Artifact project

Chapter_7.pptx

Home >Business & Finance homework help >Management homework help >Artifact project

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

BUS 211 Principles of Management

Chapter 7: Managing Strategy and Strategic Planning

7 - ‹#›

Nature of Strategic Management

7 - ‹#›

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 strategy

A strategy that promotes a superior alignment between the organization and its environment and the achievement of strategic goals.

Components of Strategy

7 - ‹#›

Distinctive

Emphasize for students that a distinctive competence always exists in a limited area and does not imply competencies in other areas. For example, Volvos are not known for their sporty performance or their trend-setting appearance. In another example, Wal-Mart has a distinctive competence in keeping prices low, but it is not especially good at offering high-quality products or exceptional service. Competence - For decades, Volvo has been associated with exceptionally safe cars. Other car makers seem unable or unwilling to compete with Volvo in those areas.

Scope - For an international business, the scope component of strategy specifies in which foreign markets the firm intends to compete.

Resource deployment For an international business, the resource deployment component of strategy determines the concentration of firm resources and efforts in various markets.

Strategy

Distinctive competence

An organizational strength possessed by only a small number of competing firms.

Scope

Specifies the range of markets in which an organization will compete.

Resource deployment

How a firm distributes its resources across the areas in which it competes.

Levels of Strategy

7 - ‹#›

Both must be developed together, at the same time.

Decisions made at the corporate level, such as to increase or decrease diversification, will then require changes in the firm’s business-level strategy.

Decisions made at the business level, for example to pursue a differentiation strategy, will require changes at the corporate-level also.

Most firms that are just being founded have only a single business, and in those firms, the business-level strategy will be developed first.

However, for a diversified firm, corporate and business strategies are formulated and implemented simultaneously.

Extra Example: A good example that helps distinguish between business- and corporate-level strategies is PepsiCo. Among other things, PepsiCo owns

Pepsi soft drinks and Frito-Lay (Doritos, Ruffles, etc.). Determining which businesses PepsiCo will own is part of its corporate-level strategy;

deciding how each separate business will compete is part of its business-level strategy.

An additional level of strategy is functional level. This refers to strategies developed for specific functional areas such as marketing, finance, and so forth.

Business-level strategy

The set of strategic alternatives from which an organization chooses as it conducts business in a particular industry or market.

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

Strategy formulation

is the set of processes involved in creating or determining the strategies of the organization

it focuses on the content of strategies.

Strategy implementation

is the methods by which strategies are executed within the organization

it focuses on the processes which achieve strategies.

7 - ‹#›

Strategy Formulation and Implementation

Deliberate strategy

is a chosen plan of action implemented to support specific goals.

Emergent strategy

is a developed pattern of actions in the absence of mission and goals or despite mission and goals.

7 - ‹#›

A firm using a deliberate strategy will identify problems, gather and analyze information, formulate alternative courses of action, choose the best alternative,

and then work to implement the chosen strategy. The process will be rational and systematic.

Texas Instruments – uses a planning process that assigns most senior managers two distinct responsibilities: an operational, short-term responsibility and a strategic long-term responsibility. This helps managers make short term operational decision while keeping in mind longer term goals and objectives.

On the other hand, an emergent strategy is one that is not planned in a formal or rational way, but rather it just emerges as a pattern in a series of actions.

Actions are not pre-planned. When a firm notices that certain actions lead to desirable outcomes, those actions are repeated.

3M – invention of invisible tape – engineers working independently – took it to their boss. Did not have a major market potential because not part of approved R & D plan. Once product evaluated by higher levels was it accepted

Figure 7.1

SWOT Analysis

SWOT is an acronym standing for Strengths, Weaknesses, Opportunities, and Threats.

7 - ‹#›

Using SWOT Analysis to Formulate Strategy

Evaluating an organization’s strengths

Organizational strengths

are skills or capabilities enabling an organization to conceive of and 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.

7 - ‹#›

Using SWOT Analysis to Formulate Strategy

Evaluating an organization’s strengths

A distinctive competence is a strength possessed by a small number of firms.

Organizations that exploit these competencies often obtain a competitive advantage.

Strategic imitation is duplicating another’s competence into a valuable strategy.

Sustained competitive advantage exists after all attempts at strategic imitation have ceased.

7 - ‹#›

A distinctive competency is an internal strength or capability that is possessed by only a few firms.

When a firm is able to successfully exploit a distinctive competency, it may obtain a competitive advantage over its rivals.

When the firm is able to maintain a competitive advantage over its rivals for an extended period of time, it becomes a sustained competitive advantage.

