Business-strategy

BUSINESS
STRATEGY - I

PIYOOSH BAJORIA

Scope of Discussions / Objectives
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Introduction to Strategic Management

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Strategic Purpose – Vision / Mission etc.

•

Environmental Scanning – PESTEL / SWOT etc.

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Strategy Development - Multiple Approaches

•

Corporate Strategy – Various Facets

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Business Strategy - Generic / Hybrid etc.

•

Global Strategy – Products & Services Adaptation / Choice of Market Entry

Learning Outcomes

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Differentiate Strategic Management from Operational Mgt & identify the
strategy development Process including different levels of Strategy
Articulate the purpose of an organization’s existence & communicating the
same to all stakeholders
Analyze the key structural drivers in the business environment to identify
opportunities / threats and strategic gaps
Discuss contemporary approaches to strategy development processes / evaluation
of strategic choices ; assess the role of a corporate parent in a multi-business
organization and it’s value adding capabilities in managing a porfolio of
businesses
Contrast the different bases of achieving competitive advantage and outline the
means to achieve sustainability in a competitive environment for an SBU
Outline the ways to go global and achieve global competitiveness and identify
risks involved
Discuss the Key tasks for effective strategy implementation and assess how to
align them

Introduction
to
Strategic Management

Customer Retention Key Issues
A Recent Survey says –

“More than 90 %
•customers do not of unsatisfied
complain”
costs 5 times
get a
• “It customer thanmore to to keepnew
it does
a
current customer”

5

Customer Expectations /
Desire
6

What do Customers look for in
Any Product or Service?

• Right Price (affordability factor)
• Right Quality (reliability factor)
• Right Delivery (service factor)

Dawn of a New Era ……………..
Old Perceptions

•
•

Price : Seller’s Cost plus Profit
Quality : Standards determined

New Realities

•
•

Price : What customer is willing to pay
Quality : Standards determined by
the customer

by the Seller

•

Marketing : A distinct Functional

•

Marketing : Is Everything / The whole
Business is Marketing

Activity

•

Focus on What is good for the

•

customer

company

•

Customer’s freedom of choice

•

Customer doesn’t know a thing

Customer’s freedom of choice
unlimited

limited

•

Focus on What is good for the

•

Customer is the King

What is Strategy?
•
•
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Large-scale, future-oriented plan
Used to interact within competitive
environment to achieve company goals
Provides a framework for managerial
decisions
Reflects a company’s awareness of the
main elements of competition

Definition of Strategy
Strategy is the direction and scope of
an organisation over the long term,
which achieves advantage in a
changing environment through its
configuration of resources and
competences with the aim of fulfilling
stakeholder expectations.

Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Strategic decisions


Strategic Decisions are Likely to :
•
•
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Be complex in nature
Be made in situations of uncertainty
Affect operational decisions
Require an integrated approach (both
inside and outside an organisation)
• Involve considerable change


The Nature of Strategic Management
Strategic management:
The set of decisions and actions that
result in formulation and implementation
of plans designed to achieve a
company’s objectives

Strategy and Operations
Strategic
Management holistic
Organisation-wide,

Operational
M anagement

Conceptualisation of
issues
Creating new directions

Techniques and actions

Routinised

Developing new
resources
Ambiguous / uncertain

Managing existing
resources
Operating within existing
strategy
Operationally specific

Long term

Day to day issues

Managers’ Strategic Thinking
(Current Status & Future Prospects)


“ Where are we now?”
( market standing / competitive pressures / strengths & weaknesses)



“ Where do we want to go?”
(direction in which management believes the company should be headed)



“ How will we get there?”
(crafting & executing a strategy to get the company from where it is to
where it wants to go)

Contribution of Leading Management
Gurus
Igor Ansoff’s Strategic Success Paradigm


Based on extensive research study on Acquisitions by American
Companies (1948-1968)



Acquisitions based on a rational strategy fared better than those
based on opportunistic decisions
The Key Elements of the paradigm are –
• No universal success formula for all firms
• Environment turbulence determines the strategy required for the
success of a company
• The strategy aggressiveness should be aligned with the
environmental turbulence

Ansoff Matrix / Ansoff Grid
Existing Products

New Products

Existing Market

Market
Penetration

Product
Development

New Market

Market
Development

Diversification

Ansoff’s Matrix


Provides four different growth strategies

 Market Penetration – Companies seek to achieve
growth with existing products in their current market
segments .
 Market Development – Companies seek growth by
targeting it’s existing products to new market segments
 Product Development – Companies develop new
products targeted to it’s existing market segments.
 Diversification – Companies grow by diversifying into
new business by developing new products for new
markets.

Ansoff’s Matrix and Risk
The greater the degree of newness, the greater is the
degree of risk

• Market Penetration – little risk involved
• Market Development – moderate risk
• Product Development – moderate risk
• Diversification – high degree of risk as both product
and market are new & unknown

Ansoff’s Matrix – Use & Application
• The Matrix is a framework to explore directions for
strategic growth

• It is the most commonly used model for analysing
the possible strategic direction that a business
should take

• It not only identifies and analyses different growth
opportunities, it also encourages planners to
consider both expected returns and risks

• However, real world examples do not fit neatly into
the four cells of the Ansoff’s Matrix

•

The management capabilities should be aligned with the
environment to optimize the company’s success

•

Book “Corporate Strategy” (1965) – played a key role in the
development of strategic planning

•

Introduced concepts – “Gap Analysis” & “Synergy”

Mintzberg – Strategy as Craft


Added a new dimension to strategic management by bringing the
personal side of the manager



Book “The Nature of Managerial Work (1973)” – advocated a more



Saw strategic formulation as a delibrate and delicate process

Peter Drucker’s Contribution

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“Management is not just passive & adaptive behaviour”

Managing implies responsibility for attempting to shape the economic
environment for planning and carrying through changes in that economic
environment

Major contribution to business strategy was the introduction of MBO
concept (1954)

Michael Porter : Strategy and Competitive Advantage


Introduced generic strategies like focus, cost leadership, cost
differentiation etc.



