Transcript
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In most (large) corporations there are several levels of
management.
Strategic management is the highest of these levels in thesense that it is the broadest - applying to all parts of thefirm - while also incorporating the longest time horizon.
It gives direction to corporate values, corporate culture,corporate goals, and corporate missions.
Under corporate strategy there are typically business-level competitive strategies and functional unit
strategies.
The strategy hierarchy
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Corporate strategy refers to the overarching strategy of thediversified firm. Such a corporate strategy answers the questionsof "in which businesses should we be in?" and "how does being in
these business create synergy and/or add to the competitiveadvantage of the corporation as a whole?"
Business strategy refers to the aggregated strategies of singlebusiness firm or a strategic business unit (SBU) in a diversifiedcorporation. A strategic business unit is a semi-autonomous unitthat is usually responsible for its own budgeting, new productdecisions, hiring decisions, and price setting. An SBU is treated asan internal profit centre by corporate headquarters.
Functional strategies include marketing strategies, new product
development strategies, human resource strategies, financialstrategies, legal strategies, supply-chain strategies, andinformation technology management strategies. The emphasis ison short and medium term plans and is limited to the domain ofeach departments functional responsibility. Each functionaldepartment attempts to do its part in meeting overall corporate
objectives, and hence to some extent their strategies are derivedfrom broader corporate strategies.
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Management by objectives (MBO): An additional level ofstrategy called operational strategy was encouraged byPeter Drucker in his theory of management by objectives
(MBO).
MBO is very narrow in focus and deals with day-to-dayoperational activities such as scheduling criteria. It must
operate within a budget but is not at liberty to adjust or createthat budget. Operational level strategies are informed bybusiness level strategies which, in turn, are informed by
corporate level strategies.Management By Walking Around (MBWA). Senior H-P managers wereseldom at their desks. They spent most of their days visitingemployees, customers, and suppliers. This direct contact with keypeople provided them with a solid grounding from which viable
strategies could be crafted. The MBWA concept was popularized in1985 by a book by Tom Peters and Nancy Austin. Japanese managersemploy a similar system, which originated at Honda, and issometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, whichtranslate into actual place, actual thing, and actual situation).
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The Art of Japanese Managementclaimed that the main reason for
Japanese success was their superior management techniques. They
divided management into 7 aspects (which are also known as
McKinsey 7S Framework): Strategy, Structure, Systems, Skills, Staff,Style, and Supraordinate goals (which we would now call shared
values). The first three of the 7 S's were called hard factors and this is
where American companies excelled. The remaining four factors
(skills, staff, style, and shared values) were called soft factors and
were not well understood by American businesses of the time.
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Why Strategy
Instead of producing products then trying to sell them tothe customer, businesses should start with the customer,find out what they wanted, and then produce it for them.
The customer became the driving force behind allstrategic business decisions.
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Strategic decay, the notion that the value of allstrategies, no matter how brilliant, decays over timewhat was a strength yesterday becomes the root ofweakness today, We tend to depend on what workedyesterday and refuse to let go of what worked so well forus in the past. Prevailing strategies become self-confirming. In order to avoid this trap, businesses must
stimulate a spirit of inquiry and healthy debate. Theymust encourage a creative process of self renewal basedon constructive conflict.
strategic windows and stressed the importance of thetiming (both entrance and exit) of any given strategy.
Strategic decay
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Henry Mintzberg
Says there are five types of strategies. They are:
Strategy as plan - a direction, guide, course of action - intentionrather than actual
Strategy as ploy - a maneuver intended to outwit a competitor
Strategy as pattern - a consistent pattern of past behaviour - realizedrather than intended
Strategy as position - locating of brands, products, or companies
within the conceptual framework of consumers or other stakeholders -strategy determined primarily by factors outside the firm
Strategy as perspective - strategy determined primarily by a masterstrategist
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In 1998, Mintzberg developed these five types of managementstrategy into 10 schools of thought. These 10 schools are groupedinto three categories.
The first group is prescriptive or normative. It consists of theinformal design and conception school, the formal planning school,and the analytical positioning school.
The second group, consisting of six schools, is more concerned withhow strategic management is actually done, rather than prescribingoptimal plans or positions. The six schools are the entrepreneurial,visionary, or great leader school, the cognitive or mental processschool, the learning, adaptive, or emergent process school, thepower or negotiation school, the corporate culture or collectiveprocess school, and the business environment or reactive school.
The third and final group consists of one school, the configuration ortransformation school, an hybrid of the other schools organized intostages, organizational life cycles, or episodes
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The firm must engage in strategic planning thatclearly defines objectives and assesses both theinternal and external situation to formulate strategy,implement the strategy, evaluate the progress, and
make adjustments as necessary to stay on track.
A simplified view of the strategic planning process isshown
Mission &Objectives
EnvironmentalScanning
StrategyFormulation
StrategyImplementation
Evaluation& Control
The Strategic Planning Process
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Probably the most influential strategist of the decade was Michael
Porter. He introduced many new concepts including; 5 forcesanalysis, generic strategies, the value chain, strategic groups, and
clusters.
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Competitive Advantage
When a firm sustains profits that exceed the average for
its industry, the firm is said to possess a competitive
advantage over its rivals. The goal of much of business
strategy is to achieve a sustainable competitiveadvantage.
Michael Porter identified two basic types of competitive
advantage:cost advantage
differentiation advantage
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A competitive advantage exists when the firm is able to deliver
the same benefits as competitors but at a lower cost (cost
advantage), or deliver benefits that exceed those of competing
products (differentiation advantage). Thus, a competitiveadvantage enables the firm to create superior value for its
customers and superior profits for itself.
Cost and differentiation advantages are known aspositional
advantages since they describe the firm's position in the industry
as a leader in either cost or differentiation.
A resource-based viewemphasizes that a firm utilizes its
resources and capabilities to create a competitive advantage thatultimately results in superior value creation. The following
diagram combines the resource-based and positioning views to
illustrate the concept of competitive advantage:
Recommended Reading
Porter, Michael E., Competitive Advantage:Creating and Sustaining Superior Performance
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Resources and Capabilities
According to the resource-based view, in order to develop a competitive advantage the
firm must have resources and capabilities that are superior to those of its competitors.
