Chapter 8 - Strategy Formation

How to go global while thinking local

1. Get the right mix 2. Get the right motivation 3. Get the right perspective 4. Get the right presence 5. Get the right people

Strategy Execution

Administration and implementation of a strategic plan

Strategic Management Process

Begins when executives evaluate their current position with respect to mission, goals, and strategies

SWOT Analysis

Careful assessment of strengths, weaknesses, opportunities, and threats that affect organizational performance

CLEAR ROLES AND ACCOUNTABILITY

Clearly define roles • Delegate authority to individuals and teams who are accountable for results

Strategic partnerships

Collaboration with other organizations is very important • The Internet helps in driving and moving towards partnership thinking

Value

Combination of benefits received and costs paid

Target customers

Define the customers and which of their needs are to served by the company

Cash cow

Exists in a mature, slow-growth industry but us a dominant business in the industry with a large market share § Positive cash flow because advertising and plant expansion are no longer required § Use this cash cow unit to invest in other, riskier businesses

Question Mark

Exists in a new, rapidly growing industry, but has only a small market share § Risky à could become a star or it could fail § Corp. can invesr the cash earned from cash cows to question marks with the goal of nurturing them into future stars

STRATEGY EXECUTION

Final step in strategic management process

Delivering value

Heart of a strategy

Porter's five competitive forces

Illustrates the competitive forces that exist in a company's environment and indicates some ways Internet technology is affecting each area

Strategy Formulation

Includes planning and decision making that lead to the establishment of the firm's goals and the development of a specific strategic plan

Rivalry among competitors

Influenced by the other four forces and by cost and product differentiation

Bargaining power of buyers

Informed customers become empowered customers

Strategic Management process

Internal or external events sometimes indicate a need to redefine the mission or goals or to formulate a new strategy at either corporate, business, or management process

Diferentiation

Involves an attempt to distinguish the firm's products or services from others in the industry

Embeddedness

Key to effective communication, which means there is a deep understanding and acceptance of organizational direction and purpose throughout the organization

Major organizational functions:

Marketing Production Finance Human Resources R&D

Multidomestic strategy

Means that competition in each country is handled independently of industry competition in other countries

Globalization strategy

Means that product design and advertising strategies are standardized throughout the world

Strategic thinking and Planning

Means to take the long-term view and to see the big picture, including the organization and the competitive environment, and consider how they fit together

Task environment sectors

Most relevant to strategic behavior • The general environment have an indirect influence on the organization

Candid communication

Openly and avidly promote strategic ideas • Listen to others and encourage disagreement and debate

Cost leadership

Organization aggressively seeks efficient facilities, pursues cost reductions, and uses tight cost controls to produce products more efficiently than competitors

Focus strategy

Organization concentrates on a specific regional market or buyer group

Business-level strategy

Pertains to each business unit or product line

Functional-level strategy

Pertains to the major functional departments within the business unit

Portfolio Strategy

Pertains to the mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage for the corporation

Corporate level strategy

Pertains to the organization as a whole and the combination of business units and product lines that make up the corporate entity

Dog

Poor performer § Only a small share of a slow-growth market § Provides little profit for the corporation § May be targeted for divestment or liquidation if turnaround is not possible

Potential New Entrants

Potential barriers to entry that can keep out new competitors: Capital requirements and economies of scale

Strategic Management

Refers to the set of decisions and actions used to formulate and execute strategies that will provide a competitively superior fit between the organization and its environment so as to achieve organizational goals

Transnational strategy

Seeks to achieve both global standardization and national responsiveness • Difficult to achieve because one goal requires close global coordination while the other goal requires local flexibility

Bargaining power of suppliers

Significant factors in determining supplier power: the concentration of suppliers and availability of substitute suppliers are

Strategic flexibility

Static long-range strategic plans can be a liability in a topsy-turvy world

Strategies that incorporate the element of strategic management

Target customers, focus on core competencies, provide synergy, create value

Define an explicit strategy

The first step in strategic management - Describes resource allocation and activities for dealing with the environment, achieving a competitive advantage, and attaining the organization's goals

Export strategy

The organization is domestically focuses, with only a few exports, managers have little need to pay attention to issues of either local responsiveness or global standardization

Threat of substitute products

The power of alternatives and substitutes for a company's product may be affected by changes in cost or in trends such as increased health consciousness that will deflect buyer loyalty

