Seminar Objectives for Tonight Unit 4 feedback and questions Review Unit 5 assignments/discussion questions Unit 5: Internal Analysis and Long Term Objectives and Strategies Unit 4 Feedback Unit 5- To Do List Read Chapter 6, Internal Analysis Chapter 7, Long-Term Objectives and Strategies Complete and upload your Case Analysis Assignment Case 28, Section B, Comprehensive Cases, Whole Foods Market 2007: Will There Be Enough Organic Food to Satisfy the Growing Demand?’s Respond to the Discussion Question Explain how you might use VCA, (value chain analysis) RBV, (resource based view) and SWOT analyses to get a better sense of what might be a firm’s key building blocks for a successful strategy. Choose a Fortune 1000 company to demonstrate these analyses mentioned. Chapter 6 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. SWOT Analysis A traditional approach to internal analysis: SWOT is an acronym for the internal Strengths and Weaknesses of a firm and the environmental Opportunities and Threats facing that firm. SWOT analysis is a historically popular technique through which managers create a quick overview of a company’s strategic situation. 6-6 SWOT Components An opportunity is a major favorable situation in a firm’s environment A threat is a major unfavorable situation in a firm’s environment A strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting the needs of the customers it serves A weakness is a limitation or deficiency in one or more of a firm’s resources or capabilities relative to its competitors that create a disadvantage in effectively meeting customer needs 6-7 Ex. 6.2 SWOT Analysis Diagram 6-8 Limitations of SWOT Analysis A SWOT analysis can overemphasize internal strengths and downplay external threats A SWOT analysis can be static and can risk ignoring changing circumstances A SWOT analysis can overemphasize a single strength or element of strategy A strength is not necessarily a source of competitive advantage 6-9 Value Chain Analysis (VCA) The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value Value chain analysis (VCA) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value VCA takes a process point of view 6-10 Ex. 6.3 The Value Chain 6-11 Conducting a VCA 1. 2. Identify activities Allocate costs VCA proponents hold that the activity-based VCA approach would provide a more meaningful analysis of the procurement function’s costs and consequent value added than the traditional cost accounting approach 6-12 Ex. 6.5 Traditional Cost Accounting VS Activity Based Cost Accounting 6-13 Difficulty in Activity-Based Cost Accounting It is important to note that existing financial management and accounting systems in many firms are not set up to easily provide activity-based cost breakdowns The information requirements to support activitybased cost accounting can create redundant work The time and energy to change to an activity-based approach can be formidable 6-14 Three Circles Analysis An internal analysis technique wherein strategists examine customers’ needs, company offerings, and competitor’s offerings to more clearly articulate what their company’s competitive advantage is and how it differs from those of competitors. 6-13 Ex. 6.7 Three Circles Analysis 6-14 Resource-Based View (RBV) 1. 2. 3. RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages 6-17 Three Basic Resources 1. 2. 3. Tangible assets are the easiest “resources” to identify and are often found on a firm’s balance sheet Intangible assets are “resources” such as brand names, company reputation, organizational morale, technical knowledge, patents and trademarks, and accumulated experience Organizational capabilities are not specific “inputs.” They are the skills that a company uses to transform inputs into outputs 6-18 What makes a resource valuable? 4 Guidelines: Is the resource or skill critical to fulfilling a customer’s need better than that of the firm’s competitors? 2. Is the resource scarce? Is it in short supply or not easily substituted for or imitated? 3. Appropriability: Who actually gets the profit created by a resource? 4. Durability: How rapidly will the resource depreciate? 1. 6-19 Elements of Scarcity Short Supply Availability of Substitutes Imitation Isolating Mechanisms: Physically Unique Resources “Path-Dependent” Resources Casual Ambiguity Economic Deterrence 6-20 Using RBV in Internal Analysis It is helpful to: Disaggregate resources Utilize a functional perspective Look at organizational processes Use the value chain approach 6-21 Ex. 6.11 Applying the Resource Based View 6-22 Making Meaningful Comparisons Managers need objective standards to use when examining internal resources and value-building activities Strategists use the firm’s historical experience as a basis for evaluating internal factors Benchmarking, or comparing the way “our” company performs a specific activity with a competitor or other company doing the same thing, has become a central concern of managers in quality commitment companies worldwide 6-23 Comparison with Success Factors in the Industry The key determinants of success in an industry may be used to identify a firm’s internal strengths and weaknesses A strategist seeks to determine whether a firm’s current internal