Five Forces Theory –

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the threat of new entrants
the bargaining power of customers
the bargaining power of suppliers
the threat of substitute products
the rivalry between existing players

Books – “Competitive Strategy” (1980) and “ The Competitive
advantage of Nations” (1990)

1-23

Three Levels of Strategy

• Corporate level: board of directors,
CEO & administration [Highest]

• Business level: business and corporate
managers [Middle]

• Functional level: Product, geographic,
and functional area managers [Lowest]

LEVELS OF STRATEGY
• Corporate level
– Determine overall scope of the organisation
– Add value to the different business units
– Meet expectations of stakeholders

• Business level (SBU)
– How to compete successfully in particular
markets

• Operational
– How different parts of organisation deliver

Levels of Strategic Management

1-26

Strategy Makers

• Ideal strategic team includes decision
makers from all three levels
• Top managers must give final approval
• Strategic decisions coincide with
managers’ responsibilities

1-27

Strategy Makers: The CEO

• A firm’s CEO plays a dominant role
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•
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in strategic planning
The CEO’s principal duty is giving
long-term direction to the firm
The CEO bears ultimate
responsibility for the firm’s success
and strategic success
CEOs are typically strong-willed,
company-oriented individuals

1-28

Benefits of Strategic Management

• Managers at all levels interact in planning and
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•
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implementing strategy
Similar to participative decision making
Assessing strategy formulation requires
looking at nonfinancial evaluations as well as
financial ones
Promoting positive behavioral consequences
enables achievement of financial goals

1-29

Strategic Management Process

• Businesses vary in formulation and other
processes
• The basic components of the models used to
analyze strategic management are similar
• Strategic management is a process—a flow
of information through interrelated stages of
analysis towards the achievement of
organisational goals

Components of Strategic
Management Model
• Internal Analysis
• Company Mission
• Strategic Analysis &
• External Analysis
Choice
• Long-Term Objectives
• Generic & Grand
• Short-Term Objectives
Strategies
• Policies Empowering
• Functional Tactics
Action
• Restructuring,
Reengineering &
• Strategic Control &
Continuous
Improvement

Refocusing

1-30

Components of Strategic Management
Process
STRATEGY FORMULATION

Existing Business
Model

FEEDBACK

Mission , Vision,
Values & Goals
External Analysis:
Opportunities &
Threats

SWOT Strategic
Choice

Internal Analysis:
Strengths &
Weaknesses

Functional – Level
Strategies
Business - Level
Strategies
Global Strategies
Corporate – Level
Strategies
STRATEGY IMPLEMENTATION

Designing
Organization Structure

Governance and
Ethics
Designing
Organization Culture

Designing
Organization
Controls

Organization – Core Philosophies
Vision Statement

• An inspiring statement of what the organization
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intends to become and to achieve in the future
“What we want to be”
The statement incorporates our Beliefs
Should project a compelling story about the future
(E.g. Steve Jobs : “ An Apple on Every Desk”)
Is culture-specific :Simply put, the vision could state
what the founder ultimately envisions the business to
be – in terms of growth, values, employees,
contribution to society, etc

1-34

What is a Company Mission?
• Company Mission:
A broadly framed but enduring statement of a
firm’s intent. It is the unique purpose that sets a
company apart from others of its type and
identifies the scope of its operations in product,
market, and technology terms.

Organization – Core Philosophies…
Mission Statement

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Spells out how we see ourselves fulfilling our ideas
of “What we want to be” in broad terms

Describes the overall purpose of the organization
Is an organization’s vision translated into written
form- spelling in concrete terms the leader’s view of
the direction and purpose of the organization
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What do we do?
How do we do it?
For whom do we do it?

1-36

The Need for an Explicit Mission

• Why is this firm in business?
• What are our economic goals?
• What is our operating philosophy in terms of
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quality, company image, and self-concept?
What are our core competencies and competitive
advantages?
What customers do we and can we serve?
How do we view our responsibilities to
stockholders, employees, communities,
environment, social issues, and competitors?

1-37

Formulating a Mission

• The typical business begins with the beliefs,

desires, and aspirations of a single
entrepreneur
• These beliefs are usually the basis for the
company’s mission
• As the business grows or is forced to alter its
product, market, or technology, redefining the
company mission may be necessary

1-38

Mission Statement Components
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Customer-market
Product-service
Geographic Domain
Technology
Concern for Survival
Philosophy
Self-concept
Concern for Public Image

Inputs to the Development of
Company Mission

1-39

Organization – Core Philosophies…
Values

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Both the mission and vision statements reside in a “sea of
values”

Organizational beliefs – respect for people, concern for
individuals, approach to innovation, reward system,
encouragement for Team work etc

Describe what your Management Team really cares about –
“what it holds dear”
(e.g. “How do your managers respond to a trade-off between
product quality and profit? That’s really a question of values”.)

Organizational structure – Philosophical
Hierarchy
Vision

Mission
Corporate Objectives
Corporate Goals
Strategic Plans
Policies
Procedures

Core-Values
&
Conduct

1-42

Perceived Stakeholders

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Customers
Government
Stockholders
Employees
Society

Corporate Social Responsibility
Internal Aspects

External Aspects

Employee welfare

Environmental issues

Working conditions

Products

Job design

Markets and marketing

Intellectual property

Suppliers
Employment
Community activity
Human rights


1-44

Types of Social Responsibility

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Economic – the duty of managers, as agents of the
company owners, to maximize stockholder wealth

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Legal – the firm’s obligations to comply with the
laws that regulate business activities

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Ethical – the company’s notion of right and proper
business behavior

Corporate Governance
The governance framework

• whom the organisation serves

• how the purposes and priorities should be decided
• how an organisation should function
• how power is distributed among stakeholders

1-47

Firm’s External Environment

1-48

Layers of the business environment

Macroenvironment – PESTEL
(1)

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Political
• Government stability
• Taxation policy
• Foreign trade
regulations
• Social welfare
policies

Economic
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Business cycles
GNP trends
Interest rates
Money supply
Inflation
Unemployment
Disposable income


Sociocultural
• Population
demographics
• Income distribution
• Social mobility
• Lifestyle changes
• Attitudes to work and
leisure
• Consumerism
• Levels of education

