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Strategy Formulation and Execution

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1 Strategy Formulation and Execution
After studying this chapter, students should be able to: Define the components of strategic management and discuss the levels of strategy. Describe the strategic management process and SWOT analysis. Define corporate‑level strategies and explain the BCG matrix, portfolio and diversification approaches. Describe Porter’s competitive forces and strategies. Discuss new trends in strategy, including innovation from within and strategic partnerships. Discuss the organizational dimensions managers use to execute strategy. Chapter 8 Strategy Formulation and Execution

2 Strategy 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 WHAT’S YOUR STRATEGY STRENGTH? Strategic management largely determines which organizations succeed and which ones struggle. This exercise helps students identify their strengths concerning strategy formulation and implementation. Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

3 Thinking Strategically
The long-term view of the organization and competition Thinking strategically impacts performance and financial success Today’s environment requires everyone to think strategically (not just top manager) THINKING STRATEGICALLY Strategic planning in for-profit organizations pertains to competitive actions in the marketplace. In nonprofit organizations, strategic planning pertains to events in the external environment. Strategic thinking means to take the long-term view and to see the big picture of the organization and its environment to achieve organizational goals. Understanding the strategy concept, the levels of strategy, and strategy formulation versus implementation is an important start toward strategic thinking. Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

4 Strategic Management 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 is the set of decisions and actions used to formulate and implement strategies that provide a superior fit between the organization and its environment to achieve organizational goals. It helps managers answer questions such as: What changes and trends are occurring in the competitive environment? What products or services should we offer? How can we offer those products and services most efficiently? Answers to questions help managers make choices about how to position their organization in the environment with respect to rival companies. Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

5 Purpose of Strategy Explicit strategy is the plan of action
Competitive advantage is the organization’s distinctive edge for meeting customer needs Strategies should: Exploit Core Competencies Build Synergy Deliver Value Purpose of Strategy 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 refers to what sets the organization apart from others and provides it with a distinctive edge in the marketplace. The essence of formulating strategy is choosing how the organization will be different. To remain competitive, companies develop strategies that focus on core competencies, develop synergy, and create value for customers. Exploit Core Competence. A company’s core competence is something the organization does especially well in comparison to its competitors. A core competence represents a competitive advantage because the company acquires expertise that competitors do not have. A core competence may be in the area of superior research and development, expert technological know-how, process efficiency, or exceptional customer service. Build Synergy. Synergy occurs when organizational parts interact to produce a joint effect that is greater than the sum of its parts acting alone. The organization may attain a special advantage with respect to cost, market power, technology, or management skill. When properly managed, synergy can create additional value with existing resources, providing a big boost to the bottom line. Deliver Value. Delivering value to customers should be the heart of strategy. Value can be defined as the combination of benefits received and costs paid. Managers help their companies create value by devising strategies that exploit core competencies and attain synergy. Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

6 8.1 Levels of Strategy Levels of Strategy Exhibit 8.1
What business are we in? Corporate‑level strategy pertains to the organization as a whole and the combination of business units and product lines that make up the corporate identity. Strategic actions at this level usually relate to acquisition of new businesses, additions or divestment of business units, plants, or product lines, and joint ventures with other corporations in new areas. How do we compete? Business‑level strategy pertains to each business unit or product line within the organization. Strategic decisions focus on advertising, direction and extent of R&D, product changes and development, equipment and facilities, and expansion or contraction of product and service lines. How do we support the business‑level competitive strategy? Functional‑level strategy pertains to the major functional departments within the business unit. Functional strategies involve all of the major functions, including finance, research and development, marketing, and manufacturing.

7 8.2 The Strategic Management Process
THE STRATEGIC MANAGEMENT PROCESS Exhibit 8.2 The strategic management process begins when executives evaluate their current position with respect to mission, goals, and strategies. Then they scan the organization’s internal and external environments and identify strategic factors that might require change. Events might indicate a need to redefine the mission or goals or to formulate a new strategy at either the corporate, business, or function level. The final stage in the strategic management process is execution of the new strategy.

