Chapter 6: Organizational Strategy

BCG matrix

A portfolio strategy that managers use to categorize their corporation's businesses by growth rate and relative market share, helping them decide how to invest corporate funds

What is the preferred method of unrelated diversification

Acquiring

Types of positioning strategies

Cost leadership, differentiation, focus

Analysis of organization's internal environment (strengths & weaknesses) begins with

Assessment of distinctive competencies and core capabilities

unrealted diversification

Creating or acquiring companies in completely unrelated businesses losses in one business or industry should have minimal effect on the performance of the others in the company

adaptive strategies

choose an industry-level strategy that is best suited to changes in the organization's external environment.

Reactors

companies that do not follow a consistent adaptive strategy but instead react to changes in the external environment after they occur tend to be poor performers unstable approach

Stars

companies that have a large share of a fast-growing market

Question marks

companies that have a small share of a fast-growing market

Focus strategy

company uses either cost leadership or differentiation to produce a specialized product or service for a limited, specially targeted group of customers in a particular geographic region or market segment.

Stability strategy

continue doing what the company has been doing, just doing it better try to improve the way in which they sell the same products or services to the same customers.

The choice to seek risk or avoid risk depends on

Enter top management views the company as falling above or below strategic reference points

Character of rivalry

Measure of the intensity of competitive behavior among companies in an industry Both industry attractiveness and profitability decrease when rivalry is cutthroat.

Two types of responses

Mirror/match your competitor's move ORRR respond along a different dimension from your competitor's move/attack

Being above a strategic reference points make companies choose a _________ strategy

Risk avoiding strategy

Being below a strategic reference points makes companies choose a _______ strategy

Risk taking strategy

Attack

a competitive move designed to reduce a rival's market share or profits

Which of the following industry forces determines the industries' overall attractiveness and potential for long-term profitability

The bargaining power of suppliers

Industry-Level Strategy

a corporate strategy that addresses the question "How should we compete in this industry?"

Firm level strategies

a corporate strategy that addresses the question, "How should we compete against a particular firm?"

Portfolio strategy

a corporate-level strategy that minimizes risk by diversifying investment among various businesses or product lines

strategic dissonance

a discrepancy between a company's intended strategy and the strategic actions managers take when implementing that strategy

strategic group

a group of companies within an industry against which top managers compare, evaluate, and benchmark strategic threats and opportunities

Threat of new entrants

a measure of the degree to which barriers to entry make it easy or difficult for new companies to get started in an industry If new companies can enter the industry easily, then competition will increase, and prices and profits will fall.

Threat of substitute products or services

a measure of the ease with which customers can find substitutes for an industry's products or services If customers can easily find substitute products or services, the competition will be greater, and profits will be lower.

Bargaining power of buyers

a measure of the influence that customers have on a firm's prices If a company sells a popular product or service to multiple buyers, then the company has more power to set prices.

Bargaining power of suppliers

a measure of the influence that suppliers of parts, materials, and services to firms in an industry have on the prices of these inputs When companies can buy parts, materials, and services from numerous suppliers, the companies will be able to bargain with the suppliers to keep prices low.

competitive inertia

a reluctance to change strategies or competitive practices that have been successful in the past

Valuable resources

a resource that allows companies to improve efficiency and effectiveness

imperfectly imitable resource

a resource that is impossible or extremely costly or difficult for other firms to duplicate

rare resources

a resource that is not controlled or possessed by many competing firms

Nonsubstitutable resource

a resource that produces value or competitive advantage and has no equivalent substitutes or replacements

Diversification

a strategy for reducing risk by buying a variety of items (stocks or, in the case of a corporation, types of businesses) so that the failure of one stock or one business does not doom the entire portfolio

4 conditions of resources being used to create a sustainable competitive advantage

Valuable, rare, imperfectly imitable, and nonsubstitutable

Grand strategy

a broad strategic plan used to help an organization achieve its strategic goals guide the strategic alternative that managers of individual businesses may use in decking what businesses they should be in

Shadow-strategy task force

a committee within a company that analyzes the company's own weaknesses to determine how competitors could exploit them for competitive advantage

Sustainable competitive advantage

a competitive advantage that other companies have tried unsuccessfully to duplicate and have, for the moment, stopped trying to duplicate

Risk-seeking strategy

aims to extend or create a sustainable competitive advantage

risk-avoiding strategy

aims to protect an existing competitive advantage

Situational Analysis (SWOT)

an assessment of the strengths and weaknesses in an organization's internal environment and the opportunities and threats in its external environment SWOT analysis helps a company determine how to increase internal strengths and minimize internal weaknesses while maximizing external opportunities and minimizing external threats.

Firms in direct competition can make two basic strategic moves:

attack and response

Response

countermove, prompted by a rival's attack, that is designed to defend or improve a company's market share or profit

3 types of grand strategies

growth, stability, defensive

Growth strategy

increase profits, revenues, market share, or the number of places in which the company does business

Benchmarking

involves identifying outstanding practices, processes, and standards at other companies and adapting them to your own company

core capabilities

less visible, internal decision-making routines, problem-solving processes, and organizational cultures that determine how efficiently inputs can be turned into outputs

Differentiation

making your product or service sufficiently different from competitors' offerings that customers are willing to pay a premium price for the extra value or performance that it provides protects companies from industry forces by reducing the threat of substitute products and protects companies by making it easier to retain customers and more difficult for new entrants trying to attract new customers.

