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MAN 4720MAN 4720

Dr. Janice CervenyDr. Janice Cerveny

[email protected]@fau.edu

Module 5Module 5Strategy FormulationStrategy Formulation

Ch. 5Ch. 5--7 Coulter and Viable Vision7 Coulter and Viable Vision

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MAN 4720 Module 5 SlideMAN 4720 Module 5 Slide 22

Objectives of the ModuleObjectives of the Module

How far youve comeHow far youve come

Understanding the Coulter textsUnderstanding the Coulter textssummary of approachessummary of approaches

Functional vs. Competitive vs. CorporateFunctional vs. Competitive vs. CorporateStrategiesStrategies

BEYOND the traditional stuff (as perBEYOND the traditional stuff (as per

Coulter)Coulter) Viable VisionViable Vision

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Conventional pictureConventional picture

oocompany performancecompany performance

((The goal of strategicThe goal of strategicplanning)planning)

Facts aboutFacts aboutthe Internalthe Internal

EnvironmentEnvironment

Facts/ObservationsFacts/Observationsabout the Externalabout the External


Statements re:Statements re:

current performancecurrent performance

Inferences aboutInferences about

current structurecurrent structure

StrategiesStrategiesPretty simple,Pretty simple,huh?huh?


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The Big PictureThe Big Pictureoocompany performancecompany performance










StrategiesStrategies

Pretty simple, huh?Pretty simple, huh?

General Environment:Economic, technological,political-legal (regulatory),

socio-cultural trends

Competitor Analysis:Defenders, prospectors,

analyzers, reactors

Industry analysis (Porter):Substitutes, new e(ntrants,

bargaining power ofsuppliers/buyers/other

stakeholders, etc.


IPW 2

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The Big PictureThe Big Picture












Value, Rareness, Imitability,

Organization (VRIO): what arethe companys verifiable areasof Distinctive Competence?

Value Chain Analysis (whichcompany functions (activities) arestrengths, which are weaknesses +

linkages across activities/functions)

Functional Area Analysis(how good a job Finance,

HR, Marketing, R&D,Operations, etc. are doing)

Assessment of theCompanys Culture

IPW 1


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The Big PictureThe Big Picture












SituationAnalysis

ExternalEnvironmental Scan

(Opportunities andThreats)

Internal Analysis(Strengths,

Weaknesses +Cause-Effect)

StrategicOptions


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Functional vs. Competitive vs.Functional vs. Competitive vs.Corporate StrategiesCorporate Strategies



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Module 5Module 5 SlideSlide 88

Understand what we mean whenUnderstand what we mean whenwe say Business Strategywe say Business Strategy

CompetitiveCompetitive vs.vs. CooperativeCooperative

CostCost(price) or(price) or

DifferentiationDifferentiation

Head to HeadHead to Headfor sharefor shareof most desirable piece ofof most desirable piece ofthe market or athe market or a NicheNiche ofof

less desirable marketless desirable market

CollusionCollusion (active effort to(active effort to

affect normal economicaffect normal economicsupply/demand)supply/demand)

Strategic AlliancesStrategic Alliances

Mutual service consortiaMutual service consortia Joint VenturesJoint Ventures

LicensingLicensing

Value Chain PartnershipsValue Chain Partnerships

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Competitive Strategies: Ch. 6Competitive Strategies: Ch. 6

Miles and SnowMiles and Snow (pp. 188(pp. 188--189, Table 6.2)189, Table 6.2) Prospector, Defender, Analyzer, ReactorProspector, Defender, Analyzer, Reactor

Abells Business Definition FrameworkAbells Business Definition Framework

(pp. 189(pp. 189--190, Fig. 6.4)190, Fig. 6.4)Market Scope vs. Level ofMarketMarket Scope vs. Level ofMarket

DifferentiationDifferentiation

Porters Generic StrategiesPorters Generic Strategies (pp. 190(pp. 190--197,197,Fig. 6.5 and 6.6)Fig. 6.5 and 6.6) Competitive Scope and CompetitiveCompetitive Scope and CompetitiveAdvantageAdvantage

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A Bit More on PorterA Bit More on Porter

An industrys attractiveness (i.e. profitAn industrys attractiveness (i.e. profitpotential) is tied tomarket size and thepotential) is tied tomarket size and thecompanys position in the industry (i.e. is itscompanys position in the industry (i.e. is itsadvantage based upon cost or productadvantage based upon cost or product

differentiation).differentiation).