Without this superiority, the competitors simply could replicate what the firm was doing andany advantage quickly would disappear.
Resources are the firm-specific assets useful for creating a cost or differentiation
advantage and that few competitors can acquire easily. The following are some examples
of such resources:
Patents and trademarksProprietary know-how
Installed customer base
Reputation of the firm
Brand equity
Capabilities refer to the firm's ability to utilize its resources effectively. An example of acapability is the ability to bring a product to market faster than competitors. Such
capabilities are embedded in the routines of the organization and are not easily
documented as procedures and thus are difficult for competitors to replicate.
The firm's resources and capabilities together form its distinctive competencies. These
competencies enable innovation, efficiency, quality, and customer responsiveness, all of
which can be leveraged to create a cost advantage or a differentiation advantage.
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Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilitiesto achieve either a lower cost structure or a differentiated product. A
firm positions itself in its industry through its choice of low cost ordifferentiation. This decision is a central component of the firm'scompetitive strategy.
Another important decision is how broad or narrow a market
segment to target. Porter formed a matrix using cost advantage,differentiation advantage, and a broad or narrow focus to identify aset of generic strategies that the firm can pursue to create andsustain a competitive advantage.
According to Michael Porter, a firm must formulate a business strategy that
incorporates either cost leadership, differentiation or focus in order to achieve
a sustainable competitive advantage and long-term success in its chosen
arenas or industries.
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Porter's generic strategies detail the interaction betweencost minimization strategies, product differentiationstrategies, and market focus strategies the role ofstrategic management is to identify your corecompetencies, and then assemble a collection of assets that
will increase value added and provide a competitiveadvantage. MP claims that there are 3 types of capabilitiesthat can do this; innovation, reputation, and organizationalstructure. The search for best practices is also calledbenchmarking. This involves determining where you need
to improve, finding an organization that is exceptional inthis area, then studying the company and applying its bestpractices in your firm.
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Porter's Generic Strategies
Target Scope Advantage
Low Cost Product Uniqueness
Broad
(Industry Wide)
Cost Leadership
Strategy
Differentiation
Strategy
Narrow(Market
Segment)
FocusStrategy
(low cost)
FocusStrategy
(differentiation)
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Cost Leadership Strategy
This generic strategy calls for being the low cost producer in an industry for a
given level of quality. The firm sells its products either at average industry
prices to earn a profit higher than that of rivals, or below the average industry
prices to gain market share. In the event of a price war, the firm can maintain
some profitability while the competition suffers losses. Even without a price
war, as the industry matures and prices decline, the firms that can produce
more cheaply will remain profitable for a longer period of time. The cost
leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by improving
process efficiencies, gaining unique access to a large source of lower cost
materials, making optimal outsourcing and vertical integration decisions, or
avoiding some costs altogether.
Each generic strategy has its risks, including the low-cost strategy. For
example, other firms may be able to lower their costs as well. As technology
improves, the competition may be able to leapfrog the production capabilities,
thus eliminating the competitive advantage.
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Differentiation Strategy
A differentiation strategy calls for the development of a product or service thatoffers unique attributes that are valued by customers and that customers
perceive to be better than or different from the products of the competition.
The value added by the uniqueness of the product may allow the firm to
charge a premium price for it. The firm hopes that the higher price will morethan cover the extra costs incurred in offering the unique product. Because of
the product's unique attributes, if suppliers increase their prices the firm may
be able to pass along the costs to its customers who cannot find substitute
products easily.
Firms that succeed in a differentiation strategy often have the following
internal strengths:
Access to leading scientific research.
Highly skilled and creative product development team.
Strong sales team with the ability to successfully communicate the perceivedstrengths of the product.
Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation by competitors and
changes in customer tastes. Additionally, various firms pursuing focus strategies may
be able to achieve even greater differentiation in their market segments.
ocus ra egy
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ocus ra egy
The focus strategy concentrates on a narrow segment and within that
segment attempts to achieve either a cost advantage or differentiation.
The premise is that the needs of the group can be better serviced by
focusing entirely on it. A firm using a focus strategy often enjoys a high
degree of customer loyalty, and this entrenched loyalty discourages
other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus strategy
have lower volumes and therefore less bargaining power with their
suppliers. However, firms pursuing a differentiation-focused strategymay be able to pass higher costs on to customers since close
substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range
of product development strengths to a relatively narrow market
segment that they know very well.
Some risks of focus strategies include imitation and changes in the
target segments. Furthermore, it may be fairly easy for a broad-market
cost leader to adapt its product in order to compete directly. Finally,
other focusers may be able to carve out sub-segments that they can
serve even better.
Generic Strategies and Industry Forces
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Generic Strategies and Industry Forces
These generic strategies each have attributes that can serve to defend against
competitive forces. The following table compares some characteristics of the generic
strategies in the context of the Porter's five forces.
IndustryForce
Generic Strategies
Cost Leadership Differentiation Focus
EntryBarriers
Ability to cut price in retaliationdeters potential entrants.
Customer loyalty can discouragepotential entrants.
Focusing develops corecompetencies that can actas an entry barrier.
BuyerPower
Ability to offer lower price to
powerful buyers.
Large buyers have less
power to negotiatebecause of few closealternatives.
Large buyers have less
power to negotiatebecause of fewalternatives.
SupplierPower
Better insulated from powerfulsuppliers.
Better able to pass onsupplier price increases tocustomers.
Suppliers have powerbecause of low volumes,but a differentiation-focused firm is better ableto pass on supplier priceincreases.
Threat ofSubstitutes
Can use low price to defendagainst substitutes.
Customer's becomeattached to differentiatingattributes, reducing threatof substitutes.
Specialized products &core competency protectagainst substitutes.
RivalryBetter able to compete onprice.
Brand loyalty to keepcustomers from rivals.
