Copyright 2005 Prentice Hall1 Bus 411 DAY 9

Copyright 2005 Prentice Hall Ch 6 -2 Agenda Assignment #3 due Assignment #4 will be assigned next class Templates available in WebCT Discussion on Mid-term  Before or after Spring Break? Finish Discussion about Strategies Start Discussion on Strategy Analysis and choice

Copyright 2005 Prentice Hall Ch 6 -3 Michael Porter’s Generic Strategies Cost Leadership Strategies Differentiation Strategies Focus Strategies

Copyright 2005 Prentice Hall Ch 6 -4 Generic Strategies  In conjunction with differentiation  Economies or diseconomies of scale  Capacity utilization achieved  Linkages w/ suppliers & distributors Cost Leadership

Copyright 2005 Prentice Hall Ch 6 -5 Generic Strategies  Many price-sensitive buyers  Few ways of achieving differentiation  Buyers not sensitive to brand differences  Large # of buyers w/bargaining power Low Cost Producer Advantage

Copyright 2005 Prentice Hall Ch 6 -6 Generic Strategies  Greater product flexibility  Greater compatibility  Improved service  Greater convenience  More features Differentiation

Copyright 2005 Prentice Hall Ch 6 -7 Generic Strategies  Industry segment of sufficient size  Good growth potential  Not crucial to success of major competitors Focus

Copyright 2005 Prentice Hall Ch 6 -8 Means for Achieving Strategies  Two or more companies form a temporary partnership or consortium for purpose of capitalizing on some opportunity. Joint Venture/Partnering -

Copyright 2005 Prentice Hall Ch 6 -9 Means for Achieving Strategies  R&D partnerships  Cross-distribution agreements  Cross-licensing agreements  Cross-manufacturing agreements  Joint-bidding consortia Cooperative Arrangements -

Copyright 2005 Prentice Hall Ch Means for Achieving Strategies  Managers who must collaborate daily; not involved in developing the venture  Benefits the company not the customers  Not supported equally by both partners  May begin to compete with one of the partners Why Joint Ventures Fail -

Copyright 2005 Prentice Hall Ch Joint Ventures Guidelines --  Synergies between private and publicly held  Domestic with foreign firm, local management can reduce risk  Complementary distinctive competencies  Resources & risks where project is highly profitable (e.g. Alaska Pipeline)  Two or more smaller firms competing w/larger firm  Need to introduce new technology quickly

Copyright 2005 Prentice Hall Ch Means for Achieving Strategies  Provide improved capacity utilization  Better use of existing sales force  Reduce managerial staff  Gain economies of scale  Smooth out seasonal trends in sales  Gain new technology  Access to new suppliers, distributors, customers, products, creditors Mergers & Acquisitions

Copyright 2005 Prentice Hall Ch Recent Mergers Acquiring FirmAcquired Firm IBMRational Software Corp YahooInktomi Corp U.S. SteelNational Steel Corp PfizerPharmacia Krispy Kreme DoughnutsMontana Mills OraclePeople Soft PalmHandspring NikeConverse

Copyright 2005 Prentice Hall Ch First Mover Advantages  Benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms.

Copyright 2005 Prentice Hall Ch First Mover Advantages  Securing access to rare resources  Gaining new knowledge of key factors & issues  Carving out market share  Easy to defend position & costly for rival firms to overtake Potential Advantages

Copyright 2005 Prentice Hall Ch Outsourcing  Companies taking over the functional operations of other firms Business-process outsourcing (BPO)

Copyright 2005 Prentice Hall Ch Outsourcing  Less expensive  Allows firm to focus on core business  Enables firm to provide better services Benefits

Copyright 2005 Prentice Hall Ch Chapter 6 Strategy Analysis & Choice Strategic Management: Concepts & Cases 10 th Edition Fred David PowerPoint Slides by Anthony F. Chelte Western New England College

Copyright 2005 Prentice Hall Ch Chapter Outline The Nature of Strategy & Choice A Comprehensive Strategy-Formulation Framework The Input Stage

