Professional Documents
Culture Documents
CH 05
CH 05
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
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 5-5
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 5-6
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 5-7
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 5-8
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 5-9
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 5-10
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 5-11
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 5-12
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 5-13
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 5-14
Alternative Analytical Frameworks
• Growth-share matrix
Market Share
High Low
High
Product
Marks
Performers
Cash
Low
Dogs
Cows
Invest /
High
Grow
Business Strengths
Medium
Harvest /
Low
Divest
Chapter 5-15
Alternative Analytical Frameworks
• Global strategy
Country Attractiveness
High Medium Low
Invest /
High
Grow
Business Strengths
Medium
Harvest /
Low
Divest
Chapter 5-16
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 5-17
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 5-18
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 5-19
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 5-20
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 5-21
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 5-22
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 5-23
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 5-24
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 5-25
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 5-26
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 5-27
Strategy and Structure
President
Unitary or U-Form
Production Marketing