Technological
• Government spending on
research
• Government and industry
focus on technological
effort
• New discoveries
/developments
• Speed of technology
transfer
• Rates of obsolescence


Environmental
• Environmental
protection laws
• Waste disposal
• Energy consumption

Legal
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Competition law
Employment law
Health and safety
Product safety


Porter’s Five Forces Model

• Risk of Entry by Potential Competitors
• Threat of Sustitutes
• Bargaining Power of Buyers
• Bargaining Power of Suppliers

The Five Forces Framework


Five Forces Analysis
The threat of entry ...
Dependent on barriers to entry such as:
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economies of scale
capital requirements of entry
access to supply or distribution channels
customer or supplier loyalty
experience
expected retaliation
legislation or government action
differentiation


Threat of substitutes
Reduction in demand for products as customers
switch to alternatives:
• Product for product substitution
– e.g. email for post

• substitution of need
– e.g. reliable and cheap appliances reduce need for
maintenance services

• generic substitution
– competition for household income, e.g. cars versus holidays
– doing without


Buyer power is likely to be high where
there is / are:
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a concentration of buyers
many small operators in the supplying industry
alternative sources of supply
low switching costs
components/materials that are a high percentage
of cost to the buyer leading to “shopping around”
• a threat of backward integration


Supplier power is likely to be high where
there is / are:
• a concentration of suppliers
• customers that are fragmented and bargaining
power low
• high switching costs
• powerful supplier brand
• possible integration forward by the supplier


Competitive Rivalry is likely to be high
when:
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competitors are in balance
there is slow market growth (product life cycle)
there are high fixed costs in an industry
there are high exit barriers
markets are undifferentiated

Competitive rivals are organisations with similar products and services aimed at
Competitive rivals are organisations with similar products and services aimed at
the same customer group = direct competitors
the same customer group = direct competitors


The SWOT Matrix


Strategic Gaps

• Opportunities in business environment not being
fully exploited by the competition:

• substitute industries
• other strategic groups or strategic spaces
• the chain of buyers
• complementary products and services
• new market segments
• markets developing over time

Strategic Capability
Strategic capability is the adequacy and suitability
Strategic capability is the adequacy and suitability
of the resources and competences of an
of the resources and competences of an
organisation for it to survive and prosper
organisation for it to survive and prosper
• Resources
– Tangible resources – physical assets of an organisation
– Intangible resources – non-physical assets of an
organisation

• Competences
– The activities and processes through which an
organisation deploys its resources effectively

Resources
• Physical resources
– Machines, buildings, production capacity

• Financial resources
– Capital, cash, debtors/creditors, suppliers of
money (shareholders, bankers etc)

• Human resources
– Number and mix of people, skills and knowledge

• Intellectual capital
– Patents, brands, business systems, customer
databases, “goodwill”

Competences

• How an organisation employs and deploys
its resources

• Efficiency and effectiveness of physical,
financial, human and intellectual resources

• How they are managed
• Cooperation between people
• Adaptability
• Innovation
• Customer and supplier relationships
• Learning

Resource-based View of Strategy
• Competitive advantage derives from the
distinctiveness of an organisation’s
capabilities

• Some businesses achieve extraordinary profits
compared with others in the same industry
• Their resources or competences permit
• production at lower cost
or
• generation of superior product or service at
standard cost


The Experience Curve


Implications of the Experience Curve

• Growth not optional
• Longer experience means lower costs
• Threat of competitors gaining cost advantages

• Real unit costs should decline each year
• First mover advantage can be important
• Accumulated experience


Implications of the Experience Curve
(contd)
But
• Sustained competitive advantage unlikely due to
unachievable market share

Therefore
• Cost reduction becomes a threshold competence
• Outsourcing may become appropriate


The Dynamics of Paradigm Change

Source: Adapted from p. Grinyeh and J.-C. Spender, Turnaround: Managerial recipes for strategic success, Associated
Business Press, 1979, p. 203.

Exhibit 11.5

Different Processes of Strategy
Development – in Multiple forms & in
different contexts

• There is no one right way in which strategies are

developed (Eg: Fast changing environment Vs slow
changing environment)

• Processes of strategy development differ over time
and in different contexts

Different Processes of Strategy
Development – in Multiple forms & in
different contexts (contd.)

• Perceptions of how strategies develop will be seen

differently by different people (Senior Executives /
Middle Management / Public Sector)

• It is likely that no one process describes strategy

development in any organisation – normally there are
multiple processes at work

Intended and Emergent Strategies
Strategy an expression of desired
• Intendeddeliberatelyisformulated or planned by strategic
direction
Managers

•

Implies that the Intended Strategy is also planned in terms of
resource allocation, control systems, organisational structure etc

Strategy comes
• Emergentand processes in anabout through day-to-day routines,
activities
organisation

•

The Routine activities, though not direct, have a significant
role in the development of strategy

Intended Processes of Strategy Development
Strategic Planning Systems

• A form of systematised, step-by-step, chronological of the
procedures involving different Functions / Departments
Organisation

assumptions
• Starting point is a set of guidelines//supply status about the
external environment (price levels
etc)

Strategic Planning Systems(contd.)
Corporate
• business plansPlan – resulting from the aggregation of

of financial / strategic targets are
• A numberbasis for performance monitoring drawn up to
provide a

Strategic Planning Systems – Advantages / Uses

•
•
•

It provides a structured means of analysis and thinking about
complex problems

Encourages managers to question and challenge the current wisdom

Encourages a long term view of organisational strategy (Eg: in the
case of FMCG sector – 5 to 7 years)

•

Provides a means of coordination (between various businesses)

•

It communicates intended strategy from the TOP

A Strategic Planning Cycle


Strategic Planning


Emergent Processes of Strategy Development
Logical Incrementalism
strategy by
• Is the development ofcommitmentsexperimentation and global
learning from partial
rather than through
formulations of total strategies
generalised rather
• Managers have a the organisation to thaninspecific view of
where they want
be future
be sensitive
• Effective Managers try toscanning and to environmental
signals through constant
test changes in strategy

Logical Incrementalism (contd.)

