MGT 2400 Strategic Management

Strategy Formulation : Situation Analysis and Business Strategy

Dr. B.Nishantha Department of Management & Organization Studies University of Colombo

Strategy
The plan of action that prescribe resource allocation and other activities for dealing with the environment , achieving a competitive advantage , and attaining o r g a n i z a t i o n a l g o a l s . - Richard L.Daft-

Strategy Formulation
Strategic planning or long range planning. The process of finding a strategic fit between external opportunities and internal strengths while working around external threats and internal weaknesses. The firm's present strategies, objectives, and mission coupled with the external and internal audit information, provide a basis for generating and evaluating feasible alternative strategies. Strategy formulation begins with situation analysis (SWOT analysis)

SWOT Analysis
SWOT analysis use to identify ; a) Firms distinctive competencies and superior ways in which they can be used. b) Opportunities that the firm is not currently able to take advantage of due to a lack of appropriate resources.

The SWOT analysis

The essence of strategy is opportunity divided by capacity An opportunity by itself has no real value unless a company has the capacity (resources) to take advantage of that opportunity Weaknesses in other resource areas can prevent a strategy from being successful.

SA=O/(S-W)

The SWOT matrix

STRENGTHS WEAKNESSES

OPPORTUNITIES

THREATS

Strengths: 1. 2. 3. 4. 5. 6. 7.

Weaknesses: Over dependent on borrowings Insufficient cash resources Board of Directors is too narrow Lack of awareness amongst prospective customers Need to relocate to larger premises Absence of strong sales/marketing expertise Overdependence on few key staff Emerging new technologies may move market in new directions Opportunities:

1. 2. 3. 4.
5. 6. 7.

R and D almost complete Basis for strong management team Key first major customer acquired Initial product can evolve into range of offerings Located near a major centre of excellence Very focused management/staff Well-rounded and managed business
Threats:

1. 2. 3. 4. 5. 6.

Major player may enter targeted market segment New technology may make products obsolescent Economic slowdown could reduce demand $ may move against Rs. Market may become price sensitive Market segment's growth could attract major competition

1. 2. 3. 4.

Market segment is poised for rapid growth Export markets offer great potential Distribution channels seeking new products Scope to diversify into related market segments

Criticism of the SWOT analysis

It generates lengthy lists It uses no weights to reflect priorities It uses ambiguous words and phrases The same factor can be placed in 2 categories There is no obligation to verify opinions with data or analysis It requires only a single level of analyses There is no logical link to strategy implementation

SFAS matrix
Strategic Factor Analysis Summary (SFAS) matrix includes only the most important factors gathered from environmental scanning thus provides info essential for strategy formulation.

Internal Factor Analysis Summary (IFAS) Maytag as Example

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External Factor Analysis Summary EFAS Maytag as Example

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Strategic Factor Analysis Summary (SFAS) Matrix

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The TOWS matrix

SWOT can be also used to generate a number of possible alternative strategies. The TOWS Matrix illustrates how the external opportunities and threats facing a corporation can be matched with the companys internal strengths and weaknesses to result in four sets of possible strategic alternatives.

SO Strategies
Strengths Weaknesses Opportunities Threats SWOT

SO Strategies

Use a firms internal strengths to take advantage of external opportunities

WO Strategies
Strengths Weaknesses Opportunities Threats SWOT

WO Strategies

Improving internal weaknesses by taking advantage of external opportunities

ST Strategies
Strengths Weaknesses Opportunities Threats SWOT

ST Strategies

Use a firms strengths to avoid or reduce the impact of external threats

WT Strategies
Strengths Weaknesses Opportunities Threats SWOT
Defensive tactics aimed at reducing internal weaknesses & avoiding environmental threats

WT Strategies

Strategy Formulation Using the TOWS Matrix

The TOWS Matrix help you generate strategic alternatives by Matching S-W-O-T

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Strengths S
TOWS Matrix for Maytag Corporation
Quality Maytag Culture Experienced Top Manag-t Vertical Integration Employee Relation Hoovers international orientation

Weaknesses W
Process-oriented R&D Distribution channels Financial position Global positioning Manufacturing facilities

Opportunities O
Economic integration of European Community Demographic favor quality Economic devel-t of Asia Opening of Eastern Europe Trend toward super stores

SO Strategies
Use worldwide Hoover distribution channels to sell both Hoover & Maytag major products. Find joint venture partners in Eastern Europe and Asia

WO Strategies
Expand Hoovers presence in continental Europe by improving quality and reducing Man. And distri. Costs.

