ch 3 levels of strategy

8/8/2019 CH 3 Levels of Strategy

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Strategy Formulation

Module III

Rajan Shah

SIMCA, Vijapur


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Learning Objectives

What is Strategy??

Understanding Strategic Management Process

Levels of Strategy Formulation

A. Corporate Level Strategy

B. Business Level Strategy

C. Operational Strategy Summary


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What is Strategy???

Strategy is the direction and scope of an

organisation over the long-term: which achieves

advantage for the organisation through itsconfiguration of resources within a challenging

environment, to meet the needs ofmarkets and

to fulfill stakeholderexpectations


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Contd

* Where is the business trying to get to in the long-term (direction)

* Which markets should a business compete in and what kind of activities

are involved in such markets? (markets; scope)* How can the business perform better than the competition in those

markets? (advantage)?

* What resources (skills, assets, finance, relationships, technical

competence, facilities) are required in order to be able to compete?

(resources)?* What external, environmental factors affect the businesses' ability to

compete? (environment)?

* What are the values and expectations of those who have power in and

around the business? (stakeholders)


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Strategic Management Process


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Strategic Analysis

Analyzing the strength ofbusinesses' position and

understanding the important external factors that

may influence that position.


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Contd

PEST Analysis - a technique for understanding the "environment" in which a business

operates

Scenario Planning- a technique that builds various plausible views of possible futures for a

business

Five ForcesA

nalysis - a technique for identifying the forces which affect the level ofcompetition in an industry

Market Segmentation - a technique which seeks to identify similarities and differences

between groups of customers or users

Directional Policy Matrix - a technique which summarises the competitive strength of a

businesses operations in specific markets

CompetitorAnalysis - a wide range of techniques and analysis that seeks to summarise abusinesses' overall competitive position

CriticalSuccess FactorAnalysis - a technique to identify those areas in which a business

must outperform the competition in order to succeed

SWOT Analysis - a useful summary technique for summarising the key issues arising from

an assessment of a businesses "internal" position and "external" environmental

influences.


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Strategic Choice

This process involves understanding the nature of

stakeholder expectations (the "ground rules"),

identifying strategic options, and then evaluatingand selecting strategic options.


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Strategic Implementation

Often the hardest part

When a strategy has been analysed and

selected, the task is then to translate it into

organisational action


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Corporate Level Strategy

It is concerned with the overall purpose and scope of

the business to meet stakeholder expectations.

This is a crucial level since it is heavily influenced byinvestors in the business and acts to guide strategic

decision-making throughout the business.

Corporate strategy is often stated explicitly in a

"mission statement". Specifies actions a firm takes to gain a competitive

advantage by selecting and managing a group of

different businesses competing in different product

markets


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Contd

Various Corporate Level Strategies are:

A. Vertical Integration

B. DiversificationC. Joint Venture

D. Strategic Alliances

E. Mergers & AcquisitionsF. New Ventures

G. Business Portfolio Restructuring


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A. Vertical Integration

Expanding operations backward into an industry

that produces inputs for the company or forward

into an industry that distributes the companysproducts

In short, company acquires its suppliers or start

producing raw material on its own


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Contd

Raw Materials

Manufacturing

Distribution


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Contd

Raw Materials

Manufacturing

Distribution


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Types of VI

Backward Vertical Integration When it controls subsidiaries that produce some of the

inputs used in the production of its products for instance,an automobile company may own a tire company

Eg. Ford Motors approach in 1920s

Forward Vertical Integration It controls distribution centres and retailers where its

products are sold.

Eg. Oil Companies own retail petrol pumps


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Examples

o American Apparel

Los Angeles based fashion retailer and manufacturer

Control the dyeing, finishing, designing, sewing, cutting,marketing and distribution of the company's product

o ExxonMobil / BP / Royal Dutch Shell

Deposits, drilling and extracting crude, transporting it around

the world

o Reliance

Manufactured its own polyester fibers


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Advantages VI

Building barriers to entry

Eg. Nirama, in Soda Ash manufacturing

Big Bazaar acquiring a Sugar Manufacturing firm Facilitating investments in specialized assets

Protecting product quality

Eg. McDonalds products

Improved scheduling

Eg. Ford Motors


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Disadvantages VI

Cost disadvantages

Company-owned suppliers that have higher costs

than external suppliers

Eg. Coca Cola owned its bottlers but later on itfocused on manufacturing and innovating soft drinks

Rapid technological change

Tying a company to an obsolescent technology

Eg. Adobe


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Contd

Demand unpredictability

Difficulty of achieving close coordination

among vertically integrated activities

Eg. PC manufacturing company

Bureaucratic costs


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B. Diversification

Basic questions to be asked???