8 Strategy Formulation versus Execution
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 Strategy Formulation versus Execution Strategy formulation includes the planning and decision making that lead to the establishment of the firm’s goals and the development of a specific strategic plan. It includes assessing the external environment and the internal problems and integrating the results into goals and strategy. Strategy execution is the use of managerial and organizational tools to direct resources toward achieving strategic outcomes. Managers may use persuasion, new equipment, changes in organization structure, or a revised reward system to ensure that employees and resources are used to make formulated strategy a reality. Discussion Question #3: You are a middle manager helping to implement a new corporate cost-cutting strategy, and you’re meeting skepticism, resistance, and in some cases, outright hostility from your subordinates. In what ways might you or the company have been able to avoid this situation? Where do you go from here?

9 SWOT Analysis 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 Exhibit 8.3 Situation analysis typically includes a search for SWOT—strengths, weaknesses, opportunities, and threats—that affect organizational performance. Situation analysis is important to all companies but is crucial to those considering globalization because of the diverse environments in which they will operate. External information about opportunities is obtained from customers, government reports, professional journals, suppliers, bankers, friends, and consultants. Internal information comes from reports, budgets, financial ratios, surveys of employee attitudes, and meetings. Internal Strengths and Weaknesses Strengths are positive internal characteristics organizations can exploit to achieve strategic performance goals. Weaknesses are internal characteristics that may inhibit or restrict the organization’s performance. The information sought pertains to specific functions such as marketing, finance, production, or R&D. External Opportunities and Threats Opportunities are characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals. Threats are characteristics of the external environment that may prevent the organization from achieving its strategic goals. The task environment sectors are the most relevant to strategic behavior and include the behavior of customers, competitors, suppliers, and the labor supply. The general environment includes technological developments, the economy, legal-political and international events, and sociocultural changes. Discussion Question #4: Perform a situation (SWOT) analysis for the school or university you attend. Do you think university administrators consider the same factors when devising their strategy? Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

10 8.3 SWOT: Audit Checklist

11 Case Study – SWOT: FACEBOOK.COM
Strength: Weakness: Opportunities: Threats: Strategies

12 Formulating Corporate-Level Strategy: Portfolio Strategy
Strategic Business Units (SBUs) have a unique mission, products, and competitors Companies manage the mix of SBUs for synergy and competitive advantage Organizations should not become too dependent on one business – Related to the diversification strategy (Diversification lowers business risk) Portfolio Strategy Portfolio strategy pertains to the mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage for the corporation. Corporations like to have a balanced mix of business divisions called strategic business units (SBUs). An SBU has a unique business mission, product line, competitors, and markets relative to other SBUs in the corporation. Senior corporate managers generally define the grand strategy and then bring together a portfolio of SBUs to achieve the strategy.

13 Agency Theory, Agency Cost
A Manager (CEO) is an agent for shareholders (owners). 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) .”

14 M & A, Corporate Strategy, Agency Cost
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 & A creates Agency Cost. Cases in Point: M & A b/w HP & Compaq M & A b/w BoA & Merrill Lynch M & A b/w Disney & ABC Television

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

16 Formulating Corporate-Level Strategy: The BCG Matrix
Organizes business along two dimensions Business growth rate – potential (future) Market share - current Four categories for corporate portfolio The combination of high/low market share and high/low business growth The BCG Matrix Exhibit 8.4 The BCG (Boston Consulting Group) matrix organizes business along two dimensions — business growth rate and market share. Business growth rate pertains to how rapidly the entire industry is growing. Market share defines whether a business unit has a larger or smaller market share than competitors. The combination of market share and business growth rate provides four categories to judge SBUs within a corporate portfolio: Star Cash Cow Question Mark Dog

17 8.4 The BCG Matrix Star. The star has a large market share in a rapidly growing industry. The star is important because it has additional growth potential and profits should be reinvested for future growth and profits. It will generate a positive cash flow as industry matures and market growth slows. Cash Cow. The cash cow exists in a mature, slow-growth industry but has a large market share. The cash cow has a positive cash flow and can be milked to feed riskier businesses. Question Mark. The question mark exists in a new, rapidly growing industry but only has small market share. The question mark is risky. It could become a star or it could fail. Dog. The dog is a poor performer with small market share in a slow growth industry. A dog provides little profit and may be targeted for divestment or liquidation. Discussion Question #7: Walt Disney Company has four major strategic business units: (1) movies (including Miramax and Touchstone), (2) theme parks, (3) consumer products, and (4) television (ABC and cable). Place each of these SBUs on the BCG matrix based on your knowledge of them.