Competitive advantage is POSITIONALCompetitive advantage is POSITIONAL

Company has a cost advantage if it can deliver theCompany has a cost advantage if it can deliver theSAME BENEFITS as competitors at a lower cost.SAME BENEFITS as competitors at a lower cost.

Company has a differentiation advantage if itsCompany has a differentiation advantage if itsbenefit EXCEED those of firms delivering competingbenefit EXCEED those of firms delivering competingproducts.products.

GIVEN the aboveGIVEN the above three generic strategiesthree generic strategiesModule 5: Part BModule 5: Part B SlideSlide 1010

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Porters GenericPorters Generic CompetitiveCompetitive StrategiesStrategies(Fig. 6.5)(Fig. 6.5)

ResourceResourceEfficienciesEfficiencies Execute/DeliverExecute/DeliverBetterBetter

BreadthBreadth(mass market)(mass market)

NicheNiche

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Porters Competitive StrategiesPorters Competitive Strategies

Cost Leadership:Cost Leadership:

CostReduction/

CostMinimization

Broad mass marketBroad mass market

Sell a lot via

lower price

Whats requiredWhats requiredto achieve this?to achieve this?

FUNCTIONAL strategiesFUNCTIONAL strategies (see Ch. 5)(see Ch. 5)

MARKETING (Table 5.2): PriceMARKETING (Table 5.2): PriceDiscountsDiscounts

HR (Table 5.4): Staffing/DownsizingHR (Table 5.4): Staffing/Downsizing

Operations (Table 5.1): JIT/InventoryOperations (Table 5.1): JIT/Inventory

Aggressively investin construction or

creation of efficient,large scale facilities

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Porters Competitive StrategiesPorters Competitive StrategiesDifferentiationDifferentiation

Invest in makingproduct or serviceunique/appealing

Broad mass marketBroad mass marketSell a lot

because itsworth itGeneral observation:


MARKETING (Table 5.2): ValueMARKETING (Table 5.2): ValuePricingPricing

HR (Table 5.4):HR (Table 5.4): Tech Staff TrainingTech Staff TrainingOperations (Table 5.1): Proj. Mgmt.Operations (Table 5.1): Proj. Mgmt.

Premium

Pricing

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Porters Competitive StrategiesPorters Competitive StrategiesCostCost FOCUSFOCUS

CostReduction/

CostMinimization

Aggressively invest

in small (sto methods ofoperation

Niche MarketNiche MarketSell deep to atarget marketvia lower price

Segment orSegment orGeographicAreaGeographicArea


MARKETING (Table 5.2): Segmentation &MARKETING (Table 5.2): Segmentation &geographic pricinggeographic pricing

HR (Table 5.4):HR (Table 5.4): Controlled work flowControlled work flow

Operations (Table 5.1): Repetitive processesOperations (Table 5.1): Repetitive processes

General observation:

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Porters Competitive StrategiesPorters Competitive StrategiesDifferentiationDifferentiation

FOCUSFOCUS

Invest incustomization ofproduct or service

Provide specificneeds or reqs insuperior fashion

Sell a lotbecause its

worth it

Niche MarketNiche Market


MARKETING (Table 5.2): ValueMARKETING (Table 5.2): ValueSellingSelling

HR (Table 5.4):HR (Table 5.4): Job RotationJob RotationOperations (Table 5.1): FlexibleOperations (Table 5.1): Flexible

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Risks ofCompetitive StrategiesRisks ofCompetitive Strategies

Risks ofCost Leadership

Not sustainable:

Competitors imitate.

Technology changes.

Other bases for costleadership erode.

Proximity in differentiationis lost.

Cost focusers achieve evenlower cost in segments.

