Lecture 3Strategy Formulation – Business Strategy

Outcome of strategic analysisThe goal is to find a propitious niche that is so

well suited to the firm’s internal and external environment that other corporations are not likely to challenge or dislodge it.◦ Look for a strategic window – a unique market

opportunity that is available only for a particular time.

◦ Occupy a propitious niche and discourage competition.

◦ Identify a market opportunity in which the firm can obtain and keep dominant market share.

◦ Niche can change faster than a firm can adapt to that change – thus the firm need to invest heavily in their capabilities to keep strong in a changing niche.

The environment/industry changes◦ The market gets smaller because of factors

beyond the control of the company/SBU.◦ The company/SBU, through its own efforts,

not only fills a demand but actually causes the market to expand.

The company/SBU changes◦ Due to demands for resources elsewhere in

the corporation, the company/SBU may be forced to cut back its activities.

◦ Its own success in the niche may cause the company/SBU to move into nearby niches.

Propitious niche can disappear because of

Mission and ObjectivesFocus on fulfilling a mission

rather than on generating action possibilities

Mission should be a common thread

Gap between planned and achieved objectives

Review of objectives

Generating alternative strategiesUsing TOWS matrix to generate alternative

strategies Strengths – S

List Strengths

Weaknesses – W

List Weaknesses

Opportunities – O

List 5-10 Opportunities

SO Strategies

Use strengths to take advantage of opportunities

WO Strategies

Overcoming weaknesses by taking advantage of

opportunities

Threats – T

List 5-10 Threats

ST Strategies

Use strengths to avoid threats

WT Strategies

Minimize weaknesses and avoid threats

Porters Generic Strategies

Porters Generic StrategiesCompetitive

StrategyRequired Skills &

ResourcesOrganizational

ElementsAssociated

RisksOverall Cost Leadership

Sustained capital investment and access to capital

Tight cost control Technological change that nullifies past investments or learning

Process engineering skills Frequent, detailed reports Low-cost learning by industry newcomers or followers through imitation, or through their ability to invest in state-of-the-art facilities

     Intensive supervision of labor

Structured organization and responsibilities

Inability to see required product or marketing change because of the attention placed on cost

Products designed for ease of manufacture

Incentives based on meeting strict quantitative targets

Inflation in costs that narrow the firm’s ability to maintain enough of a price differential to offset competitors’ brand images or other approaches to differentiation

Low-cost distribution system

   

Firm Infrastructure – cost-effective management information systems (MIS), few managerial layers, simplified planning practices.

Human Resources: consistent policies to reduce turnover, intense focus on training employees to be efficient and multi-skilled.

Technology: Easy-to-use production technologies,investment in technology that improves production efficiencies.

Procurement: procedures to find the lowest cost inputs, frequentevaluation of suppliers’ performances.

InboundLogisticsEfficient systems to link supplier products with production processes.

OperationsUse of Economies of scale.

Construction of efficient scale facilities.

Outbound LogisticsDelivery schedule that reduces costs.

Selection of low-cost carriers.

Marketing& SalesSmall, highly trained sales force.

Products priced to generate sales volume.

ServiceEfficient qualitycontrol to reduce buyercomplaints.

MA

RG

IN

MA

RG

IN

Value Chain for a Low Cost Strategy

Porters Generic StrategiesCompetitive Strategy

Required Skills & Resources Organizational Elements Associated Risks

Differentiation Strong marketing abilities Strong coordination among functions in R&D, product development, and marketing

The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings.

     Product engineering Subjective measurement and

incentives instead of quantitative measures

Buyers’ need for the differentiating factor falls. This can occur as buyers become more sophisticated.

Creative flair Amenities to attract highly skilled labor, scientists, or creative people

Imitation narrows perceived differentiation, a common occurrence as industries mature.