Strategic reference point theory

managers choose between two alternatives -risk-avoiding strategy -risk-seeking strategy

Positioning Strategies

minimize the effects of industry competition and build a sustainable competitive advantage

Firms use their resources to improve

organizational effectiveness and efficiency

Acquisitions

other companies to buy

Two major approaches to corporate-level strategy

portfolio strategy and grand strategy

competitive advantage

providing greater value for customers than competitors can

market commonality

the degree to which two companies have overlapping products, services, or customers in multiple markets more overlap = more competition

Resource similarity

the extent to which a competitor has similar amounts and kinds of resources more similarity = more likely to match your strategic actions

Secondary firms

the firms in a strategic group that follow strategies related to but somewhat different from those of the core firms

Corporate-level strategies

the overall organizational strategy that addresses the question "What business or businesses are we in or should we be in?"

Cost leadership

the positioning strategy of producing a product or service of acceptable quality at consistently lower production costs than competitors can, so that the firm can offer the product or service at the lowest price in the industry protects companies from industry forces by deterring new entrants, who will have to match low costs and prices And forces down the prices of substitute products and services, attracts bargain-seeking buyers, and increases bargaining power with suppliers, who have to keep their prices low if they want to do business with the cost leader.

Direct competition

the rivalry between two companies that offer similar products and services, acknowledge each other as rivals, and act and react to each other's strategic actions

Recovery

the strategic actions taken after retrenchment to return to a growth strategy

Strategic reference points

the targets that managers use to measure whether their firm has developed the core competencies that it needs to achieve a sustainable competitive advantage

When market commonality is large, and companies have overlapping products, services, or customers in multiple markets

there is less motivation to attack and more motivation to respond to an attack

Retrenchment strategy

to turn around very poor company performance by shrinking the size or scope of the business or, if a company is in multiple businesses, by closing or shutting down different lines of the business

distinctive competence

what a company can make, do, or perform better than its competitors tangible

Five industry forces that determine a industry's overall attractiveness and potential for long-term profitability

1. Character of the rivalry 2. Threat of new entrants 3. Threat of substitute products or services 4. Bargaining power of suppliers 5. Bargaining power of buyers

Portfolio strategy drawbacks

1. Evidence suggest that acquiring unrelated businesses is not useful (must have a medium level of diversification as to eliminate risk) 2. managers using the BCG matrix aren't very good at accurately determining which companies should be categorized as stars, cash cows, questions marks, or dogs. (common mistake is simply miscategorizing highly profitable companies as dogs) 3. Can weaken cash cows by not allowing companies to reinvest $$ into them so they can keep up in the market 4. Labeling a top performer as a cash cow can harm employee morale

In what ways can companies grow?

1. Externally merging with or acquiring other companies 2. directly expanding the company's existing business or creating and growing new businesses

Steps of retrenchment

1. Making significant cost cuts and reducing a business's size or scope 2. Recovery

To formulate effective strategies, companies must be able to answer these questions:

1. What business are we in? 2. How should be compete in this industry? 3. Who are our competitors, and how should we respond to them?

Strategy Making Process

1. assess need for strategic change 2. conduct situational analysis 3. choose strategic alternatives

According to portfolio strategy:

1. the more businesses in which a corporation competes, the smaller its overall chances of failing 2.companies can reduce risk even more through unrelated diversification—creating or acquiring companies in completely unrelated businesses 3. investing the profits and cash flows from mature, slow-growth businesses into newer, faster-growing businesses can reduce long-term risk.

Analyzers

Blend of the defender and prospector strategies; seek moderate, steady growth and limited opportunities for fast growth simultaneously minimize risk and maximize profits by following or imitating the proven successes of prospectors.

The BCG matrix recommends that:

Cash from cash cows should be reinvested in stars mainly but also some in question marks (riskier than stars)

Two factors determine the extent to which firms will be in direct competition with each other

Commonality & resource similarity

Cash cows

Companies that have a large share of a slow-growing market

Dogs

Companies that have a small share in a slow growing market

4 types of adaptive strategies

defenders, prospectors, analyzers, and reactors

Related diversification

different business units share similar products, manufacturing, marketing, technology, or cultures

Related diversification reduces risk because

different businesses can work as a team, relying on each other for needed experience, expertise, and support.

resource similarity largely affects

response capability, that is, how quickly and forcefully a company can respond to an attack. firm is less likely to attack firms with similar levels of resources because it is unlikely to gain any sustained advantage when the responding firms strike back.

Prospectors

seek fast growth by searching for new market opportunities, encouraging risk taking, and being the first to bring innovative new products to market

Defenders

seek moderate, steady growth by offering a limited range of products and services to a well-defined set of customers

Resources

the assets, capabilities, processes, employee time, information, and knowledge that an organization uses to improve its effectiveness and efficiency and create and sustain competitive advantage

Core firms

the central companies in a strategic group