Strategic Management and

Business Policy 15e, Global Edition

Chapter 6
Strategy
Formulation:
Business Strategy

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Learning Objectives
6-1 Review SWOT diagram to examine business
strategy and SFAS
6-2 Develop a mission statement that
addresses the five elements of good
design
6-3 Explain the competitive and cooperative
strategies available to corporations
6-4 Identify the types of strategic alliances

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6-2
A Framework for Examining Business
Strategy (1 of 2)
• Strategy formulation
– concerned with developing a corporation’s
mission (mission and vision), objectives,
strategies, and policies
• Situation analysis
– the process of finding a strategic fit between
external opportunities and internal strengths
while working around external and internal
weaknesses

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6-3
A Framework for Examining Business
Strategy (2 of 2)
• SWOT
– acronym used to describe the particular
strengths, weaknesses, opportunities, and
threats that are potential strategic factors for a
specific company
• Strategy = opportunity/capacity
• Opportunity has no real value unless a company
has the capacity to take advantage of that
opportunity.

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6-4
Criticisms of SWOT Analysis
• It is simply the opinions of those filling out the boxes.
• Virtually everything that is a strength is also a weakness.
• Virtually everything that is an opportunity is also a threat.
• Adding layers of effort does not improve the validity of
the list.
• It uses a single point in time approach.
• There is no tie to the view from the customer.
• There is no validated evaluation approach.

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Mission and Objectives (1 of 2)
• The mission statement must enable a common
thread to highlight and focus the energy of
everyone in the organization in the direction that
the top management team believes is best for the
business.

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Mission and Objectives (2 of 2)
A well-crafted mission statement has five common
elements
1. It must be short.
2. The design must be simple.
3. It has to provide direction.
4. It should enable employees knowing exactly
what the company does and what it does not do.
5. It should be measurable.

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6-7
Finding a Propitious Niche
• Niche is a need in the market place that is currently
unsatisfied. The ultimate goal of companies is to find a:
• Propitious niche
– An extremely favorable niche that is so well suited to
the firm’s internal and external environment that other
corporations are not likely to challenge or dislodge it
– A niche is propitious to the extent that it is currently just
large enough for one firm to satisfy the demand. After
this specific firm has filled that niche, it is not worth for
a potential competitor’s time or money to go after the
same niche.

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6-8
Strategic window

• Strategic window
– a unique market opportunity that is available
for a particular time
– Keep in mind that niches grow and change

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9
Business Strategies
• Business strategy
– focuses on improving the competitive position
of a company’s or business unit’s products or
services within the specific industry or market
segment that the company or business unit
serve
– Can be competitive(battling against all
competitors for advantage) or
Cooperative( working with one or more
competitors to gain advantage against other
competitors)
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6-10
Porter’s Competitive Strategies
(1 of 7)
Competitive strategy raises the following questions:
• Should we compete on the basis of lower cost (and
thus price), or should we differentiate our products or
services on some basis other than cost, such as
quality or service?
• Should we compete head-to-head with our major
competitors for the biggest but most sought-after
share of the market, or should we focus on a niche in
which we can satisfy a less sought-after but also the
profitable segment of the market?

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6-11
Porter’s Generic Competitive
Strategies (2 of 7)
• Cost leadership
– ability of a company or a business unit to
design, produce, and market a comparable
product more efficiently than its competitors
• Differentiation
– ability of a company to provide unique and
superior value to the buyer in terms of product
quality, special features, or after-sale service

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6-12
Porter’s Generic Competitive
Strategies (3 of 7)
• Focus
– ability of a company to provide unique and
superior value to a particular buyer group,
segment of the market line, or geographic
market

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6-13
Porter’s Competitive Strategies
(4 of 7)
• Porter proposed that a firm’s competitive
advantage in an industry is determined by
its competitive scope—that is, the breadth
of the company’s or business unit’s target
market.
• So broad target (mass market) or narrow
target (niche market)

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6-14
Porter’s Competitive Strategies
(5 of 7)
• Cost leadership
– lower-cost competitive strategy that aims at the
broad mass market and requires “aggressive
construction of efficient-scale facilities, vigorous
pursuit of cost reductions from experience, tight
cost and overhead control, avoidance of marginal
customer accounts, and cost minimization
– provides a defense against rivals
– provides a barrier to entry
– generates increased market share
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6-15
Porter’s Competitive Strategies
(6 of 7)
• Differentiation
– involves the creation of a product or service that is
perceived throughout its industry as unique; having
passed through the elements of VRIO.
– can be associated with design, brand image,
technology, features, dealer network or customer
service
• Lowers customers sensitivity to price
• Increases buyer loyalty
• Can generate higher profits
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6-16
Porter’s Competitive Strategies
(7 of 7)
• Cost focus
– low-cost competitive strategy that focuses on a
particular buyer group or geographic market and
attempts to serve only this niche to the exclusion
of others
• Differentiation focus
– concentrates on a particular buyer group,
product line segment, or geographic market to
serve the needs of a narrow strategic market
more effectively than its competitors
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6-17
Risks in Competitive Strategies
• A company following a differentiation strategy
must ensure that the higher price it charges for its
higher quality is not too far above the price of the
competition, otherwise customers will not see the
extra quality as worth the extra cost.

