CHAPTER 5STRATEGY FORMULATION :SITUATION ANALYSIS AND

BUSINESS STRATEGY

Read : Casey’s General Stores P. 106-107

Example of a differentiation focus competitive strategy in which a company focuses on a particular market area to provide a differentiated product or service.

5.1 SITUATION ANALYSIS : SWOT

SWOT analysis should not only result in the identification of a corporation’s distinctive competencies (the particular capabilities and resources that a firm possesses and the superior way in which they are used) – but also in the

identification of opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources.

Generating a Strategic Factors Analysis Summary (SFAS) MatrixSFAS : Strategic Factors Analysis Summary Fig.5.1 P. 109Combining EFAS Table & IFAS TableSteps in creating SFAS Matrix

P. 107, 109The SFAS Matrix includes only the most important factors gathered from environmental scanning and thus provides the information essential for strategy formulation.

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Finding a Propitious Niche* One desired outcome of

analyzing strategic factors in identifying a niche where an organization can use its core competencies to take advantage of a particular market opportunity *Niche : a need in the market place that is currently unsatisfiedPropitious niche : an extremely favorable 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.- a niche is propitious to the

extent that it currently is just large enough for one firm to satisfy its demand – after a firm has found and filled that niche, it is not

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worth a potential competitor’s time or money to also go after the same niche- Finding such a niche is not

always easy Strategic window : a unique market opportunity that is available only for a particular time.* The first firm through a strategic window can occupy a propitious niche and discourage competition (if the firm has the required internal strengths)Ex. Frank J. Zamboni & Company invented tractor-like machine that smooth the ice at ice skating rinks (P. 110)

- As niche grow, so can the company within the niche – by increasing its operation’s

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capacity or through alliances with larger firm (Ex. P. 110)

- Niche can also change – sometimes faster than a firm can adapt to that change (Ex. P. 110 – Cummins Engine)

5.2 REVIEW OF MISSION AND OBJECTIVES

* A reexamination of an organization’s current mission and objectives must be made before alternative strategies can be generated and evaluated- Even when formulating

strategy, decision makers tend to concentrate on the alternatives rather than on a mission to be fulfilled and objectives to be achieved.- Mission may be too narrow

or too broad, if the mission

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does not provide a common thread (a unify theme) for a corporation’s business, managers may be unclear about where the company is heading- A company’s objective can

also be inappropriately stated – either too focus on short-term or be so general

Ex. Toyota & Ford P. 111

5.3 GENERATING ALTERNATIVE STRATEGIES USING A TOWS MATRIX- A firm uses SWOT analysis

to assess its situation. SWOT can be use to generate a number of possible alternative strategies.

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TOWS Matrix : illustrates how the external opportunities and threats facing a particular corporation can be matched with that company’s internal strengths and weaknesses to result in four set of possible strategic alternatives – Fig. 5.2

P. 112 Steps : 1-5 P. 112

SO Strategies : generated by thinking of ways in which a company or business unit could use its strengths to take advantage of opportunities.

ST Strategies : consider a company’s or unit’s strengths as a way to avoid threats

WO Strategies : attempt to take advantage of opportunities by overcoming weaknesses.

WT Strategies : basically defensive and primarily act to

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minimize weaknesses and avoid threats

- TOWS Matrix is only one of many ways to generate alternative strategies (Fig. 5.3

P. 114-115)- Another approach is to

evaluate each business unit within a corporation in terms of possible competitive and cooperative strategies.

5.4 BUSINESS STRATEGIESBusiness strategy : focuses

on improving the competitive position of a company’s or business unit’s products or services within the specific industry or market segment that the company or business unit serves.

1) competitive (battling against all competitors for advantage) or

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2) cooperative (working with one or more competitors to gain advantage against other competitors)

Porter’s Competitive Strategies

Competitive strategy – raises the following questions:

Should we compete on the basis of low cost (and thus price), or should we differentiate our products or services on some basis other than cost, such as quality or service?

Should we compete head to head with our major competitors for the biggest, or should we focus on a niche in which we can satisfy a less sought-after but also

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profitable segment of the market?

