Chapter 4 Business Strategy Formulation and Implementation

1. Chapter 4 Business Strategy Formulation and Implementation

2. Learning Objectives Understanding of: • Internal growth strategies and implications for organization scope and resource allocations • External growth strategies and implications for organization scope and resource allocations • The timing of growth moves • Generic competitive strategies and their risks • The implications of stages in the product life cycle for growth and competitive strategies.

3. The Strategic Management Process Internal and External Analysis Strategy Formulation (corporate and business level) Strategic Direction Strategy Implementation and Control Strategic Restructuring

4. Business-Level Strategy Formulation Responsibilities • Direction Setting--Mission, vision, ethics, goals • Situation Analysis--Compilation and assessment of information • Selection of Strategies--Generic Strategy (cost leadership, differentiation, best cost, focus) and Strategic Posture (specific strategies) • Management of Resources--Acquisition and/or development of resources leading to competitive advantage

5. Business-Level Strategies • Growth Strategies • Competitive Strategies

6. Growth Strategies • Involve investment in resources to achieve growth in sales (assuming the industry is attractive) • Investments over time may involve a redefinition/expansion of organizational scope • Three concerns: • what activities and resources to invest in • the implications for scope and complexity • the timing relative to competitors

7. Growth Strategies • Internal Strategies • Market penetration • Market development • Application development • Product development • External Strategies • Horizontal integration • Alliance formation • Vertical integration

8. Internal Growth Strategies Market penetration • Objective: Increase sales volume, share of market in existing markets with existing products • Invest: Advertising, promotion, sales force, capacity. • Scope: Scale may increase, but scope does not change

9. Products Function Served Markets Served Processes/Activities Market Penetration

10. Internal Growth Strategies Market development • Objective: Cultivate new market segments (demographic, geographic, psychographic) for existing products • Invest: Marketing programs, new distribution channels, new sales staff, capacity... • Scope: Increases the number and type of markets served

11. Products Function Served Markets Served Processes/Activities Market Development

12. Internal Growth Strategies Application development • Objective: Qualify the product for new applications, which will lead to more volume sold to new and existing market segments. • Invest: Applications development, testing, marketing programs, new distribution channels, new sales staff, capacity... • Scope: Increases the number and type of functions served, and possibly the number and type of markets served

13. Products Function Served Markets Served Processes/Activities Application Development

14. Internal Growth Strategies Product Development • Objective: Develop new products and modifications that will lead to sales in new and existing market segments, possibly for new applications. • Invest: Product development, process development, applications development, testing, marketing programs, new distribution channels, new sales staff, capacity... • Scope: Increases the number/type of products, processes, functions served, and possibly the number and type of markets served

15. Products Function Served Markets Served Processes/Activities Product Development

16. External Growth Strategies Horizontal Integration • Objective: Intention is to accomplish the same end as the internal growth strategies. Acquire capacity, product lines, market channels, etc. • Invest: Acquire all or part of a competitor’s assets. • Scope: May increase scale and/or scope, similar to internal growth strategies.

17. External Growth Strategies Common in industries: • experiencing a leveling of growth and excess capacity: • $75.7 billion merger of Smith, Kline, Beecham with Glaxo Wellcome • acquisition of Western Airlines by Delta. • where rapid scale-up and access to new technologies are critical: • Cisco’s acquisition of 51 companies over 6 years, reshaping product line and repositioning in key technologies.

18. External Growth Strategies Strategic Alliances/Joint Ventures • Objective:To gain access to the capacity and/or capability of another firm for purposes of extending products, markets, processes, of function served. • Invest: In cooperative initiatives. Management team, project resources. • Scope: Provides a mechanism for extending scope.

19. External Growth Strategies • Alliances between competitors for product and process development • E.g., GM -- an on-line marketplace for auto suppliers’ goods and services. Toyota, Isuzu, Suzuki, and Fuji involved. • E.g., GM -- an alliance with Honda for engine and transmission development and production. • And between a firm and its suppliers or channels for exclusive supply arrangements

20. Stability Strategies • Not typical in publicly-held organizations • May be acceptable if • All key stakeholders agree • Mature market with high exit barriers • Private firms that want to preserve control • Restructuring (temporary condition)

21. Miles and Snow’s Strategic Categories • Prospectors • First mover • Analyzers • Follow the first mover when opportunity is proven • Defenders • Defensive strategy • Reactors • No distinct strategy

22. Porter’s Three Generic Business Strategies Cost Leadership Differentiation Broad Target Competitive Scope Differentiation Focus Cost Focus Narrow Target Cost Efficiency Preferred Product/Service

23. Cost Leadership • Accurate Demand Forecasting and High Capacity Utilization • Economies of Scale • Technological Advances • Learning/Experience Effects

24. Typical Learning/Experience Curve unit cost total cumulative output

25. Differentiation Create Value Through Uniqueness • Superior Quality • Innovations and Research • Speed and Flexibility • Reputation and Brand Name • Creative advertising Customers Must Be Willing to Pay More for Uniqueness • Added costs vs. incremental price

26. Best Cost • Combination of Cost Leadership and Differentiation • May Actually Be the Dominant Strategy Among the Most Successful Companies Today • Either: • The same resources/activities that allow cost reductions also allow differentiation. E.g., automation that lowers costs and improves speed and service. • Profits from cost reductions are used to invest in differentiating features, and vice versa.

27. Focus • Based on Differentiation or Lowest Cost • Key Is to Provide a Product or Service That Caters to a Particular Segment

28. The Product Life Cycle A Growth B Unit Sales Volume Maturity C Commodity or Decline Introduction Time