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6-18
Issues in Competitive Strategies
• Stuck in the middle
– when a company has no competitive advantage
and is doomed to below-average performance
– K-Mart (TK max or TJ max/Walmart)

• Successful entrepreneurial ventures follow focus

strategies. They differentiate their product or service
from those of others by focusing on customer wants in
a segment of the market, thereby achieving a
dominant share of that part of the market.

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6-19
Industry Structure and
Competitive Strategy (1 of 2)
• Fragmented industry
– many small and medium-sized companies
compete for relatively small shares of the total
market. Products are typically in early stages of
product life cycle.

• Focus strategies are used.

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6-20
Industry Structure and
Competitive Strategy (2 of 2)
• Consolidated industry
– domination by a few large companies
– premium on a firm’s ability to achieve cost leadership
• Strategic rollup
– developed in the mid-1990s as an efficient way to
quickly consolidate a fragmented industry
• Rollups differ from mergers/acquisitions in three ways:
1. They involve large numbers of firms.
2. The acquired firms are typically owner operated.
3. The objective is to reinvent an entire industry.
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6-21
Hypercompetition and Competitive
Advantage Sustainability (1 of 2)
• According to D’Aveni:
– “In a hypercompetitive environment, market stability
is threatened by short product life cycles, short
product design cycles, new technologies, frequent
entry by unexpected outsiders, repositioning by
incumbents, and tactical redefinitions of market
boundaries as diverse industries merge.”
• A company or business unit must constantly work
to improve its competitive advantage.

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Hypercompetition and Competitive
Advantage Sustainability (2 of 2)
• Sustained competitive advantage is increasingly
a matter not of a single advantage maintained
over time, but more a matter of sequencing
advantages over time.

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Cooperative Strategies (1 of 3)
• Cooperative Strategies
– used to gain a competitive advantage within an
industry by working with other firms
– Collusions AND Strategic Alliances

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6-24
Cooperative Strategies (2 of 3)
• Collusion
– the active cooperation of firms within an industry to
reduce output and raise prices to avoid economic
law of supply and demand
– Can be explicit or tacit
– Need certain conditions to be successful such as
having a small number of identifiable competitors,
similar costs among firms, one firm acting as a
price leader, common industry culture that accepts
collaboration, and high entry barriers

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6-25
Cooperative Strategies (3 of 3)
• Strategic Alliances
– a long-term cooperative arrangement between
two or more independent firms or business
units that engage in business activities for
mutual economic gain

Figure 6-2: Continuum of Strategic Alliances

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6-26
 Reasons to Form an Alliance

Obtain or learn new capabilities

Obtain access to specific markets

Reduce financial risk

Reduce political risk

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Types of Alliances (1 of 4)

• Mutual service consortium

– partnership of similar companies in similar
industries that pool their resources to gain a
benefit that is too expensive to develop alone,
such as access to advanced technology
– Partners want to work together but not share
their core competencies
– Very little interaction or communication with
partners
– IBM, Toshiba, and Sony to build super chips
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6-28
Types of Alliances (2 of 4)
• Joint venture
– Cooperative business activity, formed by two or
more separate organizations for strategic
purposes, that creates an independent business
entity and allocates ownership, operational
responsibilities, and financial risks and rewards to
each member, while preserving their separate
identity/autonomy
– P&G: Cling-film technology and 20 employees
And Clorox: Bags, Containers, and Wrap business
and created a JV to produce food-storage wraps
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Joint venture
• Disadvantages include loss of control, probability
of conflicts, lower profits etc
• Often meant to be temporary especially if formed
to rectify a competitive weakness until they can
achieve long-term dominance in the partnership
• JVs tend to be more successful when both
partners have equal ownership in the venture and
are mutually dependent on each other for results

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30
Types of Alliances (3 of 4)
• Licensing arrangement
– an agreement in which the licensing firm grants
rights to another firm in another country or
market to produce and/or sell a product
– YUM! Brands
– Danger is that the licensee might develop its
competency to the point that it becomes a
competitor
– Never license its distinctive competency

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Types of Alliances (4 of 4)

• Value-chain partnership
– a strong and close alliance in which one
company or unit forms a long-term
arrangement with a key supplier or distributor
for mutual advantage
– Facebook partnering with NBC News and New
York Times ti post stories on the Facebook site
– US Auto-Industry and Suppliers

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Table 6-1: Strategic Alliance Success
Factors

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