capabilities represent strengths or weaknesses in new competitive arenas 6-24 Chapter 7 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Long-Term Objectives Strategic managers recognize that short-run profit maximization is rarely the best approach to achieving sustained corporate growth and profitability To achieve long-term prosperity, strategic planners commonly establish long-term objectives in seven areas: Profitability Competitive Position Employee Relations Tech Leadership – – – – Productivity Employee Development Productivity Public Responsibility 7-26 Qualities of Long-Term Objectives There are five criteria that should be used in preparing long-term objectives: Flexible Measurable Motivating Suitable Understandable 7-27 The Balanced Scorecard The balanced scorecard is a set of measures that are directly linked to the company’s strategy Developed by Robert S. Kaplan and David P. Norton, it directs a company to link its own long-term strategy with tangible goals and actions. The scorecard allows managers to evaluate the company from four perspectives: financial performance customer knowledge internal business processes learning and growth 7-28 Ex. 7.1 The Balanced Scorecard 7-29 Generic Strategies A long-term or grand strategy must be based on a core idea about how the firm can best compete in the marketplace. The popular term for this core idea is generic strategy. 3 Generic Strategies: 1. Striving for overall low-cost leadership in the industry. 2. Striving to create and market unique products for varied customer groups through differentiation. 3. Striving to have special appeal to one or more groups of consumers or industrial buyers, focusing on their cost or differentiation concerns. 7-30 Low-Cost Leadership Low-cost producers usually excel at cost reductions and efficiencies They maximize economies of scale, implement cost-cutting technologies, stress reductions in overhead and in administrative expenses, and use volume sales techniques to propel themselves up the earning curve A low-cost leader is able to use its cost advantage to charge lower prices or to enjoy higher profit margins 7-31 Differentiation Strategies dependent on differentiation are designed to appeal to customers with a special sensitivity for a particular product attribute By stressing the attribute above other product qualities, the firm attempts to build customer loyalty Often such loyalty translates into a firm’s ability to charge a premium price for its product The product attribute also can be the marketing channels through which it is delivered, its image for excellence, the features it includes, and its service network 7-32 Focus A focus strategy, whether anchored in a low-cost base or a differentiation base, attempts to attend to the needs of a particular market segment A firm pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the needs of customers with special financing, inventory, or servicing problems; or to tailor the product to the somewhat unique demands of the small- to mediumsized customer The focusing firms profit from their willingness to serve otherwise ignored or underappreciated customer segments 7-33 The Value Disciplines Operational Excellence This strategy attempts to lead the industry in price and convenience by pursuing a focus on lean and efficient operations Customer Intimacy Customer intimacy means continually tailoring and shaping products and services to fit an increasingly refined definition of the customer Product Leadership Companies that pursue the discipline of product leadership strive to produce a continuous state of state-of-the-art products and services 7-34 Grand Strategies Grand strategies, often called master or business strategies, provide basic direction for strategic actions Indicate the time period over which long-rang objectives are to be achieved Any one of these strategies could serve as the basis for achieving the major long-term objectives of a single firm Firms involved with multiple industries, businesses, product lines, or customer groups usually combine several grand strategies 7-35 Concentrated Growth Concentrated growth is the strategy of the firm that directs its resources to the profitable growth of a dominant product, in a dominant market, with a dominant technology Concentrated growth strategies lead to enhanced performance Specific conditions favor concentrated growth The risks and rewards vary 7-36 Market Development Market development commonly ranks second only to concentration as the least costly and least risky of the 15 grand strategies It consists of marketing present products, often with only cosmetic modifications, to customers in related market areas by adding channels of distribution or by changing the content of advertising or promotion Frequently, changes in media selection, promotional appeals, and distribution are used to initiate this approach 7-37 Product Development Product development involves the substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels 7-38 Innovation These companies seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas The underlying rationale of the grand strategy of innovation is to create a new product life cycle and thereby make similar existing products obsolete 7-39 Horizontal