Reasons a distinctive competence might not be imitable:

Its acquisition or development may depend on unique historical circumstances that other firms cannot replicate.

Its nature and character might not be known or understood by competing firms.

It is based on complex social phenomena like teamwork or culture.

7 - ‹#›

Examples

Price competition is among the easiest strategies to imitate. For example, any time an airline lowers its prices to attract new customers, competing airlines are able to imitate its strategy within hours.

If a low-price strategy is easily imitated, is it likely to lead to a sustainable competitive advantage? Students should realize that that is unlikely. On the other hand, how has low pricing created a sustainable competitive advantage for Wal-Mart? Hint: The students should examine how the low prices are achieved. They will find that Wal-Mart’s actions, such as automating many functions and developing close relationships with suppliers, are themselves not readily imitated.

During World War II, Coca-Cola’s CEO decreed that every U.S. soldier abroad should have access to a 5-cent bottle of Coke. With government assistance, the firm built 64 overseas bottling plants. This early entry into global markets gave Coke an advantage over Pepsi that it has never relinquished.

Using SWOT Analysis to Formulate Strategy

Evaluating an organization’s weaknesses

Organizational weaknesses

are skills and capabilities that do not enable (and may limit) an organization to choose and implement strategies that support its mission.

Two ways to address weaknesses

invest to obtain strengths or modify mission.

A competitive disadvantage exists when a firm is not implementing valuable strategies implemented in competing firms.

7 - ‹#›

Using SWOT Analysis to Formulate Strategy

Evaluating opportunities and threats requires analyzing the environment.

Organizational opportunities

are areas in the environment that, if exploited, may generate higher performance.

Organizational threats

areas in the environment that increase the difficulty of an organization’s achieving high performance.

7 - ‹#›

Porter’s five forces model of the competitive environment can be used to characterize the extent of opportunity and threat in an organization’s environment.

Porter’s five forces are the level of rivalry, power of suppliers, power of buyers, threat of substitutes, and threat of new entrants.

There are three approaches to formulating business-level strategy.

Formulating Business-Level Strategies

7 - ‹#›

Porter’s Generic Strategies

The Miles and Snow Typology

Product Life Cycle Strategies

Formulating Business-Level Strategies Porter’s Generic Strategies

Differentiation strategy

seeks to distinguish itself from competitors through the quality of its products and services.

Overall cost leadership strategy

seeks to gain a competitive advantage by reducing its costs below competing firms.

Focus strategy

concentrates on a specific regional market, product line, or group of buyers.

7 - ‹#›

Table 7.1

Porter’s Generic Strategies

7 - ‹#›

Example

Volkswagen sold its original Beetle automobile in the United States until the 1970s.

The original Beetle was made of inexpensive materials, was built using an efficient mass production technology, and offered few options.

Then, in the 1990s, Volkswagen introduced its new Beetle, which has a distinctive style, provides more optional features, and is priced for upscale buyers.

7 - ‹#›

What was Volkswagen’s strategy with the original Beetle—product differentiation, low cost, or focus?

Which strategy did Volkswagen implement with its new Beetle?

7 - ‹#›

The original Beetle was clearly part of a low cost strategy with its emphasis on efficiency, inexpensive components, lack of distinguishing features, and low price.

The new Beetle signals a switch to a differentiation strategy because of its style, customization, up-scale target market, and higher price.

Formulating Business-Level Strategies The Miles and Snow Typology

Prospector strategy

encourages creativity and flexibility and is often decentralized.

Defender strategy

focuses on lowering costs and improving performance of current products.

Analyzer strategy

maintains current businesses and is somewhat innovative in new businesses.

Reactor strategy

has no consistent approach to strategy.

7 - ‹#›

Prospector - Sony also uses a prospector strategy. The firm is constantly on the alert for new product ideas and/or ways to extend its current products into new markets. 3M – encourages development of new products and ideas in a creative and entrepreneurial way - invisible tape and anit-stain fabric treatments

Sony also uses a prospector strategy. The firm is constantly on the alert for new product ideas and/or ways to extend its current products into new markets.

Defender – BIC – less entrepreneurial style and emphasizing efficient manufacturing and customer satisfaction, eBay – defends core business focus – auction business - but is expanding into foreign markets

Domino’s Pizza. After losing ground to Pizza Hut and Little Caesar’s, Domino’s has been aggressively working to protect its current market share and gain back what was lost.

In contrast to Sony which is a prospector, Matsushita is a defender in the consumer electronics industry.

Analyzer – Most large companies – want to both protect their base of operations and create new market opportunities –

Dell Computer also uses an analyzer strategy. Its expansion outside of the personal computer market has been slow and gradual,

and it keeps as its primary orientation the protection of its lucrative direct sales niche.