Rivals cannot meetdifferentiation-focusedcustomer needs.
M Porters The Value Chain
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M.Porters The Value Chain
To analyze the specific activities through which firms can create a competitive
advantage, it is useful to model the firm as a chain of value-creating activities.
Michael Porter identified a set of interrelated generic activities common to a
wide range of firms. The resulting model is known as the value chain and is
depicted below:
Primary Value Chain Activities
InboundLogistics
> Operations > OutboundLogistics
> Marketing& Sales
> Service
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Porters Value Chain
INBOUND
LOGISTICSOPERATIONS OUTBOUND
LOGISTICS
MARKETING
AND SALESSERVICE
PRIMARY ACTIVITIES
PROCUREMENT
TECHNOLOGY DEVELOPMENT
HUMAN RESOURCE MANAGEMENT
FIRM INFRASTRUCTURE
SUPPORTACTIVIT
I
ES
Figure 3-6Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from
COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright
1985 by Michael E. Porter.
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The goal of these activities is to create value that exceeds the cost of providing
the product or service, thus generating a profit margin.
Inbound logistics include the receiving, warehousing, and inventory control of
input materials.
Operations are the value-creating activities that transform the inputs into the
final product.
Outbound logistics are the activities required to get the finished product to the
customer, including warehousing, order fulfillment, etc.
Marketing & Sales are those activities associated with getting buyers to
purchase the product, including channel selection, advertising, pricing, etc.
Service activities are those that maintain and enhance the product's value
including customer support, repair services, etc.
Any or all of these primary activities may be vital in developing a competitive
advantage. For example, logistics activities are critical for a provider of
distribution services, and service activities may be the key focus for a firmoffering on-site maintenance contracts for office equipment.
These five categories are generic and portrayed here in a general manner. Each
generic activity includes specific activities that vary by industry.
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How do firms create Value:
The firm creates value by performing a series ofactivities that Porter identified as the value chain. Inaddition to the firm's own value-creating activities,the firm operates in a value system of vertical
activities including those of upstream suppliers anddownstream channel members.
To achieve a competitive advantage, the firm mustperform one or more value creating activities in a way
that creates more overall value than do competitors.Superior value is created through lower costs orsuperior benefits to the consumer (differentiation).
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Support Activities
The primary value chain activities described above are facilitated by
support activities. Porter identified four generic categories of supportactivities, the details of which are industry-specific.
Procurement - the function of purchasing the raw materials and other
inputs used in the value-creating activities.
Technology Development - includes research and development,
process automation, and other technology development used to support
the value-chain activities.
Human Resource Management - the activities associated with
recruiting, development, and compensation of employees.
Firm Infrastructure - includes activities such as finance, legal, quality
management, etc.
Support activities often are viewed as "overhead", but some firmssuccessfully have used them to develop a competitive advantage, for
example, to develop a cost advantage through innovative management of
information systems.
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Value Chain Analysis
In order to better understand the activities leading to a competitive
advantage, one can begin with the generic value chain and then identify the
relevant firm-specific activities. Process flows can be mapped, and theseflows used to isolate the individual value-creating activities.
Once the discrete activities are defined, linkages between activities should
be identified. A linkage exists if the performance or cost of one activity affects
that of another. Competitive advantage may be obtained by optimizing and
coordinating linked activities.
The value chain also is useful in outsourcing decisions. Understanding the
linkages between activities can lead to more optimal make-or-buy decisions
that can result in either a cost advantage or a differentiation advantage.
The Value System
The firm's value chain links to the value chains of upstream suppliers and
downstream buyers. The result is a larger stream of activities known as the
value system. The development of a competitive advantage depends not only
on the firm-specific value chain, but also on the value system of which the
firm is a part.
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Type of integration
Verticle integration
Horizontal integration
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Vertical Integration
The degree to which a firm owns its upstream suppliers and its
downstream buyers is referred to as vertical integration. Because it
can have a significant impact on a business unit's position in itsindustry with respect to cost, differentiation, and other strategic
issues, the vertical scope of the firm is an important consideration in
corporate strategy.
Expansion of activities downstream is referred to as forwardintegration, and expansion upstream is referred to as backward
integration.
The concept of vertical integration can be visualized using the value
chain. Consider a firm whose products are made via an assemblyprocess. Such a firm may consider backward integrating into
intermediate manufacturing or forward integrating into distribution, as
illustrated below:
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Raw Materials
IntermediateManufacturing
Assembly
Distribution
End Customer
Raw Materials
IntermediateManufacturing
Assembly
Distribution
End Customer
Raw Materials
IntermediateManufacturing
Assembly
Distribution
End Customer
No Integration Backward Integration Forward Integration
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Two issues that should be considered when deciding whether to vertically integrate is
cost and control. The cost aspect depends on the cost of market transactions between
firms versus the cost of administering the same activities internally within a single firm.
The second issue is the impact of asset control, which can impact barriers to entry
and which can assure cooperation of key value-adding players.
Benefits of Vertical Integration
Vertical integration potentially offers the following advantages:
Reduce transportation costs if common ownership results in closer geographic
proximity.
Improve supply chain coordination.
Provide more opportunities to differentiate by means of increased control over inputs.
Capture upstream or downstream profit margins.
Increase entry barriers to potential competitors, for example, if the firm can gain sole
access to a scarce resource.
Gain access to downstream distribution channels that otherwise would beinaccessible.
Facilitate investment in highly specialized assets in which upstream or downstream
players may be reluctant to invest.
Lead to expansion of core competencies.
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Drawbacks of Vertical Integration
While some of the benefits of vertical integration can be quite attractive to the firm,the drawbacks may negate any potential gains. Vertical integration potentially has
the following disadvantages:
Capacity balancing issues. For example, the firm may need to build excess
upstream capacity to ensure that its downstream operations have sufficient supply
under all demand conditions.
Potentially higher costs due to low efficiencies resulting from lack of suppliercompetition.
Decreased flexibility due to previous upstream or downstream investments. (Note
however, that flexibility to coordinate vertically-related activities may increase.)
