CHAPTER 6 Strategy Formulation Situation Analysis Business Strategy

Situational Analysis Strategy formulation -–Strategic planning or long-range planning (Develops mission, objectives, strategies, policies) Or –process of finding a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses Prentice Hall, Inc. © 2006 6 -2

Situational Analysis SWOT Criticism – – – – Generates lengthy lists No weighted priorities Ambiguous wording Same factor can be in two categories No supporting data Single level analysis No link to strategy implementation Prentice Hall, Inc. © 2006 6 -3

IFAS – Maytag as Example Prentice Hall, Inc. © 2006 6 -4

EFAS – Maytag as Example Prentice Hall, Inc. © 2006 6 -5

SFAS Matrix Prentice Hall, Inc. © 2006 6 -6

Situational Analysis Niche – –Need in the marketplace that is currently unsatisfied Corporate Goal – –Find propitious niche – market segment big enough for only one company –Strategic window – opportunity available for a limited time Prentice Hall, Inc. © 2006 6 -7

TOWS Matrix Prentice Hall, Inc. © 2006 6 -8

Business Strategy Focuses on improving competitive position of company’s products or services within the

Porter’s Competitive Strategies Competitive Strategy – –Lower Cost strategy • Greater efficiencies than competitors –Differentiation strategy • Unique/superior value, quality, features, service Competitive Scope –Direct competition –Focus on niche Prentice Hall, Inc. © 2006 6 -10

Porter’s Competitive Strategies Prentice Hall, Inc. © 2006 6 -11

Porter’s Competitive Strategies Cost Leadership – –Low-cost competitive strategy –Broad mass market –Efficient-scale facilities –Cost reductions –Cost minimization Potential Outcome –Barriers to entry –Higher ROI Prentice Hall, Inc. © 2006 6 -12

Porter’s Competitive Strategies Differentiation – –Broad mass market –Unique product/service –Premiums charged –Less price sensitivity Potential Outcome –Increase Market Share –Higher Profit –Brand as barrier to entry Prentice Hall, Inc. © 2006 6 -13

Porter’s Competitive Strategies Cost-Focus – –Low-cost competitive strategy –Focus on market segment/Niche –Geographic –Buyer

Porter’s Competitive Strategies Differentiation Focus – –Specific group or geographic market focus –Differentiation in target market –Special needs of narrow target market Prentice Hall, Inc. © 2006 6 -15

Porter’s Competitive Strategies Stuck in the middle – –No competitive advantage –Below-average performance Prentice

Risks of Generic Strategies Risks of Cost Leadership Risks of Costis. Leadership Cost leadership not Cost leadership is not sustained: • sustained: Competitors imitate. • Technology changes. • • Other bases for cost • leadership Other bases for erode. cost leadership erode. Proximity in differentiation is lost. focusers achieve even Costcost focusers achieve even lower in segments. lower cost in segments. Prentice Hall, Inc. © 2006 Risks of Differentiation is not sustained: • sustained: Competitors imitate. • • Bases for differentiation • become Bases less for differentiation important to become less important to buyers. Cost proximity is lost. Differentiation focusers achieve even greater achieve eveningreater differentiation segments. differentiation in segments. Risks of Focusis imitated: The. Risks focusof strategy focus strategy is imitated: The target segment becomes structurally unattractive: • Structure erodes. • Demand disappears. Broadly targeted competitors overwhelm the segment: • The segment’s differences from other segments narrow. • Thesegments advantages of a • Theline advantages broad increase. of a broad line increase. New focusers subsegment focusers sub-segment the New industry. the industry. 6 -17

Risks of Generic Strategies Broad versus Focused Strategies “Although there is generally room for only one company to successfully pursue the massmarket cost leadership strategy (requires dominant market share), there is room for an almost unlimited number of differentiation and focus strategies (depending on the range of possible features and market niches). ” Prentice Hall, Inc. © 2006 6 -18

8 Dimensions of Quality Prentice Hall, Inc. © 2006 6 -19

Competitive Strategy Industry Structure – –Fragmented Industry – Focus –Consolidated Industry –Cost/Differentiation through service

Competitive Strategy Strategic Rollup (industry consolidation) – Involve larger numbers of firms – Acquired firms are typically owner operated – Objective is not to gain incremental advantage but to reinvent an entire industry Prentice Hall, Inc. © 2006 6 -21

Competitive Tactics A specific operating plan that details how a strategy is to be implemented in terms of when and where it is to be put into action. (Narrower in scope and shorter time horizons than strategies) Prentice Hall, Inc. © 2006 6 -22

Competitive Tactics Timing Tactics – –First mover advantages –Reputation for industry leadership –Cost leadership as product matures –Temporary high profits – 10 years for CPG – 12 years for Industrial –Late movers advantages –Imitate technology advances –Lower R&D costs –Lower risk –Market segmentation opportunities Prentice Hall, Inc. © 2006 6 -23

Competitive Tactics Market Location Tactics -- Offensive –Frontal Assault – match the competition –Flanking Maneuver - segmentation –Bypass Attack – change the rules –Encirclement - variety –Guerrilla Warfare – many small initiatives on small market segments Prentice Hall, Inc. © 2006 6 -24

Competitive Tactics Market Location Tactics -- Defensive –Raise structural barriers –Increase expected retaliation –Lower

Cooperative Strategies Collusion active cooperation of firms within an industry to reduce output and raise prices to get around the economic laws of supply and demand –Implicit or explicit –Generally illegal Prentice Hall, Inc. © 2006 6 -26

Cooperative Strategies Strategic Alliances (Why? ) – To obtain technology and/or manufacturing capability – To obtain access to specific markets – To reduce financial risks – To reduce political risk – To learn new capabilities Prentice Hall, Inc. © 2006 6 -27

Cooperative Strategies • Mutual service consortia – Pooled services within an industry • Joint ventures – Creates an independent entity, allocates ownership, financial risk and reward (temporary with high failure rates) • Licensing arrangements – Rights are granted to a firm in another country to produce or sell products • Value-chain partnerships – Alliances among companies and their suppliers and/or distributors Prentice Hall, Inc. © 2006 6 -28

Cooperative Strategies Continuum of Strategic Alliances Mutual Service Consortium Weak and Distant Prentice Hall, Inc. © 2006 Joint Venture Licensing Arrangement Value Chain Partnerships Strong and Close 6 -29