Strategic Mange Ment

7/31/2019 Strategic Mange Ment

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Introduction to Strategy

Kelley Summer 2009GM 105 Strategic Management


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What is a Strategy?

Examples of Corporate Strategy in 2009

GM files for Chapter 11 bankruptcy

Chrysler is sold to Fiat and leaving bankruptcy

Best Buy is adding patio furniture to its product assortment

A strategy is a business approach to a set of competitive moves that are designed to generate a successful

outcome

A strategy is managements game plan for

Strengthening the organizations competitive position

Satisfying customers

Achieving performance targets

Three big questions involved in a strategy

Where are we now?

Where do we want to go?

How will we get there?

How do we know if we got there?



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Tasks Involved in Strategic Management

Defining business and stating a mission

Setting measurable objectives

Crafting a strategy to achieve objectives

Implementing a strategy Evaluating performance of the strategy, reviewing new developments and

taking corrective action



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Developing a Mission & Objectives

An organizations Mission Reflects managements vision of what the organization seeks to do and become

Provides a clear view of what the organization is trying to accomplish for its

customers

Indicates intent to take a business position

An organizations Objectives Convert the mission into performance targets

Track performance over time

Must be achievable

Two types Financial outcomes that relate to improving financial performance

Strategic outcomes that will result in greater competitiveness & stronger long-term

market position



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Examples of Types of Objectives

Financial Increase earnings growth from 10 to 15% per year

Boost return on equity investment from 15 to 20% in 2009

Achieve and maintain a AAA bond rating

Strategic Increase market share from 18 to 22% in 2009

Overtake rivals on quality or customer service by 2010

Attain lower overall costs that rivals by 2011

Become leader in new product introductions by 2010

Achieve technological superiority by 2012



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What Does a Strategy Include?

How to satisfy customers

How to grow the business Organic growth

Acquisition How to respond to changing industry and market conditions

How to best capitalize on new opportunities

How to manage each functional piece of business

How to achieve strategic and financial objectives



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What is a Strategic Plan

A strategic plan maps Where the organization is headed

Short and long range performance targets

Actions of management to achieve desired outcomes

A strategic plan consists of Mission statement

Strategic and financial performance objectives

Comprehensive strategy for achieving the objectives



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Implementing Strategy

Implementing a strategy involves Creating fits between the way things are done and what it takes for effective

strategy execution

Executing strategy efficiently and effectively

Producing desired results on time

The most important fit is between a strategy and Organizational capabilities

A reward structure

Internal support systems Organizational culture



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Evaluating Performance

The tasks of strategic management are not one-time only exercises

because Times and conditions change

Events change over time

New ways to do things surface

New managers have different ideas take over

Managers must Constantly evaluate performance

Monitor situation and decide how well things are working

Make necessary adjustments Alter organizations long-term direction

Raise or lower performance objectives

Modify strategy



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A Situation Analysis

A situation analysis identifies strategic options and opportunities

A situation analysis involves External factors: Macroenvironment (industry and competitive conditions)

Internal factors: Microenvironment (organizations internal situation and

competitive position)

External factors Industrys dominant economic traits

Competitive forces

Competitive moves of rivals

Key success factors Attractiveness of the industry



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SWOT

Internal Factors

Strengths Weaknesses

E

x F Opportunities

t a

e c

r t Threats

a o

l rs



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Five Forces Model

Rivalry among sellers

Substitute

Products

Buyers

Potential EntrantsSuppliers



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Analysis of Competitive Forces

The analysis is designed to identify the main sources of competitive forces

and the strength of the pressure

Sources of competitive pressures are defined by Rivalry among competitors

Substitute products

Potential entry

Bargaining power of suppliers

Bargaining power of buyers

Rate the strength of each competitive force

Explain how each competitive force works and its role in the overallcompetitive picture



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Environmental Scanning

A way to monitor and interpret social, political, economic, ecological and

technological events in an effort to spot trends and conditions that could

eventually impact the industry and the organization.

The purpose of environmental scanning is to raise the consciousness of

managers about potential developments that could have an important

impact on industry conditions and pose new opportunities and threats



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Assessing Competitive Positions: Strategic Groups

A Strategic Group consists of those rival firms with similar competitive

approaches and positions in an industry

A Strategic Group displays different competitive positions that rival firms

occupy

Organizations in the same strategic group have one or more competitive

characteristics in common Sell in the same price/quality range

Cover same geographic areas

Be vertically integrated to same degree

Emphasize same types of distribution channels Offer buyers similar services

Use identical technological approaches



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Competitor Analysis

An organizations strategy is affected by Current strategies of competitors Actions competitors are likely to take

Profile of key competitors involves studying Current position in the industry of each competitor Strategic objectives and recent business plans of each competitor Basic competitive approach of each competitor

Successful strategies take into account Understanding competitor strategies Evaluating their vulnerability to driving forces and competitive pressures

Sizing strengths and weaknesses of each competitor

Anticipating each competitors next move



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Key Industry Success Factors