Decreased ability to increase product variety if significant in-house development is
required.
Developing new core competencies may compromise existing competencies.Increased bureaucratic costs.
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Factors Favoring Vertical Integration
The following situational factors tend to favor vertical integration:
Taxes and regulations on market transactions
Obstacles to the formulation and monitoring of contracts.
Strategic similarity between the vertically-related activities.
Sufficiently large production quantities so that the firm can benefit from economiesof scale.
Reluctance of other firms to make investments specific to the transaction.
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Factors Against Vertical Integration
The following situational factors tend to make vertical integration less attractive:
The quantity required from a supplier is much less than the minimum efficient
scale for producing the product.
The product is a widely available commodity and its production cost decreases
significantly as cumulative quantity increases.The core competencies between the activities are very different.
The vertically adjacent activities are in very different types of industries. For
example, manufacturing is very different from retailing.
The addition of the new activity places the firm in competition with another player
with which it needs to cooperate. The firm then may be viewed as a competitorrather than a partner
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Alternatives to Vertical Integration
There are alternatives to vertical integration that may provide some of the same
benefits with fewer drawbacks. The following are a few of these alternatives for
relationships between vertically-related organizations:long-term explicit contracts
franchise agreements
joint ventures
co-location of facilities
implicit contracts (relying on firms' reputation)
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Horizontal Integration
The acquisition of additional business activities at the same level of the value chain is
referred to as horizontal integration. This form of expansion contrasts with vertical
integration by which the firm expands into upstream or downstream activities. Horizontalgrowth can be achieved by internal expansion or by external expansion through mergers
and acquisitions of firms offering similar products and services. A firm may diversify by
growing horizontally into unrelated businesses.
Some examples of horizontal integration include:
The Standard Oil Company's acquisition of 40 refineries.
An automobile manufacturer's acquisition of a sport utility vehicle manufacturer.A media company's ownership of radio, television, newspapers, books, and magazines.
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Advantages of Horizontal Integration
The following are some benefits sought by firms that horizontally integrate:
Economies of scale - acheived by selling more of the same product, for example, by
geographic expansion.
Economies of scope - achieved by sharing resources common to different products.Commonly referred to as "synergies."
Increased market power (over suppliers and downstream channel members)
Reduction in the cost of international trade by operating factories in foreign markets.
Sometimes benefits can be gained through customer perceptions of linkages between
products. For example, in some cases synergy can be achieved by using the same
brand name to promote multiple products. However, such extensions can havedrawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic,
Positioning.
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Pitfalls of Horizontal Integration
Horizontal integration by acquisition of a competitor will increase a firm's market
share. However, if the industry concentration increases significantly then anti-trust
issues may arise.
Aside from legal issues, another concern is whether the anticipated economic gains
will materialize. Before expanding the scope of the firm through horizontal integration,
management should be sure that the imagined benefits are real. Many blunders have
been made by firms that broadened their horizontal scope to achieve synergies that did
not exist, for example, computer hardware manufacturers who entered the software
business on the premise that there were synergies between hardware and software.
However, a connection between two products does not necessarily imply realizable
economies of scope.
Finally, even when the potential benefits of horizontal integration exist, they do notmaterialize spontaneously. There must be an explicit horizontal strategy in place. Such
strategies generally do not arise from the bottom-up, but rather, must be formulated by
corporate management.
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Ansoff Matrix
To portray alternative corporate growth strategies, Igor Ansoff
presented a matrix that focused on the firm's present and potential
products and markets (customers). By considering ways to grow viaexisting products and new products, and in existing markets and new
markets, there are four possible product-market combinations.
Ansoff's matrix is shown below:
Ansoff Matrix
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Existing Products New Products
ExistingMarkets
Market Penetration Product Development
NewMarkets
Market Development Diversification
Market Penetration - the firm seeks to achieve growth with existing products in their current
market
segments, aiming to increase its market share.Market Development - the firm seeks growth by targeting its existing products to new marke
segments.Product Development - the firms develops new products targeted to its existing market
segments.
Diversification - the firm grows by diversifying into new businesses by developing new prodfor new markets.
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Selecting a Product-Market Growth Strategy
The market penetration strategy is the least risky since it leverages many of
the firm's existing resources and capabilities. In a growing market, simplymaintaining market share will result in growth, and there may exist opportunities
to increase market share if competitors reach capacity limits. However, market
penetration has limits, and once the market approaches saturation another
strategy must be pursued if the firm is to continue to grow.
Market development options include the pursuit of additional market
segments or geographical regions. The development of new markets for the
product may be a good strategy if the firm's core competencies are related
more to the specific product than to its experience with a specific market
segment. Because the firm is expanding into a new market, a marketdevelopment strategy typically has more risk than a market penetration
strategy.
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A product development strategy may be appropriate if the firm's strengths
are related to its specific customers rather than to the specific product itself.In this situation, it can leverage its strengths by developing a new product
targeted to its existing customers. Similar to the case of new market
development, new product development carries more risk than simply
attempting to increase market share.
Diversification is the most risky of the four growth strategies since it
requires both product and market development and may be outside the core
competencies of the firm. In fact, this quadrant of the matrix has been
referred to by some as the "suicide cell". However, diversification may be a
reasonable choice if the high risk is compensated by the chance of a high
rate of return. Other advantages of diversification include the potential to
gain a foothold in an attractive industry and the reduction of overall business
portfolio risk.
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BCG Growth-Share Matrix
Companies that are large enough to be organized into strategic business
units face the challenge of allocating resources among those units. In theearly 1970's the Boston Consulting Group developed a model for managing a
portfolio of different business units (or major product lines). The BCG
growth-share matrix displays the various business units on a graph of the
market growth rate vs. market share relative to competitors:
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Product portfolio strategy - introduction to the boston consulting
box
Introduction
The business portfolio is the collection of businesses and products that
make up the company. The best business portfolio is one that fits the
company's strengths and helps exploit the most attractive opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses
should receive more or less investment, and
(2) Develop growth strategies for adding new products and businesses to
the portfolio, whilst at the same time deciding when products and
businesses should no longer be retained.
