1. Strategy Formulation – Business Strategy
Lecture 3
Strategy Formulation – Business Strategy

2. Outcome of strategic analysis
The goal is to find a propitious niche that is so well suited to the firm’s internal and external environment that other corporations are not likely to challenge or dislodge it.
Look for a strategic window – a unique market opportunity that is available only for a particular time.
Occupy a propitious niche and discourage competition.
Identify a market opportunity in which the firm can obtain and keep dominant market share.
Niche can change faster than a firm can adapt to that change – thus the firm need to invest heavily in their capabilities to keep strong in a changing niche.

3. Propitious niche can disappear because of
The environment/industry changes
The market gets smaller because of factors beyond the control of the company/SBU.
The company/SBU, through its own efforts, not only fills a demand but actually causes the market to expand.
The company/SBU changes
Due to demands for resources elsewhere in the corporation, the company/SBU may be forced to cut back its activities.
Its own success in the niche may cause the company/SBU to move into nearby niches.

4. Mission and Objectives
Focus on fulfilling a mission rather than on generating action possibilities
Mission should be a common thread
Gap between planned and achieved objectives
Review of objectives

5. Generating alternative strategies
Using TOWS matrix to generate alternative strategies
Strengths – S List Strengths
Weaknesses – W
List Weaknesses
Opportunities – O
List 5-10 Opportunities
SO Strategies Use strengths to take advantage of opportunities
WO Strategies Overcoming weaknesses by taking advantage of opportunities
Threats – T
List 5-10 Threats
ST Strategies Use strengths to avoid threats
WT Strategies Minimize weaknesses and avoid threats

6. Porters Generic Strategies

7. Porters Generic Strategies
Competitive Strategy
Required Skills & Resources
Organizational
Elements
Associated
Risks
Overall Cost Leadership
Sustained capital investment and access to capital
Tight cost control
Technological change that nullifies past investments or learning
Process engineering skills
Frequent, detailed reports
Low-cost learning by industry newcomers or followers through imitation, or through their ability to invest in state-of-the-art facilities
Intensive supervision of labor
Structured organization and responsibilities
Inability to see required product or marketing change because of the attention placed on cost
Products designed for ease of manufacture
Incentives based on meeting strict quantitative targets
Inflation in costs that narrow the firm’s ability to maintain enough of a price differential to offset competitors’ brand images or other approaches to differentiation
Low-cost distribution system

8. Strategic Business Planning for Commercial Producers
Identifying Strategies
Value Chain for a Low Cost Strategy
Firm Infrastructure – cost-effective management information
systems (MIS), few managerial layers, simplified planning practices.
Human Resources: consistent policies to reduce turnover,
intense focus on training employees to be efficient and multi-skilled.
Technology: Easy-to-use production technologies,
investment in technology that improves production efficiencies.
Procurement: procedures to find the lowest cost inputs, frequent
evaluation of suppliers’ performances.
Inbound
Logistics
Efficient systems
to link supplier products with production processes.
Operations
Use of Economies of scale.
Construction of efficient scale facilities.
Outbound
Delivery schedule that reduces costs.
Selection of low-cost carriers.
Marketing
& Sales
Small, highly trained sales force.
Products priced to generate sales volume.
Service
Efficient quality
control to
reduce buyer
complaints.
MARGIN
© Purdue University, Center for Food and Agricultural Business, 2002

9. Porters Generic Strategies
Competitive Strategy
Required Skills & Resources
Organizational Elements
Associated Risks
Differentiation
Strong marketing abilities
Strong coordination among functions in R&D, product development, and marketing
The cost differential between low-cost competitors and the differentiated firm becomes too great for differentiation to hold brand loyalty. Buyers thus sacrifice some of the features, services, or image possessed by the differentiated firm for large cost savings.
Product engineering
Subjective measurement and incentives instead of quantitative measures
Buyers’ need for the differentiating factor falls. This can occur as buyers become more sophisticated.
Creative flair
Amenities to attract highly skilled labor, scientists, or creative people
Imitation narrows perceived differentiation, a common occurrence as industries mature.
Strong capability in basic research
Corporate reputation for quality or technological leadership
Long tradition in the industry or unique combination of skills drawn from other businesses
Strong cooperation from channels