•
•
•
•

Commitment to strategic options may be tentative in the early stages of
strategy development

Experiments through subsystems (people involved in product development /
product positioning / diversification etc) – building on the experience gained
in that business

Top managers utilise a mix of formal / informal / social and political
processes – to draw an emerging pattern of strategies from these subsystems

Logical incrementalism is a conscious, purposeful, proactive, executive
practice – to improve available information and build people’s identification
with the strategy development

Logical Incrementalism



Source : Strategies for Change: Logical Incrementalism ( By James B.
Quinn)
A Management philosophy for achieving broad organisational goals



Enables making strategic decisions in small steps



Small steps attempt to resolve conflicting views of participants



Reduces Risk by capitalizing on knowledge that is gained during the
process



Logical incrementalism has the advantage of flexibility / but likely to be
time-consuming and inefficient



Externally Imposed Strategy

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Imposition of strategy by powerful external stakeholders

Mainly Government / Regulatory Bodies – exercising norms /
stipulations (Eg: Privatisation)

•

MNC’s being advised – for Joint Ventures / local alliances

•

Imposed strategy is “designed” – outside the organisation

•

Imposed strategy – to be implemented – might entail large capital
expenditure. (Eg: In Paper Mills: Capex on Production Machinery Vs

Strategy Development – Additional Issues
Managers Face
The challenge of Strategic Drift
Strategies – over period
progressively
• fail to address the astrategicof time – of the
position
company and performance deteriorates
There are strong forces at
that are
• push organisations towardswork pattern likely to
this

Strategy Development – Additional Issues
Managers Face
The challenge of Strategic Drift (contd.)
Incremental
• outcome of thestrategic change is a natural
influence of organisational
culture, collective experience, political processes
and prior decisions

•

Strategic drift results ultimately in a complacent
organisation

Challenges for Strategy Development
• Strategic drift
– Incremental strategic change influenced by
•
•
•
•

organisational culture
individual and collective experience
political processes
prior decisions

– Risk of getting out of line with faster changes in
environment
– Need to encourage challenge and change of
core assumptions
• Learning organisation

The Learning Organisation

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•
•
•

Traditionally, organisations are seen hierarchies and bureaucracies –
set up to achieve objectives and maintain control

Structures convey stability rather than change

A learning organisation – is the one that is capable of continual
regeneration from the variety of knowledge, experience and skills of
individuals within a culture – which encourages mutual questioning

A learning organisation – is the one where the collective knowledge of
all individuals in a company normally exceeds what the organisation
itself “knows” and is capable of doing

The Learning Organisation (contd.)

•

Formal organisational structures stifle organisational knowledge and
creativity

•

Organisations – need to look at themselves as “social networks”

•

Managers need to play a less directive and more facilitative role

Uncertain and Complex Conditions –
Strategy Development

•

A major problem of strategic management – coping with uncertainty

•

Environments – differ in their form and complexity

•
•

Simple / Static conditions – the environment is relatively straight
forward to understand and does not undergo significant change
(Eg. Mass production companies / Raw Material Suppliers)

All Companies end up following same strategy – results in high degree
of competition / low margins

Uncertain and Complex Conditions –
Strategy Development (contd.)

•
•

•

Companies resort to scenario planning – for making sense of the future

Emphasis should be to encourage individuals and groups to be forward
thinking and intuitive

In complex situations – an environment is difficult to comprehend

Strategy Development in Environmental
Contexts

Exhibit 11.8

Strategy Development Processes

Exhibit 11.1

Strategy Development Routes


Strategic Leadership

• Change Agent
• Individual or group that effects strategic change
in an organisation

• The process of influencing an organisation in its
efforts towards achieving an aim or goal

• Charismatic leaders
• Instrumental or transactional leaders

Strategic Leadership
Good leaders of the strategy-making process
have a number of key attributes:

• Vision, eloquence, and consistency
• Articulation of the business model
• Commitment
• Being well informed
• Willingness to delegate and empower
• The astute use of power
Emotional intelligence: self-awareness, self• regulation, motivation, empathy, social skills

Levels of Strategy-Making
in a Diversified Company
Corporate-Level
Managers

Corporate
Strategy
Two-Way Influence

Business-Level
Managers

Business Strategies
Two-Way Influence

Functional
Managers

Functional Strategies
Two-Way Influence

Operating
Managers

Operating Strategies
2-96

Levels of Strategy-Making in
a Single-Business Company
Business-Level
Managers

Business
Strategy
Two-Way Influence

Functional
Managers


Two-Way Influence

Operating
Managers


2-97

98

Corporate-Level Strategy
Corporate-Level Strategy: How do we sustain
competitive advantages in our current business? What
new businesses or industries do we wish to enter?

Corporate strategy is used to identify:
• Businesses or industries that the company
should compete in
• Value creation activities that the company
should perform in those businesses
• Methods to enter or leave businesses or
industries in order to maximize its long-run
profitability
Companies must adopt a long-term perspective
in formulating a corporate-level strategy.

Strategic Choices


Corporate Level Issues


Corporate Rationales

Portfolio
managers

Synergy
managers

Parental
developers

Logic

•Agent for financial
markets
•Limited SBU value
creation

•Synergy

•Competences used to
create value in SBUs

Strategic
requirements

•Acquire assets
•Divest assets
•Low strategic role
in SBU

•Share
resources/skills
•Identify bases for
sharing
•Identify benefits

•SBUs below potential
(‘parenting opportunity’)
•Relevant central
resources
•Suitable portfolio

Organisationa
l
requirements

•Autonomous SBUs
•Small, low cost
corporate staff
•SBU performancebased incentives

•Collaborative SBUs
•Corporate staff as
integrators
•Overcome resistance
to sharing
•Corporate-based
incentives

•Understand SBUs
(‘feel’)
•Effective linkages
•SBUs autonomous
•SBU performancebased incentives


Corporate Portfolio Management
• Portfolio balance
– Markets
– Organisation’s needs

• Attractiveness of business units
– Profitability
– Growth rates

• Portfolio ‘fit’
– Synergies between business units
– Synergies with corporate parent