Copyright 2005 Prentice Hall Ch Chapter Outline ( cont’d ) The Matching Stage The Decision Stage Cultural Aspects of Strategy Choice

Copyright 2005 Prentice Hall Ch Chapter Outline ( cont’d ) The Politics of Strategy Choice Governance Issues

Copyright 2005 Prentice Hall Ch To acquire or not to acquire, that is the question – Robert J. Terry Strategy Analysis & Choice Life is full of lousy options -- General P.X. Kelley

Copyright 2005 Prentice Hall Ch Establishing long-term objectives -- Generating alternative strategies -- Selecting strategies to pursue -- Best alternative - achieve mission & objectives Nature of Strategy Analysis & Choice Strategy Analysis & Choice

Copyright 2005 Prentice Hall Ch Vision Mission Objectives External audit Internal audit Past successful strategies Strategy Analysis & Choice Alternative Strategies Derive From --

Copyright 2005 Prentice Hall Ch Strategy Analysis & Choice Generating Alternatives -- Participation in generating alternative strategies should be as broad as possible

Copyright 2005 Prentice Hall Ch Comprehensive Strategy-Formulation Framework Stage 1: The Input Stage Stage 2: The Matching Stage Stage 3: The Decision Stage

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework Internal Factor Evaluation Matrix (IFE) External Factor Evaluation Matrix (EFE) Competitive Profile Matrix (CPM) Stage 1: The Input Stage

Copyright 2005 Prentice Hall Ch Stage 1: The Input Stage  Basic input information for the matching & decision stage matrices  Requires strategists to quantify subjectivity early in the process  Good intuitive judgment always needed

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix IE Matrix Grand Strategy Matrix Stage 2: The Matching Stage

Copyright 2005 Prentice Hall Ch Stage 2: The Matching Stage  Match between organization’s internal resources & skills and the opportunities & risks created by its external factors

Copyright 2005 Prentice Hall Ch Stage 2: The Matching Stage  Strengths  Weaknesses  Opportunities  Threats SWOT Matrix

Copyright 2005 Prentice Hall Ch SWOT Matrix  Strengths-Opportunities (SO)  Weaknesses-Opportunities (WO)  Strengths-Threats (ST)  Weaknesses-Threats (WT) Four Types of Strategies

Copyright 2005 Prentice Hall Ch SO Strategies Use a firm’s internal strengths to take advantage of external opportunities SO Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2005 Prentice Hall Ch WO Strategies Improving internal weaknesses by taking advantage of external opportunities WO Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2005 Prentice Hall Ch ST Strategies Use a firm’s strengths to avoid or reduce the impact of external threats ST Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2005 Prentice Hall Ch WT Strategies Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats WT Strategies Strengths Weaknesses Opportunities Threats SWOT

Copyright 2005 Prentice Hall Ch SWOT Matrix Developing the SWOT  List firm’s key internal Strengths  List firm’s key internal Weaknesses  List firm’s key external Opportunities  List firm’s key external Threats

Copyright 2005 Prentice Hall Ch SWOT Matrix Leave Blank Strengths – S List Strengths Weaknesses – W List Weaknesses Opportunities – O List Opportunities SO Strategies Use strengths to take advantage of opportunities WO Strategies Overcoming weaknesses by taking advantage of opportunities Threats – T List Threats ST Strategies Use strengths to avoid threats WT Strategies Minimize weaknesses and avoid threats

Ch Develop a new employee benefits package = Strong union activity (threat) + Poor employee morale (weakness) Develop new products for older adults = Decreasing numbers of young adults (threat) +Strong R&D (strength) Pursue horizontal integration by buying competitor's facilities = Exit of two major foreign competitors form the industry (opportunity) + Insufficient capacity (weakness) Acquire Cellfone, Inc.= 20% annual growth in the cell phone industry (opportunity) + Excess working capacity (strength) Key Internal FactorKey External FactorResultant Strategy Matching Key Factors to Formulate Alternative Strategies