Strong capability in basic research

   

Corporate reputation for quality or technological leadership

   

Long tradition in the industry or unique combination of skills drawn from other businesses

   

Strong cooperation from channels

   

Value Chain for a Differentiation StrategyFirm Infrastructure – Highly developed MIS to capture

customer preferences, firm-wide focus on high-quality products.

Human Resources: Compensation encourages creativity, subjective performance measures, superior training.

Technology: strong capability in basic research, investment in technologies that allow for production of highly differentiated products.

Procurement: procedures to find the highest quality inputs, purchase ofhighest quality replacement parts, strict standards for suppliers.

InboundLogisticsSuperior handling to minimize damage and improve quality.

OperationsConsistent production of attractive products.Rapid response to customers’ production demands.

Outbound LogisticsAccurate and responsive order processing.

Rapid and timely deliveries.

Marketing& SalesExtensive granting of credit buying.

Extensive personal relationships with buyers.

ServiceExtensive buyertraining to assure max.value fromProduct.

MA

RG

IN

MA

RG

IN

Porters Generic StrategiesCompetitive Strategy

Required Skills & Resources

Organizational Elements

Associated Risks

Focus Combination of the above policies directed at the particular strategic target

Combination of the above policies directed at the particular strategic target

The cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus.

The differences in desired products or services between the strategic target and the market as a whole narrows.

Competitors find submarkets within the strategic target and outfocus the focuser.

Generic Strategies & 5 Forces

Strategic rollup: a way to organize a fragmented industry

Which competitive strategy is best?Competitive Tactics: a tactic is a

specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action◦Timing Tactics (when)◦Market Location Tactics (where)

Timing Tactics◦First Mover◦Late Mover

Which competitive strategy is best?Market Location Tactics

◦Offensive Tactics Frontal Assault: generally expensive

Flanking Maneuver: focus on an unguarded niche

Bypass Attack: change the rules of the game

Encirclement: use a broad product line to annihilate competition

Guerrilla Warfare: patient enough to accept small gains and avoid pushing established competitors too far

◦Defensive Tactics Raise structural barriers Increase expected retaliation Lower the inducement of attack

Which competitive strategy is best?Market Location Tactics

◦ Offensive Tactics: established competitors marketplace Frontal Assault: generally expensive

Flanking Maneuver: focus on an unguarded niche

Bypass Attack: change the rules of the game

Encirclement: use a broad product line to annihilate competition

Guerrilla Warfare: patient enough to accept small gains and avoid pushing established competitors too far

◦ Defensive Tactics: make competitive advantage sustainable, takes place in own market Raise structural barriers: offer full line off products, block channel

access, raise buyer switching costs, raise the cost of gaining trial users, increase scale economies, foreclosure alternative technologies, limit outside access to facilities, tie-up suppliers, avoid suppliers serving competitors,

Increase expected retaliation Lower the inducement of attack

Cooperative strategiesCollusion

◦Explicit mostly illegal◦Tacit favored in certain types of industries

Strategic Alliances: 30% to 50% alliances perform unsatisfactorily

◦Objectives: obtain technology/manufacturing capabilities, obtain access to specific markets, reduce financial risk, reduce political risk, achieve competitive advantage

◦Types of alliances: Mutual Service Consortia Joint Venture Licensing Arrangement Value chain partnership

Strategic PosturesOffensive Defensive

1. Concentration Growth 1. .Retrenchment/TurnaroundA. Market Penetration A. ShallowB. Market Development B. DeepC. Product Development C. BankruptcyD. Horizontal Merger 2. DivestitureE. Niching A. Sell-off1. Low-cost Leadership("Functional Rationalization")

B. Spin-off

2. Cost Focus C. Split-off3. Differentiation 3. Liquidation4. Focused Differentiation A. Voluntary Closure

2. Integrative Growth B. AssignmentA. Backward C. BankruptcyB. Forward 4. Harvesting

3. Diversification Growth  A. Concentric  B. Conglomerate  

4. Joint Ventures