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Chapter 8 Strategy Formulation and Execution. Every company is concerned with strategy – It determines which organizations succeed and which ones struggle.

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Presentation on theme: "Chapter 8 Strategy Formulation and Execution. Every company is concerned with strategy – It determines which organizations succeed and which ones struggle."— Presentation transcript:

1 Chapter 8 Strategy Formulation and Execution

2 Every company is concerned with strategy – It determines which organizations succeed and which ones struggle – Strategic blunders can hurt a company Strategic management is a specific type of planning Strategy 2

3 The long-term view of the organization and competition Thinking strategically impacts performance and financial success Today’s environment requires everyone to think strategically Thinking Strategically 3

4 The set of decisions and actions used to formulate and execute strategies that will provide competitively superior fit (= competitive advantage) between the organization and its environment to achieve organizational goals Strategic Management 4

5 Explicit strategy is the plan of action that describes resource allocation and activities for dealing with the environment, achieving a competitive advantage, and attaining the organization’s goals Competitive advantage is the organization’s distinctive edge for meeting customer needs Strategies should: Exploit Core Competencies Build Synergy Deliver Value Target Customers Purpose of Strategy 5

6 3 Levels of Strategy in Organizations 6

7 The Strategic Management Process 7

8 Strategy Formulation vs. Execution Formulation: Assessing the external environment and internal problems to create goals and strategy Formulation: Assessing the external environment and internal problems to create goals and strategy Execution: The use of managerial and organizational tools to direct resources toward accomplishing strategic results 8

9 Formulating strategy often begins with an audit of internal and external factors – Internal Strengths and Weaknesses – External Opportunities and Threats Information is acquired from reports, surveys, discussions, and meetings SWOT Analysis 9

10 SWOT: Audit Checklist 10

11 SBU – an autonomous organization within a firm: Budgeting authority Personnel authority Examples of SBU: ABC Television – one of four SBUs in Disney Division in Army – the division commander (two star general) Strategic Business Unit (SBU) 11

12  Strategic Business Units (SBUs) have a unique mission, products, and competitors  Companies manage the mix (portfolio) of SBUs for synergy and competitive advantage  Organizations should not become too dependent on one business Formulating Corporate-Level Strategy: Portfolio Strategy 12

13 A Manager (CEO) is an agent for shareholders. Owners of the firm are clients of the manager. The manager is supposed to work for the best interest of the shareholders, that is, to maximize shareholders’ wealth – increase the stock price, by boosting the profit, increasing revenue and/or decreasing cost. In reality, a manager works for his own best interest, not for the shareholders. When this problem occurs, we call it “agency cost (problem).” Agency Theory, Agency Cost 13

14 Merge & Acquisition is an example of corporate strategy. Like any other strategy, M & A should focus on synergy, efficiency, shareholders’ wealth maximization. However, some M & As create Agency Cost. Cases in Point (Real World Applications): M & A b/w HP & Compaq M & A b/w BoA & Merrill Lynch M & A b/w Disney & ABC Television M & A, Corporate Strategy, Agency Cost 14

15 How do shareholders know whether the manager (CEO)’s corporate strategy works or not? o If the stock price does not go up after the M & A announcement, the strategy is not working. Managing (Controlling) a manager: Shareholders can use a carrot-and-stick approach to control the manager. o Carrot  Stock Option: A widely used carrot to motivate the manager to work hard for the best interest of shareholders. o Stick  Termination Agency Cost, Stock Option 15

16 Organizes business along two dimensions – Business growth rate – Market share Four categories for corporate portfolio – The combination of high/low market share and high/low business growth Formulating Corporate-Level Strategy: The BCG Matrix 16

17 The BCG Matrix 17

18 Moving into new lines of business – Expand into new valuable products and services Why does a firm attempt to diversify its business? – Manage/control/minimize the risk A Case in Point: – DELTA (Airline Company) vs. SHELL (Oil Company) – When oil price goes up, DELTA stock goes down, but SHELL stock goes up. – If DELTA merges/acquires SHELL (diversification), DELTA can lower the risk of uncertainty (a sudden spike of oil price due to the war in the Middle East) Formulating Corporate-Level Strategy: Diversification Strategy 18

19 Expansion into new lines of business Can be a difficult strategy Many companies are giving up on unrelated diversification Unattractive to investors; hard to value the firm – Hard to measure the profit, cost of capital – Hard to measure the firm value – Hard to measure the firm’s stock price Hypothetical Example: GM enters a clothing business. Unrelated Diversification Strategy – Corporate Strategy 19