18 Case Study – The BCG Matrix: General Electric
New CEO – Jeff Immelt Cash Cow: Home & Business Solutions Star: GE Technology & Infrastructure, GE Energy Question Mark: Media Division – NBC Universal Finance – GE Capital The Question Mark can become a Dog or Star. Dog: If a division falls into a dog, GE sells it off.

19 Formulating Corporate-Level Strategy: Diversification Strategy
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 Related Diversification vs. Unrelated Diversification Example of Related Diversification: Facebook + Search Engine Example of Unrelated Diversification: An airline company like DELTA merges with an oil company like SHELL Diversification Strategy The strategy of moving into new lines of business is called diversification. The purpose of diversification is to expand the firm’s business operations to produce new kinds of valuable products and services. When the new business is related to the company’s existing business activities, the organization is implementing a strategy of related diversification. Example of Related Diversification: Facebook + Search Engine Example of Unrelated Diversification: DELTA (Airline Company) vs. SHELL (Oil Company) When oil price goes up, DELTA stock goes down, but SHELL stock goes up; By owning both DELTA & SHELL (diversification), you can lower the risk of uncertainty (a sudden spike of oil price due to the war)

20 Unrelated Diversification Strategy – Corporate Strategy
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 occurs when an organization expands into a totally new line of business. Valuing a Firm: a firm value is estimated by: Firm Value = Profit / Cost of Capital When a variety of unrelated businesses are included in the balance sheet, it is very difficult to estimate the profit and cost of capital of the firm. When we can estimate profit & cost of capital easily, we can easily estimate the firm value. Profit = $1 million Cost of capital = 10% Then, the firm value is estimated: 1,000,000 ÷ 0.10 = 10,000,000 # of outstanding common stocks = 1,000,000 shares Estimated stock price = Firm Value ÷ # of outstanding common stocks = 10,000,000 ÷ 1,000,000 = $ 10 per share Now, NYSE reports the stock price is being traded at $8 per share. It is undervalued according to your analysis, so you would purchase (invest) this stock. When an investor finds easy to understand & analyze a firm’s business operations and financials, he is more likely to purchase the firm’s stock. If this unrelated diversification strategy makes your company unattractive to investors, then what’s the point? The firm’s stock price goes down, as your manager career also does. That’s why the unrelated diversification is not recommended in general. However, there are some companies (conglomerates, private equity firms like Bain Capital run by Romney, etc.) that implements the unrelated diversification strategy very well.

21 Vertical integration (VI) – Corporate Strategy
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 Hypothetical Examples: Starbucks in VI GM in VI Managers may also pursue diversification opportunities to create value through a strategy of vertical integration. Vertical integration means the company expands into businesses that either produce the supplies needed to make products or that distribute and sell those products to customers. Hypothetical Examples: Suppose Starbucks owns a whole supply chain: coffee farm in Africa coffee trading in Africa  coffee vendor in US  coffee factory in US  coffee distributor  coffee retail Suppose GM owns a whole supply chain: raw materials  parts manufacturing  parts vendors  GM Assembly Factory  distributor  dealership Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

22 Formulating Business-Level Strategy
Strategy within the business units (SBU): How do we compete? Biz-Level Strategy vs. Corporate-Level Strategy: At the business level, strategies are accomplished through competitive actions rather than acquisition or divestment Porter’s Five Forces are widely used to develop biz-level strategy The focus of business‑level strategy is how to compete. Generic strategies at the business level are the same as at the corporate level: growth, stability, and retrenchment. At the business level, strategies are accomplished through competitive actions rather than acquisition or divestment. web technology is impacting all industries in positive and negative ways

23 Strategic Business Unit (SBU)
SBU – an autonomous organization within a firm: Budgeting authority Personnel decision-making Examples of SBU: ABC Television – one of four SBUs in Disney Division in Army College at LSSU In Army, there are many units: squad < platoon < company < battalion < brigade < division A commander of division, usually two-star general is given the budget & personnel decision-making power. A dean of college has a budget and personnel authority, while a department chair does not. Thus, a college is considered a SBU, while a department is not.