Grow a capability

Poor business prospects

Smooth out cyclicality

Balance a portfolio

Reduce one type of risk Too much cash?


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When Does Diversification

Start to Make Sense?Strong competitive position,

rapid market growth -- Not

a good time to diversify

Eg. Jet Airways, IKEA

Weak competitive position,

rapid market growth -- Not

a good time to diversify

Eg. Maxx Mobile

Strong competitive position,

slow market growth --

Diversification is toppriorityconsideration

Eg. IBM in PC market to server

Weak competitive position,

slow market growth --

Diversification meritsconsideration


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Related vs. Unrelated

DiversificationRelated Diversification

Involves diversifying into

businesses whose value

chains possess competitively

valuable strategic fits with

the value chain of the firms

present business

Sometimes known as

concentric diversification

Unrelated Diversification

Involves diversifying into

businesses where there is no

deliberate effort to seek out

businesses having strategic fit

with the firms other business

Sometimes known as

conglomerate diversification


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What is Related Diversification?

(L

owL

evel)

Involves diversifying into businesses whose

value chains possess competitively valuable

strategic fits with the value chain of thepresent business

Capturing the strategic fits makes related

diversification a1 + 1 = 3

phenomenon

Firms in the organization do better together

than they could have alone. Synergy occurs!


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Concept: Strategic Fit

Exists wheneverone or more activities in the value

chains of different businesses are sufficiently similarto present opportunities for

Transferring competitively valuable expertise ortechnological know-how from one business toanother

Combining performance of common value chain

activities to achieve lower costs Exploitinguse of a well-known brand name

Cross-business collaboration to createcompetitively valuable resource strengths and

capabilities


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Contd.

Cross-business strategic fits can exist anywhere

along the value chain

R&D and technology activities

Supply chain activities

Manufacturing activities

Distribution activities

Sales and marketing activities

Managerial and administrative support activities


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Few Examples

Bajaj Autos Entry into Three & Four Wheeler

Coca Colas offering in bottled water i.e. Kenly

LG / Samsung / Sony for all their Electronics products Indian bank entered into Insurance business


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What is Unrelated

Diversification? (HighL

evel) Involves diversifying into businesses with

No strategic fit

No meaningful value chainrelationships

No unifying strategic theme

Approach is to venture into any business

in which we think we can make a profit Firms pursuing unrelated diversification are often

referred to as conglomerates


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Few Examples.

Virgin Group

Tatas venture into Electronics i.e. Croma

Torrent Pharma enters into Electricity business

Googles Acquisition of YouTube, Orkut

ITC from Tobacco based business to hotels


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Criteria For Unrelated

Diversification

Can business meet corporate targets forprofitabilityand ROI?

Will business require substantial infusions ofcapital?

Is business in an industry with growth potential? Is business big enough to contribute to the parent

firms bottom line? Is there potential for union difficulties or adverse

government regulations? Is industry vulnerable to recession, inflation, high

interest rates, or shifts in government policy?


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Summary


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Strategies for Entering

New Businesses

Acquire existing company

Internal start-up

Joint venture/strategic partnerships


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Acquisition of an Existing

Company

Most popular approach to diversification

Advantages

Quicker entry into target market Easier to hurdle certain entry barriers

Technological inexperience

Gaining access to reliable suppliers

Being of a size to match rivals in terms of

efficiency and costs

Getting adequate distribution access


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Internal Startup

More attractive when

Ample time exists to create a newbusiness from ground up

Incumbents slow in responding to new entry

Less expensive than buying an existing firm

Company already has most of needed skills, likeproprietary technology

Additional capacity will not adversely impactsupply-demand balance in industry

New start-up does not have to go head-to-headagainst powerful rivals


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Joint Ventures and Strategic

Partnerships

JV= new entity created

SP = working agreement between 2 or more firms

Good way to diversify when

Uneconomical or risky to go it alone

Pooling competencies of two partners provides morecompetitive strength

Foreign partners are needed to surmount

Import quotas Tariffs

Nationalistic political interests

Cultural roadblocks

Lack of knowledge about markets of particular countries


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Turnaround (retrenchment)

Strategies: The Options

Sell or close down a portion of operations

Shift to a different, and hopefully better, business-level

strategy

Launch new initiatives to boost

revenues

Pursue cost reduction

Combination of efforts

ch 3 levels of strategy

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