Strategy
What is Strategy?
o A pattern of actions that affect performance
o A company's "game plan"
o Some people refer to “tactics” (up to 5 year) and “strategy” (20 year)
Current Research
o Firms with a strategy perform better
o Firms without a strategy more likely to fail
o Strategy is no guarantee of success
Primary Strategic Questions
o Where are we now?
o Where do we want to go?
o How will we get there?
The Five Tasks of Strategic Management
o Define your business and mission
o Establish objectives
o Craft a strategy
o Implement the strategy
o Evaluate, review, and make adjustments
Task 1: Developing a Mission
Need a vision of where the company is headed over the next 5 years
Goals of Task 1:
o Inject the organization with a sense of purpose
o Provide long-term direction
o Give the organization an identity
o Establish a written mission statement
Example of a Mission Statement
"Our mission is to expand our worldwide leadership in the spice, seasoning, and
flavouring markets." (McCormick and Company)
Task 2: Establish Objectives
o Objectives should be measurable
o Objectives should be difficult, but doable
o Ideally, objectives should have a time frame
Examples of Corporate Objectives
o Achieve a 20% return on equity within 3 years
o Achieve a net sales growth rate of 10% per year
o Pay out 25% to 35% of net income in dividends per year
o Within 5 years, achieve the largest market share in the industry
Task 3: Crafting a Strategy
This is your action plan
o How to gain a competitive advantage
o How to respond to change
o How to defend against threats
o How to pursue opportunities
Task 4: Implementation
o How you "make it happen"
o Accomplishing your objectives
o Key is Achieving Results
Task 5: Evaluate, Review, and Adjust
The "guided missile" approach
Some examples of adjustments:
o Alter strategy
o Raise or lower objectives
o Improve implementation
Some Caveats in Strategic Planning
o Centralized planning is doomed to failure
o Never separate responsibility from accountability
o Implementers must "buy in" to the strategy
Developing the Mission
What activities the firm will pursue
What course management has charted for the future
Three distinct aspects:
o Understanding what business we are in
o Deciding when to change course (these can be “milestoned”)
o Articulating the mission so that it is simple and motivational
Establishing Objectives
 Financial objectives
 Strategic objectives:
o Competitor focused
o Attempts to improve LR (Long Run) market and competitive position
o Aims at being "best" (“benchmarking”)
Examples of Financial Objectives
o Increase earnings by 15% annually
o Increase net profit margins by 4%
o Improve bond rating to AA within 3 years
o Increase dividends per share by 5% per year
Examples of Strategic Objectives
o
o
o
o
o
Increase market share to 45% within 5 years
Attain a lower cost relative to key competitors
Strengthen our reputation with our customers relative to our competitors
Improve customer service
Recognition as a leader in product innovation
Purpose of Long Run Objectives
o Provides guidance for what needs to be done now
o Forces managers to weigh impact of today's decisions on future performance
Guidelines for Setting Objectives
o Quantifiable (esp. financial objectives)
o Challenging but doable
o Time frame
Levels of Strategy
o Corporate: "What business(es) should we be in"
o Business: "How shall we compete in this business"
Factors Shaping Strategy
o External
 Societal, political, regulatory
 Industry conditions
 Specific opportunities and threats
o Internal
 Strengths and weaknesses
 Ambitions and values of management
 Culture
o Core Competencies
 Unique skills and know-how
 Can provide a competitive advantage
 May be a cornerstone of strategy
 "Strategic resources"
o Tests of a Winning Strategy
 Goodness of fit test
 Competitive advantage test
 Performance test
Industry and Competitive Analysis
Competitor analysis.
Locate your competitor, what are they trying to achieve, how do they contact their customers ?
Never copy ---- if you take from others you will never be first !
Other companies. have they solved similar problems ?
Collect competitor information. business info e.g. yahoo and krak.
customer surveys on-line - do they visit the competition
subscribe to your competitors mailng list to find out what they think is new
Think of value chain. Instead of selling kunst directly, your customer may prefer to pick it up at
their nearest gallery: improved know-how in handling, extra sales possibilities, you make friends
instead of enemies.
Driving Forces Analysis
"Driving Force" = major underlying cause of change in industry and competitive conditions
Usually no more than 3 or 4 driving forces
Purpose of the analysis:
o Identify the driving forces (demographic, new technology etc)
o Assess their impact
Examples of Driving Forces
o Change in industry growth rate
o Product innovation
o Marketing innovations
o Exit or entry of major players
o Globalisation of the industry
o Changes in government regulation
o Changing societal concerns and lifestyles
Assessing the Profitability of an Industry
o Porter's "Five Forces" model *
o Strong forces = low profit potential
Common Barriers to Entry
o Economies of scale
o Specialized know-how
o Experience curve effects
o Brand loyalty
o Capital requirements
o Access to distribution channels
o Regulation
Strategic Group Mapping
Step 1: Identify competitive characteristics that differentiate firms in an industry
o Price/quality
o Geographic coverage
o Degree of vertical integration
o Product line breadth
o Use of distribution channels
o Degree of service
Step 2: Plot the competitors on a two variable map using pairs of differentiating
characteristics
Step 3: Assign firms that fall in about the same strategy space to the same strategic
group
Step 4: Draw circles around each strategic group, making the circles proportional to the
size of the group's market share
Interpreting Strategic Group Maps
o Different profit potential
o Helps to identify your competitors
o Five Forces differ by strategic group
Key Success Factors
Three to five major determinants of financial and competitive success
Can be
o a skill or talent
o something you have to do to satisfy customers
o KSFs should serve as the cornerstone on which strategy is built
Implications of Industry Attractiveness
o Good to excellent: Build and Invest
o Medium: Protect and Milk
o Poor: Exit, Sell
Company Situation Analysis
The Key Issues
o What is the present strategy?
o Is it working?
o SWOT (see below)
o Cost competitiveness
o Competitive position
o What problems need to be addressed?
