Chapter 8
Strategy Formulation and Execution
Strategy
• Every company is concerned with strategy
– It determines which organizations succeed and
which ones struggle
– Strategic blunders can hurt a company
• Strategic management is a specific type of
planning
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Thinking Strategically
• The long-term view of the organization and
competition
• Thinking strategically impacts performance and
financial success
• Today’s environment requires everyone to think
strategically (not just top manager)
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Strategic Management
The set of decisions and actions used to formulate
and execute strategies that will provide
competitively superior fit (competitive
advantage) between the organization and its
environment to achieve organizational goals
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Purpose of Strategy
• Explicit strategy is the plan of action
• Competitive advantage is the organization’s
distinctive edge for meeting customer needs
Strategies should:
 Exploit Core Competencies
 Build Synergy
 Deliver Value
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8.1 Levels of Strategy
8.2 The Strategic Management Process
Strategy Formulation
versus Execution
Formulation:
Assessing the external
environment and
internal problems to
create goals and
strategy
Execution:
the use of managerial
and organizational
tools to direct
resources toward
accomplishing
strategic results
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SWOT Analysis
• Formulating strategy often begins with an audit
of internal and external factors
– Internal Strengths and Weaknesses
– External Opportunities and Threats
• Information is acquired from reports, surveys,
discussions, and meetings
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8.3 SWOT: Audit Checklist
Case Study – SWOT:
FACEBOOK.COM
• Strength:
• Weakness:
• Opportunities:
• Threats:
• Strategies
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Formulating Corporate-Level Strategy:
Portfolio Strategy
Strategic Business Units (SBUs) have a
unique mission, products, and
competitors
Companies manage the mix of SBUs for
synergy and competitive advantage
Organizations should not become too
dependent on one business – Related to
the diversification strategy (Diversification
lowers business risk)
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Agency Theory, Agency Cost
• A Manager (CEO) is an agent for shareholders
(owners).
• Owners of the firm are clients of the manager.
• The manager is supposed to work for the best
interest of the shareholders, that is, to maximize
shareholders’ wealth – increase the stock price, by
boosting the profit, increasing revenue and/or
decreasing cost.
• In reality, a manager works for his own best interest,
not for the shareholders.
• When this problem occurs, we call it “agency cost
(problem) .”
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M & A, Corporate Strategy, Agency
Cost
• Merge & Acquisition is an example of corporate
strategy.
• Like any other strategy, M & A should focus on
synergy, efficiency, shareholders’ wealth
maximization.
• However, Some M & A creates Agency Cost.
• Cases in Point:
• M & A b/w HP & Compaq
• M & A b/w BoA & Merrill Lynch
• M & A b/w Disney & ABC Television
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Agency Cost, Stock Option
• How do shareholders know whether the
manager (CEO)’s corporate strategy works or
not?
o If the stock price does not go up after the M & A
announcement, the strategy is not working.
• Managing a manager: Stockholders can use a
carrot-and-stick approach to control the
manager.
o Stock Option: A widely used carrot to motivate the
manager to work hard for the best interest of
shareholders.
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Formulating Corporate-Level Strategy:
The BCG Matrix
• Organizes business along two dimensions
– Business growth rate – potential (future)
– Market share - current
• Four categories for corporate portfolio
– The combination of high/low market share and
high/low business growth
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8.4 The BCG Matrix
Case Study – The BCG Matrix:
General Electric
•
•
•
•
New CEO – Jeff Immelt
Cash Cow: Home & Business Solutions
Star: GE Technology & Infrastructure, GE Energy
Question Mark:
– Media Division – NBC Universal
– Finance – GE Capital
– The Question Mark can become a Dog or Star.
• Dog:
– If a division falls into a dog, GE sells it off.
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Formulating Corporate-Level Strategy:
Diversification Strategy
• Moving into new lines of business
– Expand into new valuable products and services
• Why does a firm attempt to diversify its business?
– Manage/control/minimize the risk
• Related Diversification vs. Unrelated Diversification
– Example of Related Diversification: Facebook + Search Engine
– Example of Unrelated Diversification: An airline company like
DELTA merges with an oil company like SHELL
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Unrelated Diversification Strategy –
Corporate Strategy
• Expansion into new lines of business
• Can be a difficult strategy
• Many companies are giving up on unrelated
diversification
• Unattractive to investors; hard to value the firm
– Hard to measure the profit, cost of capital
– Hard to measure the firm value
– Hard to measure the firm’s stock price
• Hypothetical Example: GM enters a clothing business.
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Vertical integration (VI) –
Corporate Strategy
• Vertical integration expands into businesses that
supply to the business or are distributors
• Benefits of VI: Securing supply & distribution
chains  cost savings  efficiency
• Limitations of VI: Less competition  less
productive  inefficiency
• Hypothetical Examples:
– Starbucks in VI
– GM in VI
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Formulating Business-Level Strategy
Strategy within the business units (SBU): How do
we compete?
 Biz-Level Strategy vs. Corporate-Level Strategy:
At the business level, strategies are accomplished
through competitive actions rather than acquisition or
divestment
Porter’s Five Forces are widely used to develop
biz-level strategy
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Strategic Business Unit (SBU)
• SBU – an autonomous organization within a firm:
• Budgeting authority
• Personnel decision-making
• Examples of SBU:
• ABC Television – one of four SBUs in Disney
• Division in Army
• College at LSSU
8.5 Porter’s Five Forces
8.6 Porter’s Competitive Strategies
Formulating Functional-Level
Strategy
 Action plans used by major departments
(Marketing, Production, Finance, HR, R&D)
 To support the execution of biz-level strategy
 To coordinate with biz-level strategy to achieve
the organization’s strategic goals
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New Trends in Strategy
• Strategic Flexibility – managers must be
prepared to change and adjust strategy quickly
• Strategic Partnerships – collaboration with
other organizations is important – Partners
must share resources & information.
• Global Strategy – organizations pursue a
distinctive focus for global business
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8.7 Global Corporate Strategies
Strategy Execution - The final step!
• “Strategy is easy, but execution is hard”
– Most important but most difficult part
• Strategy must be skillfully executed
• Alignment requires all aspects of the organization to
focus on strategy goals
– Everyone is moving in the same direction
• Dynamic approaches:
– Vision, intuition and employee participation
– Leadership, structure, information and control systems, and
human resources
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8.8 Six Silent Killers of Strategy
8.9 Tools for Putting Strategy into Action
Strategic Planning & Management
• Truth vs. Spin
• Strategic Planning - Strategy Map
• Agency Theory – Agency Cost: HP & Compaq, BoA & Merrill
• SWOT Analysis: Facebook case
• SBU - BCG Matrix
• Porter’s 5 Competitive Force Model - 3 Competitive Strategies
• Tools for Strategy Execution – Leadership, Clear Roles,
Accountability, HR, Candid Communication
• Management: Leadership, Organization, Planning, Control