Strategy DevelopmentWeek 3Objectives Week 3Devel.docx
- 1. Strategy Development Week 3 Objectives Week 3Develop strategic objectives. Create organizational objectives and goals. Articulate value proposition, key activities, resources, and channels to market. Quote…… “Successful business strategy is about actively shaping the game you play, not just playing the game you find.” Adam M. Brandenburger and Barry J. Nalebuff Quote…… “The essence of strategy lies in creating tomorrow’s competitive advantage faster than competitors mimic the ones you posses today”
- 2. Gary Hamel and C.K. Prahalad Quote…… “Competitive strategy is about being different. It means deliberately choosing to perform activities differently or to perform different activities than rivals to deliver a unique mix of value”. —Michael E. Porter Quote…… “Winners in business play rough and don’t apologize for it. The nicest part of playing hardball is watching your competitors squirm” —George Stalk, Jr., and Rob Lachenauer” Long-Term ObjectivesStrategic managers recognize that short- run profit maximization is rarely the best approach to achieving sustained corporate growth and profitability.Strategic decision makers confronts:
- 3. Should they eat the seeds to improve the near-term profit picture and make large dividend payments through cost-saving measures such as laying off workers during periods of slack demand, selling off inventories, or cutting back on research and development? Or should they sow the seeds in the effort to reap long-term rewards by reinvesting profits in growth opportunities, committing resources to employee training, or increasing advertising expenditures? Long-Term ObjectivesTo achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas: Profitability Competitive PositionEmployee RelationsTechnological Leadership Productivity – In- OutEmployee DevelopmentPublic Responsibility Qualities of Long-Term ObjectivesWhat distinguishes a good objective from a bad one? What qualities of an objective improve its chances of being attained?There are five criteria that should be used in preparing long-term objectives: Flexible Measurable Motivating Suitable Understandable The Balanced ScorecardThe balanced scorecard is a set of measures that are directly linked to the company’s strategy Developed by Robert S. Kaplan and David P. Norton, it directs a company to link its own long-term strategy with tangible
- 4. goals and actions. The scorecard allows managers to evaluate the company from four perspectives: financial performance customer knowledge internal business processes learning and growth The Balance Scorecard The Balance Scorecard The Balance ScorecardPerspectiveObjectiveKPIGoal for 2014FinanceBecome industry Cost Leader% Reduction in Cost per Unit20%Utilization of AssetsUtilization Rate7%Increase Market ShareMarket Share30%CustomerCustomer Retention% Retention 75%On Time Delivery% of On Time Delivery90%Zero Defects% of Good Quality First Time100%ProcessImprove Quality# Warranty Claims200Reduce Inventory Obsolescence Inventory Turnover12Reduce Customer Backlog% Order Backlog10%Learning & GrowthCreate Innovative Culture% of new Products this year10%Employee SatisfactionSurvey Index75%Develop Quality Improvement Skills% Trained in SPC75%
- 5. The Balance ScorecardEHSCustomer ServiceQuality and ComplianceProduct Development and new businessOrganizational developmentBudget The Balance ScorecardDepartmentAreas FinanceReturn On Investment Cash Flow Return on Capital Employed
- 6. Financial Results (Quarterly/Yearly)Internal Business Processes Number of activities per function Duplicate activities across functions Process alignment (is the right process in the right department?) Process bottlenecks Process automationLearning & GrowthIs there the correct level of expertise for the job? Employee turnover Job satisfaction Training/Learning opportunitiesCustomerDelivery performance to customer Quality performance for customer Customer satisfaction rate Customer percentage of market Customer retention rate The Balance Scorecard Radar Chart Dashboard What Is “Competitive Strategy”?Deals exclusively with a company’s business plans to compete successfully Specific efforts to please customers Offensive and defensive moves to counter maneuvers of rivals Responses to prevailing market conditions Initiatives to strengthen its market positionNarrower in scope than business strategy
- 7. Strategy and Competitive AdvantageCompetitive advantage exists when a firm’s strategy gives it an edge in Attracting customers and Defending against competitive forces Convince customers firm’s product / service offers superior value An acceptable product at a bargain price A superior product worth paying more for A more-value-for-the-money product (an upscale product at a “low” price Key to Gaining a Competitive Advantage Generic StrategiesA long-term or grand strategy must be based on a core idea about how the firm can best compete in the marketplace. The popular term for this core idea is generic strategy. 3 Generic Strategies: Striving for overall low-cost leadership in the industry. Striving to create and market unique products for varied customer groups through differentiation. Striving to have special appeal to one or more groups of consumers or industrial buyers, focusing on their cost or differentiation concerns. How to Achieve a Cost Advantage Do a better job than rivals of controlling the costs of performing value chain activities Approach 1