24 8.5 Porter’s Five Forces Porter’s Five Competitive Forces
Potential new entrants. Capital requirements and economies of scale are examples of barriers to entry that can keep out new competitors. Internet technology has made it easier for new companies to enter an industry by curtailing the need for an established sales force, buildings and machinery, or access to existing supplier and sales channels. Bargaining power of buyers. Informed customers become empowered customers. The Internet provides easy access to a wide array of information about products, services and competitors, thereby greatly increasing the bargaining power of end consumers. Bargaining power of suppliers. The concentration of suppliers and the availability of substitute suppliers are significant in determining the bargaining power of suppliers. Procurement over the web gives a company greater power over suppliers, but the web also gives suppliers access to a greater number of customers as well as the ability to reach end users. Threat of substitute products. The power of alternatives and substitutes for a company’s product may be affected by cost changes or trends that will deflect buyer loyalty. The Internet has created a greater threat of new substitutes by enabling new approaches to meeting customer needs. Rivalry among competitors. Rivalry among competitors is influenced by the preceding four forces, as well as by cost and product differentiation. With the leveling force of the Internet and information technology, it has become more difficult for many companies to find ways to distinguish themselves from their competitors, so rivalry has intensified.

25 8.6 Porter’s Competitive Strategies
Competitive Strategies Exhibit 8.6 Differentiation. The differentiation strategy is an attempt to distinguish the firm’s products or services from others in the same industry. The organization may use advertising, distinctive product features, exceptional service, and new technology to achieve a product perceived as unique. The differentiation strategy can be profitable because customers are loyal and will pay high prices for the product. Companies that pursue differentiation need strong marketing abilities, a creative flair, and a reputation for leadership. This strategy can reduce rivalry with competitors if buyers are loyal. It can reduce the bargaining power of large buyers because other products are less attractive. Differentiation erects barriers in the form of customer loyalty to new entrants. Cost Leadership. With a cost leadership strategy, the organization seeks efficient facilities, pursues cost reductions, and uses tight cost controls to produce products more efficiently than competitors. A low‑cost position means the company can undercut competitors’ prices and still offer comparable quality and earn a reasonable profit. Being a low‑cost producer provides a successful strategy to defend against the five competitive forces. The low‑cost company is protected from price wars, powerful customers who cannot find lower prices elsewhere, suppliers, substitute products, and potential new entrants. Focus. With a focus strategy, the organization concentrates on a specific regional market or buyer group. The firm may use a differentiation or low-cost approach but only on a narrow target market. Discussion Question #6: Using Porter’s competitive strategies, how would you describe the strategies of Wal‑Mart, Macy’s and Target?

26 Formulating Functional-Level Strategy
Action plans used by major departments (Marketing, Production, Finance, HR, R&D) To support the execution of biz-level strategy To coordinate with biz-level strategy to achieve the organization’s strategic goals FORMULATING FUNCTIONAL-LEVEL STRATEGY Functional-level strategies are the action plans used by major departments to support the execution of business-level strategy. Major organizational functions include marketing, production, finance, human resources, and research and development. Managers in these and other departments adopt strategies that are coordinated with the business-level strategy to achieve the organization’s strategic goals. Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

27 New Trends in Strategy Strategic Flexibility – managers must be prepared to change and adjust strategy quickly Strategic Partnerships – collaboration with other organizations is important – Partners must share resources & information. Global Strategy – organizations pursue a distinctive focus for global business NEW TRENDS IN STRATEGY Strategic Flexibility In many industries today, things change so fast that managers have to be ready to shift course on the fly. Many companies are developing adaptive strategies that take into account multiple scenarios. Managers must find the right balance between strategic stability and strategic flexibility to keep their organizations healthy during good times and bad. Strategic Partnerships Collaboration with other organizations, sometimes even with competitors, is an important part of how today’s successful companies enter new areas of business. The Internet is both driving and supporting the move toward partnership thinking. The ability to rapidly and smoothly conduct transactions, communicate information, exchange ideas, and collaborate on complex projects via the Internet means that companies have been able to enter entirely new businesses by partnering in business areas that were previously unimaginable. Global Strategy – Refer to the next slide.