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BCG Matrix
On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market
On the vertical axis: market growth rate - this provides a measure of market attractiveness
Resources are allocated to business units according to where they are
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Resources are allocated to business units according to where they are
situated on the grid as follows:
Cash Cow - a business unit that has a large market share in a mature, slow
growing industry. Cash cows require little investment and generate cash that
can be used to invest in other business units.
Star- a business unit that has a large market share in a fast growing
industry. Stars may generate cash, but because the market is growing rapidly
they require investment to maintain their lead. If successful, a star will
become a cash cow when its industry matures.
Question Mark (or Problem Child) - a business unit that has a small
market share in a high growth market. These business units require
resources to grow market share, but whether they will succeed and become
stars is unknown.
Dog - a business unit that has a small market share in a mature industry. A
dog may not require substantial cash, but it ties up capital that could better be
deployed elsewhere. Unless a dog has some other strategic purpose, it
should be liquidated if there is little prospect for it to gain market share.
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By dividing the matrix into four areas, four types of SBU can be distinguished:
Stars - Stars are high growth businesses or products competing in markets
where they are relatively strong compared with the competition. Often they needheavy investment to sustain their growth. Eventually their growth will slow and,
assuming they maintain their relative market share, will become cash cows.
Cash Cows - Cash cows are low-growth businesses or products with a
relatively high market share. These are mature, successful businesses with
relatively little need for investment. They need to be managed for continued
profit - so that they continue to generate the strong cash flows that the companyneeds for its Stars.
Question marks - Question marks are businesses or products with low market
share but which operate in higher growth markets. This suggests that they have
potential, but may require substantial investment in order to grow market share
at the expense of more powerful competitors. Management have to think hard
about "question marks" - which ones should they invest in? Which ones should
they allow to fail or shrink?
Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that
have low relative share in unattractive, low-growth markets. Dogs may generate
enough cash to break-even, but they are rarely, if ever, worth investing in.
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Using the BCG Box to determine strategy
Once a company has classified its SBU's, it must decide what to do with them.In the diagram above, the company has one large cash cow (the size of the
circle is proportional to the SBU's sales), a large dog and two, smaller stars and
question marks.
Conventional strategic thinking suggests there are four possible strategies for
each SBU:
(1) Build Share: here the company can invest to increase market share (forexample turning a "question mark" into a star)
(2) Hold: here the company invests just enough to keep the SBU in its present
position
(3) Harvest: here the company reduces the amount of investment in order to
maximise the short-term cash flows and profits from the SBU. This may havethe effect of turning Stars into Cash Cows.
(4) Divest: the company can divest the SBU by phasing it out or selling it - in
order to use the resources elsewhere (e.g. investing in the more promising
"question marks").
Strategy - portfolio analysis - GE matrix
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Strategy - portfolio analysis - GE matrix
The business portfolio is the collection of businesses and products that make up the
company. The best business portfolio is one that fits the company's strengths andhelps exploit the most attractive opportunities.
The company must:
(1) Analyse its current business portfolio and decide which businesses should receive
more or less investment, and
(2) Develop growth strategies for adding new products and businesses to the portfolio,
whilst at the same time deciding when products and businesses should no longer be
retained.
The two best-known portfolio planning methods are the Boston Consulting Group
Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision
note). In both methods, the first step is to identify the various Strategic Business Units
("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate
mission and objectives and that can be planned independently from the other
businesses. An SBU can be a company division, a product line or even individual
brands - it all depends on how the company is organised.
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GE / McKinsey Matrix
In consulting engagements with General Electric in the 1970's,
McKinsey & Company developed a nine-cell portfolio matrix as a
tool for screening GE's large portfolio of strategic business units(SBU). This business screen became known as the GE/McKinsey
Matrix and is shown below:
Business Unit Strength
High Medium Low
High
Medium
Low
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The GE / McKinsey matrix is similar to the BCG growth-share matrix in
that it maps strategic business units on a grid of the industry and the
SBU's position in the industry. The GE matrix however, attempts toimprove upon the BCG matrix in the following two ways:
The GE matrix generalizes the axes as "Industry Attractiveness" and
"Business Unit Strength" whereas the BCG matrix uses the market growth
rate as a proxy for industry attractiveness and relative market share as a
proxy for the strength of the business unit.
The GE matrix has nine cells vs. four cells in the BCG matrix.
Industry attractiveness and business unit strength are calculated by first
identifying criteria for each, determining the value of each parameter in thecriteria, and multiplying that value by a weighting factor. The result is a
quantitative measure of industry attractiveness and the business unit's
relative performance in that industry.
Industry Attractiveness
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The vertical axis of the GE / McKinsey matrix is industry attractiveness,
which is determined by factors such as the following:
Market growth rate
Market size
Demand variability
Industry profitability
Industry rivalry
Global opportunities
Macroenvironmental factors (PEST)
Business Unit Strength
The horizontal axis of the GE / McKinsey matrix is the strength of the business unit.
Some factors that can be used to determine business unit strength include:
Market share
Growth in market share
Brand equity
Distribution channel access
Production capacity
Profit margins relative to competitors
The business unit strength index can be calculated by multiplying the estimated value of
each factor by the factor's weighting, as done for industry attractiveness.
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Strategic Implications
Resource allocation recommendations can be made to grow, hold, or
harvest a strategic business unit based on its position on the matrix as
follows:
Grow strong business units in attractive industries, average business unitsin attractive industries, and strong business units in average industries.
Hold average businesses in average industries, strong businesses in weak
industries, and weak business in attractive industies.
Harvest weak business units in unattractive industries, average business
units in unattractive industries, and weak business units in average
industries.
There are strategy variations within these three groups. For example, within
the harvest group the firm would be inclined to quickly divest itself of a weak
business in an unattractive industry, whereas it might perform a phased
harvest of an average business unit in the same industry.