Risks of Differentiation

Not sustainable:

Competitors imitate.

Bases for differentiation

become less importantto buyers.

Cost proximity is lost.

Differentiation focusers

achieve even greaterdifferentiation insegments.

Risks of Focus

Strategy is imitated:

The target segmentbecomes structurally

unattractive: Structure erodes.

Demand disappears.

Broadly targeted competitorsoverwhelm the segment:

The segments

differences from othersegments narrow.

The advantages of abroad line increase.

New focusers sub-segmentthe industry.

The QUALITY paradigm

Six Sigma

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Module 5: Part BModule 5: Part B SlideSlide 1717

Industry

Force

Generic Strategies

Cost Leadership Differentiation Focus

Entry

Barriers

Ability to cut price in

retaliation deters potential

entrants.

Customer loyalty can

discourage potential

entrants.

Focusing develops core

competencies that can act as

an entry barrier.

Buyer

Power

Ability to offer lower price

to powerful buyers.

Large buyers have less

power to negotiate

because of few close

alternatives.

Large buyers have less

power to negotiate because

of few alternatives.

Supplier

Power

Better insulated from

powerful suppliers.

Better able to pass onsupplier price increases to

customers.

Suppliers have power

because of low volumes, buta differentiation-focused firm

is better able to pass on

supplier price increases.

Threat of

Substitutes

Can use low price to

defend against substitutes.

Customer's become

attached to differentiating

attributes, reducing threat

of substitutes.

Specialized products & core

competency protect against

substitutes.

RivalryBetter able to compete on

price.

Brand loyalty to keep

customers from rivals.

Rivals cannot meet

differentiation-focused

customer needs.

The generic strategies each have attributes that can serve to defend against competitive forces. TheThe generic strategies each have attributes that can serve to defend against competitive forces. The

table compares some characteristics of the generic strategies in the context of the Porter's five forces.table compares some characteristics of the generic strategies in the context of the Porter's five forces.

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Functional vs. Competitive vs.Functional vs. Competitive vs.Corporate StrategiesCorporate Strategies



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GENERICConflicts?GENERICConflicts?

ALLALL organizationsmanagers or keyorganizationsmanagers or keydecisiondecision--makers are fundamentally tornmakers are fundamentally tornon either of two, generic conflicts:on either of two, generic conflicts:

Local vs. Global optimizationLocal vs. Global optimization

Short term vs. Long TermShort term vs. Long Term


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Generic Strategy Conflict 1Generic Strategy Conflict 1

AA

BB

CC

DD

DD

Successfulcompany

ContainContainCostsCosts

Take actions thatTake actions thatprotect (my) unitsprotect (my) units

performanceperformance

Protect orProtect orEnsureEnsure

ThroughputThroughput

Take actions thatTake actions thatenhance companysenhance companys



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Generic Strategy Conflict 2Generic Strategy Conflict 2

AA

CC

DD

DDSuccessfulSuccessfulcompanycompany

Protect theProtect thecompanyscompanys

CURRENT healthCURRENT health

Take actions thatTake actions thatemphasize shortemphasize short

term improvementsterm improvements

Protect theProtect thecompanyscompanys

FUTURE healthFUTURE health

Take actions thatTake actions thatemphasize longemphasize long

term growthterm growth

BB


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Objective:Objective: to check that the conflict DRIVES orto check that the conflict DRIVES orCAUSES theCAUSES the organizationsorganizations problems.problems.

For example:

DDTake actions thatTake actions that

protect (my) unitsprotect (my) unitsperformanceperformance

Expedite new workExpedite new workbefore scheduledbefore scheduled

work [Ops].work [Ops].

We did not orderWe did not orderfrom suppliers infrom suppliers in

time [Purch].time [Purch].

We delay sendingWe delay sendingthe deliverythe delivery

trucks [Shipping].trucks [Shipping].DD

Take actions thatTake actions thatenhance companysenhance companys


We accept as manyWe accept as manynew orders as wenew orders as we

can [Sales].can [Sales].


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The Policy Constraint (cont.)The Policy Constraint (cont.)

