business strategy hnd 2nd
TRANSCRIPT
HND
BUSINESS STRATEGY
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Functional Strategies• Functional strategies or operational
strategies are goal oriented plans and actions of the functional areas of an organization, they include:– Production-Operations– Marketing– Research & Development– Human Resources– Financial-Accounting– Information Technology & Support
Competitive Strategies• Competitive strategies or business
strategies are goal directed plans and actions concerned with how an organization competes in a specific business or industry– Looks at all aspects of strategies and actions– Seeks to determine what the company
currently can do and what it wants to do– Focus is on how it might more effectively
compete
CORPORATE STRATEGY
• Corporate strategies are goal directed plans and actions that are concerned with what business or businesses a firm wants to be in and what to do with those businesses; for example– FedEx’s decision to acquire Kinko's– PepsiCo’s decision to spin off their fast-food
division
STRATEGY IMPLEMENTATION
• It is not enough to formulate great strategies, they must be implemented– Strategy implementation is putting the various
stages of strategies into action– How a strategy is implemented must be
considered
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Competitive Advantage
• The key to strategic management, the challenge is getting and keeping competitive advantage– It is about doing something others cannot or doing it
better (distinctive capability)– Or, the organization has something others do not
(unique resource)
• An organization’s competitive strategies are designed to exploit its competitive advantage
• However, other organizations are attempting to develop their own competitive advantage in order to compete.
• Competition is in all markets and industries
What an External Analysis Is?• External analysis is the process of scanning and
evaluating an organization’s external environment– It is how strategic managers evaluate the threats and
opportunities facing their organization
• Opportunities– Positive external trends or changes that may help an
organization improve performance
• Threats– Are negative external trends or changes that may
hinder an organization’s performance
• Understanding the external environment is essential to creating adaptive strategies
What an External Analysis Is?
• Opportunities– Positive external trends or changes that may
help an organization improve performance• Threats
– Are negative external trends or changes that may hinder an organization’s performance
• Understanding the external environment is essential to creating adaptive strategies
WHAT IS AN EXTERNAL ANALYSIS?
• An external analysis is the process of scanning and evaluating an organization's external environment to determine the opportunities and threats facing their organizations.
• Opportunities are positive external trends or changes that may help an organization improve its performance.
• Threats are negative external trends or changes that may hinder an organization's performance.
• It’s important to know what’s happening in the external environment so new strategies can be formulated or current strategies changed in response to the opportunities or threats.
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Environmental Scanning and External Analysis
• Environmental scanning allows strategic decision makers to know what's happening in the external environment so they can identify and anticipate environmental changes. This means scanning the environment and evaluating what the various data and trends mean to the organization.
• Note that it's not enough just to know what's happening in an organization's environment—the informational needs of an organization also need to be assessed. In other words, an external analysis is needed to determine the opportunities and threats facing the organization. 10
An Organization’s External Environment
• General environment refers to those external environmental sectors that indirectly affect the organization’s strategic decisions and actions and may pose opportunities or threats (e.g., economic, demographic, sociocultural, political-legal and technological sectors).
• Specific environment describes those external environmental sectors that directly impact the organization's decisions and actions by opening up opportunities or threats. (e.g., customers, competitors, suppliers and other industry-competitive variables).
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An Organization’s External Environment
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Identifying environmental influences – PESTEL
General Environment
• The general environment includes those external environmental sectors that indirectly affect the organization's strategic decisions and actions and may pose opportunities or threats. The five main general environment sectors:
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Economic• The economic sector encompasses all the
macroeconomic data (i.e., current statistics, forecasted trends and changes) that reflect what’s happening with the economy. It doesn't include the economic statistics of an organization’s industry.
• For instance, industry sales forecasts and trends aren't part of the general economic sector. However, you would look at those statistics in evaluating the industry and competitive environment.
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Economic• The economic sector includes:
Interest ratesExchange rates and the value of the dollarBudget deficit or surplusTrade deficit or surplus Inflation ratesGross National Product (GNP) or Gross Domestic Product
(GDP) levels and resulting stage of the economic cycleConsumer income, spending and debt levelsEmployment-unemployment levelsConsumer confidence levelsWorkforce productivity rates
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Evaluating the effect on the organization:
• Look at current information as well as forecasted trends, and determine how the change may or may not affect your organization.
• International considerations:– An additional challenge is to find convenient and
reliable information.– Most critical economic information may be the
inflation rates, interest rates, currency exchange rates, and consumer-income-spending-debt levels because these tend to be the most volatile economic factors.