While the GE business screen represents an improvement over the moresimple BCG growth-share matrix, it still presents a somewhat limited view by
not considering interactions among the business units and by neglecting to
address the core competencies leading to value creation. Rather than
serving as the primary tool for resource allocation, portfolio matrices are
better suited to displaying a quick synopsis of the strategic business units.
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The McKinsey / General Electric Matrix
The McKinsey/GE Matrix overcomes a number of the disadvantages of
the BCG Box. Firstly, market attractiveness replaces market growth asthe dimension of industry attractiveness, and includes a broader range of
factors other than just the market growth rate. Secondly, competitive
strength replaces market share as the dimension by which the
competitive position of each SBU is assessed.
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Factors that Affect Market Attractiveness
Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which
can help determine attractiveness. These are listed below:
- Market Size- Market growth
- Market profitability
- Pricing trends
- Competitive intensity / rivalry
- Overall risk of returns in the industry
- Opportunity to differentiate products and services
- Segmentation
- Distribution structure (e.g. retail, direct, wholesale
Factors that Affect Competitive Strength
Factors to consider include:
- Strength of assets and competencies
- Relative brand strength- Market share
- Customer loyalty
- Relative cost position (cost structure compared with competitors)
- Distribution strength
- Record of technological or other innovation
- Access to financial and other investment resources
Strategy -
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Strategy benchmarking
Definition
Benchmarking is the process of identifying "best practice" in relation to both products
(including) and the processes by which those products are created and delivered. The
search for "best practice" can taker place both inside a particular industry, and also in other
industries (for example - are there lessons to be learned from other industries?).
The objective of benchmarking is to understand and evaluate the current position of a
business or organisation in relation to "best practice" and to identify areas and means of
performance improvement.
The Benchmarking Process
Benchmarking involves looking outward (outside a particular business, organisation,
industry, region or country) to examine how others achieve their performance levels and tounderstand the processes they use. In this way benchmarking helps explain the processes
behind excellent performance. When the lessons learnt from a benchmarking exercise are
applied appropriately, they facilitate improved performance in critical functions within an
organisation or in key areas of the business environment.
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Application of benchmarking involves four key steps:
(1) Understand in detail existing business processes
(2) Analyse the business processes of others
(3) Compare own business performance with that of others
analysed
(4) Implement the steps necessary to close the performancegap
Benchmarking should not be considered a one-off exercise. To be
effective, it must become an ongoing, integral part of an ongoing
improvement process with the goal of keeping abreast of ever-
improving best practice.
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Core Competencies
The Core Competence of the Corporation, C.K. Prahalad and Gary Hamelcoined the term core competencies, or the collective learning and
coordination skills behind the firm's product lines. They made the case that
core competencies are the source of competitive advantage and enable the
firm to introduce an array of new products and services.
According to Prahalad and Hamel, core competencies lead to the
development of core products. Core products are not directly sold to end
users; rather, they are used to build a larger number of end-user products.
For example, motors are a core product that can be used in wide array of
end products. The business units of the corporation each tap into the
relatively few core products to develop a larger number of end user productsbased on the core product technology. This flow from core competencies to endproducts is shown in the following diagram:
Core Competencies to End Products
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Core Competencies to End Products
End Products
1 2 3 4 5 6 7 8 9 10 11 12
Business1
Business2
Business3
Business4
Core Product 1
Core Product 2
Competence1
Competence2
Competence3
Competence4
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The intersection of market opportunities with core competencies forms
the basis for launching new businesses. By combining a set of core
competencies in different ways and matching them to market
opportunities, a corporation can launch a vast array of businesses.Without core competencies, a large corporation is just a collection of
discrete businesses. Core competencies serve as the glue that bonds
the business units together into a coherent portfolio.
Developing Core CompetenciesAccording to Prahalad and Hamel, core competencies arise from the
integration of multiple technologies and the coordination of diverse production
skills. Some examples include Philip's expertise in optical media and Sony's
ability to miniaturize electronics.
There are three tests useful for identifying a core competence. A corecompetence should:
provide access to a wide variety of markets, and
contribute significantly to the end-product benefits, and
be difficult for competitors to imitate.
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Core competencies tend to be rooted in the ability to integrate and coordinate
various groups in the organization. While a company may be able to hire a
team of brilliant scientists in a particular technology, in doing so it does not
automatically gain a core competence in that technology. It is the effective
coordination among all the groups involved in bringing a product to market thatresults in a core competence.
It is not necessarily an expensive undertaking to develop core competencies.
The missing pieces of a core competency often can be acquired at a low cost
through alliances and licensing agreements. In many cases an organizationaldesign that facilitates sharing of competencies can result in much more
effective utilization of those competencies for little or no additional cost.
To better understand how to develop core competencies, it is worthwhile to
understand what they do not entail. According to Prahalad and Hamel, core
competencies are not necessarily about:
outspending rivals on R&D
sharing costs among business units
integrating vertically
While the building of core competencies may be facilitated by some of these
actions, by themselves they are insufficient.
The Loss of Core Competencies
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p
Cost-cutting moves sometimes destroy the ability to build core
competencies. For example, decentralization makes it more difficult to build
core competencies because autonomous groups rely on outsourcing of
critical tasks, and this outsourcing prevents the firm from developing core
competencies in those tasks since it no longer consolidates the know-how
that is spread throughout the company.
Failure to recognize core competencies may lead to decisions that result in
their loss. For example, in the 1970's many U.S. manufacturers divested
themselves of their television manufacturing businesses, reasoning that theindustry was mature and that high quality, low cost models were available
from Far East manufacturers. In the process, they lost their core
competence in video, and this loss resulted in a handicap in the newer
digital television industry.
Similarly, Motorola divested itself of its semiconductor DRAM business at
256Kb level, and then was unable to enter the 1Mb market on its own. By
recognizing its core competencies and understanding the time required to
build them or regain them, a company can make better divestment
decisions.
