Introduction to Strategy

1. Introduction to Strategy Kelley Summer 2009 GM 105 Strategic Management

2. 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 management’s game plan for • Strengthening the organization’s 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? Kelley Summer 2009 GM 105 Strategic Management

3. 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 Kelley Summer 2009 GM 105 Strategic Management

4. Developing a Mission & Objectives • An organization’s Mission • Reflects management’s 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 organization’s 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 Kelley Summer 2009 GM 105 Strategic Management

5. 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 Kelley Summer 2009 GM 105 Strategic Management

6. 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 Kelley Summer 2009 GM 105 Strategic Management

7. 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 Kelley Summer 2009 GM 105 Strategic Management

8. 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 Kelley Summer 2009 GM 105 Strategic Management

9. 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 organization’s long-term direction • Raise or lower performance objectives • Modify strategy Kelley Summer 2009 GM 105 Strategic Management

10. 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 (organization’s internal situation and competitive position) • External factors • Industry’s dominant economic traits • Competitive forces • Competitive moves of rivals • Key success factors • Attractiveness of the industry Kelley Summer 2009 GM 105 Strategic Management

11. SWOT Internal Factors Strengths Weaknesses E x F Opportunities t a e c r t Threats a o l r s Kelley Summer 2009 GM 105 Strategic Management

12. Five Forces Model Substitute Products Rivalry among sellers Potential Entrants Suppliers Buyers Kelley Summer 2009 GM 105 Strategic Management

13. 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 overall competitive picture Kelley Summer 2009 GM 105 Strategic Management

14. 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 Kelley Summer 2009 GM 105 Strategic Management

15. 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 Kelley Summer 2009 GM 105 Strategic Management

16. Competitor Analysis • An organization’s 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 competitor’s next move Kelley Summer 2009 GM 105 Strategic Management

17. 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 and competitive success in an industry Kelley Summer 2009 GM 105 Strategic Management

18. Competitive Strategy Kelley Summer 2009 GM 105 Strategic Management

19. Competitive Strategy • A competitive strategy consists of moves to • Attract customers • Withstand competitive pressures • Strengthen an organization’s market position • The objective of a competitive strategy is to generate a competitive advantage, 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 Kelley Summer 2009 GM 105 Strategic Management

20. 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 Kelley Summer 2009 GM 105 Strategic Management

21. Overall Low-Cost Leadership Strategy Kelley Summer 2009 GM 105 Strategic Management

22. 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 Kelley Summer 2009 GM 105 Strategic Management

23. When Doesn’t a Overall Low-Cost Strategy Work • When technological breakthroughs open cost reductions for competitors, negating a low-cost provider’s efficiency advantage • Competitors find it relatively easy and inexpensive to imitate the leader’s 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 Kelley Summer 2009 GM 105 Strategic Management

24. Broad Differentiation Strategies • Striving to build customer loyalty by differentiating an organization’s 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 Kelley Summer 2009 GM 105 Strategic Management

25. 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 Kelley Summer 2009 GM 105 Strategic Management

26. Pitfalls of a Broad Differentiation Strategy • Trying to differentiate on an unimportant product feature that doesn’t 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 Kelley Summer 2009 GM 105 Strategic Management

27. 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 Kelley Summer 2009 GM 105 Strategic Management

28. 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 Kelley Summer 2009 GM 105 Strategic Management

29. 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 Kelley Summer 2009 GM 105 Strategic Management

30. 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

31. Strengths and Risks of Focus Strategies • Strengths • Competitors don’t have the motivation to meet specialized needs of the niche • Organization’s competitive advantage could be seen as a barrier to entry • Organization’s competitive advantage provides an obstacle for substitutes • Organization’s 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 GM 105 Strategic Management

32. 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 GM 105 Strategic Management

33. The Growth Matrix Products Present New M a Present r k e New t s Market Product Penetration Development Market Diversification Development Kelley Summer 2009 GM 105 Strategic Management

34. Market Penetration • Use when markets are not saturated with an organization’s 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 GM 105 Strategic Management

35. 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 GM 105 Strategic Management

36. 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 human resources to manage the expanded operations • Use when unsaturated markets exist Kelley Summer 2009 GM 105 Strategic Management

37. 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 GM 105 Strategic Management

38. 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 doesn’t have to go head-to-head against powerful competitors Kelley Summer 2009 GM 105 Strategic Management

39. 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 GM 105 Strategic Management

40. 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 GM 105 Strategic Management

41. 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 GM 105 Strategic Management

42. 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; it’s an exercise in doing things in a world-class way. Kelley Summer 2009 GM 105 Strategic Management

43. Formal Reporting of Strategy-Critical Information • Accurate & timely information is essential to guide action • Prompt feedback on implementation initiatives are needed BEFORE actions 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 GM 105 Strategic Management

44. 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 GM 105 Strategic Management

45. 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 implementing pay-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 individual’s control) Kelley Summer 2009 GM 105 Strategic Management