- 8. Revamp value chain to eliminate cost-producing activities that add little value from the buyer’s perspective Approach 2 Control costs! Eliminate activities! * Keys to Success in Achieving Low-Cost LeadershipScrutinize each value chain activity to identify what factors drive the costs of performing the activity Use knowledge about cost drivers to
- 9. manage costs of each activity down year after yearFind ways to restructure value chain to eliminate nonessential work steps and low-value activities Aggressively pursue investments in resources and capabilities that promise to drive costs out of the business Characteristics of a Low-Cost ProviderCost conscious corporate cultureBroad employee participation in cost-control effortsOngoing efforts to benchmark costsIntensive scrutiny of budget requestsPrograms promoting continuous cost improvement Successful low-cost producers champion frugality but wisely and aggressively invest in cost-saving improvements ! When Does a Low-Cost Strategy Work Best?Price competition is vigorousProduct is standardized or readily available from many suppliersThere are few ways to achieve differentiation that have value to buyersMost buyers use product in same waysBuyers incur low switching costs Buyers are large and have significant bargaining powerIndustry newcomers use introductory low prices to attract buyers and build customer base Pitfalls of Low-Cost StrategiesCutting price by an amount greater than size of cost advantage (having a $1 cost advantage and cutting price by $2)Low cost methods are easily imitated by
- 10. rivalsBecoming too fixated on reducing costs and ignoring Buyer interest in additional features Declining buyer sensitivity to price Changes in how the product is usedTechnological breakthroughs open up cost reductions for rivals, thus allowing them to close cost gap
- 11. Differentiation StrategiesIncorporate differentiating features that cause buyers to prefer firm’s product or service over brands of rivals Finding ways to differentiate that create value for buyers and that are not easily matched or cheaply copied by rivalsNot spending more to achieve differentiation than the price premium that customers are willing to pay for all the differentiating extras Keys to Success Objective Benefits of Successful DifferentiationA product / service with
- 12. unique, appealing attributes allows a firm to Command a premium price and/or Increase unit sales and/or Build brand loyalty = Competitive Advantage
- 15. Which hat is unique? Types of Differentiation ThemesUnique taste – Dr. Pepper and ListerineMultiple features – Microsoft Windows and OfficeWide selection and one-stop shopping – Home Depot and Amazon.comSuperior service – FedExSpare parts availability – CaterpillarEngineering design and performance – Mercedes and BMWPrestige – RolexProduct reliability – Johnson & JohnsonQuality manufacture – Karastan, Michelin, and HondaTechnological leadership – 3M CorporationComplete line
- 16. of products – Campbell’sTop-of-line image – Ralph Lauren and Starbucks Sustaining Differentiation: Keys to Competitive AdvantageMost appealing approaches to differentiation Those hardest for rivals to duplicate Those buyers will find most appealingBest choices to gain a longer-lasting, more profitable competitive edge New product innovation Technical superiority Product quality and reliability Comprehensive customer service Unique competitive capabilities Where to Find Differentiation Opportunities in the Value ChainPurchasing and procurement activitiesProduct R&D and product design activitiesProduction process / technology-related activitiesManufacturing / production activitiesDistribution-related activitiesMarketing, sales, and customer service activities Activities, Costs, & Margins of Forward Channel Allies Internally Performed Activities, Costs, & Margins Activities,
- 17. Costs, & Margins of Suppliers Buyer/User Value Chains Pitfalls of Differentiation StrategiesBuyers see little value in a product’s unique attributes Appealing product features are easily copied by rivalsDifferentiating on a feature buyers do not perceive as lowering their cost or enhancing their well- beingOver-differentiating such that product features exceed buyers’ needsCharging a price premium buyers perceive is too high
- 18. SpeedSpeed-based strategies, or rapid response to customer requests or market and technological changes, have become a major source of competitive advantage for numerous firms in today’s intensely competitive global economy
- 19. Focus A focus strategy, whether anchored in a low-cost base or a differentiation base, attempts to attend to the needs of a particular market segmentA firm pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the needs of customers with special financing, inventory, or servicing problems; or to tailor the product to the somewhat unique demands of the small- to medium-sized customer The focusing firms profit from their willingness to serve otherwise ignored or underappreciated customer segments Focus Involve concentrated attention on a narrow piece of the total market Serve needs of niche buyers better than rivals Choose a market niche where buyers have distinctive preferences, special requirements, or unique needsDevelop unique capabilities and product attributes to serve needs of target buyer segment Objective Keys to Success Approaches to Defining a Market NicheGeographic uniquenessSpecialized requirements in using product/serviceSpecial product attributes appealing only to niche buyers