What is the Present Strategy? Is it Working?
o Market share
o Profit margins
o Sales growth
o Is there a competitive advantage?
o Stock price
SWOT
Internal: Strenghts and Weaknesses
External: Opportunities and Threats
external
Positive
Opportunities
negative
threats
internal
Strengths
weaknesses
Core Competence
Something a company does better than the competition
Examples
o know-how
o quality control
o service capability
o product design
o marketing skills
o quality of management
Strategic Cost Analysis
Cost position relative to competitors
Activity Chain Analysis
o raw materials supply
o logistics
o manufacturing
o distribution
o retailing
Correcting a Cost Disadvantage
o Tighten the budget
o Productivity (equipment and employees)
o Eliminate cost-producing activities
o Re-locate high cost activities geographically
o "Make or buy" decision
o Technological improvements
o Redesign the product
Competitive Strength Assessment
Step 1: List KSFs (Key Success Factors)
Step 2: Rate firm and rivals (1-10)
Step 3: Weight the KSFs by importance
Step 4: Multiply rate by weight - weighted rate
Step 5: Sum the weighted rates
Step 6: Evaluate where you stand competitively
Deciding what the Issues Are
o Is the present strategy adequate?
o Is the present strategy geared to KSFs?
o Does the present strategy provide a defence against the "Five Forces"?
o Do strengths heavily outweigh weaknesses?
o Is there a competitive advantage?
o Any weak spots in the present strategy?
Strategy and Competitive Advantage
Some Cost Reduction Tools
o Product standardization
o Work methods improvement
o More efficient processing
o Learning curve effects
o Product "fine tuning"
o "Make or buy" decisions
Differentiation Strategy
The basis of differentiation if perception of value by consumers
Examples
o product features
o linkages
o timing
o location
o product mix
o reputation
Advantages of Differentiation
o Advertising can influence perceptions
o Brand loyalty = an entry barrier
o Can charge a premium price
o Can use to increase sales and market share
o Market power  above average profits
Disadvantages of Differentiation
o Much differentiation is easy to imitate
o Consumer's tastes and preferences are dynamic
o Price is still important to most consumers
Focus Strategy
Serving a limited set of customers with low cost or differentiation
Some ways to Focus
o Geographic
o Consumer attributes (income, gender, etc)
o Product attributes
Key to success is to find a vacant niche where major players are not doing a good job
Offensive Strategies (Business)
o Avoid head to head competition Beware the "popgun strategy"
o Concentrate your strengths against their weaknesses Honda vs Harley Davidson
o Simultaneous attack on several fronts
o Guerrilla offensives
o Pre-emptive strategies
o moving first to tie up resources
o creates a "prime" position
First Mover Pros and Cons
First mover advantages
o can tie up best resources
o can enhance image and reputation
o can create brand loyalty
o experience curve effects
First mover disadvantages
o pioneering costs are high
o second movers tend to be stronger financially
o second movers can imitate know-how by hiring away talent
Matching Strategy to the Situation
Characteristics of Emerging Industries
o Market is new, unproven
o Most buyers are first-time users
o Companies are in a growth mode
o Lack of product/technological standards
o Buyers are difficult to attract
Strategy Options in Emerging Industries
o Try to make the "rules of the game" eg phone.com
o Constant improvement in quality & features
o Go for first mover advantages
o Seek out new customers
o Advertising for product awareness
o Build brand loyalty
Characteristics of Maturing Industry
o Slowing growth
o Buyers are more sophisticated
o More emphasis on price & service
o Industry profitability falls
o International competition increases
Strategy Options in Maturing Industries
o Refocus the product line
o Emphasize process innovation
o Emphasize cost reduction
o Seek to retain customers
o Horizontal integration
o Global expansion
Characteristics of International Markets
o Market differences between countries
o Cost differences between countries
o Exchange rate fluctuations
o Differences in host government trade policies
Strategy Options for Competing Internationally
o Licensing
o One-Country production & export
o Multi-country strategy
o Global low-cost strategy
o Global differentiation strategy
o Global focus strategy
Multi-country Strategy
o Works best when market conditions are diverse from country to country
o Matches strategy to host country circumstances
o Entails little coordination across borders
o Is a "collection" of single-country strategies
Global Strategy
Works best when similarities exist in products & buyer requirements across countries, allowing a
o uniform worldwide strategy
o Involves tremendous coordination
o Involves being a player in all the significant markets
o Competitive advantage from:
o Locating activities in countries with the lowest
o Coordination of worldwide activities
o The Competitive Power of Cross-Subsidization
Porter's "Five Forces" model *
Potential
Competition
The 6th Force:
Interest groups
Suppliers’
Position in the market
Rivals or competitors
Already in the market
Customers’
Purchasing power
Alternative
Products/services
Porters original 5 force model has been modified by adding a sixth: interest groups (Greenpeace
etc) is your product offensive to environmental, womens, etc pressure groups