Chapter 5

Strategic Processes
 Nature of Strategy
 Defines the long-term plans, policies and
culture of an organization
 Strategic planning is a dynamic process that
requires inputs from all segments of the
organization
 Acquisition and restructuring policies and
decisions should be part of the company's
overall strategic plans and processes
 Ultimate responsibility for strategic planning
resides in the top executive group

Chapter 5-2
Successful Strategies
Low cost airfare
No meals, quick turnaround…
Made-to-order computers
Supplier system, online ordering…
Online retailing
Low inventory, no retail facilities…
High quality coffee experience
Many products, good locations…
Rural area department stores
Low prices, inventory controls…
Chapter 5-3
Importance of Economic Environment
 Business cycle not dead – stock prices
and merger activity overshoot on both
the up and downside
 Investment accelerator principle
• Small changes in consumer spending can
cause large changes in investment levels
• Example: Cisco’s rise and fall
 Sales-to-capacity relationships
• Investment may be excessive in relation
to sales
• Example: Telecom industry
Chapter 5-4
 If demand increase (economy boom), supply need to increase to fulfil
demand.
 How increase supply? Increase more inventory/equipment/hire expertise.
(debt will increase – investments)
 But what if there is too many competitors(economy level off)? Price of the
good will be controlled. In this case, you let the one with lower price wins.
 What if demand slowly reduce? Supply will slowly exceed demand.
(overcapacity). To sell your surplus inventory, they will be forced to
reduce price even more. (in worse case, stock price will reduce and attract
investors so you can get more capital to pay off debts) What about their
debts? It is fixed. Hence they will have problem in paying it.

Chapter 5-5
 Strategic Planning Processes
 Essential elements in strategic planning
• Assessment of changes in the environments
• Evaluation of company capabilities and
limitations
• Assessment of expectations of stakeholders
• Analysis of company, competitors, industry,
domestic economy and international economies
• Formulation of the missions, goals and policies
for the master strategy
• Development of sensitivity to critical
environmental changes

Chapter 5-6
 Strategic Planning Processes
 Essential elements in strategic planning
• Formulation of organization performance
measurements and benchmarks
• Formulation of long-range strategy programs
• Formulation of mid-range programs and short-
run plans
• Organization, funding and other methods to
implement all of the preceding elements
• Information flow and feedback system for
continued repetition of above activities and for
adjustments and changes at each stage
• Review and evaluation of above processes
Chapter 5-7
 Strategic Planning Processes
 Monitoring environments
• Should encompass both domestic and
international dimensions
• Include analysis of economic, social,
technological, political, and legal factors
 Strategy also deals with stakeholders – groups
with interests in the firm and its actions
 Organization cultures
• Firm cultures affect strategic thought and plans
• Failure to combine cultures is a key obstacle to
merger integration