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Demographics• The demographic sector evaluates current statistical data
and trends in population characteristics. – Gender– Age– Income levels– Ethnic makeup– Education– Family composition– Geographic location– Birthrates– Employment status
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Demographics
• Evaluate changes and trends, and how the trends would affect the organization. Also consider the interaction of these variables, e.g., What is the trend of the geographic location of baby boomers? Will this affect marketing?
• International considerations: Demographics on current or target customers is relevant regardless of location. It may be difficult to find this information in some of the semi-industrialized countries, but industrialized and most larger semi-industrialized countries collect census data.
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Demographics
• What the country's culture is like and is it changing? What are society's traditions, values, attitudes, beliefs, tastes, patterns of behavior and how are these changing?
• Evaluating shifts in beliefs, opinions, values, etc. to determine how these values may influence people’s behavior in shop, work, family rearing, etc. (e.g., How has the fear of terrorism influenced buyers? What about “low carb” diet fads?)
• International Considerations: Important to understand each country’s culture, and try to uncover any trends or changes within the culture.
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Political-Legal• The various laws, regulations, judicial decisions, and political
forces that are currently in effect at the federal, state, and local levels of government.
It might also include regulations enacted by professional associations
Potential legal, regulatory, and political changes, or pending judicial decisions that might take place and could impact your organization.
• Evaluate the impact regulations may have on the organization and the industry. Also consider how consumer attitudes may change toward the industry/organization due to regulation (e.g., “vices” [tobacco, alcoholic beverages, gambling]).
• International Considerations: If operating in another country, your organization needs to know the relevant laws and regulations, and abide by them. It is also important to be aware of political changes.
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Political-Legal• Various trade alliances among countries are easing
political and economic restrictions on trade and creating numerous opportunities and threats.
• Trade alliances among countries include: the North American Free Trade Agreement (NAFTA), the European Union, the Central America Free Trade Agreement, the Association of Southeast Asian Nations (ASEAN) and the African Union
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Technological• Scientific or technological improvements,
advancements and innovations create opportunities and threats for an organization, such as:
Communications Computing TransportationManufacturing Robotics Biotechnology Medicine and medical Telecommunications Consumer electronics
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Technological• Two organizational areas impacted most by technological
innovations concern the product research and development and organizational work processes.
• In evaluating this sector, consider how technological changes will affect your organizations products (positively or negatively) or how the changes will affect how you produce your product (the process) (e.g., computerization of an organization’s activities).
• International Considerations: a country’s level of technological advancement is going to affect the assessment (e.g., Infrastructure required for telecommunications).
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Specific Environment• The specific environment consists of those external
sectors with which the organization directly interacts. In other words, the specific environment includes industry and competitive variables.
• Industry is a group(s) of organizations producing similar or identical products. These organizations compete for customers to purchase their products and must secure the necessary resources that are converted into products.
• The strategic manager can use Porter’s model to determine external opportunities and threats by evaluating the five forces. 25
Porter's Five Forces Model • Some industries are inherently more attractive
than others (i.e., the profit potential for companies in those industries is greater).
• The strength and interaction of the five forces are what influence profit potential
• The existing firms in an industry are an organization's current competitors. The more intense the rivalry among existing firms, the more profitability will suffer.
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Business StrategyUnit 7a
External Analysis
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The five forces of industry competitionSource : Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from COMPETITIVE STRATEGY: Techniques for analyzing industries and competitors by Michael E. Porter. Copy right © 1980,1998 by The Free Press. All rights reserved.
Current Rivalry Among Existing Firms
• Porter lists eight conditions that contribute to intense rivalry among existing competitors:
1. Numerous or equally balanced competitorsa. Constant competitive turmoil , constantly jockeying for position
2. Slow industry growthI. Battle for the limited market share
3. High fixed or storage costsa. e.g., Price cutting strategy keeps profits low
4. Lack of differentiation or switching costsa. Commodity-like product leads to differentiation by price and service
5. Addition of capacity in large incrementsa. Adding capacity is costly so competitors will cut prices to attract customers
6. Diverse competitorsa. Differing philosophies or circumstances between competitors make it difficult to predict strategies in the
market, which increases rivalry.
7. High strategic stakesa. Short run profitability may be sacrificed to succeed
8. High exit barriersa. Factors that keep companies competing even though they may be earning low or negative returns on
investment. Extreme tactics may be used to compete28
Potential Entrants• In addition to current competitors,
organizations should also be on the lookout for organizations moving into their industry.