The Growth Share (or BCG) Matrix


The BCG Matrix
the
• The BCG Matrix method is based onwhatproduct life cyclebe
theory that can be used to determine
priorities should
given in the product portfolio of a business unit

longterm
a company should
• To ensureof productsvalue creation, growth products inhave aof
portfolio
– both high –
need
cash inputs and low-growth products that generate a lot of cash

in the BCG
• Placing Products company : Matrix results in four categories in
the portfolio of a

•
•
•
•

STARS – High Growth / High Market Share
CASH COWS – Low growth / High Market Share
DOGS – Low Growth / Low Market Share
QUESTION MARKS – High Growth / Low Market Share

frequently
• BCG Matrix Method can help understand aapproach tomade
strategy mistake – having a one-size-fits-all
strategy : such as a generic growth target (say 10% p.a) or a
generic return on capital (say 8% p.a) for the entire
corporation

GE / McKinsey Matrix

•

•

•

The GE / McKinsey Matrix is a model to perform a business portfolio
analysis on the strategic Business Units of a corporation

A Business Portfolio is the collection of Strategic Business Units that
make up a corporation

The Aim of a portfolio Analysis is:

•
•

Analyse it’s current business portfolio and decide which SBU’s should receive
more or less investments
Develop growth strategies for adding new products and businesses to the
portfolio

•

•

BCG Matrix is the best-known portfolio planning framework - the GE /
McKinsey Matrix is a later and more advanced form of the BCG Matrix

The GE / McKinsey Matrix is more sophisticated than the BCG Matrix in three
aspects:
• Market / Industry attractiveness replaces market growth as the
dimension of industry attractiveness

•

Competitive strength replaces market share as the dimension by which
the competitive position of each SBU is assessed

•

GE / McKinsey Matrix works with a 3x3 Grid while the BCG Matrix
has only 2x2 Grid (allows for more sophistication)

Strategic Business Units are portrayed as a circle
plotted in the GE / Mckinsey Matrix, whereby:
•

The size of the circles represent the market size

•

The size of the pies represent the market share of the SBU’s

•

Arrows represent the direction and the movement of the SBU’s in the
future

Generic Strategies
Low-cost
leadership

Differentiation

Focus

Grand Strategies
 Grand strategies, often called master or

business strategies, provide basic direction for
strategic actions
 Indicate the time period over which long-range
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

Types of Grand Strategies
Concentrated Growth
Concentrated Growth

Conglomerate Diversification
Conglomerate Diversification

Market Development
Market Development

Turnaround
Turnaround

Product Development
Product Development

Divestiture
Divestiture

Innovation
Innovation

Liquidation
Liquidation

Horizontal Integration

Bankruptcy
Bankruptcy

Vertical Integration

Joint Ventures
Joint Ventures

Concentric Diversification
Concentric Diversification

Strategic Alliances
Strategic Alliances
Consortia
Consortia

Market Development
 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

Product Development
 Product 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

Innovation Strategy

Involves creating a new product life
cycle, thereby making similar existing
products obsolete

Repositioning &Redefining a
Company’s Business Model

117

Corporate-level strategies are primarily directed towards
improving a company’s competitive advantage and
profitability in its present business or product line:

•


•


•

Strategic Outsourcing

The process of acquiring or merging with industry competitors
Expanding operations backward into an industry that produces
inputs for the company or forward into an industry that
distributes the company’s products
Letting some value creation activities within a business be
performed by an independent entity

Horizontal Integration:
Single-Industry Strategy

118

Horizontal Integration: the process of acquiring or
merging with industry competitors in an effort to achieve
the competitive advantages that come with large scale
and scope.

Staying inside a single industry allows a
company to:


Focus resources
Resources
devoted to competing successfully in one
area



‘Stick to the knitting’

Benefits of Horizontal
Integration
Profits and profitability increase when horizontal
integration:
1. Lowers the cost structure

• Creates increasing economies of scale
• Reduces the duplication of resources between two companies

2. Increases product differentiation

• Product bundling – broader range at single combined price
• Total solution – saving customers time and money
• Cross-selling – leveraging established customer relationships

3. Replicates the business model

• In new market segments within same industry

4. Reduces industry rivalry

• Eliminate excess capacity in an industry
• Easier to implement tacit price coordination among rivals

5. Increases bargaining power

• Increased market power over suppliers and buyers
• Gain greater control

119

Problems with

120

A wealth of data suggests that the majority of mergers
and acquisitions DO NOT create value and that many
may actually DESTROY value.
 Implementing a horizontal integration is not an easy
task
•
•
•
•

Problems associated with merging very different company cultures
High management turnover in the acquired company when the acquisition
is a hostile one
Tendency of managers to overestimate the benefits to be had in the
merger
Tendency of managers to underestimate the problems involved in
merging their operations

 The merger may be blocked if merger is perceived to:
•
•
•

Create a dominant competitor
Create too much industry consolidation
Have the potential for future abuse of market power

Vertical Integration:
Entering New Industries

•

Backward Vertical Integration

•

Forward Vertical Integration

•

Full Integration

•

•
•

Company expands its operations into an industry that produces
inputs to the company’s products
Company expands into an industry that uses, distributes, or
sells the company’s products

• Company produces all of a particular input from its own
operations
• Disposes of all of its completed products through its own outlets
Taper Integration
• In addition to company-owned suppliers, the company will also
use other suppliers for inputs or independent outlets in addition
to company-owned outlets

121

Vertical and Horizontal
Integrations
Textile producer

Textile producer

Shirt manufacturer

Shirt manufacturer

Clothing store

Clothing store

Acquisitions or mergers of suppliers or customer
businesses are vertical integrations
Acquisitions or mergers of competing
businesses are horizontal integrations

123

Full and Taper Integration

Increasing Profitability
Through Vertical Integration

124

A company pursues vertical integration to strengthen
the business model of its core business or to improve its
competitive position.

1. Facilitates investments in efficiency-enhancing
specialized assets
•

Lowered cost structure or better differentiation.