Reactor – most firms will deny using this – reason for RadioShack collapse

Kmart might be a good example of a reactor. After once ruling the discount world, the firm grew complacent and was eventually

passed by Wal-Mart. It had to merge with Sears in order to have a chance of survival.

Table 7.2

The Miles and Snow Typology

7 - ‹#›

Formulating Business-Level Strategies

Product life cycle

is a model portraying how sales volume for products change over the life of the product.

Different stages call for different strategies.

Introduction stage

Demand may be very high.

Focus on increasing production, keeping quality high, and managing inventories and cash flow.

7 - ‹#›

Figure 7.2

The Product Life Cycle

7 - ‹#›

Formulating Business-Level Strategies

Product life cycle

Growth stage

Sales continue to grow.

Focus on quality/delivery and begin to differentiate.

Maturity stage

Demand begins to slow.

Focus on low costs and search for new products.

Decline stage

Total sales decline.

Firms may close, or differentiate and cut costs.

7 - ‹#›

Some firms extend product life cycles by introducing them into less-developed foreign markets.

For example, a line of home appliances that is entering the decline stage in Japan, Europe, or the United States

might be seen as advanced technology in less developed regions.

Implementing Business-Level Strategies 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.

7 - ‹#›

Neiman Marcus – advertised as a “total shopping experience” – not just clothes or electronics - $3,000 pet house, $50,000 mink coat, $7,000 exercise machines

Other organizations – Chanel, Calvin Klein, Bloomingdales

Implementing Business-Level Strategies Porter’s Generic Strategies

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.

7 - ‹#›

Advertising - BIC pens – “Writes first time, every time” - Timex “takes a licking and keeps on ticking”, Walmart – “Save Money, Live Better”

Implementing Business-Level Strategies The Miles and Snow’s Strategies

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.

7 - ‹#›

No organization would purposefully choose to implement a reactor strategy –

Organization implementing Prospector strategy is - innovative, seeks new market opportunities, and takes many risks

Defender – tries to protect its market from new competitors. - Mrs Fields Cookies – first firms high-quality, high-priced, cookies – sold in special cookie stores and grew rapidly –

increased competition and reduced demand threatened market position – they scaled back operations to defend current market share rather than seeking additional growth.

Analyzer – Starbucks – growing rapidly – focus still on coffee – cautiously branching out into music and ice cream,

experimenting with menu items – truffle mac and cheese, grilled vegetables, flatbreads – remain focused on its core but explore new opportunities.

Diversification is the number of different businesses an organization engages in and the extent to which these businesses are related to each other.

Formulating Corporate-Level Strategies

7 - ‹#›

PepsiCo is organized around two SBUs—packaged drinks (Pepsi, Lipton, etc.) and snack foods (Frito-Lay).

Most large businesses are engaged in several businesses, industries, and markets.

Each business within such a firm is frequently called a strategic business unit, or SBU.

Formulating Corporate-Level Strategies

Single-product strategy

an organization manufactures one product or service and sells in a single geographic market.

Related diversification

an organization operates in several businesses that are somehow linked with one another.

Bases of relatedness include common:

technology, distribution network, marketing skills, brand names and reputation, and customers.

7 - ‹#›

Single- product – Red Bull

Table 7.3

Bases of Relatedness in Implementing Related Diversification

7 - ‹#›

Formulating Corporate-Level Strategies

Advantages of related diversification

Reduces economic risk.

Reduces overhead costs.

Allows an organization to create synergy.

Synergy exists among a set of businesses when the businesses’ economic value together is greater than their economic value separately.

7 - ‹#›

Disney – decline in theme park attendance can be made up by increased ticket sales at the movies

HR, Accounting Legal Services – utilized by all companies reduces costs

McDonalds – McCafe – premium coffee stands allows the firm to create new revenue while using firms strengths in food-product purchasing and sdistribution

Formulating Corporate-Level Strategy

Unrelated diversification

An organization operates multiple businesses not logically associated with one another.

Presumed benefits:

Businesses should have stable performance over time and resource allocation advantages.

Actual disadvantages:

Lack of knowledge at the corporate level about unrelated businesses.

Fails to exploit important synergies used by competitors.

7 - ‹#›

Extra Example: General Electric is perhaps the most successful firm today that still uses unrelated diversification. GE owns businesses in

such disparate industries as aircraft engines, appliances, finance and insurance, and plastics.

Implementing Corporate-Level Strategies

When implementing a diversification strategy, organizations face two important questions.

How will they move from a single-product strategy to some form of diversification?

