MADM 760 - Module 4

Sources of Organizational Strengths and Weaknesses: There are three firm resources that form the foundation for firm strengths and weaknesses: 1) Human Resources:

HR: The experience, capabilities, knowledge, skills, and judgment of all the firm's employees.

Why does a company pursue the horizontal (related) diversification?

It is because it can create synergy using the same supplies and resources, the same marketing and distribution channels, and advertising multiple services simultaneously

1) Strengths and 2) Weaknesses - Gap analysis - Value chain - Strategic capabilities

-Gap analysis identifies the distance between a firm's current position and its desired position with regard to an internal weakness. When possible, a firm should take action to close the gap, especially when it leaves a firm vulnerable to external threats. -The value chain helps a firm analyze its strengths and weaknesses, and understand how they might translate into competitive advantage or disadvantage. -Firm resources are translated into strengths (or weaknesses) via strategic capabilities, the mechanism through which individuals in an organization coordinates efforts along one or more resources to solve a particular problem.

I. What Is the Corporate level Strategy?

1) Corporate level Strategy - (Highest level of decision) = CEO & top managers 2)Business Unit (Competitive) Strategy = Business unit managers 3) Functional (Operational) Strategy - Lowest level of decision = Operational managers

Example: Disney Corporation Three Levels of Strategies

1) Corporate-level Strategy CEO and Top Managers ask questions such as • Which business unit(s) should we have? • How should we support & enhance the value of each business unit as a whole? 2) Business Unit (Competitive) Strategy Business Unit Managers ask questions such as • How individual business units compete & win in their own individual markets? 3) Functional (Operational) Strategy Operational Managers ask questions such as • How to improve the effectiveness and efficiencies of operations?

What are the 4 issues in Strategy formulation?

1) Evaluating Strategic Change "Should an organization change course when performance declines, or should it stay the course?" o On the one hand, its strategic managers may choose to commit to a strategic course of action for an extended period of time and enjoy the benefits of specialization, expertise, organizational learning, and a clear customer image. o Alternatively, an organization can remain flexible so that it does not become committed to products, technology, or market approaches that may become outdated. In a perfect world, organizations commit to predictable, successful courses of action, and strategic change is only incremental.

II. What Are the Three Corporate-level Strategies?

1) Growth Strategy - Growth (Increase in size) 2)Stability Strategy - Stability (Retain current size) 3)Retrenchment Strategy - Retrenchment (Decrease in size)

External growth can take many forms. We will focus on five forms:

1) Horizontal integration 2) Horizontal related diversification 3) Conglomerate (unrelated) diversification 4) Vertical integration 5) Strategic alliances

Growth Strategy

1) Internal Growth - is accomplished when a firm increases its revenues, production capacity, and workforce. 2) External Growth -is accomplished when two firms merge or one acquires the other.

Shortcoming of a merger or acquisition

1) The acquiring firm pays a premium. 2) Top managers of the acquired firm often depart the organization. 3) Building a common culture after layoffs can be complicated

Three Forms of Retrenchment

1) Turnaround - A turnaround seeks to transform the corporation into a leaner, more effective firm, and includes such actions as eliminating unprofitable outputs, pruning assets, reducing the size of the workforce, cutting costs of distribution, and reassessing the firm's product lines and customer groups. 2) Divestment - Selling one or more of a firm's business units—may be necessary when the industry is in decline, or when a business unit drains resources from more profitable units, is not performing well, or is not synergistic with other corporate holdings. 3) Liquidation - It is the strategy of last resort, and terminates the business unit by selling its assets. In effect, liquidation represents a divestment of all the firm's business units and should be adopted only under extreme conditions.

What are the 4 issues in Strategy formulation?

2) Social Responsibility and Ethics "Is the strategy compatible with its stances on social responsibility and ethics?" o Strategy decisions should not be based solely on projected effects on financial performance. An organization's strategies at all levels should be compatible with its stance on social responsibility and ethics. 3) Effects on Organizational Resources "What effect does the change in strategy have on existing resources?"

What are the 4 issues in Strategy formulation?

4) Anticipated Responses from Competitors and Customers "How will competitors (or customers) respond when the strategic change is implemented?" Issues in Strategy Formulation-Contd. o Given the complexity of competitor retaliation, some firms opt for a blue ocean strategy.

2) Horizontal (Related) Diversification

A firm is engaging in horizontal related diversification when it acquires a business outside its present scope of operation, but with similar or related core competencies, the firm's key capabilities and collective learning skills that are fundamental to its strategy, performance, and longterm profitability.

1) Horizontal (Related) Integration

A firm that acquires other companies in the same line of business is engaging in horizontal integration. Doing so allows a firm operating in a single industry to grow rapidly without moving into other industries

2) Horizontal (Related) Diversification-Contd.

MacDonald's is generally famous for somewhat unhealthy fast-food meals such as hamburgers, fries, and soda. It was its original scope of the menu (or operation). Since MacDonald's learned that an increasing number of people are interested in healthy fast meals and fast morning experience, the company has extended its menu selections (e.g., salads and McCafe drinks). These new menus are outside its present scope of the menu (or operation) but have similar core competencies because they are still "fast meals." As a result, MacDonald's has diversified its menu to accommodate different customer segments with other preferences. By capturing varied customer demand, MacDonald's could increase its total sales and grow its business.

Sources of Organizational Strengths and Weaknesses Contd. 3) Physical Resources

Plant and equipment, geographic locations, access to raw materials, distribution network, and technology.