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Core Products
Core competencies manifest themselves in core products that serve as alink between the competencies and end products. Core products enable valuecreation in the end products. Examples of firms and some of their coreproducts include:
3M - substrates, coatings, and adhesives
Black & Decker - small electric motors
Canon - laser printer subsystems
Matsushita - VCR subsystems, compressors
NEC - semiconductors
Honda - gasoline powered engines
The core products are used to launch a variety of end products. For
example, Honda uses its engines in automobiles, motorcycles, lawn mowers,and portable generators.
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Because firms may sell their core products to other firms that use
them as the basis for end user products, traditional measures of
brand market share are insufficient for evaluating the success ofcore competencies. Prahalad and Hamel suggest that core product
share is the appropriate metric. While a company may have a low
brand share, it may have high core product share and it is this share
that is important from a core competency standpoint.
Once a firm has successful core products, it can expand the
number of uses in order to gain a cost advantage via economies of
scale and economies of scope.
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Implications for Corporate Management
Prahalad and Hamel suggest that a corporation should be organized
into a portfolio of core competencies rather than a portfolio ofindependent business units. Business unit managers tend to focuson getting immediate end-products to market rapidly and usuallydo not feel responsible for developing company-wide corecompetencies. Consequently, without the incentive and directionfrom corporate management to do otherwise, strategic business
units are inclined to underinvest in the building of corecompetencies.
If a business unit does manage to develop its own corecompetencies over time, due to its autonomy it may not sharethem with other business units. As a solution to this problem,Prahalad and Hamel suggest that corporate managers should havethe ability to allocate not only cash but also core competenciesamong business units. Business units that lose key employees forthe sake of a corporate core competency should be recognized fortheir contribution.
Strategic planning - the link
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g p gwith marketing plan
Introduction
Businesses that succeed do so by creating and keeping customers. Theydo this by providing better value for the customer than the competition.
Marketing management constantly have to assess which customers they
are trying to reach and how they can design products and services thatprovide better value (competitive advantage).
The main problem with this process is that the environment in whichbusinesses operate is constantly changing. So a business must adapt toreflect changes in the environment and make decisions about how to
change the marketing mix in order to succeed. This process of adaptingand decision-making is known as marketing planning.
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Where does marketing planning fit in with the overall strategicplanning of a business?
Strategic planning is concerned about the overall direction of the
business. It is concerned with marketing, of course. But it also involvesdecision-making about production and operations, finance, human resourcemanagement and other business issues.
The objective of a strategic plan is to set the direction of a businessand create its shape so that the products and services it providesmeet the overall business objectives.
Marketing has a key role to play in strategic planning, because it is the jobof marketing management to understand and manage the links between thebusiness and the environment.
Sometimes this is quite a straightforward task. For example, in many smallbusinesses there is only one geographical market and a limited number ofproducts (perhaps only one product!).
However, consider the challenge faced by marketing management in a
multinational business, with hundreds of business units located around theglobe, producing a wide range of products. How can such management keepcontrol of marketing decision-making in such a complex situation? This callsfor well-organised marketing planning.
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What are the key issues that should be addressed instrategic and marketing planning?
The following questions lie at the heart of any marketing and
strategic planning process:
Where are we now?
How did we get there?
Where are we heading?
Where would we like to be?
How do we get there?
Are we on course?
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Why is marketing planning essential?
Businesses operate in hostile and increasingly complex environment.The ability of a business to achieve profitable sales is impacted by
dozens of environmental factors, many of which are inter-connected. It
makes sense to try to bring some order to this chaos by understanding
the commercial environment and bringing some strategic sense to the
process of marketing products and services.
A marketing plan is useful to many people in a business. It can help to:
Identify sources of competitive advantage
Gain commitment to a strategy
Get resources needed to invest in and build the business
Inform stakeholders in the business Set objectives and strategies
Measure performance
Strategy competitor analysis
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Strategy - competitor analysis
Competitor Analysis is an important part of the strategic planning process. This
revision note outlines the main role of, and steps in, competitor analysis
Why bother to analyse competitors?
Some businesses think it is best to get on with their own plans and ignore the
competition. Others become obsessed with tracking the actions of competitors
(often using underhand or illegal methods). Many businesses are happy simply to
track the competition, copying their moves and reacting to changes.
Competitor analysis has several important roles in strategic planning:
To help management understand their competitive advantages/disadvantages
relative to competitors
To generate understanding of competitors past, present (and most importantly)
future strategies
To provide an informed basis to develop strategies to achieve competitive
advantage in the future
To help forecast the returns that may be made from future investments (e.g.
how will competitors respond to a new product or pricing strategy?
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What questions should be asked when undertaking competitor analysis? The
following is a useful list to bear in mind:
Who are our competitors? (see the section on identifying competitors further
below)
What threats do they pose?
What is the profile of our competitors?
What are the objectives of our competitors?
What strategies are our competitors pursuing and how successful are these
strategies?
What are the strengths and weaknesses of our competitors?
How are our competitors likely to respond to any changes to the way we do
business?
Sources of information for competitor analysis
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Sources of information for competitor analysis
Davidson (1997) describes how the sources of competitor information can beneatly grouped into three categories:
Recorded data: this is easily available in published form either internally or
externally. Good examples include competitor annual reports and product
brochures;
Observable data: this has to be actively sought and often assembled from
several sources. A good example is competitor pricing;
Opportunistic data: to get hold of this kind of data requires a lot of planning
and organisation. Much of it is anecdotal, coming from discussions with
suppliers, customers and, perhaps, previous management of competitors.
:
The table below lists possible sources of competitor datausing Davidsons categorisation
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Recorded DataObservable Data Opportunistic Data
Annual report &
accounts
Pricing / price lists Meetings with suppliers
Press releases Advertising campaigns Trade shows
Newspaper articles Promotions Sales force meetings
Analysts reports Tenders Seminars / conferences
Regulatory reports Patent applications Recruiting ex-employees
Government reports Discussion with shareddistributors
Presentations /
speeches
Social contacts with
competitors
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What businesses need to know about their competitors
The tables below lists the kinds of competitor information that would
help businesses complete some good quality competitor analysis.