10. Strategic Business Planning for Commercial Producers
Identifying Strategies
Value Chain for a Differentiation Strategy
Firm Infrastructure – Highly developed MIS to capture
customer preferences, firm-wide focus on high-quality products.
Human Resources: Compensation encourages creativity,
subjective performance measures, superior training.
Technology: strong capability in basic research, investment in
technologies that allow for production of highly differentiated products.
Procurement: procedures to find the highest quality inputs, purchase of
highest quality replacement parts, strict standards for suppliers.
Inbound
Logistics
Superior handling to minimize damage and improve quality.
Operations
Consistent production of attractive products.
Rapid response to customers’ production demands.
Outbound
Accurate and responsive order processing.
Rapid and timely deliveries.
Marketing
& Sales
Extensive granting of credit buying.
Extensive personal relationships with buyers.
Service
Extensive buyer
training to
assure max.
value from
Product.
MARGIN
Value Chain – A framework that firms can use to identify and evaluate the ways in which their resources and capabilities can add value. The value of the analysis lies in being able to break the organization's operations or activities into primary (such as operations, marketing & sales, and service) and support ( staff activities including human resources management & procurement) activities.
Analyzing the firm's value-chain helps to assess your organization and what you perceive your competitor’s value-chain to be will uncover ways to cut costs, and find ways add value that will provide a competitive advantage.
Here we have a value chain for a low cost strategy that identifies some activities that are used to keep costs low.
© Purdue University, Center for Food and Agricultural Business, 2002

11. Porters Generic Strategies
Competitive Strategy
Required Skills & Resources
Organizational Elements
Associated Risks
Focus
Combination of the above policies directed at the particular strategic target
The cost differential between broad-range competitors and the focused firm widens to eliminate the cost advantages of serving a narrow target or to offset the differentiation achieved by focus.
The differences in desired products or services between the strategic target and the market as a whole narrows.
Competitors find submarkets within the strategic target and outfocus the focuser.

12. Generic Strategies & 5 Forces
Strategic rollup: a way to organize a fragmented industry

13. Which competitive strategy is best?
Competitive Tactics: a tactic is a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action
Timing Tactics (when)
Market Location Tactics (where)
Timing Tactics
First Mover
Late Mover

14. Which competitive strategy is best?
Market Location Tactics
Offensive Tactics
Frontal Assault: generally expensive
Flanking Maneuver: focus on an unguarded niche
Bypass Attack: change the rules of the game
Encirclement: use a broad product line to annihilate competition
Guerrilla Warfare: patient enough to accept small gains and avoid pushing established competitors too far
Defensive Tactics
Raise structural barriers
Increase expected retaliation
Lower the inducement of attack

15. Which competitive strategy is best?
Market Location Tactics
Offensive Tactics: established competitors marketplace
Frontal Assault: generally expensive
Flanking Maneuver: focus on an unguarded niche
Bypass Attack: change the rules of the game
Encirclement: use a broad product line to annihilate competition
Guerrilla Warfare: patient enough to accept small gains and avoid pushing established competitors too far
Defensive Tactics: make competitive advantage sustainable, takes place in own market
Raise structural barriers: offer full line off products, block channel access, raise buyer switching costs, raise the cost of gaining trial users, increase scale economies, foreclosure alternative technologies, limit outside access to facilities, tie-up suppliers, avoid suppliers serving competitors,
Increase expected retaliation
Lower the inducement of attack

16. Cooperative strategies
Collusion
Explicit mostly illegal
Tacit favored in certain types of industries
Strategic Alliances: 30% to 50% alliances perform unsatisfactorily
Objectives: obtain technology/manufacturing capabilities, obtain access to specific markets, reduce financial risk, reduce political risk, achieve competitive advantage
Types of alliances:
Mutual Service Consortia
Joint Venture
Licensing Arrangement
Value chain partnership

17. Strategic Postures Offensive Defensive 1. Concentration Growth
1. .Retrenchment/Turnaround
A. Market Penetration
A. Shallow
B. Market Development
B. Deep
C. Product Development
C. Bankruptcy
D. Horizontal Merger
2. Divestiture
E. Niching
A. Sell-off
1. Low-cost Leadership("Functional Rationalization")
B. Spin-off
2. Cost Focus
C. Split-off
3. Differentiation
3. Liquidation
4. Focused Differentiation
A. Voluntary Closure
2. Integrative Growth
B. Assignment
A. Backward
B. Forward
4. Harvesting
3. Diversification Growth
A. Concentric
B. Conglomerate
4. Joint Ventures