PowerPoint Presentation by Charlie Cook The University of West Alabama © 2010 South-Western, Cengage Learning, Inc. All rights reserved.

8–2 The Nature of Strategic Management StrategyStrategy  Is a comprehensive plan for accomplishing an organization’s goals. Strategic ManagementStrategic Management  Involves formulating and implementing strategies to take advantage of business opportunities and meet competitive challenges. Effective StrategiesEffective Strategies  Promote superior alignment between an organization, its environment, and its goals.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–3 Components of Strategy Distinctive Competence Competitive Scope Resource Deployment Components of Strategy

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–4 Strategic Alternatives Business-level strategy Functional-level strategy Operations-level strategy Corporate-level strategy Business-level strategy Functional-level strategy Operations-level strategy Market AMarket B

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–5 Types of Strategic Alternatives Business-Level StrategyBusiness-Level Strategy  The set of strategic alternatives that an organization chooses from as it conducts business in a particular industry or a particular market. Corporate-Level StrategyCorporate-Level Strategy  The set of strategic alternatives that an organization chooses from as it manages its operations simultaneously across several industries and several markets.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–6 Strategy Formulation and Implementation Strategy FormulationStrategy Formulation  The set of processes involved in creating or determining the organization’s strategies; it focuses on the content of strategies. Strategy ImplementationStrategy Implementation  The methods by which strategies are operationalized or executed within the organization; it focuses on the processes through which strategies are achieved.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–7 Management Challenge If it is important that all employees be involved in strategy implementation, then what are the most important responsibilities for managers in helping them participate?If it is important that all employees be involved in strategy implementation, then what are the most important responsibilities for managers in helping them participate?

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–8 Types of Strategies Deliberate StrategyDeliberate Strategy  A plan, chosen and implemented to support specific goals, that is the result of a rational, systematic, and planned process of strategy formulation and implementation. Emergent StrategyEmergent Strategy  A pattern of action that develops over time in the absence of goals or missions, or despite goals and missions.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–9 8.1 SWOT Analysis

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–10 SWOT Analysis and Strategy Evaluating Organizational StrengthsEvaluating Organizational Strengths  Organizational strengths  are skills and abilities enabling an organization to conceive of and implement strategies.  Common organizational strengths  are organizational capabilities possessed by numerous competing firms.  Distinctive competencies  are useful for competitive advantage and superior performance.  Imitation of distinctive competencies  removes the competitive advantage of the competency.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–11 SWOT Analysis and Strategy (cont’d) Evaluating Organizational Strengths (cont’d)Evaluating Organizational Strengths (cont’d)  Sustained competitive advantage  occurs when a distinctive competence cannot be easily duplicated.  is what remains after all attempts at strategic imitations cease.  Strategic imitation of a distinctive competence is difficult when:  it is based on unique historical circumstances.  it is difficult for competitors to understand its nature or character.  it is based on a complex phenomenon (e.g., organizational culture).

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–12 SWOT Analysis and Strategy (cont’d) Evaluating Organizational WeaknessesEvaluating Organizational Weaknesses  Organizational weaknesses  Skills and capabilities that do not enable an organization to choose and implement strategies that support its mission.  Weaknesses can be overcome by:  investments to obtain the strengths needed.  modification of the organization’s mission so it can be accomplished with the current workforce.  Competitive disadvantage  occurs when an organization fails to implement strategies being implemented by competitors.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–13 SWOT Analysis and Strategy (cont’d) Evaluating an Organization’s Opportunities and ThreatsEvaluating an Organization’s Opportunities and Threats  Organizational opportunities  are areas in the organization’s environment that may generate high performance.  Organizational threats  are areas in the organization’s environment that make it difficult for the organization to achieve high performance.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–14 Formulating Business-Level Strategies Overall cost leadership strategy Focus strategy Differentiation strategy Porter’s Generic Strategies

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–15 Formulating Business-Level Strategies Porter’s Generic StrategiesPorter’s Generic Strategies  Differentiation strategy  An organization seeks to distinguish itself from competitors through the quality of its products or services.  Overall cost leadership strategy  An organization attempts to gain competitive advantage by reducing its costs below the costs of competing firms.  Focus strategy  An organization concentrates on a specific regional market, product line, or group of buyers.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8– Porter’s Generic Strategies Strategy TypeDefinitionExamples DifferentiationDistinguish products or services Rolex (watches) Godiva (chocolate) Mercedes-Benz (automobiles) Nikon (cameras) Cross (writing instruments Overall cost leadership Reduce manufacturing and other costs Timex (watches) Hershey (chocolate) Hyundai (automobiles) Kodak (cameras) BIC (writing instruments) FocusConcentrate on specific regional market, product market, or group of buyers Tag Heuer (watches) Vosges (chocolate) Fiat, Alfa Romeo (automobiles) Polaroid (cameras) Waterman (writing instruments) Fisher-Price (handheld calculators)

