Business Strategy Ch. 6 Management A Practical Introduction Angelo Kinicki & Brian K. Williams

Learning objectives 1 Explain the importance of strategy, strategic management and strategic planning Define strategic positioning Describe the strategic management process and illustrate it with examples Define SWOT analysis and explain how it is related to strategy Describe the two types of forecasts

Learning objectives 2 Describe the various techniques to formulate strategy: Porter’s five competitive forces, Porter’s four competitive strategies, the product life cycle, diversification and synergy Define competitive intelligence Recognize the importance of effective execution

6.1 The Dynamics Of Strategic Planning WHY IS IT IMPORTANT TO HAVE A STRATEGY? Organizations need to know where they are going and how they will get there A large scale action plan that sets the direction for an organization is a strategy - it is an educated guess about what the organization has to do to survive The process that involves managers from all parts of the organization in the formulation and the implementation of strategies and strategic goals is strategic management Strategic planning determines the organization’s long term goals and how the organization should achieve them

6.1 The Dynamics Of Strategic Planning There are three reasons to adopt strategic management and strategic planning: 1. Strategic planning can help organizations focus on their goals and avoid getting caught up in day-to-day issues 2. Strategic planning can be important for stressing the development of new ideas as a means of achieving long-term success 3. Strategic management helps organizations: develop sustainable competitive advantages by being responsive to customers, be innovative, provide quality, and be effective

6.1 The Dynamics Of Strategic Planning WHAT IS AN EFFECTIVE STRATEGY? Michael Porter argues strategic positioning attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company

6.1 The Dynamics Of Strategic Planning There are three key principles of strategic positioning: 1. An organization’s strategic position comes from serving few needs to many customers like Jiffy Lube, serving broad needs of a few customers like Bessemer Trust, or serving broad needs of many customers 2. Companies have to choose what strategy to follow and also what strategy not to follow – they have to make trade-offs 3. Creating a “fit” among activities is important - a company’s activities should interact and reinforce one another Studies show that strategic planning is effective for both large and small companies

6.2 The Strategic-Management Process WHAT IS THE STRATEGIC MANAGEMENT PROCESS? The strategic management process has five steps plus a feedback loop Step 1: Establish The Mission & The Vision A good mission statement expresses the organization’s purpose or reason for being A good vision statement describes the long-term goal of what the organization wants to become

6.2 The Strategic-Management Process Figure 6.1: The Strategic-Management Process

6.2 The Strategic-Management Process Step 2: Establish The Grand Strategy The grand strategy explains how the organization’s mission is to be accomplished Three common grand strategies are growth (involves expansion of sales revenue, market share, number of employees, or number of customers served), stability (involves little or no significant change), and defensive (involves reduction in the organization’s efforts)

6.2 The Strategic-Management Process Step 3: Formulate Strategic Plans The process of choosing among different strategies and altering them to best fit the organization’s needs is strategy formulation The strategy formulation process can be completed using techniques like Porter’s competitive forces and strategies, and product life cycles Step 4: Carry Out The Strategic Plan Strategy implementation involves putting strategic plans into effect Managers need to ensure that the right people and control systems are in place to execute the plans

6.2 The Strategic-Management Process Step 5: Maintain Strategic Control: The Feedback Loop Monitoring the execution of strategy and making necessary adjustments is strategic control To keep strategic plans on track, managers need to encourage people, keep planning simple, stay focused, and keep moving

6.3 Establishing The Grand Strategy HOW CAN A SWOT ANALYSIS HELP WITH STRATEGY? The starting point for a grand analysis is the SWOT analysis (a search for the Strengths, Weaknesses, Opportunities, and Threats affecting an organization) A SWOT analysis provides managers with a realistic understanding of where the organization is relative to its internal and external environments Practical Action: How to Streamline Meetings This Practical Action warns of the dangers of making the planning process too complicated and time consuming. The process can be streamlined by: eliminating unnecessary meetings & meeting attendance distributing an action agenda in advance staying in control of the meeting doing follow-up afterwards.

