities and threats


Assessing Competitive Positions: Strategic Groups

A Strategic Group consists of those rival firms with similar competitive approaches and positions in an industry

A Strategic Group displays different competitive positions that rival firms occupy

Organizations in the same strategic group have one or more competitive characteristics in common Sell in the same price/quality range Cover same geographic areas Be vertically integrated to same degree Emphasize same types of distribution channels Offer buyers similar services Use identical technological approaches


Competitor Analysis

An organization’s strategy is affected by Current strategies of competitors Actions competitors are likely to take

Profile of key competitors involves studying Current position in the industry of each competitor Strategic objectives and recent business plans of each competitor Basic competitive approach of each competitor

Successful strategies take into account Understanding competitor strategies Evaluating their vulnerability to driving forces and competitive pressures Sizing strengths and weaknesses of each competitor Anticipating each competitor’s next move


Key Industry Success Factors

Key success factors spell the difference between Profit and loss Competitive success or failure

A key success factor can be A specific skill or talent Competitive capability Something an organization must do to satisfy customers

Being distinctively better than competitors on one or more key success factors produces a competitive advantage

Key success factors consist of 3-5 major determinants of financial and competitive success in an industry


Competitive Strategy


Competitive Strategy

A competitive strategy consists of moves to Attract customers Withstand competitive pressures Strengthen an organization’s market position

The objective of a competitive strategy is to generate a competitive advantage, increase the loyalty of customers and beat competitors

A competitive strategy is narrower in scope than a business strategy Five competitive strategies are

Overall low-cost leadership strategy Best cost provider strategy Broad differentiation strategy Focused low-cost strategy Focused differentiation strategy


Overall Low-Cost Leadership Strategy

Strive to be the overall low-cost provider in an industry How to achieve overall low-cost leadership

Scrutinize each cost activity Manage each cost lower year after year Reengineer cost activities to reduce overall costs Cut some cost activities out of the value chain

Competitive strengths of a overall low-cost strategy Organization in a better position to compete offensively on price Organization is better able to negotiate with large customers Organization is able to use price as a defense against substitutes Low cost is a significant barrier to entry Organization is more insulated from the power of suppliers


Overall Low-Cost Leadership Strategy

Carrier 3Q 2008 (cents) Carrier 3Q 2008 (cents)

Northwest 15.65 Frontier 11.92

United 14.64 Delta 11.82

US Airways 14.21 Jet Blue 10.06

Continental 12.74 Southwest 9.74

American 12.69 AirTran 9.66


When Does an Overall Low-Cost Strategy Work the Best

When price competition is a dominant competitive force The product is a “commodity” There are few ways to differentiate the product Most customers have similar needs/requirements Customers incur low switching costs changing sellers Customers are large and have significant bargaining power


When Doesn’t a Overall Low-Cost Strategy Work

When technological breakthroughs open cost reductions for competitors, negating a low-cost provider’s efficiency advantage

Competitors find it relatively easy and inexpensive to imitate the leader’s low cost methods

Low-cost leader focuses so much on cost reduction that the organization fails to respond to Changes in customer requirements for quality and service New product developments Reduced customer sensitivity to price


Broad Differentiation Strategies

Striving to build customer loyalty by differentiating an organization’s products from competitors’ products

Keys to success include Finding ways to differentiate to create value for customers that are not easily

copied Not spending more to differentiate than the price premium that can be charged

A successful differential strategy allows an organization to Set a premium price Increase unit sales Build brand loyalty


Broad Differentiation Strategies

Where to look for differentiation opportunities Supply chain Research and development Production activities Marketing, sales and service activities

Strengths of a Differentiation Strategy Customers develop loyalty to the brand Brand loyalty acts as an entry barrier Organization is better able to fend off threats of substitute products because of

brand loyalty Reduces bargaining power of large customers since other brands are less

attractive Seller may be in a better position to resist efforts of suppliers to raise prices


Pitfalls of a Broad Differentiation Strategy

Trying to differentiate on an unimportant product feature that doesn’t result in providing more value to the customer

Over differentiating the product such that the product features exceed the customers’ needs

Charging a price premium that buyers perceive as too high Ignoring need to signal value Not identifying what customers consider valuable


Best-Cost Provider Strategy

Striving to give customers more value for the money by combining an emphasis on low cost with an emphasis on upscale differentiation Combines low-cost and differentiation

The objective is to create superior value by meeting or beating customer expectation on product attributes and beating their price expectations

Keys to success Match close competitors on key product attributes and beat them on cost Expertise at incorporating upscale product attributes at a lower cost than

competitors Contain costs by providing customers a better product


Advantages of Best-Cost Provider Strategy

Competitive advantage comes from matching close competitors on key product attributes and beating them on price

Most successful best-cost providers have skills to simultaneously manage costs down and product quality up

Best-cost provider can often beat an overall low-cost strategy and a broad differentiation strategy where Customer diversity makes product differentiation the norm Many customers are price and value sensitive


Focus Strategies

Focus strategy based on low-cost Concentrate on a narrow customer segment beating the competition on lower

cost Focus strategy based on differentiation

Offering niche customers a product customized to their needs Overall objective of both focus strategies is to do a better job of serving a

niche target market than competitors Keys to success

Choose a niche were customers have a distinctive preference, unique needs or special requirements

Develop a unique ability to serve the needs of a niche target market


What Makes a Niche Attractive?