20 Vertical integration expands into businesses that supply to the business or are distributors Benefits of VI: Securing supply & distribution chains  cost savings  efficiency Limitations of VI: Less competition  less productive  inefficiency [Soviet Economic Model] Hypothetical Examples: – Starbucks in VI – GM in VI Vertical integration (VI) Vertical integration (VI) – Corporate Strategy 20

21 Strategy within the business units (SBU): How do we compete? Business-level strategies are developed by Porter’s Five Forces Web technology is impacting all industries in positive and negative ways Formulating Business-Level Strategy 21

22 Porter’s Five Competitive Force Model 22

23 Porter’s Competitive Strategies 23

24 Action plans used by major departments  Marketing  Production  Finance  Human Resources  Research and Development Formulating Functional-Level Strategy 24

25 Strategic Flexibility – managers must be prepared to change and adjust strategy quickly Strategic Partnerships – collaboration with other organizations is important: Sharing Resources & Information: eg. Boeing with Delta on airplane engine cost sharing Global Strategy – organizations pursue a distinctive focus for global business New Trends in Strategy 25

26 Global Corporate Strategies 26

27 IB strategies Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved. 27 Wholly owned subsidiary Joint venture License

28 “Strategy is easy, but execution is hard” – Most important but most difficult part Strategy must be skillfully executed Alignment requires all aspects of the organization to focus on strategy goals – Everyone is moving in the same direction S.E. needs more dynamic approaches S. E. requires vision, intuition and employee participation S. E. is done through changes in leadership, org. structure, information and control systems, and human resources. Strategy Execution - The final step! 28

29 Six Silent Killers of Strategy 29

30 4 Tools for Putting Strategy into Action 30

31 Truth vs. Spin Strategic Planning - Strategy Map Agency Theory – Agency Cost SWOT Analysis SBU - BCG Matrix Porter’s 5 CFM & Competitive Strategies Tools for Strategy Execution – Leadership, Clear Roles, Accountability, HR, Candid Communication Management: Leadership, Organization, Planning, Control Review: Strategic Planning & Strategic Management 31

32 Explain briefly what "think strategically" means in practice. (class discussion) Explain why a strategy matters for competitive advantage. (class discussion) Explain briefly core competency of GM, Wal-Mart. (class discussion) There are three types of strategies: corporate, business, and functional (operational) strategy. Explain what kind of strategy Merge & Acquisition (M&A) belongs to. Explain briefly the reason. (class discussion) Explain briefly agency theory. (class discussion) Explain briefly when the agency cost incurs in a firm. (class discussion) Suppose you are a shareholder of GM. How would you control the agency cost? Conduct a SWOT Analysis of Facebook Inc.. Explain briefly internal situations. Conduct a SWOT Analysis of Facebook Inc.. Explain briefly external situations. Explain briefly what makes a SBU unique in an organization. Give an example of SBU in Disney, Army, LSSU. (class discussion) Give an example of SBU in Lake Superior State University. Explain briefly why it can be a SBU. Chapter 8 - Discussion Questions 32

33 Explain briefly why the unrelated diversification strategy makes a firm unattractive to investors. (class discussion) Explain briefly why a manger must focus on profit. (class discussion) Explain briefly what benefits a firm can gain from vertical integration strategy.(class discussion) Explain briefly why the vertical integration sometimes leads to inefficiency. (class discussion) Explain briefly potential new entrants in Porter's 5 Competitive Force Model. Explain briefly bargaining power of buyers in Porter's 5 Competitive Force Model. Explain briefly bargaining power of suppliers in Porter's 5 Competitive Force Model. Explain briefly threat of substitute products in Porter's 5 Competitive Force Model. Explain briefly rivalry among competitors in Porter's 5 Competitive Force Model. Explain briefly the differentiation strategy in Porter's Competitive Strategy Model. Explain briefly the cost leadership strategy in Porter's Competitive Strategy Model. Explain briefly the focus strategy in Porter's Competitive Strategy Model. Chapter 8 - Discussion Questions (continued) 33

34 Two firms want to become partners. Explain briefly the most important thing they need to do in strategic planning, from the business partnership perspectives if they want to be partners truly. (class discussion) List Six Silent Killers of Strategy Implementation. Among “six silent killers of strategy,” employees were not listed. Explain why. Explain briefly the four tools for putting strategy into action. Real World Applications: Avon Products Case (Feb. 2014) | MS-Word |: In this business case, which U.S. federal law did Avon break? What was the background for drafting the federal law? Give the main reason that the law was needed in the U.S. In class, we learned the three international business strategies on foreign direct investment (wholly-owned subsidiary, joint-venture, and licensing). Which strategy would you recommend Avon to avoid such legal troubles? Explain how Avon can benefit from the strategy.MS-Word Chapter 8 - Discussion Questions (continued) 34


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