Michael Porter : two “generic” competitive strategies

1) lower cost 2) differentiation

Lower cost strategy : the ability of a company or a business unit to design, produce, and market a comparable product more efficiently than its competitors

Differentiation strategy : the ability to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service

Porter further proposes a firm’s competitive advantage in an industry is determined by its competitive scope

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Competitive scope : the breadth of the company’s or business unit’s target market- broad target (aim at the

middle of the mass market)- narrow target (aim at the

market niche)Combining two types of target market & two competitive strategies Fig. 5.4 P. 116

* cost leadership & differentiation (lower cost and differentiation – in mass market)

* cost focus & differentiation cost (focus on a market niche)

Cost leadership : a low-cost competitive strategy that aims at the broad mass market and requires “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from

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experience, tight cost and overhead control, and cost minimization in areas like R&D, service, sales force, advertising, and so on”. Ex. Wal-Mart, Southwest Airlines etc.- lower costs allow it to

continue to earn profits during times of heavy competition- high market share – high

bargaining to its suppliers- low pricebarrier to entrySo, cost leaders are likely to

earn above-average returns on investment.

Differentiation : aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company or business unit may

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then charge a premium for its product.- i.e. design or brand image,

technology, features, dealer network, or customer service- viable strategy for earning

above-average returns in a specific business because the resulting brand loyalty lowers customer’s sensitivity to price - increased costs usually

passed on to the buyers. Ex. Mercedez-Benz etc.

Cost focus : a low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others.

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- company or business unit seeks a cost advantage in its target segment

Ex. Fadal Engineering – building and selling no-frills machine tools to small manufacturers- focused its efforts is better

able to serve its narrow strategic target more efficiently than can its competition.- tradeoff b/w profitability

and overall market shareDifferentiation focus : like

cost focus, concentrates on a particular buyer group, product line segment, or geographic marketEx. Casey’s General Store- company or business unit

seeks differentiation in a targeted market segment

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- believe that a company or a unit that focuses its efforts is better able to serve the special needs of narrow strategic target more effectively than can its competition

Read : Strategy in a Changing World P.117

Risks in Competitive StrategiesNo one competitive strategy

is guaranteed to achieve success, and some companies that have successfully implemented one of Porter’s competitive strategies have found that they could not sustain the strategy – each of the generic strategies has its risks

Cost proximity : higher price charges higher quality too far above the competition

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customer will not see the extra quality as worth the extra cost Table 5.1 P. 118Ex. P&G was forced to reduce costs until if could get prices back in line with customer expectations.

Issues in Competitive Strategies

Porter : argues that to be successful, a company or business unit must achieve one of the preceding generic competitive strategies, otherwise, the company or business unit is stuck in the middle of the competitive marketplace – dilemma – trying to be all things to all people.Ex. Tandy Corporation – selling PC to average person – had failed – no exciting features

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like Compaq nor low price like Dell or Gateway

- then sold the company’s computer operations to AST Research

What about companies that attempt to achieve both low–cost and a high differentiation position?

Toyota, Nissan & Hondagood example for both

strategiesPorter : agrees , but argues

that this state is often temporary

Porter : pursue that there is generally room for only one company to successfully pursue the mass market cost leadership strategy (because it is so dependent on achieving dominant market share), there is room for an almost unlimited number of differentiation and

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focus strategies (depending on the range of possible desirable features and the number of possible desirable features and the number of identifiable market niches) Ex. Table 5.2 P. 119 Quality alone, has eight different dimensions* Most entrepreneurial ventures follow focus strategies – opportunities in market niches are too small to justify retaliation from the market leaders.

Industry Structure and Competitive Strategy

Although each of Porter’s generic competitive strategies may be used in any industry, certain strategies are more

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likely to succeed than others in some instances

Fragmented industry (early stage) : many small and medium–sized local companies compete for relatively small shares focus strategies will likely predominateEx. Chinese restaurants, local pizza

Consolidated industry : dominated by a few large companies- after product standards

become established for minimum quality and features, competitive shifts to a greater emphasis on cost and service slower growth, overcapacity, and knowledgeable buyers combine to put a premium on a firm’s ability to

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achieve cost leadership or differentiation along the dimension most desired by the market- the industry has now

become one in which cost leadership and differentiation tend to be combined to various degrees – this consolidation is taking place worldwide in the automobile, airline, and home appliance

Hypercompetition and Competitive Strategy

D’Aveni : Hypercompetition – “ Market stability is threatened by short product life cycles, short product design cycles, new technologies, frequent entry by unexpected outsiders,

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repositioning by incumbents, and tactical redefinitios of market boundaries as diverse industries merge”

- when industries become hypercompetition, they tend to go through escalating stages of competition firms compete on cost and quality until an abundance of high-quality, low-priced goods result. Ex. Home appliance in U.S.

Before hypercompetition, strategic initiatives provided competitive advantage for many years, now no longer the caseWhich Competitive Strategy is Best ?