Large enough to be profitable Good growth potential Not critical to the success of major competitors Organization has the resources to effectively serve the niche Organization can defend itself against challengers through a superior ability

to serve the niche No competitors are focusing on the niche


Strengths and Risks of Focus Strategies

Strengths Competitors don’t have the motivation to meet specialized needs of the niche Organization’s competitive advantage could be seen as a barrier to entry Organization’s competitive advantage provides an obstacle for substitutes Organization’s ability to meet the needs of customers in the niche can reduce the

bargaining power of large niche buyers Risks

Broad differentiated competitors may find effective ways to enter the niche Niche customers’ preferences may move toward the product attributes desired by

a larger market segment Profitability may be limited if too many competitors enter the niche


From Single-Business to Diversification

Stage 1 - Single-business serves a local or regional market Stage 2 – Geographic expansion Stage 3 – Vertical integration Stage 4 – Growth slows so the business diversifies


The Growth Matrix

ProductsPresent New

Ma Presentrke Newts

Market Product Penetration Development

Market Diversification Development


Market Penetration

Use when markets are not saturated with an organization’s products Use when the usage rate of present customers can be increased Use when the market shares of the major competitors has been declining Use when the relationship between sales and marketing expenses is high Use when increased economies of scale provide the opportunity for

competitive advantages


Product Development

Use when the organization has successful products that are in the maturity stage of the product life cycle. The objective is to attract satisfied customers to try new, improved products

Use when an organization competes in an industry that is characterized by rapid technological change

Use when competitors offer better quality products at comparable prices Use if the organization competes in a high-growth industry Use when the organization has strong research and development

capabilities


Market Development

Use when channels of distribution are available, reliable and inexpensive Use when the organization is very successful in what it does Use when the organization has excess production capacity Use when the organization possesses the needed capital and human

resources to manage the expanded operations Use when unsaturated markets exist


Diversification

Use when entering new industries Acquire an existing company in the target industry Start a new company internally Form a joint venture

Acquiring an existing company Quick entry into target market Able to hurdle entry barriers

Technological inexperience Gain access to reliable suppliers Being of a size to match competitors in terms of efficiency and costs Get distribution access


Start a New Company

Use when ample time exists to enter by starting from scratch Use if existing competitors are slow to respond to changes in the industry Use if it is more economical to start from scratch rather than acquiring an

existing company Use if the organization already has most of the needed skills Use if additional capacity will not adversely impact the industry Use when the new company doesn’t have to go head-to-head against

powerful competitors


Joint Ventures

Use when it is too risky to go it alone Use when pooling competencies of partners provides a stronger competitor Drawbacks

Which partner will do what Who has effective control

Potential conflicts Sourcing of components Control over cash flows and profits Whether operations should conform to one partner or the other


Linking the Budget to Strategy

Implementation of a strategy requires Enough resources to support the strategy Screening of requests for new capital projects and bigger operating budgets Shifting resources to support new strategy priorities

- Downsizing some areas and upsizing other areas- Eliminating activities that are no longer needed

How well budget allocations are linked to the needs of a strategycan either promote or impede the implementation process.


Implementing Best Practices & Continuous Improvement

Implementing a strategy involves adopting “best practices” Best practices means:

Benchmarking is an integral part of a successfully implemented strategy Continuous improvement programs

Total quality management - TQM


Instituting Best Practices & Continuous Improvement

Quality improvement programs are linked to Defect-free manufacture Superior product quality Superior customer service Total customer satisfaction

Identifying & implementing best practices is a journey, not a destination; it’s an exercise in doing things in a world-class way.


Formal Reporting of Strategy-Critical Information

Accurate & timely information is essential to guide action Prompt feedback on implementation initiatives are needed BEFORE actions

are fully completed Monitoring early implementation actions serves two purposes

Quick detection of the need to adjust the strategy or its implementation Making sure things are moving in the planned direction

Critical success variables must be track as needed


Formal Reporting of Strategy-Critical Information

Information systems should cover Customer data Operations data Employee data Financial data

Accurate information allows a strategy to be monitored and corrective action to be taken promptly


Commitment to Chosen Strategy

Implementing rewards & incentives inducing employees to make the strategy work The reward structure must motivate people to do the very things it takes to mjake

the strategy work successfully Requiring results, not intentions Keys to implementing pay-for-performance programs

Make performance targets the basis for structuring the incentive system Ensure performance targets are clearly defined and every person/group is

accountable for achieving them Be fair and impartial in comparing actual performance against targets Avoid rewarding non-performers Explore reasons for deviations (“poor” individual performance or circumstances

beyond the individual’s control)


Strategic Mangement

Business

Transcript of Strategic Mangement