The D and DThe D and D' entities spawn the base' entities spawn the baserules each organizations managersrules each organizations managersuseuse tomake decisions regardingtomake decisions regarding::

Product mixProduct mix PricingPricing

Capital investment and processCapital investment and processimprovement expendituresimprovement expenditures

Additions of products or pursuit of aAdditions of products or pursuit of amarket niche, and/ormarket niche, and/or

Deletion of a product or businessDeletion of a product or businesssegment.segment.

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The Two Roles ofThe Two Roles ofFinanceFinance

Judgment of the system as aJudgment of the system as a

wholewhole Judgment on investmentJudgment on investment

Judgment on make/buyJudgment on make/buyalternativesalternatives

Judgment on the subJudgment on the sub--systemssystems

Judgment onJudgment onproduct/service profitproduct/service profit

ScorekeeperScorekeeper

PayrollPayroll PayablesPayables

ReceivablesReceivables

BankingBankingRelationshipsRelationships

Monitoring theMonitoring theMoneyMoney

Which is moreimportant and why?

VV Ch. 4 pp. 32-33!

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The Two Roles of FinanceThe Two Roles of Finance

ScorekeeperScorekeeper

ROI, price of equipmentROI, price of equipmentand resulting cost savingsand resulting cost savings

What does finance useto make each decision?

Judgment of the systemJudgment of the system

as a wholeas a whole

Judgment on investmentJudgment on investment

Judgment on make/buyJudgment on make/buy

alternativesalternatives Judgment on the subJudgment on the sub--

systemssystems

Judgment onJudgment on

produc

t/service profitprod

uct/servi

ce profit

Balance sheet, P & L,Balance sheet, P & L,

cash statementscash statements

Outside price vs. internalOutside price vs. internal

costcost

Indl P&L performanceIndl P&L performance

Each ones product costEach ones product cost

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Product CostProduct Cost (product or service(product or serviceprofit)profit)

The TheoryThe Theory

CompanysCompanysSelling Price > CostSelling Price > Cost

for a Product orfor a Product orServiceService

ThenThenCompany makesCompany makes

money by producingmoney by producingand selling thatand selling that

Product or ServiceProduct or Service

IfIf

The RealityThe RealityThere are manyThere are many

companies that are losingcompanies that are losingmoney yet every one of itsmoney yet every one of its

products/ services isproducts/ services isselling at prices higherselling at prices higher

than the coststhan the costs

Usual explanation:Usual explanation: data useddata used

to calculate cost was not capturedto calculate cost was not captured

accurately or was dated.accurately or was dated.

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Lets explore whether theLets explore whether the

theory or the stated reality istheory or the stated reality iscorrect using Goldrattscorrect using Goldratts

P & Q ProblemP & Q Problem

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GOLDRATT'S "P & Q" PROBLEMGOLDRATT'S "P & Q" PROBLEM

PP QQPrice = $90

Mkt. demand =100 units/wk

Price = $100

Mkt. demand =50 units/wk

Resource D15 min/unit

Resource D5 min/unit

Resource C10 min/unit

Resource C5 min/unit

Resource B15 min/unit

Purchasedpart $5/unit

Resource A

15 min/unit

Resource B

15 min/unitResource A10 min/unit

RM 1$20/unit

RM 2$20/unit

RM 3$20/unit

How much of P & Qshould be produced and

what is the maximumprofit?

Perfect marketPerfect market

Perfect suppliersPerfect suppliersPerfect ResourcesPerfect Resources

Operating ExpenseOperating Expense= $6000/week= $6000/week

Copyright Avraham Y. Goldratt Institute, 1995

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Theoretical SolutionTheoretical Solution

Make or produce:Make or produce: ________ of P________ of P ________ of Q________ of Q

Total Revenue:Total Revenue:

Our NetOur Net

Less OE:Less OE: __________________

Net profitNet profit shouldshould be:be:

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RealityReality

To make 100 PTo make 100 P To make 50 QTo make 50 QResourceResourceAA 15 min * 100=1500 10 min * 50= 500 2000 min.15 min * 100=1500 10 min * 50= 500 2000 min.BB 15 min * 100=1500 30 min * 50=1500 3000 min.15 min * 100=1500 30 min * 50=1500 3000 min.CC 15 min * 100=1500 5 min * 50= 250 1750 min.15 min * 100=1500 5 min * 50= 250 1750 min.