You can probably think of many more pieces of information about a
competitor that would be useful. However, an important challenge in
competitor analysis is working out how to obtain competitor
information that is reliable, up-to-date and available legally(!).
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What businesses probably already know their competitorsOverall sales and profits
Sales and profits by marketSales by main brand
Cost structure
Market shares (revenues and volumes)
Organisation structure
Distribution system
Identity / profile of senior management
Advertising strategy and spending
Customer / consumer profile & attitudes
Customer retention levels
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What businesses would really like to know about competitors
Sales and profits by productRelative costs
Customer satisfaction and service levels
Customer retention levels
Distribution costs
New product strategies
Size and quality of customer databases
Advertising effectiveness
Future investment strategy
Contractual terms with key suppliers
Terms of strategic partnerships
pyramid
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pyramidIntroduction
This model is similar in some respects to the well-established AnsoffModel. However, it looks at growth strategy from a slightly different
perspective.
The McKinsey model argues that businesses should develop their growth
strategies based on:
Operational skills
Privileged assets
Growth skills
Special relationships
Growth can be achieved by looking at business opportunities along
several dimensions, summarised in the diagram below:
i h id
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McKinsey growth pyramid
The model outlines seven ways of achieving growth, which are summarised below:
Existing products to existing customers
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Existing products to existing customers
The lowest-risk option; try to increase sales to the existing customer base; this is about increasing
the frequency of purchase and maintaining customer loyalty
Existing products to new customers
Taking the existing customer base, the objective is to find entirely new products that these
customers might buy, or start to provide products that existing customers currently buy fromcompetitors
New products and services
A combination of Ansoffs market development & diversification strategy taking a risk by
developing and marketing new products. Some of these can be sold to existing customers who
may trust the business (and its brands) to deliver; entirely new customers may need more
persuasion
New delivery approaches
This option focuses on the use of distribution channels as a possible source of growth. Are there
ways in which existing products and services can be sold via new or emerging channels which
might boost sales?
New geographies
With this method, businesses are encouraged to consider new geographic areas into which to sell
their products. Geographical expansion is one of the most powerful options for growth but also
one of the most difficult.
New industry structure
This option considers the possibility of acquiring troubled competitors or consolidating the industry
through a general acquisition programme
New competitive arenas
This option requires a business to think about opportunities to integrate vertically or consider
whether the skills of the business could be used in other industries.
strategic planning - values andvision
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vision
Introduction to Values and Vision
Values form the foundation of a business management style.Values provide the justification of behaviour and, therefore, exert significant influence on
marketing decisions.
Consider the following examples of a well-known business BT Group - defining its
values:
BT's activities are underpinned by a set of values that all BT people are asked to
respect:- We put customers first
- We are professional
- We respect each other
- We work as one team
- We are committed to continuous improvement.
These are supported by our vision of a communications-rich world - a world in which
everyone can benefit from the power of communication skills and technology.A society in which individuals, organisations and communities have unlimited access to
one another and to a world of knowledge, via a multiplicity of communications
technologies including voice, data, mobile, internet - regardless of nationality, culture,
class or education.
Our job is to facilitate effective communication, irrespective of geography, distance, time
or complexity.
Source: BT Group plc web site
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Operational skills are the core competences that a business has which can
provide the foundation for a growth strategy. For example, the business may
have strong competencies in customer service; distribution, technology.
Privileged assets are those assets held by the business that are hard to
replicate by competitors. For example, in a direct marketing-based business
these assets might include a particularly large customer database, or a well-
established brand. Growth skills are the skills that businesses need if they are to successfully
manage a growth strategy. These include the skills of new product
development, or negotiating and integrating acquisitions.
Special relationships are those that can open up new options. For example,
the business may have specially string relationships with trade bodies in the
industry that can make the process of growing in export markets easier thanfor the competition.
Why are values important?
Many Japanese businesses have used the value system to provide the motivation to make them global market
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Many Japanese businesses have used the value system to provide the motivation to make them global market
leaders. They have created an obsession about winning that is communicated at all levels of the business that has
enabled them to take market share from competitors that appeared to be unassailable.
For example, at the start of the 1970s Komatsu was less than one third the size of the market leader Caterpillar
and relied on just one line of smaller bulldozers for most of its revenues. By the late 1980s it had passed Caterpillar
as the world leader in earth-moving equipment. It had also adopted an aggressive diversification strategy that led it
into markets such as industrial robots and semiconductors.
If values shape the behaviour of a business, what is meant by vision?
To succeed in the long term, businesses need a vision of how they will change and improve in the future. The vision
of the business gives it energy. It helps motivate employees. It helps set the direction of corporate and marketing
strategy.
What are the components of an effective business vision?
Davidson identifies six requirements for success:
- Provides future direction
- Expresses a consumer benefit
- Is realistic
- Is motivating
- Must be fully communicated
- Consistently followed and measured
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Failure to obtain sufficient company
resources to accomplish task
Failure to obtain employee commitmentNew strategy not well explained to employees
No incentives given to workers to embrace the new
strategy
Under-estimation of time requirements
No critical path analysis done
Failure to follow the plan
No follow through after initial planningNo tracking of progress against plan
No consequences for above
Failure to manage change
Inadequate understanding of the internal resistance to
change
Lack of vision on the relationships between processes,
technology and organization
Poor communicationsInsufficient information sharing among stakeholders
Exclusion of stakeholders and delegates
Reasons why strategic plans fail
Th h t t i l f il i ll
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There are many reasons why strategic plans fail, especially:
Failure to understand the customer
Why do they buy
Is there a real need for the productinadequate or incorrect marketing research
Inability to predict environmental reaction
What will competitors do
Fighting brands
Price wars
Will government intervene
Over-estimation of resource competence
Can the staff, equipment, and processes handle the new strategy
Failure to develop new employee and management skills
Failure to coordinate
Reporting and control relationships not adequate
Organizational structure not flexible enough
Failure to obtain senior management commitment
top related