Treats T
Increasing government regulation Strong U.S. competition Whirlpool & Electrolux positioned for global economy New products advances Japanese appliance companies

ST Strategies
Acquire Raytheons appliance business to increase US market share. Merge with Japanese major ho. Appliance company

WT Strategies
sell off Dixie- Narco Division to reduce debt. Emphasize cost reduction to reduce break-even point.

Levels of Strategy
CORPORATE STRATEGY CORPORATE HEAD OFFICE

BUSINESS STRATEGY

Division A

Division B

R&D
FUNCTIONAL STRATEGIES

R&D Personnel Finance Production Marketing/Sales

Personnel Finance Production Marketing/Sales

Business Strategy
is concerned with how the firm competes within a particular industry or market. to win a business unit must adopt a strategy that establishes a competitive advantage over its rivals. It is a plan of action to use the firms resources/capabilities and distinctive competencies to gain . . . competitive advantage. Strategic decisions include amount of advertising, direction and extend of R & D, product changes, new product development, equipment and facilities, expansion or contraction of product lines.
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Porters Competitive Strategies

Generic Competitive Strategies -Lower Cost strategy
Ability of a company or business unit to design , produce, and market a comparable product at greater efficiencies than competitors. The objective is for a company to have a low-cost structure as compared with its competitors.

Differentiation strategy
Ability of company to provide unique and superior value to the buyer in terms of product quality, special features, or after sales service.

Focused Strategy

Rather than serving the entire market with its products or services an enterprise may emphasize a specific segment of the market. A low cost strategy, differentiation, or both may be accomplish this.
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Porters Competitive Strategies

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Cost leadership, How ?

For broad mass market Construction of efficient scale facilities Cost reduction from experience Tight control on cost and overhead Cost minimizing in areas like R&D, sales force, advertising, .ect. Maintains standard operating procedurs

The cost leader is able to charge lower price for its products than its competitors and still make satisfactory profit

Differentiation
For broad mass market Creation of a product or service that is perceived throughout its industry as unique and charging a premium for its product to earn above average returns. This specialty can be grained through design or brand image, technology, features, a dealer network , or customer service. Increased cost pass on to the buyers. Brand loyalty lowers customers sensitivity to price.

Focus
Application of differentiation or low-cost strategy for narrow target market. 1. Cost Focus- become the low cost producer in particular segment. Suits for start ups to compete with MNCs 2. Differentiation focus perceived added value to particular segment, warranting price premium. Serve special needs of a narrow strategic target more effectively than competitors.

Risks of Generic Strategies

Risks of Cost Leadership Risks of Cost Leadership Cost leadership is not Cost leadership is not sustained: sustained: imitate. Competitors Competitors imitate. Technology changes. Technologyfor cost Other bases changes. Other bases for cost leadership erode. leadership erode. Proximity in differentiation is Proximity in differentiation is lost. lost. Cost focusers achieve even Cost focusers achieve lower cost in segments. even lower cost in segments.

Risks of Differentiation Risks of Differentiation Differentiation is not Differentiation is not sustained: sustained: imitate. Competitors Competitors imitate. Bases for differentiation Bases less important to become for differentiation become buyers. less important to buyers. Cost proximity is lost. Cost proximity is lost. Differentiation focusers Differentiation focusers achieve even greater achieve even segments. differentiation ingreater differentiation in segments.

Risks of Focus Risks of Focus The focus strategy is The focus strategy is imitated: imitated: The target segment becomes The target segment becomes structurally unattractive: structurally unattractive: Structure erodes. Demand disappears. Demand disappears. Broadly targeted competitors Broadly targeted competitors overwhelm the segment: overwhelm the segment: The segments The segments differences from other differences from other segments narrow. segments narrow. The advantages of a The advantages of a broad line increase. broad line increase. New focusers sub-segment New focusers subsegment the industry. the industry.

