8.0 STRATEGY

1. 8.0 STRATEGY Definitions and approaches Analysing the environment Analysing the organization Strategic options and choice

2. 8.1 WHAT IS STRATEGY I? “….the long term direction of the organization.” Johnson, Whittingham and Scholes, 2010, p2 “….the determination of long-run goals and objectives of the enterprise and the adoption of courses of action and the allocation of resources necessary to carry our these goals.” Chandler, 1962 p3

3. 8.2 WHAT IS STRATEGY II? • Consideration of environmental changes including opportunities and threats • Assessment of internal strengths and weaknesses and ability to respond to environmental change • Values and preferences of interested parties including ethical considerations • Creation and evaluation of options • Choice of option Strategy formulation is a highly complex process!

4. 8.3 WHAT IS STRATEGY III Part of a hierarchy of intentions • Vision Overall future intention • Mission Statement of key values • Goals Generalized statements of intent • Strategies Processes for determining and achieving goals • Objectives Intentions measurable within a time frame

5. 8.4 LEVELS OF STRATEGY I • Corporate strategy - how all activities and constituent businesses add value to the whole organisation. - entering new markets, acquisitions, the extent of the range of products and services, the differential allocation of resources. - for example, Samsung’s strategy for its entire group of companies.

6. 8.5 LEVELS OF STRATEGY II • Business strategy - how individual businesses compete in their own markets (competitive strategy). - nature of the response to competition, control of costs. - relates to a stand-alone business or a unit in a larger organization. - for example, Samsung’s strategy for its mobile phone business.

7. 8.6 LEVELS OF STRATEGY III • Functional strategy – how different departments /areas of the business deliver corporate and business strategies. - for example, Samsung’s advertising strategy for the Samsung brand (corporate level) and for its mobile phones (business level).

8. 8.7 APPROACHES TO STRATEGY • Rational approach (see slide 8.8) • Flexible approach • Creative approach • Behavioural approach • Incremental approach • An absence of strategy? • Combination of approaches

9. 8.8 SWOT ANALYSIS (STRENGTHS, WEAKNESSES, OPPORTUNITIES AND THREATS) • A rational approach • Analysis of external environment as opportunities and threats • Analysis of internal environment as strengths and weaknesses • Collects useful data, gives direction, has face validity, can be a teambuilding experience But • Information is usually incomplete • Modern business environment usually complex making analysis difficult • Same information often available to competitors who draw same conclusions • Management may be unaware of real strengths and weaknesses • Pseudo-science?

10. 8.9 APPROACHES AND STYLES OF STRATEGY

11. 8.10 USES AND VALUE OF STRATEGY • Assists in the formation and modification of goals • Management control device • Assists in resource allocation • Focuses management on key issues and actions • Guides and co-ordinates the constituent parts of the organization • Assists in organizational and cultural change • Can be part of management development However • Mixed evidence on links between strategy and performance • Cause and effect complicated by many variables

12. 8.11 ANALYSING THE ENVIRONMENT The general environment – factors affecting all firms Characteristics of the general environment: • Simple and static versus dynamic/complex • All environments have become more diverse and complex • In all environments change is faster and more frequent • In general a simple and static environment lends itself to more rational approaches • In general dynamic and complex environments lend themselves to more flexible and creative approaches Local environment – the immediate competitive environment

13. 8.12 THE IMMEDIATE COMPETITIVE ENVIRONMENT (After Porter 1980) The immediate competitive environment can be assessed by analysing. • The threat of potential entrants • The threat of substitution • The bargaining power of buyers • The bargaining power of suppliers • Competitive rivalry This is often referred to as Porter’s Five Forces model.

14. 8.13 THE THREAT OF POTENTIAL ENTRANTS • The ease with which a competitor can establish themselves in your business • The ease of entry is linked to low barriers to entry • Can lead to volatile markets • Threat is greatest when a competitor has a strong brand e.g. Apple and Virgin entering new markets • High barriers to entry are associated with: - the cost of technology - strong customer loyalty - difficulties of accessing distribution channels - existing patents

15. 8.14 THE THREAT OF SUBSTITUTION • ‘A substitute performs the same or a similar function as an industry’s product by a different means’ (Porter 2008). • The greatest threat is where the substitute is cheaper and/or performs better. • Examples include; - man-made fibres versus cotton - digital camera versus film camera - air travel versus train travel.

16. 8.15 THE BARGAINING POWER OF BUYERS • Highest where there are many suppliers of the same or substitute product • Tends to be high where there would be no cost in switching suppliers • Influenced by the complexity of the market and of technology • Bargaining power increases when the buyer has economic power over the supplier and increases with the volume bought • Affected by the nature of the relationship between buyers and suppliers

17. 8.16 THE BARGAINING POWER OF SUPPLIERS • Highest where there are few suppliers and where the product is highly specialized • Highest where suppliers have created monopoly position e.g. in the computer industry by Microsoft and Intel • Tends to be high where there would be high cost in switching suppliers • Can apply to labour markets as well as product markets • Affected by the nature of the relationship between buyers and suppliers

18. 8.17 COMPETITIVE RIVALRY • Firms jockeying for position • Rivalry is greatest where there are a large number of firms of equal size and resources • Can be damaging if there is no differentiation in product function, style and/or price • Can be enhanced by product and process innovation, by improving delivery times and by offering a customized service • Innovative products and better service can often be offered successfully at higher prices