Once diversified, how will they manage diversification effectively?

7 - ‹#›

Most organizations do not start out completely diversified.

Becoming a Diversified Firm

7 - ‹#›

Diversifying

New Products

Replace suppliers or customers

Mergers and acquisitions

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 conducts by its suppliers.

Forward vertical integration

an organization begins activities formerly conducted by its customers.

7 - ‹#›

Extra Example: The Limited, which began as a women’s clothing chain, added units such as Structure, a men’s clothing chain,

Limited Express for more trendy, less expensive styles, and Limited, Too, for children’s fashions.

In addition, the firm developed concepts that became the White Barn Candle Co. and Bath and Body Works.

Extra Example: In the 1990s, Disney used forward vertical integration when it opened a chain of retail stores to sell

Disney products directly to consumers, rather than going through other retailers, as it had done in the past.

Extra Example: Many petroleum firms have implemented both backward and forward vertical integration—they

extract petroleum, refine it, distribute it, and retail it.

Becoming a Diversified Firm

Another common way to diversify is through mergers and acquisitions.

A merger is the purchase of one firm by another firm of approximately the same size.

An acquisition is the purchase of a firm by a firm that is considerably larger.

7 - ‹#›

With the decline in the stock market that began in 2001, mergers and acquisitions are no longer as popular as they were in the 1990s.

Companies that merge today are finding it hard to obtain financing for the giant deals.

Merger - Example: Daimler-Benz and Chrysler merged in 1998, creating the world’s third-largest automobile company.

Citibank and Traveler’s Insurance merged, creating Citigroup, the largest financial services firm in the U.S.

More recent mega-mergers include the Kmart-Sears and the Kraft-Heinz mergers

Acquisition - Example: The Limited has grown by acquisition. It purchased Lane Bryant and later sold it. It also purchased

Victoria’s Secret intimates stores and Abercrombie and Fitch, a popular brand of clothing geared toward young adults.

Becoming a Diversified Firm

The two major tools for managing diversification are organization structure and portfolio management techniques.

Portfolio management techniques

methods of determining which businesses to engage in and how to manage these businesses to maximize corporate performance.

7 - ‹#›

Organization Structure is covered in chapter 10

Figure 7.3

BCG Matrix

The BCG matrix is a method of evaluating businesses relative to the growth rate of their market and the organization’s share of the market.

7 - ‹#›

Dogs are businesses that have a very small share of a market that is not expected to grow. do not invest or sell ASAP

Cash cows are businesses that have a large share of a market that is not expected to grow substantially.

Generate high profits - Milked for cash to support question marks and stars. Who have greater growth potential

Question marks are businesses that have only a small share of a quickly growing market. Future performance is uncertain invest carefully

Stars are businesses that have the largest share of a rapidly growing market. – Cash cows support to ensure preeminent position

BCG Matrix

Dogs are businesses that have a very small share of a market that is not expected to grow. do not invest or sell ASAP

Cash cows are businesses that have a large share of a market that is not expected to grow substantially.

Generate high profits - Milked for cash to support question marks and stars. Who have greater growth potential

Question marks are businesses that have only a small share of a quickly growing market. Future performance is uncertain invest carefully

Stars are businesses that have the largest share of a rapidly growing market. – Cash cows support to ensure preeminent position

7 - ‹#›

Managing Diversification

GE Business Screen

a method of evaluating businesses along two dimensions: (1) industry attractiveness and (2) competitive position;

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

7 - ‹#›

A more sophisticated approach than the BCG matrix, using a nine-cell matrix.

Does not focus on just market growth and market share, considers industry attractiveness and competitive position

Using the GE Business Screen parallels the application of SWOT analysis

Determinants of industry and attractiveness = Opportunities and Threats

Determinants of competitive position = strengths and weaknesses

Figure 7.4

The G.E. Business Screen

7 - ‹#›

Several factors combine to determine a business’s competitive position and the attractiveness of its industry

These two can be used to classify businesses as winners, question marks, average businesses, losers, or profit producers

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.

Multimarket flexibility.

Worldwide learning.

7 - ‹#›

International and Global Strategies

Global efficiencies include:

Location efficiencies allows firms to locate wherever they can obtain cost advantage.

Economies of scale lowers the per unit cost of production due to large quantities.

Economies of scope lowers cost per unit by sharing expenses across product lines.

7 - ‹#›

International and Global Strategies

Multimarket 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.

7 - ‹#›

International and Global Strategies

Strategic alternatives

Home replication strategy

A company uses the core competency it developed at home as its main competitive weapon.

Multidomestic 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.

7 - ‹#›