- 20. Examples of Focus StrategieseBay Online auctionsPorsche Sports carsJiffy Lube International Quick maintenance for motor vehiclesPottery Barn Kids Children’s furniture and accessoriesBandag Specialist in truck tire recapping
- 24. Focus and Competitive Advantage Achieve lower costs than rivals in serving the segment -- A low-cost strategy Offer niche buyers something different from rivals -- A differentiation strategy Approach 1 Approach 2 Risks of a Focus StrategyCompetitors find effective ways to match a focuser’s capabilities in serving nicheNiche buyers’ preferences shift towards product attributes desired by majority of buyers - niche becomes part of overall marketSegment becomes so attractive it becomes crowded with rivals, causing segment profits to be splintered Deciding Which Generic Competitive Strategy to UseEach positions a company differently in its marketEach establishes a central theme for how a company will endeavor to outcompete rivalsEach creates some boundaries for maneuvering as market circumstances unfoldEach points to different ways of experimenting with the basics of the strategyEach entails differences in product line, production emphasis, marketing emphasis, and means to sustain the strategy The big risk – Selecting a “stuck in the middle” strategy!
- 25. This rarely produces a sustainable competitive advantage or a distinctive competitive position! The Value DisciplinesOperational ExcellenceThis strategy attempts to lead the industry in price and convenience by pursuing a focus on lean and efficient operationsCustomer IntimacyCustomer intimacy means continually tailoring and shaping products and services to fit an increasingly refined definition of the customerProduct LeadershipCompanies that pursue the discipline of product leadership strive to produce a continuous state of state-of-the-art products and services Grand StrategiesGrand strategies, often called master or business strategies, provide basic direction for strategic actions Indicate the time period over which long-rang objectives are to be achieved Any one of these strategies could serve as the basis for achieving the major long-term objectives of a single firm Firms involved with multiple industries, businesses, product lines, or customer groups usually combine several grand strategies 15 principals grand strategies. Concentrated GrowthConcentrated growth is the strategy of the firm that directs its resources to the profitable growth of a dominant product, in a dominant market, with a dominant technologyConcentrated growth strategies lead to enhanced performance Specific conditions favor concentrated growthThe risks and rewards vary
- 26. Concentrated Growth Market development commonly ranks second only to concentration as the least costly and least risky of the 15 grand strategies It consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion Frequently, changes in media selection, promotional appeals, and distribution are used to initiate this approach Market Development Market Development Product DevelopmentProduct development involves the substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels Product Development InnovationThese companies seek to reap the initially high profits associated with customer acceptance of a new or greatly
- 27. improved productThen, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete Horizontal AcquisitionWhen a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain, its grand strategy is called horizontal acquisitionSuch acquisitions eliminate competitors and provide the acquiring firm with access to new markets Vertical Integration StrategyExtend a firm’s competitive scope within same industry Backward into sources of supply Forward toward end-users of final productCan aim at either full or partial integration Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User
- 28. Value Chains Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Advantages of a Vertical Acquisition StrategyTwo reasons to invest resources in vertical acquisition Strengthen a firm’s competitive position and/or Boost a firm’s profitabilityPotential benefits of vertical acquisition Produces sufficient cost savings and/or profit increases to justify extra investment Adds materially to a firm’s technological and competitive strengths Helps differentiate a firm’s product offerings Strategic Advantages of Backward AcquisitionGenerates cost savings only if volume needed is big enough to capture efficiencies equal to that of suppliersPotential to reduce costs exists when Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily metCan produce a differentiation-based competitive advantage when it results in a