Key success factors spell the difference between Profit and loss

Competitive success or failure

A key success factor can be A specific skill or talent

Competitive capability

Something an organization must do to satisfy customers

Being distinctively better than competitors on one or more key success

factors produces a competitive advantage

Key success factors consist of 3-5 major determinants of financial andcompetitive success in an industry



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Competitive Strategy



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Competitive Strategy

A competitive strategy consists of moves to Attract customers Withstand competitive pressures Strengthen an organizations market position

The objective of a competitive strategy is to generate a competitiveadvantage, increase the loyalty of customers and beat competitors

A competitive strategy is narrower in scope than a business strategy Five competitive strategies are

Overall low-cost leadership strategy Best cost provider strategy Broad differentiation strategy Focused low-cost strategy Focused differentiation strategy



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Overall Low-Cost Leadership Strategy

Strive to be the overall low-cost provider in an industry

How to achieve overall low-cost leadership Scrutinize each cost activity

Manage each cost lower year after year

Reengineer cost activities to reduce overall costs

Cut some cost activities out of the value chain

Competitive strengths of a overall low-cost strategy Organization in a better position to compete offensively on price

Organization is better able to negotiate with large customers

Organization is able to use price as a defense against substitutes

Low cost is a significant barrier to entry

Organization is more insulated from the power of suppliers



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Overall Low-Cost Leadership Strategy

Carrier 3Q 2008 (cents) Carrier 3Q 2008 (cents)

Northwest 15.65 Frontier 11.92

United 14.64 Delta 11.82

US Airways 14.21 Jet Blue 10.06

Continental 12.74 Southwest 9.74

American 12.69 AirTran 9.66



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When Does an Overall Low-Cost Strategy Work

the Best

When price competition is a dominant competitive force

The product is a commodity

There are few ways to differentiate the product

Most customers have similar needs/requirements Customers incur low switching costs changing sellers

Customers are large and have significant bargaining power



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When Doesnt a Overall Low-Cost Strategy Work

When technological breakthroughs open cost reductions for

competitors, negating a low-cost providers efficiency advantage

Competitors find it relatively easy and inexpensive to imitate the

leaders low cost methods Low-cost leader focuses so much on cost reduction that the

organization fails to respond to

Changes in customer requirements for quality and service

New product developments

Reduced customer sensitivity to price



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Broad Differentiation Strategies

Striving to build customer loyalty by differentiating an organizations

products from competitors products

Keys to success include Finding ways to differentiate to create value for customers that are not easily

copied

Not spending more to differentiate than the price premium that can be charged

A successful differential strategy allows an organization to Set a premium price

Increase unit sales

Build brand loyalty



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Broad Differentiation Strategies

Where to look for differentiation opportunities Supply chain

Research and development

Production activities

Marketing, sales and service activities

Strengths of a Differentiation Strategy Customers develop loyalty to the brand

Brand loyalty acts as an entry barrier

Organization is better able to fend off threats of substitute products because of

brand loyalty Reduces bargaining power of large customers since other brands are less

attractive

Seller may be in a better position to resist efforts of suppliers to raise prices



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Pitfalls of a Broad Differentiation Strategy

Trying to differentiate on an unimportant product feature that doesnt result

in providing more value to the customer

Over differentiating the product such that the product features exceed the

customers needs

Charging a price premium that buyers perceive as too high

Ignoring need to signal value

Not identifying what customers consider valuable



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Best-Cost Provider Strategy

Striving to give customers more value for the money by combining an

emphasis on low cost with an emphasis on upscale differentiation Combines low-cost and differentiation

The objective is to create superior value by meeting or beating customer

expectation on product attributes and beating their price expectations

Keys to success Match close competitors on key product attributes and beat them on cost

Expertise at incorporating upscale product attributes at a lower cost than

competitors

Contain costs by providing customers a better product



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Advantages of Best-Cost Provider Strategy

Competitive advantage comes from matching close competitors on key

product attributes and beating them on price

Most successful best-cost providers have skills to simultaneously manage

costs down and product quality up

Best-cost provider can often beat an overall low-cost strategy and a broad

differentiation strategy where Customer diversity makes product differentiation the norm

Many customers are price and value sensitive



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Focus Strategies

Focus strategy based on low-cost Concentrate on a narrow customer segment beating the competition on lower

cost

Focus strategy based on differentiation Offering niche customers a product customized to their needs

Overall objective of both focus strategies is to do a better job of serving a

niche target market than competitors

Keys to success Choose a niche were customers have a distinctive preference, unique needs or

special requirements Develop a unique ability to serve the needs of a niche target market



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What Makes a Niche Attractive?