Issues in Competitive Strategies

According to Porter, to be successful , a company must achieve one of the generic competitive strategies. Some researchers suggest that combination of the two competitive strategies may also successful. eg : Toyota, Honda One company in industry has only possibility pursue mass market cost-leadership strategy One company has possibility to pursue number of differentiation and focus strategies (Based on desirable features and number of market niches )

The strategy clock: Bowmans competitive strategy options

High Hybrid
3

Differentiation Focused 4 differentiation

5

PERCEIVED ADDED VALUE

Low 2 price

7 8

Low price/ low added value Low Low

Strategies destined for ultimate failure

High PRICE Source: Based on the work of Cliff Bowman. See C.Bowman and D.Faulkner. Competitive and Corporate Strategy, Irwin, 1996.

The strategy clock

1 2 Low price/low added value Low price Likely to be segment specific Risk of price war and low margins/need to be cost leader Low cost base and reinvestment in low price and differentiation

Hybrid

Differentiation (a) Without price premium (b) With price premium

Perceived added value by user, yielding market share benefits Perceived added value sufficient to bear price premium Perceived added value to a particular segment, warranting price premium Higher margins if competitors do not follow/risk of losing market share Only feasible in monopoly situation Loss of market share

Focused differentiation

Increased price/standard value Increased price/low value Low value/standard price

7 8

Quality- with 8 dimensions - potential of providing a product with a com. ad.

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Industry Structure & Competitive Strategy

Industry Structure -Fragmented Industry

Many small and medium-sized local companies compete for small shares of total market
Focus strategies predominate

Consolidated industry
Mature industry dominated by a few large companies
Cost Leadership or Differentiation predominate

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Competitive Tactics
Tactic is a specific operating plan detailing how a strategy is to be implemented in terms of when and where it is to be put into action they are viewed as the link between formulation and implementation of strategies.
Timing Tactics (When to Compete) First mover: Reputation as industry leader, high profits, sets standards for subsequent products in the industry Late movers: Able to imitate technological advances of others. Allow to keep R&D costs and risks down
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Competitive Tactics Market Location Tactics (Where to compete) To protect or take market share Offensive Tactics ( in an established competitors market location) 1. Frontal Assault (Head to Head)- the attacking firm goes head to
head with its competitor. need superior resources and/or capabilities to persevere. 2.Flanking Maneuver- a firm may attack a part of the market where the competitor is weak. Attack the enemy at its weak points or blind spots i.e. its flanks 3.Bypass Attack change the rules of the game. By diversifying into unrelated products or markets neglected by the leader. Could overtake the leader by using new technologies. Usually use to precede a stronger attack
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Competitive Tactics
Offensive Tactics.. 4. Encirclement Attack the enemy at many fronts at the same time Ideal for challenger having superior resources 5. Guerrilla warfare

By launching small, intermittent hit-and-run attacks to harass and destabilize the leader Usually use to precede a stronger attack eg: price cuts, hiring the opposition's best staff e.g. airlines use short promotions to attack the national carriers especially when passenger loads in certain routes are low

Market Location Tactics (Where to compete)

Defensive Tactics aim to lower the probability of attack.

1.Raise structural barriers Entry barriers act to block a challengers logical avenues of attack. exclusive agreements, e of scale 2. Increase expected retaliation Defend any possible erosion of market share through Price cuts or Matching competitors promotional activities 3. Lower the inducement for attack Keep industry profits low (Southwest Airlines) Reduce challenger's expectations of future profits in the industry.

Cooperative Strategies

Collusion -- Active cooperation of firms to reduce output and raise prices: explicit or tacit
Normally Illegal Practice

Strategic Alliances -- Partnership of two or more corporations or business units to achieve strategically significant objectives that are mutually beneficial
Mutual Service Consortia A Joint Venture Licensing Arrangements Value Chain Partnership

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Continuum of Strategic Alliances

Mutual Service Consortia

Joint Venture Licensing Arrangement

Value-Chain Partnership

Weak and Distant

Strong and Close

Source: Suggested by R. M. Kanter, Collaborative Advantage: The Art of Alliances, Harvard Business Review (July-August 1994), pp. 96108.

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Strategic Alliances
Mutual Service Consortia: similar companies in similar industries pool their resources to gain a benefit too expensive to acquire alone. Joint Venture : pursue an opportunity that needs a capability from each of them Value Change Partnerships : companies in different industries with different but complimentary skills link their capabilities to create value for ultimate users.

Drivers of Strategic Alliances

Obtain technology

Access to markets

Strategic Alliance

Reduce financial risk

Reduce political risk Achieve competitive advantage

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