- 29. better quality partReduces risk of depending on suppliers for crucial raw materials / parts / components Strategic Advantages of Forward AcquisitionTo gain better access to end users and better market visibilityTo compensate for undependable distribution channels which undermine steady operationsTo offset the lack of a broad product line, a firm may sell directly to end usersTo bypass regular distribution channels in favor of direct sales and Internet retailing which may Lower distribution costs Produce a relative cost advantage over rivals Enable lower selling prices to end users Strategic Disadvantages of Vertical AcquisitionBoosts resource requirementsLocks firm deeper into same industry which may Result in fixed sources of supply and Less flexibility in accommodating buyer demand for product varietyPoses all types of capacity- matching problemsMay require radically different skills / capabilitiesReduces flexibility to make changes in component parts which may Lengthen design time and Delay new product introductions
- 30. Vertical and Horizontal Integration Merger and Acquisition StrategiesMerger – Involves a pooling of equals, with newly created firm often taking on a new nameAcquisition – One firm, the acquirer, purchases and absorbs operations of another, the acquired Characteristics of mergers and acquisitions Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances Objectives of Mergers and Acquisitions To pave way for acquiring firm to gain more market share and create a more efficient operationTo expand a firm’s geographic coverageTo extend a firm’s business into new product categories or international marketsTo gain quick access to new technologiesTo invent a new industry and lead the convergence of industries whose boundaries are blurred by Changing technologies and New market opportunities Pitfalls of Mergers and AcquisitionsCombining operations may result in
- 31. Resistance from rank-and-file employees Hard-to-resolve conflicts in management styles and corporate cultures Tough problems of integration Greater-than-anticipated difficulties in Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities Turnaround The firm finds itself with declining profitsAmong the reasons are economic recessions, production inefficiencies, and innovative breakthroughs by competitors Strategic managers often believe the firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences. This is turnaround.Two forms of retrenchment: Cost reduction Asset reduction Elements of TurnaroundA turnaround situation represents absolute and relative-to-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions The immediacy of the resulting threat to company survival is known as situation severity Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response
- 32. Turnaround Turnaround DivestitureA divestiture strategy involves the sale of a firm or a major component of a firmWhen retrenchment fails to accomplish the desired turnaround, or when a nonintegrated business activity achieves an unusually high market value, strategic managers often decide to sell the firm Reasons for divestiture vary LiquidationWhen liquidation is the grand strategy, the firm typically is sold in parts, only occasionally as a whole—but for its tangible asset value and not as a going concern Planned liquidation can be worthwhile BankruptcyLiquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount they are owed Reorganization bankruptcy—the managers believe the firm can remain viable through reorganizationTwo notable types of bankruptcy Chapter 7 Chapter 11
- 33. BankruptcyCompanyFiling DateTotal Assets pre-filingAssets Adjusted to Yr. 2012Lehman Brothers Holding Inc.2008-09- 15$639,063,000,800$700 billionWashington Mutal2008-09- 26$327,913,000,000$359 billionWorldcom Inc.2002-07- 21$103,914,000,000$136 billionGeneral Motors Inc.2009-06- 01$82,300,000,000$90.5 billionCIT Group2009-11- 01$71,019,200,000$78.1 billionEnron Corp.2001-12- 02$63,392,000,000$84.4 billionChrysler LLC2009-04- 30$39,300,000,000$43.2 billionTexaco1987-04- 12$35,892,000,000$74.5 billionDelta Air Lines2005-09- 14$21,801,000,000$26.3 billion Outsourcing Strategies Involves withdrawing from certain value chain activities and relying on outsiders to supply needed products, support services, or functional activities Concept Internally
- 34. Performed Activities Suppliers Support Services Functional Activities Distributors or Retailers What Factors Drive Decisions to Outsource?Outsiders can often perform certain activities better or cheaperAllows a firm to focus its entire energies on activities that are At the center of its expertise – Core competencies Most critical to its competitive and financial success When Does Outsourcing Make Strategic Sense?Activity can be performed better or more cheaply by outside specialists Activity is not crucial to achieve a sustainable competitive advantageRisk exposure to changing technology and/or changing buyer preferences is reducedFirm’s ability to innovate is improvedOperations are streamlined to Improve flexibility Cut cycle timeFirm can assemble diverse kinds of expertise speedily and efficiently by using capable outside suppliersIf it helps a firm concentrate its full energies and resource strengths on better performing “core” value chain activities
- 35. Pitfalls of OutsourcingFarming out too many or the wrong activities, thus Hollowing out capabilities Losing touch with activities and expertise that determine overall long-term success
- 36. Joint VenturesOccasionally two or more capable firms lack a necessary component for success in a particular competitive environmentThe solution is a set of joint ventures, which are commercial companies (children) created and operated for the benefit of the co-owners (parents)The joint venture extends the supplier-consumer relationship and has strategic advantages for both partners When to Engage in a Joint Venture Evaluating