Chapter 5-8
Alternative Strategy Methodologies
 SWOT or WOTS UP – inventory and analysis
of organizational strengths, weaknesses,
environmental opportunities and threats
 Gap analysis – assessment of goals versus
forecasts or projections
 Top-down or Bottom-up – relate to company
forecasts vs. aggregation segment forecasts
 Computer models – allow detail and complexity
 Logical incrementalism – well-supported moves
from current bases
 Comparative histories – learn from the
experiences of others
Chapter 5-9
Alternative Strategy Methodologies
 Competitive analysis – assess customers,
suppliers, new entrants, products, etc.
 Muddling through – incremental changes
selected from ongoing policy alternatives
 Delphi technique – iterated opinion reactions
from selected groups
 Discussion group technique – stimulating ideas
by discussions aimed at consensus decisions
 Synergy – look for complementarities
 Adaptive processes – periodic reassessment of
environmental opportunities and organization
capability adjustments required
Chapter 5-10
Alternative Strategy Methodologies
 Environmental scanning – continuous analysis
of all relevant environments
 Intuition – insights of brilliant managers
 Entrepreneurship – creative leadership
 Discontinuities – crafting strategy from
recognition of trend shifts
 Brainstorming – free-form repeated exchange
of ideas
 Game theory – logical analysis of competitor
actions and reactions
 Game playing – assign roles and simulate
alternative scenarios
Chapter 5-11
Alternative Analytical Frameworks
 Product life cycle – introduction, growth,
maturity, decline stages with changing
opportunities, threats
 Learning curve – costs decline with cumulative
volume experience (first mover advantage)
 Competitive analysis – industry, suppliers,
customers, complemetors, etc.
 Value chain analysis – seek to add product
characteristics valued by customers
 Niche opportunities – specialize in particular
needs or interests of customer groups
 Cost leadership – low-cost advantages
Chapter 5-12
Alternative Analytical Frameworks
 Product differentiation – develop products that
achieve customer preference
 Product breadth – carryover of organizational
capabilities
 Correlations with profitability – statistical
studies of factors associated with profitability
 Market share – high market share associated
with competitive superiority
 Product quality – customer allegiance and price
differentials for higher quality
 Technological leader – keep at knowledge
frontiers
Chapter 5-13
Alternative Analytical Frameworks
 Resource-based view – capabilities are
inimitable
 Relatedness matrix – unfamiliar markets and
products involve greatest risk
 Focus matrix – narrow versus broad product
families
 Growth/share matrix – aim for high market
share in high growth markets
 Attractiveness matrix – aim to be strong in
attractive industries
 Global matrix – aim for competitive strength in
attractive countries
Chapter 5-14
Alternative Analytical Frameworks
• Product-market matrix
Product
Present Related Unrelated
Market

Low High
Present
Risk Risk

Related

High Highest
Unrelated
Risk Risk

• Competitive-position matrix
Product Cost
Differentiation Leadership

Narrow
Focus

Broad Range
of Markets

Chapter 5-15
Alternative Analytical Frameworks
• Growth-share matrix
Market Share

High Low

Market Growth Rate

Star
Question

High
Product
Marks
Performers

Cash

Low
Dogs
Cows

• Strength-market attractiveness matrix

Industry Attractiveness
High Medium Low

Invest /
High

Grow
Business Strengths

Medium

Harvest /
Low

Divest
Chapter 5-16
Alternative Analytical Frameworks
• Global strategy
Country Attractiveness
High Medium Low

Invest /

High
Grow
Business Strengths

Medium

Harvest /
Low

Divest

Chapter 5-17
Strategy Formulation Approaches
 Boston Consulting Group Approach
• Historical emphasis: experience curve, product
life cycle, product portfolio balance
• Recent approaches
– Impact of the Internet and other innovations
– Performance measurements - cash flow
return on investment (CFROI)
 Michael Porter Approach (1980, 1985, 1987)
• Select attractive industry using “Five Forces”
• Develop competitive advantage through cost
leadership, product differentiation, or focus
• Develop attractive value chains
Chapter 5-18
Evaluation of Strategic Approaches
 Strategy decisions are usually ill-structured
problems
 In practice, all approaches are eclectic
 Computers allow approaches to become more
closely tied
 Results of strategy viewed differently:
• Firms can develop and implement strategic
planning to obtain competitive advantage
• Adaptive process approach — competitive
advantage not permanent; planning as a
continual learning and adjustment process

Chapter 5-19
Evaluation of Strategic Approaches
 Steps taken in checklists and iterations:
• State objectives
• Define environment
• Analyze strengths/weaknesses relative to
environment
• Assess potential in environment
• Compare potential to objectives
• If gap, search for alternative ways to close gap
• Select alternatives for analysis
• Cost/benefit analysis of alternatives
• Tentative selection — formulate plans and
actions
Chapter 5-20
Evaluation of Strategic Approaches
 Steps taken in checklists and iterations:
• Repeat process from several viewpoints
(research, production, marketing, financial,
etc.) and all over system standpoint
• Commit resources to implement plan
• Competitive reactions
• Follow-up to compare performance to plan
• Repeat comparison of objectives and potential
• Goal is effective alignment to changing
environments

Chapter 5-21
 Formulating a Merger Strategy
 Requires continuing reassessment
• Industry analysis
• Competitor analysis
• Supplier analysis
• Customer analysis
• Substitute products
• Complementors
• Technology changes
• Societal factors
• Firm's strengths/weaknesses relative to
present/future industry conditions