DD 15 min * 100=1500 5 min * 50= 250 1750 min.15 min * 100=1500 5 min * 50= 250 1750 min.

You CANNOT make ALL thatYou CANNOT make ALL that

the market demands of BOTH products?the market demands of BOTH products?

So WHICH product would you make first?So WHICH product would you make first?

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Make or produce:Make or produce: 50 of Q50 of Q

Gross revenues of:Gross revenues of:Less materials cost:Less materials cost:Net revenue from 50 Q:Net revenue from 50 Q:

Making 50 Q used 1500 of 2400 minutes of Resource Bs capacity.Making 50 Q used 1500 of 2400 minutes of Resource Bs capacity.Thus, use the remaining 900 minutes of resource B time (2400Thus, use the remaining 900 minutes of resource B time (2400

minutesminutes 1500 minutes used) to make all the Product Ps possible1500 minutes used) to make all the Product Ps possible

Thus, I can make:Thus, I can make:Gross revenues of:Gross revenues of:Less materials cost:Less materials cost:

Net revenue from 60 P:Net revenue from 60 P:

Total net revenue isTotal net revenue isLess my operating expense:Less my operating expense:

Net profit will be:Net profit will be:

Conventional (local)Conventional (local)basis of selectingbasis of selecting

product priorities do NOTproduct priorities do NOTyield correct resultsyield correct results

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Make or produce:Make or produce: 100 of P100 of PGross revenues of:Gross revenues of: $90 * 100 = $9000$90 * 100 = $9000Less materials cost:Less materials cost: $45 * 100 =$45 * 100 = ($4500)($4500)Net revenue from 100 P: $4500Net revenue from 100 P: $4500

Once again, we used 1500 of 2400 minutes of Resource Bs time.Once again, we used 1500 of 2400 minutes of Resource Bs time.Thus, 900 minutes of Resource B time remains.Thus, 900 minutes of Resource B time remains.

Thus, I can make:Thus, I can make: 900/30 min. = 30 of Q900/30 min. = 30 of QGross revenues of: $100 * 30 = $3000Gross revenues of: $100 * 30 = $3000

Less materials cost:Less materials cost: $40 * 30 =$40 * 30 = ($1200)($1200)Net revenue from 30 Q:Net revenue from 30 Q: $1800$1800Total net revenue isTotal net revenue is $4500 + $1800$4500 + $1800 == $6300$6300Less my operating expense:Less my operating expense: ($6000)($6000)

Net profit will be:Net profit will be: $ 300/wk$ 300/wk

What if we ignore the traditionalWhat if we ignore the traditionalproduct cost judgment?product cost judgment?

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Product CostProduct Cost(product or service profit)(product or service profit)

The TheoryThe Theory

CompanysSelling Price > Cost

for a Product orService

ThenCompany makes

money by producingand selling that

Product or Service

IfIf

There are manycompanies that are losingmoney yet every one of its

products/ services isselling at prices higher

than the costs

Usual explanation:.

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TraditionalTraditionalAccounting &Accounting &Mgmt. ScienceMgmt. Scienceand the P & Qand the P & QProblemProblem

OE = $6000/wkOE = $6000/wk

Resource Time = 5 days * 8 hrs./day*60 min.hr.Resource Time = 5 days * 8 hrs./day*60 min.hr.