19. 8.18 ASSESSMENT OF THE 5 FORCES MODEL • Focuses on the immediate operating environment • Avoids prescription as it requires analysis of the 5 forces • Can be used to asses how forces change over time BUT • Requires information about other firms that may not be available • Emphasises competition when the trend is towards greater collaboration especially between buyers and suppliers • Once analysis is made the firm may not be able to respond

20. 8.19 ENVIRONMENTAL ANALYSIS - COMPLICATIONS • Incomplete information + complex environment • Information is available to competitors, who can then develop similar strategies • Threat to one part of an organization may be an opportunity to another • Once analysis is made is an appropriate strategy available? • Ability to respond may depend on factors such as size, market position, and financial status • Managers may differ in their perception of opportunities, threats, strengths and weaknesses • Managers may have different attitudes to risk

21. 8.20 ORGANIZATIONAL ANALYSIS • Knowledge of resources determines what can be done • Identifies gaps • Combining resources may be a source of competitive advantage • Managers can rate the attractiveness of products and markets • Managers can assess the ability of the organization to change

22. 8.21 RESOURCE BASED VIEW OF THE FIRM I • Traditional approaches to organizational analysis see it as secondary to environmental analysis. • Firms in the same industry face similar environmental conditions and changes. Why do some do better than others? Toyota and BMW versus Ford and GM. • Must be more than techniques to improve effectiveness – these can often be copied – growth of benchmarking. • Barney (1991) sees configuration and combination of resources as a source of competitive advantage. He identifies, physical capital, organization capital and human capital. To this we can add financial capital. • Similar to concept s of core competence (Hamel and Prahalad 1990) and dynamic capabilities (Teece 1997).

23. 8.22 RESOURCE BASED VIEW OF THE FIRM II • Core competence (Hamel and Prahalad 1990). Focus on those resources and activities that produce competitive advantage. Having something and being able to do something that competitors cannot do – distinctive capabilities. • Dynamic capabilities (Teece 1997). How organizations can recreate their resources and capabilities to meet the needs of a changing environment and to avoid imitation. These can be built into formal structures and processes but are more likely to be found in less formal aspects. Link with tacit learning.

24. 8.23 RESOURCE BASED VIEW OF THE FIRM III (Barney 1991) • Physical capital – products and brands, processes, intellectual property. Involves efficiency, productivity, flexibility, innovation. • Organizational capital – how the firm is structured, its key processes. Involves corporate culture, the nature of relationships between different parts of the organization internally and relationships with external organizations and stakeholders. • Human capital – skills and training. Involves corporate culture, learning, the importance of building relationships and tacit knowledge. • Financial capital – the ability to raise and manage funds.

25. 8.24 RESOURCE BASED VIEW OF THE FIRM IV (Barney 1991) Advantage of resources and capabilities is based on: • Value – linked to value chains and value networks • Rarity • Inimitability • Non-substitutability

26. 8.25 THE VALUE CHAIN I • A cumulative build-up of added value for the customer through the interaction between key operations activities. • The ends are greater than the sum of parts. • In profit organizations, profits are built up at every stage.

27. 8.26 THE VALUE CHAIN II

28. 8.27 PORTFOLIO ANAYSIS • Useful for firms operating in a number of product markets • Analysis of strengths and weaknesses of products and markets in a specific range • Informs the strategies relating to product mix and product development • Guide to acquisition and divestment.

29. 8.28 BOSTON CONSULTING GROUP MATRIX

30. 8.29 STRATEGIC OPTIONS • Business level strategies – competitive options in product markets • Corporate strategies – competitive options at industry or company level

31. 8.30 BUSINESS LEVEL OPTIONS • Cost leadership • Differentiation via innovation • Focus on niche product markets

32. 8.31 BOWMAN’S STRATEGY CLOCK Bowman’s model is an extension of Porter’s generic business strategies and is based on price and the perceived value to the customer. Potentially successful strategies are: • No frills • Low price • Hybrid • Differentiation • Focused differentiation Potentially unsuccessful strategies are: • High price, standard value • High price low value • Low value, standard price

33. 8.32 CORPORATE STRATEGY OPTIONS (ANSOFF 1968) • Product penetration strategy – growth of existing products in existing markets • Product development strategy – growth of new products in existing markets • Market development strategy – seeking new markets for existing products • Diversification strategy - growth based on new products in new markets.

34. 8.33 ANSOFF’S CORPORATE STRATEGY MIX

35. 8.34 CORPORATE LEVEL OPTIONS • Diversification • Acquisition and merger • Joint venture (see slides 2A.13-2A.17) • Licensing or franchising • Delete operations These can also apply to business level strategies

36. 8.35 ACQUISITIONS - RATIONALE Achieve greater market power Able to charge higher prices Managers want to gain salary rise and power Achieve better fit with the operating environment Because other firms have done it A way of life for some organizations Enhanced by increased networking at director level (Findings by Haleblain et al, 2009)

37. 8.36 MERGERS AND ACQUISITIONS - TRENDS Investment in acquisitions has grown globally. Most acquisitions either do not increase or reduce shareholder value. Those selling shares benefited from a higher than value share price. (Findings by Haleblain et al, 2009)

38. 8.37 MERGERS AND ACQUISITIONS - FINDINGS Much conflicting evidence. Common conclusion is that most acquisitions deliver poor performance. Poor performance is attributed to: - company not doing their homework - poor choice of partner - overpaying for the acquisition - ignoring likely integration problems. There are significant political and stakeholder issues which can lead to the acquisition being blocked.

39. 8.38 STRATEGIC CHOICE • Analysis of the environment • Analysis of the organization • Stated goals and objectives • Values and preferences of key decision-makers • Organization politics • Issue of sustainability