Large enough to be profitable

Good growth potential

Not critical to the success of major competitors

Organization has the resources to effectively serve the niche Organization can defend itself against challengers through a superior ability

to serve the niche

No competitors are focusing on the niche

Kelley Summer 2009

GM 105 Strategic Management


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Strengths and Risks of Focus Strategies

Strengths Competitors dont have the motivation to meet specialized needs of the niche

Organizations competitive advantage could be seen as a barrier to entry

Organizations competitive advantage provides an obstacle for substitutes

Organizations ability to meet the needs of customers in the niche can reduce the

bargaining power of large niche buyers

Risks Broad differentiated competitors may find effective ways to enter the niche

Niche customers preferences may move toward the product attributes desired

by a larger market segment Profitability may be limited if too many competitors enter the niche

Kelley Summer 2009



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From Single-Business to Diversification

Stage 1 - Single-business serves a local or regional market

Stage 2 Geographic expansion

Stage 3 Vertical integration

Stage 4 Growth slows so the business diversifies

Kelley Summer 2009



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The Growth Matrix

Products

Present New

Ma Present

r

k

e New

ts

Market ProductPenetration Development

Market Diversification

Development

Kelley Summer 2009



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Market Penetration

Use when markets are not saturated with an organizations products

Use when the usage rate of present customers can be increased

Use when the market shares of the major competitors has been declining

Use when the relationship between sales and marketing expenses is high Use when increased economies of scale provide the opportunity for

competitive advantages

Kelley Summer 2009



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Product Development

Use when the organization has successful products that are in the maturity

stage of the product life cycle. The objective is to attract satisfied

customers to try new, improved products

Use when an organization competes in an industry that is characterized by

rapid technological change Use when competitors offer better quality products at comparable prices

Use if the organization competes in a high-growth industry

Use when the organization has strong research and development

capabilities

Kelley Summer 2009



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Market Development

Use when channels of distribution are available, reliable and inexpensive

Use when the organization is very successful in what it does

Use when the organization has excess production capacity

Use when the organization possesses the needed capital and humanresources to manage the expanded operations

Use when unsaturated markets exist

Kelley Summer 2009



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Diversification

Use when entering new industries Acquire an existing company in the target industry

Start a new company internally

Form a joint venture

Acquiring an existing company Quick entry into target market

Able to hurdle entry barriers Technological inexperience

Gain access to reliable suppliers

Being of a size to match competitors in terms of efficiency and costs

Get distribution access

Kelley Summer 2009



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Start a New Company

Use when ample time exists to enter by starting from scratch

Use if existing competitors are slow to respond to changes in the industry

Use if it is more economical to start from scratch rather than acquiring an

existing company

Use if the organization already has most of the needed skills

Use if additional capacity will not adversely impact the industry

Use when the new company doesnt have to go head-to-head against

powerful competitors

Kelley Summer 2009



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Joint Ventures

Use when it is too risky to go it alone

Use when pooling competencies of partners provides a stronger competitor

Drawbacks

Which partner will do what

Who has effective control

Potential conflicts Sourcing of components

Control over cash flows and profits

Whether operations should conform to one partner or the other

Kelley Summer 2009



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Linking the Budget to Strategy

Implementation of a strategy requires Enough resources to support the strategy

Screening of requests for new capital projects and bigger operating budgets

Shifting resources to support new strategy priorities

- Downsizing some areas and upsizing other areas

- Eliminating activities that are no longer needed

How well budget allocations are linked to the needs of a strategy

can either promote or impede the implementation process.

Kelley Summer 2009



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Implementing Best Practices & Continuous

Improvement

Implementing a strategy involves adopting best practices Best practices means:

Benchmarking is an integral part of a successfully implemented strategy Continuous improvement programs

Total quality management - TQM

Kelley Summer 2009



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Instituting Best Practices & Continuous

Improvement

Quality improvement programs are linked to Defect-free manufacture

Superior product quality

Superior customer service

Total customer satisfaction

Identifying & implementing best practices is a journey, not a

destination; its an exercise in doing things in a world-class

way.

Kelley Summer 2009



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Formal Reporting of Strategy-Critical Information

Accurate & timely information is essential to guide action

Prompt feedback on implementation initiatives are needed BEFOREactions

are fully completed

Monitoring early implementation actions serves two purposes

Quick detection of the need to adjust the strategy or its implementation

Making sure things are moving in the planned direction

Critical success variables must be track as needed

Kelley Summer 2009



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Formal Reporting of Strategy-Critical Information

Information systems should cover Customer data

Operations data

Employee data

Financial data

Accurate information allows a strategy to be monitored and

corrective action to be taken promptly

Kelley Summer 2009



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Commitment to Chosen Strategy

Implementing rewards & incentives inducing employees to make the

strategy work The reward structure must motivate people to do the very things it takes to mjake

the strategy work successfully

Requiring results, not intentions Keys to implementingpay-for-performance programs

Make performance targets the basis for structuring the incentive system

Ensure performance targets are clearly defined and every person/group is

accountable for achieving them

Be fair and impartial in comparing actual performance against targets Avoid rewarding non-performers

Explore reasons for deviations (poor individual performance or circumstances

beyond the individuals control)

Kelley Summer 2009

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