1. 1 2002 Edition Vitale and Giglierano Chapter 5 Concepts and Context of Business Strategy Prepared by John T. Drea, Western Illinois University

2. 2 Business Strategy Basics Goals A general statement of desirable outcomes, directly supportive of and aligned with the mission. Mission A qualitative description/definition of who the organization is and what it expects to accomplish. It is further defined by goals and objectives. Objectives Specific, measurable expressions of the stated goals, with specific targets and time periods.

3. 3 Key Strategy Concepts: Fit and Providing Superior Value 1. Business strategy designers should seek a fit between the business strategy and the environment 2. The key element of fit in business strategy revolves around providing superior value for customers.

4. 4 Key Strategy Concepts: Providing Superior Value, Differentiation, and Core Competencies 3. Superior value – the offering must be differentiated from offerings of competitors (in the minds of targeted customers) 4. Differentiation is produced by using core competencies to advantage. As core competencies become more distinct, customer value Increases. Core competencies: a company’s skills, capabilities, and knowledge assets necessary to compete in its markets.

5. 5 Key Strategy Concepts: Providing Superior Value, Quality, Measuring and Tracking Results 5. Quality and process Improvement are fundamental to providing superior value. 6. Measuring and tracking results creates learning and sets the stage for later improvements.

6. 6 Additional Observations on Strategy 1. Changes in customers, channels and competitors interact to create discontinuities in industries or markets. 2. Companies may influence how markets change, but they seldom influence the pace of change. 3. Companies need to look for ways to change the rules of the markets in which they compete. 4. Changes in the rules are still subject to constraints in the business environment. 5. Companies need to identify the core competencies that will translate into advantages in the future. 6. Advantages are not sustainable for long – companies must innovate and change the rules to stay ahead.

7. 7 Hierarchy of Strategy Corporate Strategy Business Unit Strategy Product Strategies Business Unit Strategy Product Strategies Functional area strategies

8. 8 Strategic Business Units SBU –Organizational entities within within a corporation that address a single business. –SBUs must be capable of being planned and measured separately from the rest of the organization (though this does not imply independence from the larger organization).

9. 9 Business Portfolio A collection of strategic business units that serve various needs in the corporate structure. An ongoing firm will need 1.Sources of cash to fund investment in growing markets 2.New possibilities emerging from research and development that may be valuable business opportunities in the future.

10. 10 Exhibit 5-2 Growth-Share Matrix

11. 11 Growth Share Matrix: Stars Stars Cash Cows Dogs Question Marks + Relative market share - - Market Growth Rate + Stars- Must invest heavily to maintain position in the growing market. Likely a SBU with a prominent position in a market in the growth stage of the product life cycle Should be managed with market ownership as an objective.

12. 12 Growth Share Matrix: Cash Cows Stars Cash Cows Dogs Question Marks + Relative market share - - Market Growth Rate + Cash Cows- Found in slower-growth markets where the SBU may be the market owner. SBUs generate cash that fuels other parts of the organization. “Cash cows” are often found in the late growth, maturity, or decline stages of the product life cycle.

13. 13 Growth Share Matrix: Dogs Stars Cash Cows Dogs Question Marks + Relative market share - - Market Growth Rate + Dogs- Slow or negative growth relative to organizational goals, and a less than prominent market share. Can occur at any stage of the product life cycle. Must choose to either divest of the business or continue to harvest it for short-term cash.

14. 14 Growth Share Matrix: Question Marks Stars Cash Cows Dogs Question Marks + Relative market share - - Market Growth Rate + Question Marks- Significant market potential, but the SBU does not have a significant share. The SBU may require significant investment, may not be associated with the competencies of the firm, and may never grow to be prosperous. Can exist when a business discovers an opportunity not aligned with corporate goals or core lines.

15. 15 Potential Issues with the Growth-Share Matrix The relationship between market share and profitability is suspect. There is inherent subjectivity in the analysis of shares and growth. Investment implications of the categories are not consistent. The matrix is a snapshot in time.