- 37. the Potential for a Joint Venture Is the opportunity too complex, uneconomical, or risky for one firm to pursue alone? Does the opportunity require a broader range of competencies and know-how than the firm now possesses? Will the opportunity involve operations in a country that requires foreign firms to have a local minority or majority ownership partner? Strategic AlliancesStrategic alliances are distinguished from joint ventures because the companies involved do not take an equity position in one another In some instances, strategic alliances are synonymous with licensing agreements Outsourcing arrangements vary Why Cooperative Strategies Are Integral to a Firm’s CompetitivenessTwo demanding competitive challenges are faced by many companies Global race to build a market presence in many different national markets Race to seize opportunities on the frontiers of advancing technologyCollaborative arrangements can Help a company lower its costs and/or Gain access to needed expertise and capabilities
- 38. Purposes of Strategic Alliances To acquire or improve market access via joint marketing agreementsTo pursue joint sales or distributionTo gain economies of scale in productionTo collaborate on the design of new productsTo engage in joint research and developmentTo form technology licensing agreements What Factors Make an Alliance “Strategic”?It is critical to a company’s achievement of an important objectiveIt helps build, sustain, or enhance a Core competence or Competitive advantageIt helps block a competitive threatIt helps open up important new market opportunitiesIt mitigates a significant risk to a company’s business Why Are Strategic Alliances Formed?To expedite development of promising new technologies or products To fill gaps in technical or manufacturing expertiseTo create desirable new skill sets and capabilitiesTo improve supply chain efficiencyTo gain economies of scale in production and/or marketingTo acquire or improve market access via joint marketing agreements Why Do Alliances Fail?Ability of an alliance to endure depends on How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargainReasons for
- 39. alliance failure Diverging objectives and priorities of partners Inability of partners to work well together Emergence of more attractive technological paths Marketplace rivalry between one or more allies Costs of establishing the working arrangement Cultural and language barriers Web Site Strategies: Which One to Employ?Strategic Issue – What role should a firm’s Web site play in its competitive strategy?Approaches to using the Internet Solely as a vehicle to disseminate product information Minor distribution channel One of several important distribution channels Primary distribution channel Exclusive distribution channel Using the Internet to Disseminate Product InformationApproach – Website used to provide product information of manufacturers or wholesalers Relies on click-throughs to websites of dealers for sales transactions Informs end-users of location of retail storesIssues – Pursuing online sales may Signal weak strategic commitment to dealers
- 40. Signal willingness to cannibalize dealers’ sales Prompt dealers to aggressively market rivals’ brandsAvoids channel conflict with dealers – important where strong support of dealer networks is essential Web Site E-Stores as a Minor Distribution ChannelApproach – Use online sales to Achieve incremental sales Gain online sales experience Conduct marketing research Learn more about buyer tastes and preferences Test reactions to new products Create added market buzz about products Boost overall sales a few percentage pointsUnlikely to provoke much outcry from dealers Strategies for Online EnterprisesApproach – Use Internet as exclusive channel of all buyer-seller contactStrategic issues How a firm will deliver unique value to buyers Whether a firm pursues competitive advantage based on lower costs, differentiation, or better value for the money Whether a firm will have a broad or narrow product offering Whether to perform order fulfillment activities internally or to outsource them How a firm will draw traffic to its Web site Consortia, Keiretsus, and Chaebols Consortia are defined as large interlocking relationships between businesses of an industryIn Japan such consortia are known as keiretsus, in South Korea as chaebols Their cooperative nature is growing in
- 41. evidence as is their market success Selection of Long-Term Objectives and Grand Strategy Sets When strategic planners study their opportunities, they try to determine which are most likely to result in achieving various long-range objectivesAlmost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so the tentative objectives can be metIn essence, then, three distinct but highly interdependent choices are being made at one time Sequence of Selection and Strategy ObjectivesThe selection of long-range objectives and grand strategies involves simultaneous, rather than sequential, decisions While it is true that objectives are needed to prevent the firm’s direction and progress from being determined by random forces, it is equally true that objectives can be achieved only if strategies are implemented