Strategy Execution

The use of managerial and organizational tools to direct resources toward accomplishing strategic results

APPROPRIATE HUMAN RESOURCE PRACTICES

Training employees à helps people understand the purpose and importance of strategy, overcome resistance, and develop necessary skills and behaviors to implement the strategy

Synergy

When organizational parts interact to produce a joint effect that is greater than the sum of the parts acting alone - Can create additional value with existing resources, providing boost to the bottom line

Evergreen project

a clear strategic direction was a key factor that distinguished winners from losers

Actions of corporate level strategy

acquisition of business units and joint ventures with other corporations

Functional-level strategies

action plans used by major departments to support the execution of business-level strategy

Finance dept

adopt plans to borrow money, handle large cash investments, authorize construction of new facilities

Alignment

all aspects of the organization are in congruence with the strategy and every department and individual's efforts are coordinated toward accomplishing strategic goals

Actions of business level strategy

amount of advertising, direction and extent of research and development, product changes, new-product development, equipment and facilities, and expansion of product and service lines

Internal analysis

assesses overall organization structure, management competence and quality, and human resource characteristics

Main strategic dilemma

between the need for global standardization and national responsiveness

Internal Information about strengths and weaknesses

budgets, financial ratios, profit and statements, and surveys of employee attitudes and satisfaction

Opportunities

characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals

Threats

characteristics of the external environment that may prevent the organization from achieving its strategic goals (e.g. Microsoft -à proliferation of cheap or free software available)

Low cost position

company can undercut competitor's prices and still offer comparable quality and earn a reasonable profit (e.g. Comfort Inn and Motel 6) o Most likely to succeed a price war while still making profit

External Information about opportunities and threats

customers, government reports, professional journals, suppliers, bankers, friends in other organizations, consultants, or association meetings

Market share

defines whether a business unit has a larger or smaller share then competitors

Impact of internet to potential new entrants

has made it much easier for new companies to enter an industry

Weaknesses

internal characteristics that might inhibit or restrict the organization's performance

Actions of a functional- level strategy

involve all major functions, including finance, research and development, marketing, and manufacturing

Production dept

long production runs, routinization, cost reduction

Vertical integration

means the company expands into businesses that either produce the supplies needed to make products and services or that distribute and sell those products and services to customers (e.g. steelmaker Nucor acquired scrap-metal processor and rival Arcelor)

Unrelated diversification

occurs when an organization expands into a totally new line of business; company's lines of business aren't logically associated with one another à difficult to make the strategy successful (e.g. GE's entry into consumer finance)

BCG Matrix

organizes businesses along two dimensions

Business growth rate

pertains to how rapidly the entire industry is increasing

Strength

positive internal characteristics that the organization can exploit to achieve its strategic performance goals

Impact of internet to bargaining powers of buyers

provides easy access to wide array of information about products, services, and competitors à increasing the bargaining power of end consumers • e.g. customer shopping for a car can gather information about various options

Competitive advantage

refers to what sets the organization apart from others and provides it with a distinctive edge for meeting customer or client needs in the marketplace

Advertising slugfest

scrambling and jockeying for position that occurs among fierce rivals • e.g. Nintendo vs Sony

Core competence

something the organization does especially well in comparison to its competitors

Strategic thinking for non-profit firms

strategic planning pertains to events in the external environment

Strategic thinking for profit firms

strategic planning typically pertains to competitive actions in the marketplace

HR dept

strategy for growth à recruiting additional personnel and training middle and lowerlevel managers for new positions

HR Dept

strategy for retaining and developing stable workforce

Diversification

strategy of moving into new lines of business (e.g. GE getting into health care)

Marketing dept

stress brand loyalty and development of established, reliable distribution channels

Marketing dept

test marketing, aggressive advertisement, consumer product trials

Leadership

the ability to influence people to adopt the new behaviors needed for putting strategy into action • Use: persuasion, motivation techniques, cultural values • Actions: speeches, build coalitions, persuade middle managers • Lead by example!

Strategic business units

unique business mission, product line, competitors, and markets relative to other SBUs in the corporation

Related diversification

when the new business is related to the company's existing business activities (e.g. GE's move into renewable energy)

Star

§ Large market share in a rapidly growing industry § IMPORTANCE: has additional growth potential and profits should be plowed into this business as investment for future growth and profits § Visible and attractive à will generate profits and a positive cash flow