I. What Is The SWOT Analysis?

SWOT Analysis helps an organization to list its Strengths, Weaknesses, Opportunities, and Threats. Internal - Strengths: An organization does best and its positive product feature Weaknesses: Problems that affect the organization's success External - Opportunities: Events that can affect a business Threats: Elements that could have a serious adverse impact on a business

5) Strategic Alliances (Partnerships)

Strategic alliances—often called partnerships—occur when two or more firms agree to share the costs, risks, and benefits associated with pursuing new business opportunities. Advantage of a strategic alliance: • It minimizes increases in the organizational bureaucracy. • It allows a firm to share in the benefits of the alliance without bearing all of the costs

Sources of Organizational Strengths and Weaknesses Contd. 2) Organizational Resources

The firm's systems and processes, including its strategies at various levels, structure, and culture.

Purpose of the SWOT analysis:

To organize research and perspectives into a useful framework for strategic decision-making.

3) Conglomerate (Unrelated) Diversification

When a corporation acquires a business in an unrelated industry to reduce cyclical fluctuations in cash flows or revenues, it is pursuing conglomerate (unrelated) diversification. Example: Gaming Company + Construction (industry unrelated to hospitality) - However, remember that it can increase complexity and requires managers to understand each of the core technologies & special requirements of the individual units. This often reduces the effectiveness of management.

HR: Issues to consider

o Board of directors: Tenure, experience, and present level of investment o Top managers, including the CEO: Background, capabilities, experience as a member o Other managers & employees: Effective HR planning, training & development, turnover, effective performance appraisal (PA)

Organizational Resources: Issues to consider

o Consistency among corporate, business, and functional strategies o Consistency between organizational strategies and the firm's mission/goals o Consistency between the firm's strategies and its culture o Consistency between the firm's strategies and its structure o Relative position in the industry

Physical Resources: Issues to Consider

o Currency of technology o Quality and sophistication of distribution network o Production capacity o Reliable access to cost-effective sources of supplies o Favorable location(s)

4 Categories of Alternatives:

o Strength-Opportunity: "Offensive" alternatives, utilize a strength to address an opportunity. o Weaknesses-Threat: "Defensive" alternatives, eliminate or minimize a weakness in order to minimize the effect of a threat. o Strength-Threat: Utilize a strength to minimize the effect of a threat. o Weakness-Opportunity: Shore up a weakness to enable the organization to take advantage of an opportunity.

II. What Is The SW/OT Matrix (=TOWS)?

• After the SWOT analysis is completed, alternative courses of action may be analyzed by creating a SW/OT matrix (=TOWS). This information is proprietary to Dr. Minsun Kim. Scanning, copying, website posting, or reproducing and sharing in any form is strictly prohibited. • The SW/OT matrix (=TOWS) extends the SWOT analysis by using it as a tool for generating strategic alternatives for the firm. This is why it is critical that external opportunities not be confused with alternative courses of action.

What's an acquisition & merger?

• An Acquisition is a form of merger whereby one firm purchases another, often with a combination of cash and stock. • A Merger occurs when two or more firms, usually of roughly similar sizes, combine into one through an exchange of stock.

III. Issues in Strategy Formulation?

• Crafting a strategy is not an easy task, even with the assistance of tools like the SW/OT Matrix (=TOWS). • When a strategy appears attractive, a number of issues should be considered before it is implemented. Four such issues are discussed in this section.

3) Opportunities and 4) Threats-Contd.: Pitfall #2 to Avoid

• Distinguish between opportunities and alternatives. These words are often interchanged in everyday speech, but they are not synonymous. • Opportunities represent the application of macroenvironmental forces to a specific organization. Alternatives emanate from the SW/OT matrix (discussed in Section 9- 6) and represent specific courses of action that the organization may choose to pursue.

3) Opportunities and 4) Threats-Contd.: Pitfall #1 to Avoid

• Don't confuse external opportunities with internal strengths and weaknesses. • Factors associated with the firm such as a poor financial position, an ineffective marketing strategy, or a strong brand image are internal factors and therefore must be classified as strengths or weaknesses. In contrast, factors outside the firm such as demographic changes, competitive threats, or recent legislation are external factors and therefore must be classified as opportunities or threats.

Retrenchment Strategy

• Retrenchment strategy—a firm deliberately reduce its size. • Growth and stability strategies are usually adopted when firms are performing well. When performance is disappointing or declines are anticipated, a retrenchment strategy may be appropriate. • A retrenchment strategy is often accompanied by a reorganization process known as corporate restructuring.

Stability Strategy

• Stability strategy attempts to maintain the present size and scope of operations. • Stability strategy may be more attractive than growth strategy when: 1) Industry growth is slow or non-existent. 2) Costs associated with growth do not exceed its benefits. 3) Growth may place great constraints on quality, marketing efforts, and customer service 4) There is an increased competitive pressure associated with growth.

4) Vertical Integration

• Vertical integration refers to merging various stages of activities in the distribution channel. • When a firm acquires its suppliers (i.e., expanding "upstream"), it is engaging in backward integration, whereas a firm acquiring its buyers (i.e., expanding "downstream") is engaging in forward integration.

3) Opportunities and 4) Threats

• Whereas strengths and weaknesses are internal, opportunities and threats are external. • Source #1: Application of macroenvironmental forces to the organization. • Source #2: Application of industry analysis (Porter's five-force model) to the organization

What is Blue Ocean Strategy?

✓It is a growth strategy contingent on inventing or discovering a new industry or industry segment that creates new demand. ✓Examples include Starbucks, eBay, and Cirque Du Soleil in the coffee house, auction, and circus industries. ✓Success is not highly dependent on competitive responses, but effective blue ocean strategies require research, creativity, and a lot of savvy.