Integration When a firm’s long-term strategy is based on growth through the acquisition of one or more similar firms operating at the same stage of the production-marketing chain, its grand strategy is called horizontal integration Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets 7-40 Vertical Integration When a firm’s grand strategy is to acquire firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products), vertical integration is involved The main reason for backward integration is the desire to increase the dependability of the supply or quality of the raw materials used as production inputs 7-41 Ex. 7.7 Vertical and Horizontal Integrations 7-42 Concentric Diversification Concentric diversification involves the acquisition of businesses that are related to the acquiring firm in terms of technology, markets, or products With this grand strategy, the selected new businesses possess a high degree of compatibility with the firm’s current businesses The ideal concentric diversification occurs when the combined company profits increase the strengths and opportunities and decrease the weaknesses and exposure to risk 7-43 Conglomerate Diversification Occasionally a firm, particularly a very large one, plans acquire a business because it represents the most promising investment opportunity available. This grand strategy is commonly known as conglomerate diversification. The principal concern of the acquiring firm is the profit pattern of the venture Unlike concentric diversification, conglomerate diversification gives little concern to creating product-market synergy with existing businesses 7-44 Turnaround The firm finds itself with declining profits Among the reasons are economic recessions, production inefficiencies, and innovative breakthroughs by competitors Strategic managers often believe the firm can survive and eventually recover if a concerted effort is made over a period of a few years to fortify its distinctive competences. This is turnaround. Two forms of retrenchment: Cost reduction Asset reduction 7-45 Elements of Turnaround A turnaround situation represents absolute and relativeto-industry declining performance of a sufficient magnitude to warrant explicit turnaround actions The immediacy of the resulting threat to company survival is known as situation severity Turnaround responses among successful firms typically include two stages of strategic activities: retrenchment and the recovery response The primary causes of the turnaround situation have been associated with the second phase of the turnaround process, the recovery response 7-46 Divestiture A divestiture strategy involves the sale of a firm or a major component of a firm When retrenchment fails to accomplish the desired turnaround, or when a nonintegrated business activity achieves an unusually high market value, strategic managers often decide to sell the firm Reasons for divestiture vary 7-47 Liquidation When liquidation is the grand strategy, the firm typically is sold in parts, only occasionally as a whole—but for its tangible asset value and not as a going concern Planned liquidation can be worthwhile 7-48 Bankruptcy Liquidation bankruptcy—agreeing to a complete distribution of firm assets to creditors, most of whom receive a small fraction of the amount they are owed Reorganization bankruptcy—the managers believe the firm can remain viable through reorganization Two notable types of bankruptcy Chapter 7 Chapter 11 7-49 Joint Ventures Occasionally two or more capable firms lack a necessary component for success in a particular competitive environment The solution is a set of joint ventures, which are commercial companies (children) created and operated for the benefit of the co-owners (parents) The joint venture extends the supplier-consumer relationship and has strategic advantages for both partners 7-50 Strategic Alliances Strategic alliances are distinguished from joint ventures because the companies involved do not take an equity position in one another In some instances, strategic alliances are synonymous with licensing agreements Outsourcing arrangements vary 7-51 Consortia, Keiretsus, and Chaebols Consortia are defined as large interlocking relationships between businesses of an industry In Japan such consortia are known as keiretsus, in South Korea as chaebols Their cooperative nature is growing in evidence as is their market success 7-52 Selection of Long-Term Objectives and Grand Strategy Sets When strategic planners study their opportunities, they try to determine which are most likely to result in achieving various longrange objectives Almost simultaneously, they try to forecast whether an available grand strategy can take advantage of preferred opportunities so the tentative objectives can be met In essence, then, three distinct but highly interdependent choices are being made at one time 7-53 Sequence of Selection and Strategy Objectives The selection of long-range objectives and grand strategies involves simultaneous, rather than sequential, decisions While it is true that objectives are needed to prevent the firm’s direction and progress from being determined by random forces, it is equally true that objectives can be achieved only if strategies are implemented 7-54