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix IE Matrix Grand Strategy Matrix Stage 2: The Matching Stage

Copyright 2005 Prentice Hall Ch SPACE Matrix Strategic Position & Action Evaluation Matrix  Aggressive  Conservative  Defensive  Competitive

Copyright 2005 Prentice Hall Ch SPACE Matrix Two Internal Dimensions  Financial Strength (FS)  Competitive Advantage (CA) Two External Dimensions  Environmental Stability (ES)  Industry Strength (IS)

Ch SPACE Factors Environmental Stability (ES) Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry Competitive pressure Price elasticity of demand Ease of exit from market Risk involved in business Financial Strength (FS) Return on investment Leverage Liquidity Working capital Cash flow External Strategic PositionInternal Strategic Position

Ch SPACE Factors Industry Strength (IS) Growth potential Profit potential Financial stability Technological know-how Resource utilization Ease of entry into market Productivity, capacity utilization Competitive Advantage CA Market share Product quality Product life cycle Customer loyalty Competition’s capacity utilization Technological know-how Control over suppliers & distributors External Strategic PositionInternal Strategic Position

Ch SPACE Matrix FS ES CAIS ConservativeAggressive DefensiveCompetitive

Copyright 2005 Prentice Hall Ch The steps to develop a SPACE Matrix: Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS).  Table 6-2 provides Good examples Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make up the FS and IS dimensions. Assign a number between –1 (best) to –6 (worst) for variables that make up the ES and CA dimensions. On the FS and CA axes, make comparison to competitors. On the IS and ES axes, make comparison to other industries. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables and dividing by the number of variables included in each dimension. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE Matrix. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization.  Aggressive  Competitive  Defensive  Conservative Lets try with Data in table 6-3

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix IE Matrix Grand Strategy Matrix Stage 2: The Matching Stage

Copyright 2005 Prentice Hall Ch BCG Matrix Boston Consulting Group Matrix  Enhances multi-divisional firm in formulating strategies  Autonomous divisions = business portfolio  Divisions may compete in different industries  Focus on market-share position & industry growth rate

Copyright 2005 Prentice Hall Ch BCG Matrix Relative Market Share Position  Ratio of a division’s own market share in an industry to the market share held by the largest rival firm in that industry.

Copyright 2005 Prentice Hall Ch BCG Matrix Data required  Relative market Share for each Division Horizontal axis Compare to leading firm (1 means you are the leading firm)  Industry growth pattern Vertical axis  Percentage of Corporate Revenues generated by division Size of circle  Percentage of Corporate Profits generated by division Size of pie slice

Ch BCG Matrix Dogs IV Cash Cows III Question Marks I Stars II Relative Market Share Position High 1.0 Medium.50 Low 0.0 Industry Sales Growth Rate High +20 Low -20 Medium 0

Copyright 2005 Prentice Hall Ch BCG Matrix Question Marks  Low relative market share – compete in high- growth industry  Cash needs are high  Case generation is low  Decision to strengthen (intensive strategies) or divest

Copyright 2005 Prentice Hall Ch BCG Matrix Stars  High relative market share and high growth rate  Best long-run opportunities for growth & profitability  Substantial investment to maintain or strengthen dominant position  Integration strategies, intensive strategies, joint ventures

Copyright 2005 Prentice Hall Ch BCG Matrix Cash Cows  High relative market share, competes in low- growth industry  Generate cash in excess of their needs  Milked for other purposes  Maintain strong position as long as possible  Product development, concentric diversification  If weakens—retrenchment or divestiture

Copyright 2005 Prentice Hall Ch BCG Matrix Dogs  Low relative market share & compete in slow or no market growth  Weak internal & external position  Liquidation, divestiture, retrenchment

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix IE Matrix Grand Strategy Matrix Stage 2: The Matching Stage

Copyright 2005 Prentice Hall Ch IE Matrix The IE Matrix positions an organization’s various divisions in a nine-cell display illustrated in Figure The IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization divisions in a schematic diagram; this is why they are called portfolio matrices. Differences between the IE Matrix and the BCG Matrix  Axes are different.  IE Matrix requires more information about divisions than BCG.  Strategic implications of each matrix are different.