16. 16 Exhibit 5-5 Attractiveness-Strength Matrix High Medium Low StrongMediumWeak Protect position Build selectively Protect and refocus Invest to build Build selectively or manage for earnings Manage for earnings Build selectively Limited expansion or harvest Divest Business strength Market attractiveness Invest/grow Selectively earn Harvest/divest

17. 17 Strategic Management Steps in the Business-to-Business Company 1. Develop goals and objectives 2. Environmental analysis 3. Strategy design 4. Implementation plan design 5. Strategy implementation 6. Monitoring of environment and performance results 7. Analysis of performance 8. Performance

18. 18 Special Issues in Strategy Development Strategy development and the Internet Strategy development and the Internet Volatility and uncertainty require flexibility Volatility and uncertainty require flexibility Strategy implications of value networks Strategy implications of value networks Strategic implications of market ownership Strategic implications of market ownership Strategy development in new business Strategy development in new business

19. 19 Strategy Development and the Internet The Internet can be used to Manage customer relationships Streamline purchasing relationships Increase the speed with which the environment changes Reduce transaction costs, shipping costs, and inventory costs

20. 20 Increased uncertainty and speed of change make visions of the future increasingly inexact. Choices of which businesses to pursue are less enduring as business boundaries and definitions are blurred. Budgets are more difficult to set, since it is difficult to know what investments will be needed to compete and grow. Volatility and Uncertainty Require Flexibility

21. 21 Successful strategies hinge on developing a portfolio of core competencies, including changing strategies and models rapidly: “Fast vertical integration” Identification of SBUs that can generate cash flow, and identification of SBUs and markets in which the company can play a dominant role Strategy Implications of Value Networks

22. 22 Strategy Implications of Market Ownership Developing competencies that are important in multiple businesses allows a company to produce value across a range of possible scenarios. Companies can strive to shape the market by taking a proactive approach. Yearly planning cycles are too slow – a time frame that recognizes the rapid life cycle of many offerings is needed.

23. 23 Strategy Development in New Business Some business-to-business Internet start- ups begin with only one customer – but this can result in becoming too dependent on a single customer, missing translation opportunities. Increased pressures on time and other resources may make it difficult to get a strategy developed.

24. 24 Tactical Planning for Modern Distribution

25. 25 Introduction Distributor functions and customer expectations are changing rapidly Distributors expected to be more information-based Strategic decisions for distributor focus Tactical decisions for strategy implementation.

26. 26 How E-Business Will Reshape the Distributor Customer Service Requirements Purchasing Decision InventoryForecasting The Distribution/Logistics Loop

27. 27 How E-Business Will Reshape the Distributor Customer Service Requirements Purchasing Decision Inventory Forecasting Customer Lead Time Requirements Fill Rate Lost Sales Supplier Lead Time Lead Time Variability Forecast Error Demand Patterns Variability ABC Policies Warehouse Constraints Transportation Financial Constraints Obsolescence The Distribution/Logistics Loop with Information Activities

28. 28 Matching Distribution Processes to Information Technology IT Problems –E-Business and internal information systems have little performance history –Inability to apply traditional financial measures to information technology –Technology shortcomings –Poor match between traditional business processes and the new technology

29. 29 Matching Distribution Processes to Information Technology Lack of Internet utilization –Lack of data standardization made setting up web sites for selling product very expensive. –The Internet was not accessible enough because of bandwidth problems. –Business procedures used by many end users still required a written purchase order process. –Trust and security issues hampered the process as firms jockeyed for position.

30. 30 Matching Distribution Processes to Information Technology The Information Automation Process –Identify and document business processes –Determine the value these processes generate for the firm's customers –Consider non-critical processes for elimination –Business Process Redesign –Document processes resistant to automation

31. 31 Process Mapping Distribution Begin with the customer and work backward through the supply chain 1. Customer 2. Distribution customer support systems 3. Warehouse operations 4. Planning/replenishment 5. Supplier 6. Support processes (financials, human resources, etc.)

32. 32 From Process Mapping to Organizational Realities Start use of improved processes that are friendly or compatible with the IT system Be comfortable with changes in the way the company communicates with its customers, suppliers, and within its own four-walls. Reduction in flexibility Cost reduction and supply chain reliability

33. 33 Conclusions Year 2000, a warning against jumping into expensive technology without a full understanding E-Business, in the short-term does not look like the death of distributors E-Business environment is uncharted territory, the business models new, and the technology complicated. Understanding E-Business and profitability is a challenge