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–17 Implementing Porter’s Generic Strategies DifferentiationDifferentiation  Marketing and sales emphasize high-quality, high-value image of the organization’s products or services. Overall Cost LeadershipOverall Cost Leadership  Marketing and sales focus on simple product attributes and how these product attributes meet customer needs in a low-cost and effective manner. FocusFocus  Either differentiation or cost leadership, depending on which one is the proper basis for competing in or for a specific market segment, product category, or group buyers.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–18 Miles and Snow’s Strategy Types ProspectorsDefenders Analyzers Reactors Strategic Types of Organizations

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–19 Miles and Snow’s Strategy Types ProspectorProspector  Encourages creativity to seek out new market opportunities and to take risks.  Develops the flexibility to meet changing market conditions by decentralizing its organizational structure. DefenderDefender  Focuses on defending its current markets by lowering its costs and/or improving the performance of its current products. AnalyzerAnalyzer  Incorporates elements of both the prospector and the defender strategies to maintain business and to be somewhat innovative. ReactorReactor  Has no clear strategy, reacts to changes and events.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8– The Miles and Snow Typology Strategy TypeDefinitionExamples ProspectorIs innovative and growth oriented, searches for new markets and new growth opportunities, encourages risk taking Amazon.com 3M Rubbermaid DefenderProtects current markets, maintains stable growth, serves current customers BIC eBay Mrs. Fields AnalyzerMaintains current markets and current customer satisfaction with moderate emphasis on innovation DuPont IBM Yahoo! ReactorNo clear strategy, reacts to changes in the environment, drifts with events International Harvester (now doing business as Navistar) Joseph Schlitz Brewing Co. Kmart Montgomery Ward (no longer in business)

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8– The Product Life Cycle IntroductionMaturityGrowth Time Decline Sales Volume StagesHigh Low

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–22 Management Challenge Questions Which of Porter’s generic strategies are best suited for which stages of the product life cycle?Which of Porter’s generic strategies are best suited for which stages of the product life cycle? Which of the Miles and Snow’s types of effective strategic organizations are most appropriate for which stage of the product life cycle?Which of the Miles and Snow’s types of effective strategic organizations are most appropriate for which stage of the product life cycle? Do your answers support the concept that structure must follow strategy?Do your answers support the concept that structure must follow strategy?

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–23 Formulating Corporate-Level Strategies Strategic Business UnitsStrategic Business Units  Each business or group of businesses within an organization is engaged in serving the same markets, customers, or products. DiversificationDiversification  The number of businesses an organization is engaged in and the extent to which these businesses are related to one another

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–24 Corporate-Level Strategies Related diversification (synergy) Unrelated diversification (risk/return) Single-product strategy (simplicity) Strategic Choices

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–25 Corporate-Level Strategies Single-Product StrategySingle-Product Strategy  An organization manufactures one product or service and sells it in a single geographic market. Related DiversificationRelated Diversification  A strategy in which an organization operates in several different businesses, industries, or markets that are somehow linked.  Avoids the disadvantages and risks of a single- product strategy.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8– Bases of Relatedness in Implementing Related Diversification Basis of RelatednessExamples Similar technologyPhilips, Boeing, Westinghouse Common distribution and marketing skills Kraft Foods, Philip Morris, Procter & Gamble Common brand name and reputation Disney, Universal Common customersMerck, IBM, AMF-Head

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–27 Advantages of Related Diversification Reduces an organization’s dependence on any one of its business activities and thus reduces economic risk.Reduces an organization’s dependence on any one of its business activities and thus reduces economic risk. Reduces overhead costs associated with managing any one business through economies of scale and economies of scope.Reduces overhead costs associated with managing any one business through economies of scale and economies of scope. Allows an organization to exploit its strengths and capabilities in more than one business.Allows an organization to exploit its strengths and capabilities in more than one business. Synergy exists among a set of businesses when the businesses’ value together is greater than their economic value separately.Synergy exists among a set of businesses when the businesses’ value together is greater than their economic value separately.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–28 Unrelated Diversification Unrelated Diversified OrganizationUnrelated Diversified Organization  Operates multiple businesses that are not logically associated with one another.  Advantages  Stable performance over time due to business cycle differences among the multiple businesses.  Allocation of resources to areas with the highest return potentials to maximize corporate performance.  Disadvantages  Poor performance due to the complexity of managing a diversity of businesses.  Failing to exploit key synergies puts the firm at a competitive disadvantage to firms with related diversification strategies.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–29 Becoming a Diversified Firm Development of new products Vertical integration Merger with another firm Acquisition of another firm Diversification Alternatives