2. Enhances or protects product quality
•

To strengthen its differentiation advantage through either forward or
backward integration

3. Results in improved scheduling
•
•

Makes it easier and more cost-effective to plan, coordinate, and
schedule the transfer of product within the value-added chain
Enables a company to respond better to changes in demand

125

Problems with
 Increased Cost Structure
•
•

Company-owned suppliers develop a higher cost structure than those of
the independent suppliers
Bureaucratic costs of solving transaction difficulties

 Fast-changing Technology
•
•

Vertical integration may lock into old or inefficient technology
Prevent company from changing to a new technology that could strengthen
the business model

 Unpredictable Demand
 Creates risk in vertical integration investments
Vertical integration can weaken a business model when:

• Company-owned suppliers lack incentive to reduce costs
• Changing demand or technology reduces ability to be competitive

Strategic Outsourcing of
Primary Value Creation

Functions

126

Benefits of Outsourcing

•
•
•

•
•
•
•

127

Lower cost structure
The specialist company cost is less than what it would cost to
perform the activity internally

Enhanced differentiation
The quality of the activity performed by the specialist is greater
than if the activity were performed by the company

Focus on the core business
Distractions are removed
The company can focus attention and resources on activities
important for value creation and competitive advantage

Strategic outsourcing may be detrimental when there is:

• Holdup – company becomes too dependent on specialist provider
• Loss of information – company loses important customer contact or
competitive information

of Diversification
Diversification Strategy is the company’s decision to
enter one or more new industries (that are distinct from
its established operations) to take advantage of its
existing distinctive competencies and business model.

Types of diversification:

•
•

Related diversification
Unrelated diversification

•
•
•

Internal new ventures
Acquisitions
Joint ventures

Methods to implement a diversification
strategy:

128

Increasing Profitability
Through Diversification

129

A diversified company can create value by:

•
•
•
•
•
•

Transferring competencies among existing businesses
Leveraging competencies to create new businesses
Sharing resources to realize economies of scope
Using product bundling
Managing rivalry by using diversification as a means in one or
more industries

Exploiting general organizational competencies that enhance
performance within all business units

Managers often consider diversification when their
company is generating free cash flow – with resources in
excess of those needed to maintain competitive advantage.

130

Two Types of Diversification
 Related diversification
Entry into a new business activity in a different industry that:
•
•

Is related to a company’s existing business activity or activities and
Has commonalities between one or more components of each activity’s
value chain
Based on transferring and leveraging competencies, sharing resources,
and bundling products

 Unrelated diversification
Entry into industries that have no obvious connection to any of a company’s
value chain activities in its present industry or industries
Based on using only general organizational competencies to increase
profitability of each business unit

Disadvantages and
Limits of Diversification
Conditions that can make diversification
disadvantageous:

Changing Industry- and Firm-Specific Conditions

•
•

Future success of this strategy is hard to predict.
Over time, changing situations may require businesses to be
divested.

Diversification for the Wrong Reasons

•
•

Must have clear vision as to how value will be created.
Extensive diversification tends to reduce rather than improve
profitability.

Bureaucratic Costs of Diversification

•
•

Costs are a function of the number of business units in a
company’s portfolio, and the
Extent to which coordination is required to gain the benefits.

131

132

Choosing a Strategy
The choice of strategy depends on a comparison of the
benefits of each strategy versus the cost of pursuing
it:

Related diversification

• When company’s competencies can be applied across
a greater number of industries and
• Company has superior capabilities to keep bureaucratic
costs under control

Unrelated diversification

have
• When functional competenciesand few useful
applications across industries
• Company has good organizational design skills to build
distinctive competencies

Firms may pursue both strategies
simultaneously

Sony’s Web of

133

Restructuring

134

Restructuring is the process of divesting businesses
and exiting industries to focus on core distinctive
competencies in order to increase company profitability.

Why restructure?

• Diversification discount: investors see highly
diversified companies as less attractive

• Complexity and lack of transparency in financial statements
• Too much diversification
• Diversification for the wrong reasons

• Response to failed acquisitions
• Innovations in strategic management have

diminished the advantages of vertical integration or
diversification

Divestiture and
Liquidation Strategies

135

• Divestiture strategy

• Involves selling a firm or a major component of a firm
• Reasons for divestiture
• Partial mismatches between acquired firm and parent firm
• Corporate financial needs
• Government antitrust action

• Liquidation strategy

• Involves selling parts of a firm, usually for its tangible asset value
and not as a going concern

Levels of Strategy-Making in
a Single-Business Company
Business-Level
Managers

Business
Strategy
Two-Way Influence

Functional
Managers


Two-Way Influence

Operating
Managers


2-137

138

Generic Strategies
Low-cost
leadership

Differentiation

Focus

139

Evaluating and Choosing Business
Strategies: Seeking Sustained
Competitive Advantage

•

The two most prominent sources of competitive
advantage can be found in the business’s cost
structure and its ability to differentiate the
business from competitors

•

Businesses that have one or more resources /
capabilities that allow them to operate at a lower
cost will consistently outperform their
competitosrs who do not have those capabilities

140

Evaluating Cost Leadership
Opportunities


Business success built on cost leadership
requires the business to be able to
provide its product or service at a cost
below what its competitors can achieve

Business Level Strategies


Bases of Competitive Advantage

• Competitive strategy
• The bases for achieving competitive advantage
• The bases for providing best value

• Porter’s generic strategies
• Cost leadership
• Differentiation
• Focus

• Bowman and D’Aveni’s market facing strategies
• Provide customer needs better or more effectively than
competitors
• The strategy clock

The Strategy Clock

Note: The strategy clock is adapted from the work of Cliff Bowman (see D. Faulkner and C. Bowman,

The Essence of Competitive Strategy, Prentice Hall, 1995.) However, Bowman uses the dimenstion
‘Perceived Use Value’.