Before selecting one of Porter’s generic competitive strategies, management should assess its feasibility in

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terms of its resources and capabilities

* Look at Table 5.3 P. 122 *Competitive Tactics

Tactic : a specific operating plan detailing how a strategy is to be implemented in term of when and where it is to be put into action.

- tactics narrower in scope and shorter in time horizon than are strategiesTiming Tactics : When to Compete

First mover (pioneer) :advantage : company is able

to establish a reputation as an industry leader

Ex. Microsoft WindowsNetscape Internet

browserLate mover :

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advantage : may be able to imitate the technological advances of others (low costs of R&D) disadvantage of first moverMarket Location Tactics : Where to compete

Tactics

Offensive Tactics : Frontal Assault : The

attacking firm goes head to head with its competitor (to be successful, not only have superior resources, but also the willingness to preserve)- a vary expensive tactic and

may a waken a sleeping giant (MCI, SPRINT and AT & T)- depressing profits for the

whole industry

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OffensiveDefen

Flanking Maneuver : The firm may attack a part of the market where the competitor is weak

Cyrix Corporation – enter microprocessor where Intel is weak

- to be successful, the flanker must be patient and willing to carefully expand out of the relatively undefended market niche or else face retaliation by an established competitor

Bypass Attack : attempts to cut the market out from under the established defender by offering a new type of product that makes the competitor’s product unnecessary Ex. Netscape chose to use Java “applets” in its Internet

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browser not directly compete with Window 95

Encirclement : occurs as an attacking company or unit encircles the competitor’s position in term of products or markets or both

Guerrilla Warfare : “hit and run” use of small, intermittent assaults on different market segments held by the competitor- to be successful, the firm

or unit must be patient enough to accept small gains and to avoid pushing the established competitor to the point that it must respond or else lose face

Defensive Tactics :- lessen intensity of attack,

lower probability of attack

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- reduce short- term profitability to ensure long-term profitability

Raise Structural Barriers :1) offer a full line of

products2) block channel3) raise buyer switching

costs (i.e. low-cost training to users)

4) keeping prices low on items new users are most likely to purchase

5) increase scale economies to reduce unit costs

Increase Expected Retaliation : any action that increases the perceived threat of retaliation for an attach

Ex. When Clorox challenged P&G in detergent market with Clorox Super Detergent, P&G

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retaliate by test marketing its liquid bleach

Lower the Inducement for Attack : reduce a challenger’s expectations of future profits in the industry

Ex. Southwest AirlinesCooperative Strategies

Working with other firmsCollusionStrategic Alliances

Collusion :The active cooperation of

firms within an industry to reduce output and raise prices in order to get around the normal economic law of supply and demand- explicit : firms cooperate

through direct communication and negotiation

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- tacit : firms cooperate indirectly through an informal system of signalsLegal or illegal ?

Strategic Alliances :A partnership of two or

more corporation or business units to achieve strategically significant objectives that are mutually beneficial- alliances become a fact of

life in modern businessreasons for alliance P. 125 (No. 1 – 5)

Cooperative arrangement fall along a continuum from weak to strong Fig. 5.5 P. 127

Mutual Service Consortia : a partnership of similar companies in similar industries who pool their resources to gain a benefit that is too expensive to develop alone,

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such as access to advanced technology Ex. IBM, Toshiba, and Siemens

Joint Venture : a cooperative business activity, formed by two or more separate organizations for strategic purposes, that creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while preserving their separate identity/autonomy- most popular form of

strategic alliance- a way to temporarily

combine the different strengths of partners to achieve an outcome of value to both

Read : 21st Century Global Society P. 128

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Licensing Arrangement : an agreement in which the licensing firm grants rights to another firm in another country or market to produce and for sell a product- useful strategy it the

trademark or brand name is well known, but MNC does not have sufficient funds to finance

Anheuser-Busch (Budweiser beer) in U.K., Japan, etc.

Value – Chain Partnership : a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage- becoming extremely

popular as more

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companies and business units outsource activities

5.5 GLOBAL ISSUES FOR THE 21ST CENTURY

As a corporation becomes more involved internationally, it will need to constantly review the appropriateness of its current mission and objectives

One set of business strategies may not be sufficient for success in global industry – need to tailor its business strategies to each nation

To be competitive in a global industry, companies are discovering that they must raise the quality of their products and reduce the prices

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As more industries become increasing global and hypercompetitive, fewer companies will survive unless they are able to adapt to changing conditions

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