Chapter 5-22
 Formulating a Merger Strategy
 Goal/capability analysis
• Are current goals, policies appropriate?
• Do goals, policies match resources?
• Does timing of goals/policies reflect ability
of firm to change?
 Work out strategic alternatives
• May not include current strategy
• Choose best
• Mergers represent one set of alternatives
Chapter 5-23
 Formulating a Merger Strategy
 Grove (1996)
• Firm must adjust to six forces
– Existing competitors
– Potential competitors
– Complementors
– Customers
– Suppliers
– Industry transformation
• Eclectic adaptive processes approach to
strategy
Chapter 5-24
 Formulating a Merger Strategy
 Business goals - general or specific, but must be
quantifiable to facilitate progress assessment
• Size objectives
– Large enough to use fixed factors effectively
– Critical mass necessary to attain cost levels for
profitable operation at market prices
• Growth objectives - sales, assets, EPS, values
– To get favorable P/E multiple for shares
– To increase market to book value of shares

Chapter 5-25
 Formulating a Merger Strategy
 Business goals
• Stability objectives - two kinds of instability
– Large erratic fluctuations in total size and
abrupt program shifts (e.g., defense industry)
– Cyclical instability of durable goods industries
• Flexibility objectives - ability to operate in variety
of product markets and responsive to consumers
– Breadth of capabilities, e.g., research,
manufacturing, marketing
– Technological breadth
– Stay close to customers
Chapter 5-26
 Formulating a Merger Strategy
 Aligning firm to changing environments
• Gap between objectives and potential based
on current capabilities
• Various approaches:
– Choose products related to needs of
customer that provide large markets
– Focus on technological bottlenecks
– Be at frontier of technology and aim for
attractive product fallout
– Emphasize economic criteria – ex. value
Chapter 5-27
 Formulating a Merger Strategy
 Strategic planning and mergers
• Diversification strategy may be necessary if
firm must alter product-market mix or
capabilities to reduce or close strategic gap
• Both involve evaluation of current
capabilities relative to those needed to reach
objectives
• Related diversification involves lower risks

Chapter 5-28
 Strategy and Structure
President
 Unitary or U-Form

V.P. V.P. V.P. V.P.

Research Production Marketing Finance

• Highly centralized under the president

• Broken into functional departments - no
departments can stand alone
• No easy way to measure each department as a
profit center
• Allows rapid decision-making
• Only successful in small organizations
• Difficult to handle multiple products
Chapter 5-29
 Strategy and Structure
 Holding company or H-Form

President
Accounting and Finance

Autos Movies Toys Food

• Arranged around various unrelated operating businesses
• Leadership can evaluate each unit individually
• Resources can be allocated according to projected
returns

Chapter 5-30
 Strategy and Structure
 Multidivisional organization (M-form)
President

Division 1 Division 2 Division 3 ...Division 10

Production Marketing

• Each division is autonomous enough to be judged

a profit center
• Divisions share some general staff assistance
• Can handle related product and geographic
market extensions
Chapter 5-31
 Strategy and Structure
President
 Matrix form

Product A Product B Product C

Research
Manager
Production
Manager
Marketing
Manager
• Managers of functional departments such as finance,
manufacturing and development
• Employees are assigned to subunits organized around
products, geography, or other criteria
• Effective in firms characterized by many new
products or projects
Chapter 5-32
Structure and Acquisition Strategy
Structure Strategy
U-Form Target likely fully consolidated
Usually closely related activities
H-Form Easier to acquire unrelated firms
Operations may remain somewhat
independent
M-Form Target may become separate division
served by existing functional groups
Matrix Best for geographic expansion of
related products
Chapter 5-33
 Strategy and Structure
 Virtual integration (Dell Computers)
• Links of value chain brought together by
informal arrangements among suppliers and
customers
– Effective customer ordering and services
– Arrangement of supply shipments and
customer needs facilitated by efficient
computer systems
• Represents a blurring of company boundaries
• Strengthen communication ties between
different firms in value chain creates a "form of
organization"
Chapter 5-34