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–30 Becoming a Diversified Firm Replacement of Suppliers And CustomersReplacement of Suppliers And Customers  Backward vertical integration  Beginning a business that furnishes resources previously handled by a supplier.  Forward vertical integration  Beginning a business previously handled by an intermediary and selling more directly to customers.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–31 Becoming a Diversified Firm (cont’d) Purposes of Mergers and AcquisitionsPurposes of Mergers and Acquisitions  To diversify through vertical integration.  To acquire complementary products or services linked by a common technology and common customers.  To create or exploit synergies that reduce the combined organizations’ costs of doing business to increase revenues.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–32 Managing Diversification Major Tools for Managing DiversificationMajor Tools for Managing Diversification  Organization structure  A detailed discussion of organization structure is contained in Chapter 12.  Portfolio management techniques  Methods used by diversified firms to make decisions about what businesses to engage in and how to manage these businesses to maximize corporate performance.  Two important portfolio management techniques  The BCG Matrix  The GE Business Screen

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–33 Managing Diversification (cont’d) BCG MatrixBCG Matrix  Evaluates a portfolio of businesses on the growth rate of their respective markets and each business’s relative share of its market.  Classifies the types of businesses in a diversified firm’s portfolio as:  “Dogs” have small market shares and no growth prospects.  “Cash cows” have large shares of mature markets.  “Question marks” have small market shares in quickly growing markets.  “Stars” have large shares of rapidly growing markets.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8– The BCG Matrix Stars Question marks Cash Cows Relative Market Share Dogs Market Growth Rate High Low High Low

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–35 Managing Diversification (cont’d) GE Business ScreenGE Business Screen  A method of evaluating businesses in a diversified portfolio along two dimensions, each of which contains multiple factors:  Industry attractiveness.  Competitive position (strength) of each firm in the portfolio.  In general, the more attractive the industry and the more competitive a business is, the more resources an organization should invest in that business.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8– The GE Business Screen Winner Average business Loser Profit producer Loser Winner Question mark Competitive Position Industry Attractiveness Good MediumPoor Medium High Low Competitive Position 1.Market share 2.Technological know-how 3.Product quality 4.Service network 5.Price competitiveness 6.Operation costs Industry Attractiveness 1.Market growth 2.Market size 3.Capital requirements 4.Competitive intensity

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–37 International and Global Strategies Multimarket flexibility Worldwide learning Global efficiencies Developing International and Global Strategies

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–38 International and Global Strategies Developing International and Global StrategiesDeveloping International and Global Strategies  Global efficiencies  Location efficiencies—seeking lower input cost locations  Economies of scale—larger facilities result in lower costs  Economies of scope—broadening product lines  Multimarket flexibility  International businesses may respond to a change in one country by implementing a change in another country.  Worldwide learning  The diverse operating environments of multinational corporations (MNCs) contribute to organizational learning that can be transferred to other operating environments.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–39 Strategic Alternatives for International Businesses Home replication Multi-domestic strategy Global strategy Transnational strategy Strategic Alternatives

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–40 Strategic Alternatives for International Businesses Home ReplicationHome Replication  Utilizing a core competency or a firm-specific advantage developed at home as a main competitive weapon in foreign markets. Multi-Domestic StrategyMulti-Domestic Strategy  Managing a corporation as a collection of independent operating subsidiaries frees a firm to customize its products, its marketing campaigns, and operating techniques to meet local customer needs.

© 2010 South-Western, Cengage Learning, Inc. All rights reserved.8–41 Strategic Alternatives for International Businesses (cont’d) Global StrategyGlobal Strategy  Viewing the world as a single marketplace and having as a primary goal the creation of standardized goods and services that will address the needs of customers worldwide. Transnational StrategyTransnational Strategy  Attempting to combine the benefits of scale efficiencies pursued by a global corporation, with the benefits and advantages of local responsiveness of a multi-domestic corporation.