Copyright 2005 Prentice Hall Ch IE Matrix IIIIII IVVVI VIIVIIIIX IFE Scores StrongAverageWeak High 3-4 Medium Low EFE Scores

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework SWOT Matrix SPACE Matrix BCG Matrix Grand Strategy Matrix Stage 2: The Matching Stage IE Matrix

Copyright 2005 Prentice Hall Ch Grand Strategy Matrix  Tool for formulating alternative strategies  Based on two dimensions  Competitive position  Market growth

Ch Quadrant IV 1. Concentric diversification 2. Horizontal diversification 3. Conglomerate diversification 4. Joint ventures Quadrant III 1. Retrenchment 2. Concentric diversification 3. Horizontal diversification 4. Conglomerate diversification 5. Liquidation Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation RAPID MARKET GROWTH SLOW MARKET GROWTH WEAK COMPETITIVE POSITION STRONG COMPETITIVE POSITION

Copyright 2005 Prentice Hall Ch Grand Strategy Matrix  Excellent strategic position  Concentration on current markets/products  Take risks aggressively when necessary Quadrant I

Copyright 2005 Prentice Hall Ch Grand Strategy Matrix  Evaluate present approach  How to improve competitiveness  Rapid market growth requires intensive strategy Quadrant II

Copyright 2005 Prentice Hall Ch Grand Strategy Matrix  Compete in slow-growth industries  Weak competitive position  Drastic changes quickly  Cost & asset reduction (retrenchment) Quadrant III

Copyright 2005 Prentice Hall Ch Grand Strategy Matrix  Strong competitive position  Slow-growth industry  Diversification to more promising growth areas Quadrant IV

Copyright 2005 Prentice Hall Ch Strategy-Formulation Analytical Framework Stage 3: The Decision Stage Quantitative Strategic Planning Matrix (QSPM)

Copyright 2005 Prentice Hall Ch QSPM  Technique designed to determine the relative attractiveness of feasible alternative actions Quantitative Strategic Planning Matrix

Ch QSPM Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Computer Information Systems Strategy 3Strategy 2Strategy 1WeightKey External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Strategic Alternatives

Copyright 2005 Prentice Hall Ch QSPM  Requires intuitive judgments & educated assumptions  Only as good as the prerequisite inputs Limitations

Copyright 2005 Prentice Hall Ch QSPM  Sets of strategies considered simultaneously or sequentially  Integration of pertinent external & internal factors in the decision making process Advantages

Copyright 2005 Prentice Hall Ch Cultural Aspects of Strategy Choice  Successful strategies depend on the degree of consistency with the firm’s culture Organization Culture

Copyright 2005 Prentice Hall Ch Politics of Strategy Choice  Management hierarchy  Career aspirations  Allocation of scarce resources Politics in Organizations

Copyright 2005 Prentice Hall Ch Politics of Strategy Choice  Equifinality  Satisfying  Generalization  Higher-order issues  Political access on important issues Political tactics for strategists

Copyright 2005 Prentice Hall Ch Governance Issues  Control & oversight over management  Adherence to legal prescriptions  Consideration of stakeholder interests  Advancement of stockholder rights Board of Directors Roles & Responsibilities

Copyright 2005 Prentice Hall Ch Corporate Governance Issues 1.No more than 2 directors current or former company executives 2.No directors do business with the company 3.Audit, compensation, and nominating committees made up of outside directors 4.Each director attends at lest 75% of all meetings 5.Audit committee meets at least four times a year 6.CEO is not also the Chairperson of the Board 7.Shareholders have considerable power and information to choose & replace directors 8.Stock options are considered a corporate expense 9.No interlocking directorships Business Week’s “principles of good governance”