6.3 Establishing The Grand Strategy Organizational strengths include the skills and capabilities that give the organization special competencies and competitive advantages in executing strategies in pursuit of its mission Organizational weaknesses include the drawbacks that hinder an organization in executing strategies in pursuit of its mission Organizational opportunities include environmental factors that the organization may exploit for competitive advantage Organizational threats include environmental factors that hinder an organization’s achieving a competitive advantage

6.3 Establishing The Grand Strategy Figure 6.2: SWOT Analysis

6.3 Establishing The Grand Strategy After completing the SWOT analysis, managers need to make forecasts (visions or projections of the future) There are two types of forecasts: A hypothetical extension of a past series of events into the future is a trend analysis The creation of alternative hypothetical but equally likely future conditions is contingency planning or scenario planning

6.4 Formulating Strategy HOW IS STRATEGY FORMULATED? Organizations can use many techniques to formulate strategy including Porter’s five competitive forces, Porter’s four competitive strategies, the product life cycle, diversification and synergy, and competitive intelligence

6.4 Formulating Strategy Porter’s Five Competitive Forces include: 1. The threat of new entrants New competitors can shake-up an industry virtually overnight 2. The bargaining power of suppliers Companies that rely on a single supplier are vulnerable

6.4 Formulating Strategy 3. The bargaining power of buyers Major customers, and customers that shop around can negotiate better prices 4. The threat of substitute products or services When there are substitute products or services available, firms have less power 5. Rivalry among competitors Intense rivalry is a threat to companies

6.4 Formulating Strategy Porter’s four competitive strategies or generic strategies include: 1. The cost leadership strategy - involves trying to keep costs and prices below those of competitors and targeting a wide market Examples of companies with this strategy include Bic, Home Depot, and Dell 2. The differentiation strategy - offer products or services that are of unique and superior value compared to those of competitors, and sell to a wide market Examples of companies using a differentiation strategy include PepsiCo and Ritz-Carlton Hotels

6.4 Formulating Strategy 3. The cost-focus strategy - keep costs and prices below those of competitors and target a narrow market Examples of companies with a cost-focus strategy include regional gas stations 4. The focused-differentiation strategy - offer products or services that are of unique and superior value compared to those of competitors, and sell to a narrow market Examples of companies with this strategy include Ferrari and Lamborghini

6.4 Formulating Strategy The four stages a product or service goes through over its life are known as the product life cycle In the introduction stage, the product is introduced to the marketplace In the growth stage, customer demand increases, sales grow, and competitors may enter the market In the maturity stage, the product starts to fall out of favor and sales and profits drop In the decline stage, the product falls out of favor and is withdrawn from the marketplace

6.4 Formulating Strategy A company that makes and sells only one product in its market follows a single-product strategy This strategy has both benefits (the firm can focus on just one product) and risks (the firm is vulnerable to competitors) The diversification strategy involves operating several businesses in order to spread the risk There are two kinds of diversification: unrelated (operating several businesses that are not related to each other) and related (operating several businesses that are related)

6.4 Formulating Strategy There are three advantages to related diversification: reduced risk because the firm sells more than one product management efficiencies because administration is spread over several businesses synergy because the economic value of separate, related companies operating under one roof is greater than the companies are worth separately

6.4 Formulating Strategy When companies gain information about their competitors so that they can anticipate their moves and react appropriately, the companies are practicing competitive intelligence Companies can collect information on their competitors through public prints and advertising, through investor information, and through informal sources

6.5 Implementing & Controlling Strategy: Execution WHY IS EFFECTIVE EXECUTION IMPORTANT? The execution stage of strategy involves getting things done Execution is a central part of strategy that consists of using questioning, analysis, and follow-through to mesh strategy with reality, align people with goals, and achieve promised results

Key terms 1 Growth strategy Competitive intelligence Organizational Opportunities Organizational strengths Organizational threats Organizational weaknesses Porter’s 4 competitive strategies Competitive intelligence Cost-focus strategy Cost-leadership strategy Defensive strategy Differentiation Diversification Focused-differentiation Grand strategy

Key terms 2 Porter’s model for industry analysis Related diversification Stability strategy Strategic positioning SWOT analysis Synergy Unrelated diversification