The Strategy Clock


“No Frills” Strategy
Low price
Low price
Low perceived product/service benefits
Low perceived product/service benefits
Focus on price-sensitive market segment
Focus on price-sensitive market segment

• Commodity-like products or services
• Price-sensitive customers
• High buyer power and / or low switching
costs
• Small number of providers with similar
market shares
• Avoiding the major competitors

Low Price Strategy
Lower price than competitors
Lower price than competitors
Maintain similar product/service benefits
Maintain similar product/service benefits

• Pitfalls of low price strategy

• Margin reduction (competitor reaction)
• Inability to reinvest leading to loss of perceived
benefit of product

• Need a low cost base

• Low cost itself not a basis for advantage
• Low cost achieved in ways that competitors

cannot match to give sustainable advantage

Differentiation Strategies
Offering benefits different from competitors
Offering benefits different from competitors
Widely valued by buyers
Widely valued by buyers
Better products/services at same or higher price
Better products/services at same or higher price

• Success depends on
• Identification of strategic customers and knowing
what they value
• Knowing the competitors
• Narrow competitor base – focused differentiation
• Wide competitor base – address bases of
differentiation valued by customers

Hybrid Strategy
Simultaneously achieving differentiation and
Simultaneously achieving differentiation and
a price lower than competitors
a price lower than competitors

• Achieve greater volumes
• Clarity about activities on which
differentiation can be built (core
competences)
• Reduce costs on other activities

• Entry strategy in market with established
competitors

Focused Differentiation
High perceived product/service benefits to
High perceived product/service benefits to
selected market segment (niche)
selected market segment (niche)
Premium products, heavily branded
Premium products, heavily branded

• Choice to be made between focused differentiation
and broad differentiation if growth required
• Difficult when the focus strategy is only part of an
organisation’s overall strategy
• Possible conflict with stakeholder expectations
• New ventures start off focused, but need to grow
• Market situation may change, reducing differences
between segments

Sustaining Competitive Advantage


Competitive Strategies in Hypercompetitive
Conditions


Competitive Strategies in
Hypercompetitive Conditions

• Competitive advantage is temporary
• Rapid imitation
• Not sustainable

• Competitive advantage relates to
• Organisation’s ability to change
• Speed
• Flexibility
• Innovation
• Disruption of market


The Value Chain


The Concept of a
Company Value Chain
 A company’s business consists of all activities undertaken in

designing, producing, marketing, delivering, and supporting
its product or service
 A company’s value chain consists of a linked set of value-

creating activities performed internally
 The value chain contains two types of activities
 Primary

activities – where most of
the value for customers is created

 Support

activities – facilitate
performance of the primary activities

4-154

Representative
Company Value Chain

4-155

Representative Value Chain for
an Entire Organisation

4-156

Example: Value Chain Activities
Pulp & Paper Industry
Timber farming
Logging
Pulp mills
Papermaking
Distribution
4-157

Example: Value Chain Activities
Home Appliance Industry
Parts and components manufacture
Assembly
Wholesale distribution
Retail sales
4-158



A method of visually mapping a
product's production path (materials and
information) from "door to door".



Value stream is all the actions (both value
added and non-value added) currently
required to bring a product through the
main flows essential to every product:

Value Stream Mapping


helps to visualize more than just the
single-process level



helps see more than waste - it helps see
the sources of waste in your value stream



provides a common language for talking
about manufacturing processes



ties together lean concepts and techniques



forms the basis of an implementation plan



shows the linkage between the information
flow and the material flow



is much more useful than quantitative tools
and layout diagrams that produce a tally of
non-value added steps, lead time, distance
traveled, the amount of inventory, and so on.




To diagnose strategic capability
To understand how value is created or lost
in terms of the activities undertaken
The value chain describes the activities within
The value chain describes the activities within
and around an organisation which together
and around an organisation which together
create a product or service
create a product or service









Identifies clusters of activities providing
particular benefit to customers
Highlights activities which are less efficient
and which might be de-emphasised or
outsourced
Requires managers to think about the role
of such activities
Can be used to identify the cost and value
of activities

Characteristics of
Value Chain Analysis
 Combined costs of all activities in a company’s value chain

define the company’s internal cost structure
 Compares a firm’s costs activity

by activity against costs of key rivals
 From raw
 Price

materials purchase to

paid by ultimate customer

 Pinpoints which internal activities are a

source of cost advantage or disadvantage
4-164

An Activity Map


Globalization

167



Globalization refers to the strategy of
approaching worldwide markets with
standardized products



Awareness of the strategic opportunities faced
by global corporations and of the threats posed
to them is important to planners in almost every
domestic industry



Understanding the nuances
of competing in global markets
is rapidly becoming a required
competence of strategic managers

What Is the Motivation
for Competing Internationally?
Gain access to
new customers

Obtain access to
valuable natural
resources

Help
achieve
lower costs
Capitalize
on core
competencies
7-168

Spread
business risk
across wider
market base

Reasons for Going Global












PROACTIVE
Additional resources
Lowered costs
Incentives
New, expanded markets
Exploitation of firmspecific advantages
Taxes
Economies of scale
Synergy
Power and prestige
Protect home market








169

REACTIVE
Trade barriers
International customers
International
competition
Regulations
Chance

At the Start of Globalization






External and internal assessments are
conducted before a firm enters global
markets
External assessment involves careful
examination of critical features of the
global environment
Internal assessment involves
identification of the basic strengths of a
firm’s operations

170

How Markets Differ from
Country to Country
 Consumer tastes and preferences
 Consumer buying habits
 Market size and growth potential
 Distribution channels
 Driving forces
 Competitive pressures
One of the biggest concerns of companies competing in foreign
markets is whether to customize their product offerings in each
different country market to match the tastes and preferences of local buyers or
whether to offer a mostly standardized product worldwide.
7-171

172

Factors That Drive Global
Companies







Global Management Team
Global Strategy
Global Operations and Products
Global Technology and R&D
Global Financing
Global Marketing

Basic Entry Decisions
•
•

•
•
•
•

173

Which overseas markets to enter (WHERE)
Assessment of long-run profit potential
Balancing the benefits, costs, and risks associated with
doing business in a country

Timing of entry (WHEN)
First-mover advantages: preempt and build share
First-mover disadvantages: pioneering costs

Scale of Entry (HOW)
Entering on a large scale is a major strategic
commitment
Benefits and drawbacks of small-scale entry

174

The Choice of Entry Mode
1.

Exporting
Most manufacturing companies begin their global expansion as
exporters and later switch to one of the other modes.

2.

Licensing
A foreign licensee buys the rights to produce a company’s product
for a negotiated fee; licensee puts up most of the overseas capital.

3.

Franchising
Franchising is a specialized form of licensing. The franchiser not
only sells intangible property, but also insists that franchisee agrees
to follow strict rules as to how it does business.

4.