28 8.7 Global Corporate Strategies
GLOBAL STRATEGY Exhibit 8.7 In global strategy, management tries to formulate coherent strategies to provide synergy among worldwide operations for the purpose of fulfilling common goals. A systematic strategic planning process for deciding on the appropriate strategic alternative should be used. Firms that pursue further international expansion must decide whether they want each global affiliate to act autonomously or to standardize and centralize activities. This choice leads managers to select a basic grand strategy alternative such as globalization, multidomestic strategy, or transnational strategy. Globalization In a strategy of globalization, product design and advertising strategies are standardized throughout the world. This is based on the theory that people everywhere want to buy the same products and live the same way. A globalization strategy can help an organization reap efficiencies by standardizing product design and manufacturing, using common suppliers, introducing products around the world faster, coordinating prices, and eliminating overlapping facilities. Multidomestic Strategy In a multidomestic strategy, product design, marketing, and advertising are modified to suit the specific needs of each country. Many companies reject the idea of a single global market. Transnational Strategy A transnational strategy seeks to achieve both global integration and national responsiveness. This is difficult to achieve, as one goal requires close global coordination while the other goal requires local flexibility. Caterpillar Inc. uses a transnational strategy by designing products to use many identical components but adding certain product features to meet local needs. Although most multinational companies want to achieve some degree of global integration to hold costs down, even global products may require some customization to meet government regulations in various countries or some tailoring to meet customer preferences.

29 Strategy Execution - The final step!
“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 Dynamic approaches: Vision, intuition and employee participation Leadership, structure, information and control systems, and human resources STRATEGY EXECUTION Exhibit 8.8, Exhibit 8.9 The final step in the strategic management process is strategy execution. Execution may be the most difficult and important part of strategic management. In today’s competitive environment, there is an increasing recognition of the need for more dynamic approaches to executing strategies. Strategy is not a static, analytical process. It requires vision, intuition and employee participation. Once a new strategy is selected, it is executed through changes in leadership, structure, information and control systems, and human resources.

30 8.8 Six Silent Killers of Strategy

31 8.9 Tools for Putting Strategy into Action
Visible leadership. The primary key to successful strategy implementation is leadership. Leadership is the ability to influence people to adopt the behaviors needed for strategy execution. Leadership means using persuasion, motivating employees, shaping culture and values to support the new strategy. Clear roles and accountability. People need to understand how their individual actions can contribute to achieving the strategy. To execute strategy effectively, top executives clearly define roles and delegate authority to individuals and teams who are accountable for results. Candid communication. Managers openly and avidly promote their ideas, but they also listen to others and encourage disagreement and debate. Effective strategy execution requires candid communications with shareholders, customers, and other stakeholders. Appropriate human resource practices. The human resource function recruits, selects, trains, compensates, transfers, promotes, and lays off employees to achieve strategic goals. Discussion Question #8: As an administrator for a medium‑sized hospital, you and the board of directors have decided to change to a drug dependency hospital from a short‑term, acute‑care facility. How would you go about executing this strategy?

32 Strategic Planning & Management
Truth vs. Spin Strategic Planning - Strategy Map Agency Theory – Agency Cost: HP & Compaq, BoA & Merrill SWOT Analysis: Facebook case SBU - BCG Matrix Porter’s 5 Competitive Force Model - 3 Competitive Strategies Tools for Strategy Execution – Leadership, Clear Roles, Accountability, HR, Candid Communication Management: Leadership, Organization, Planning, Control

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