Formulation
Formulation Overview
Want to create a sustainable competitive
advantage
Grounded in current mission, objectives,
and strategies
1. Identify rich range of strategic
alternatives
2. Balanced evaluation of + and - of
alternatives
3. Decide on alternatives to be
implemented/recommended
Three Levels of Strategy
Corporate level strategy
Competitive (business level) strategy
Functional strategies
…all need to be consistent and in
alignment
Corporate Level Strategy
Directional strategy (retrenchment through
growth)
Portfolio strategy (what LOB’s for future)
Parenting strategy (allocation of resources
+ connections)
Directional Growth Strategies
Concentration
– Vertical integration
– Horizontal growth
Diversification
– Related (concentric)
– Unrelated (conglomerate)
Mergers, acquisitions, strategic alliances
Other Directional Strategies
Stability
Retrenchment
…often more appropriate than growth
strategies, which tend to be overused
Competitive Strategy
(Sometimes called business level strategy)
How we will compete within each line of
business (LOB) or strategic business unit
(SBU)
Porter’s four generic competitive strategies
Variations plus tactics
Generic Competitive Strategies
Competitive Advantage
Lower cost Differentiation
Competitive Broad
Scope
Narrow
Price
leadership
Differentiation
Price focus Differentiation
Focus
Competitive Advantage
A firm’s ability to create value in a way that its
rivals cannot
When a firm has the potential to earn a
persistently higher rate of profit than its rivals
Competitive advantage means a lack of
equilibrium with rival firms
Being distinctively better than rivals on 1-2
key success factors usually translates into
competitive advantage
The Emergence of Competitive Advantage
How does competitive
advantage emerge?
External sources of
change e.g.:
•Changing customer demand
•Changing prices
•Technological change
Resource heterogeneity
among firms means
differential impact
Some firms faster
and more effective
in exploiting change
Internal sources
of change
Some firms
have greater creative
and innovative
capability
Competitive Advantage from
Responsiveness to External Change
Any external change creates opportunities
Frequently, speed of response is critical
Responsiveness requires:
– One key resource: information
– One key capability: flexibility
For example, Wal-Mart’s purchasing and
distribution driven by point-of-sale data
Competitive Advantage from InternallyGenerated Change: Strategic Innovation
Characteristics of innovative strategies:
– Associated with new entrants to an
industry (e.g. IKEA in furniture, Home Depot, Dell in
PCs)
– Reconcile conflicting performance goals
(e.g. Toyota’s lean production system combines low
cost, high quality, and flexibility)
– Reconfiguring the value chain (e.g. Southwest
Airlines’ simplification of the normal airline value chain)
Sustaining Competitive Advantage
Competitive advantage is subject to
erosion by competitors
– …by imitation or innovation
Competitive imitation requires:
– Identification of a competitive advantage
– Incentive to imitate
– Diagnosis of key features
– Resource acquisition
Sustaining Competitive Advantage Against Imitation
REQUIREMENT FOR IMITATION
Identification
Incentives for imitation
ISOLATING MECHANISM
- Obscure superior performance
- Deterrence--signal aggressive
intentions to imitators
- Pre-emption--exploit all available
investment opportunities
Diagnosis
- Rely upon multiple sources of
competitive advantage to create
“causal ambiguity”
Resource acquisition
- Base competitive advantage upon
resources and capabilities that are
immobile and difficult to replicate
Competitive Advantage in Different Industry Settings:
Trading Markets and Production Markets
MARKET
TYPE
SOURCE OF
IMPERFECTION OF
COMPETITION
TRADING
MARKETS
• None (efficient markets)
• Imperfect information
• Transaction costs
• Systematic behavioral trends
• Overshooting
• Barriers to imitation
PRODUCTION
MARKETS
• Barriers to innovation
OPPORTUNITY
FOR COMPETITIVE
ADVANTAGE
None
Insider trading
Cost minimization
Superior diagnosis
(e.g. chart analysis)
Contrarianism
Identify potential barriers to
imitation (e.g. deterrence,
preemption, causal ambiguity,
resource immobility, etc.) &
base strategy upon them.
Difficult to influence or
exploit.
Functional Level Strategy
More localized and shorter-horizon
strategies
Deal with how each functional area will
carry out its activities to be effective and
maximize resource productivity
Need to ensure that the set of
recommended strategies
address all the critical issues
well
International Strategies
Licensing
Management contracts
Exporting
Joint ventures, production sharing,
subcontract arrangements
Turnkey construction contracts
BOT (build, operate, transfer) contracts
Acquisitions
Green-field development
Implementation
Implementation
Third stage in strategic management
process
Vital, often neglected
Reread notes on implementation
Need a good implementation plan
“Then any path will do” (Cheshire Cat)
“If you don’t know where you’re going, you
might wind up somewhere else!” (Yogi Berra)
BUT you have to work with the situation as your
implementation proceeds
“Plans get you into things, but you got to
work your way out.” (Will Rogers, Jr.)
Any implementation plan needs to
answer:
What?
How?
Who?
When?
Where?
Why (are we doing it this way)?
An implementation plan is a
sequence of action steps
Action steps in an implementation plan
may result from considering:
– Basic steps necessary
– Resources
– Timing
– Support
– Reward systems
– Organization structure
– Culture
– Tracking & control systems
Some problems in rewarding &
measuring performance
Lack of valid, measurable objectives
Can’t get timely, valid information
Side effects:
– Short-term orientation
– Goal displacement
Behavior substitution
Suboptimization
Behavior Substitution