Per unit cost of 4 work stations (or resources),Per unit cost of 4 work stations (or resources),($6000 per wk / 4 stations * 2400 min per station($6000 per wk / 4 stations * 2400 min per station}} $0.63/station (or resource) minute$0.63/station (or resource) minute

Time or Cost per station (@ $0.63 per minutes)Time or Cost per station (@ $0.63 per minutes)Product PProduct P Product QProduct Q

Resource A:Resource A: 15/ $9.4515/ $9.45 10/ $ 6.3010/ $ 6.30

Resource B:Resource B: 15/ $9.4515/ $9.45 30/ $18.9030/ $18.90Resource C:Resource C: 15/ $9.4515/ $9.45 5/ $ 3.155/ $ 3.15Resource D:Resource D: 15/ $9.4515/ $9.45 5/ $ 3.155/ $ 3.15

TOTALSTOTALS 60/$37.8060/$37.80 50/$31.5050/$31.50

Margin Calculations:Margin Calculations:

PricePrice $90.00$90.00 $100.00$100.00Less RMLess RM $45.00$45.00 $ 40.00$ 40.00Per Unit ProfitPer Unit Profit $45.00$45.00 $ 60.00$ 60.00OverheadOverhead --37.8037.80 -- 31.5031.50

MarginMargin $ 7.20 perP$ 7.20 perP $ 28.50 per Q$ 28.50 per Q


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Linear Programming:Linear Programming:

240240

220220

200200

180180

160160

140140

120120

100100

8080

6060

4040

2020

20 40 60 8020 40 60 80 100100 120120 140140 160160 180180 200200 220220 240240

15P + 10Q15P + 10Q

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Linear Programming SolutionLinear Programming Solution

Maximize: Z= $7.20 P + $28.50 Q

Subject to:

Resource ALabor:Resource ALabor: 15 P + 10 Q < 2400 minutes

Resource B Labor:Resource B Labor: 15 P + 30 Q < 2400 minutes

Resource CLabor:Resource CLabor: 15 P + 5 Q < 2400 minutes

Resource D Labor:Resource D Labor: 15 P + 5 Q < 2400 minutes

Market P Demand:Market P Demand:1 P + 0 Q < 100 each

Market Q Demand:Market Q Demand: 0 P + 1 Q < 50 each

Optimal Solution: Produce 60 P and 50 Q w/ expected profit of $1,857

Actual profitActual profit = (60 P*$45 + 50 Q*$60) - $6000 = $-300 loss!The paradigm (mental)The paradigm (mental) ConstraintConstraint isis

What are some of the results of doing so?What are some of the results of doing so?


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According to Eli Goldratt:According to Eli Goldratt:

The product cost judgment is arbitrary. It doesThe product cost judgment is arbitrary. It does

not necessarily direct us to promote products thatnot necessarily direct us to promote products thatwill increase the profitability of the companywill increase the profitability of the company andandmight promote products that will jeopardizemight promote products that will jeopardize

profitability.profitability.(TOC Insights for Finance and Accounting)(TOC Insights for Finance and Accounting)

We face, two issues:

1.1.

2.2.

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The Missing LinkThe Missing Link

We need a mechanism to guide or ensure everyWe need a mechanism to guide or ensure everyentities local decisions/ actionsentities local decisions/ actions goodgood

organization performance (system throughput)organization performance (system throughput)

Throughput isThroughput isachieved byachieved by

strengtheningstrengthening thethesystem.system.

The weakest linkThe weakest linkdetermines thedetermines thestrength of thestrength of thesystem (chain)system (chain)

The entities ofThe entities ofthe organizationthe organization(the system) are(the system) arelinks in a chain.links in a chain.

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MechanismMechanism so local actionsso local actions systemsystem

POOGIPOOGI

1.1. Identify the constraintIdentify the constraint

2.2. Decide how to exploit itDecide how to exploit it

3.3. Subordinate to thatSubordinate to thatdecisiondecision

4.4. Elevate the constraintElevate the constraint

5.5. Repeat the processRepeat the process

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Throughput for P:Throughput for P: ==

Throughput for Q:Throughput for Q: ==

Decide which product (P orDecide which product (P orQ) will yield maximum TQ) will yield maximum T

1.1. Identify the constraintIdentify the constraint

We need to clarify what we should use toWe need to clarify what we should use tomake product decisions properly.make product decisions properly.

Resource BResource B

2.2. Exploit the constraintExploit the constraint

T = SalesT = Sales RMRMThroughputThroughput

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