Joint Ventures
Typically a 50/50 venture – a favored mode for entering a new market

5.

Wholly-Owned Subsidiaries
Parent company owns 100% of subsidiary’s stock – setup or acquire

Escalating Commitments to
International Markets

175

Competitive Strategies for
Firms
in Foreign Markets
1.
2.
3.
4.
5.
6.
7.

Niche Market Exporting
Licensing and Contract Manufacturing
Franchising
Joint Ventures
Foreign Branching
Equity Investment
Wholly Owned Subsidiary

176

Advantages and Disadvantages
of Different Entry Modes

177

178

Four Basic Strategies








Companies typically
choose among the
four main global
strategic postures
when competing
internationally.
The appropriateness
of each strategy
varies with the extent
of pressures for cost
reduction versus
local responsiveness.

179

Choosing a Global Strategy
 Standard Globalization Strategy

• Reaping the cost reductions that come from economies of scale
and location economies
• Business model based on pursuing a low-cost strategy on a
global scale
Makes the most sense when there are strong pressures for cost
reduction and the demand for local responsiveness is minimal

 Localization Strategy

company’s goods
• Customizing thematch to tastes andor services sointhat thy
provide a good
preferences different
national markets
Most appropriate when there are substantial differences across
nations with regard to consumer tastes and preferences and
where cost pressures are not too intense

180

Choosing a Global Strategy
 Transnational Strategy

• Difficult to pursue due to its conflicting demands
• Business model that simultaneously:

Achieves low costs » Differentiates across markets
Fosters a flow of skills between subsidiaries

Building an organization capable of supporting a transnational
strategy is a complex and challenging task.

 International Strategy

that sell products that serve
• Multinational companiesdifferentiate) and do not face universal
needs (minimal need to
significant
competitors (low cost pressure).
In most international companies the head office retains tight
control over marketing and product strategy.

Strategy Formulation vs.
Implementation


Strategy Formulation = stage of strategic
management that involves planning and decision
making that lead to the establishment of the
organization’s goals and of a specific strategic plan



Strategy Implementation = stage of strategic
management that involves the use of managerial
and organizational tools to direct resources toward
achieving strategic outcomes

Copyright © 2005 by South-Western, a division of Thomson Learning. All rights reserved.

Strategy Implementation

• Designing organizational Structure
• Designing Control systems

Structure

 Market and output controls
 Bureaucratic controls
 Control through organizational culture
 Rewards and incentives

Culture

• Matching Strategy, Structure,
Culture and Controls

 Congruence (fit) among strategy,

structure, culture and controls

Controls

Implementing Strategy Tools

 Leadership
 Structural

design
 Information and control systems
 Human resources


Tools for Putting
Strategy into Action

Environment
Organization

Strategy

Leadership
 Persuasion

Motivation

Culture/values
Structural Design
Human Resources
 Organization Chart

 Teams
Recruitment/selection


Centralization
Transfers/promotions
Decentralization,
 Training
 Facilities, task design
 Layoffs/recalls
Information and Control Systems
 Pay, reward system
 Budget allocations



Information systems

Performance

Why Structure
Follows Strategy
 Changes in strategy typically require a new or modified

organization structure
 A new

strategy often involves different skills,
different key activities, and different staffing
and organizational requirements

 Hence,

a new strategy signals a need to
reassess and often modify the organization
structure

 How work is structured is a means to an end –

not an end in itself!
11-

McGraw-Hill/Irwin

© 2005 The McGraw-Hill Companies, Inc. All rights reserved.

Corporate Culture


Features of the Corporate
Culture at Wal-Mart
 Dedication to customer satisfaction
 Zealous pursuit of low costs
 Frugal operating practices
 Strong work ethic
 Ritualistic Saturday morning meetings
 Executive commitment to
 Visit

stores

 Listen
 Solicit
13-

to customers
employees’ suggestions

Features of the Corporate
Culture at Microsoft
 Long work hours of programmers
 Emotional peaks and valleys in

encountering and overcoming coding problems
 Exhilaration of completing a complex program on schedule
 Satisfaction of working on cutting-edge projects
 Rewards of being part of a team responsible

for a popular new software program
 Tradition of competing aggressively

13-

Steps in Designing
an Effective Control
System

13-

Levels of Organizational
Control
Controls at each level should provide
the basis on which managers at lower
levels design their controls systems.

13-

Types of
Strategic Control Systems


Personal Control
Managers question and probe to better understand

subordinates.
The result is more possibilities for learning to occur and
competencies to develop.


Output Control
Set appropriate performance goals for each division,
department, and employee, then measure actual
performance relative to these goals.



Behavior Control
Establish standardization, predictability, and accuracy by

creating a system of rules to direct actions and/or behaviors
of divisions, functions, or individuals.

13-

McKinsey 7-S framework
model
The 7-S framework of McKinsey is a
Value Based Management (VBM)
model that describes how one can
holistically and effectively organize a
company. Together these factors
determine the way in which a
corporation operates.

Shared Value
The interconnecting center of
McKinsey's model is: Shared Values.
What does the organization stands for
and what it believes in - Central
beliefs and attitudes.

Strategy
Plans for the allocation of a
firm’s scarce resources, over
time, to reach identified
goals, Environment,
competition, customers

Structure
The way the organization's units
relate to each other: centralized,
functional divisions (top-down);
decentralized (the trend in larger
organizations); matrix, network,
holding, etc.

System
The procedures, processes and
routines that characterize how
important work is to be done:
financial systems; hiring, promotion
and performance appraisal systems;
information systems

Staff
Numbers and types of personnel
within the organization

Style
Cultural behaviour of the organization
and how key managers behave in
achieving the organization’s goals Management Styles.

Skills
Distinctive capabilities of personnel
or of the organization as a whole Core Competences.

Managing Strategic Change
The only constant is change.
Success requires adapting strategy and
structure to a changing world.
The feedback loop in
Corporate
strategic planning.
Operational

Business

Functional

Key Steps to Implement Strategic
Change
• Sense the need for strategic change
• Build awareness of the need to change and
learn
• Foster debate
• Create consensus
• Assign responsibility
• Allocate resources
• Act quickly

Business-strategy

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