– Why?:» Bring new capacity to the industry» Want to gain customers (market share)» May possess substantial resources that can be used to
launch attacks against current competitors
• Threat of potential entrants depends on the barriers to entry and the reaction by current competitors to entrants
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Barriers to entry• Are obstacles to entering an industry. When barriers are high or
current competitors can be expected to take significant actions to keep newcomers out, then the threat of entry is low.
• A low threat of potential entrants is positive for an industry because profitability won’t be divided up among more competitors.
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What are the major entry barriers? • Porter described seven:
1. Economies of scale
2. Cost disadvantages from other than scale (e.g., favorable access to raw materials, favorable location; government subsidies, human resource advantages from cumulative knowledge, learning and experience).
3. Product differentiation (e.g., brand loyalty with customers creates a high barrier).
4. Capital requirements: high initial investment will discourage newcomers.
5. Switching costs: One-time cost facing the buyer who switches from one supplier’s product to another’s, may be monetary or psychological (e.g., mobile phone or Internet service providers; new software).
6. Access to distribution channels: costs associated with distributing the product such as price breaks to distributors.
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Barriers to entry
• Government policy: Licensing and other standards can be costly in time and money. The more government regulations, the higher the barrier
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Bargaining Power of Buyers• Buyers are the seller's customers. If they have
a lot of bargaining power, they can force prices down, bargain for higher quality or more services, or even play competitors against each other trying to see who will give them the best deal.
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The factors of buyer power are:1. Large volume purchases—customer is more important to the seller than
seller is to the customer.
2. Products purchased represent a significant portion of the buyer's costs or purchases—customer is more likely to bargain hunt.
3. Products are standard or undifferentiated—the customer sees little difference in the sellers’ (competitors’) products with customer likely to play one supplier against another to find the best deal.
4. Buyer faces few switching costs—this does not encourage brand loyalty.
5. Buyer has low profits (or has low income levels)—if the customer is earning low profits, the customers will be looking for ways to reduce costs, hence reduce purchasing costs.
6. Buyer's ability and resources to produce the products themselves—if customer can make the product it’s buying, then it’s in a powerful position to ask for concessions from the supplier.
7. Product's quality isn’t important to the quality of the buyer's products or services.
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The factors of buyer power are:• If buyers don’t need the industry’s products to
get desired levels in their products or services, they have the power to bargain with the industry over prices and services offered.– Buyer has full information/knowledge about
product demand, market prices, and supplier costs—gives the customer good ammunition to get the best possible prices from suppliers.
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Bargaining Power of Suppliers• If an industry's suppliers have bargaining
power, they can raise prices or reduce the quality of products that an industry purchases.
• An industry's suppliers include any of the providers of resources or inputs: raw materials sources, equipment manufacturers, financial institutions and even labor sources.
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The factors of supplier power are:• Domination by a few suppliers and more
concentration than the industry• Availability of substitute products (inputs)• Multiple industries demanding the products of
suppliers• Importance of the product (input) to the industry• Supplier’s products are differentiated or if customer
has switching costs—availability of substitute or undifferentiated products
• Ability of the supplier to enter the customer's industry and start making the product that the customer makes 37
Substitute Products• The best way to evaluate the threat of
substitute products is to ask whether other industries can satisfy the consumer need that our industry is satisfying.
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Evaluating the Five Forces
Evaluating the Five Forces
Finding Information on the External Environment and Evaluating it
• Finding valuable information and interpreting it is essential to organizational success. Examples include:– Data specific to the context– Statistics– Analyses– Trends– Predictions and forecasts– Inferences or statements by experts
Finding Information on the External Environment and Evaluating it – cont’d
• External information can be found using informal and unscientific observations; as well as formal and systematic searches
• Examples of informal approaches– Discussions with customers and suppliers– Reading industry journals or news periodicals
• Examples of formal approaches– Surveys– Scientific analysis
Finding Information on the External Environment and Evaluating it – cont’d
• External information system– Is information system that provides managers
with needed external information on regular basis– Purpose is to identify potential trends and
changes that might positively or negatively impact organizational performance
– Information is valuable because external environment is complex and dynamic
– The challenge: having enough, but not too much information
For Your Information
• Spotting Trends: The art of picking up on what is “hot” or popular
• Suggestions for trend spotting:– Remember that valuable information can be
found anywhere– Gather information and file it away for later use– Determine whether something is a fad or a
trend; trends have staying power– Trends are not obvious, require effective
analysis
Responsibilities for External Analysis at Different Managerial Levels
• In smaller and medium sized companies, all employees should monitor changes in the specific industry and competitive environment– In small companies, front line employees
have the greatest interaction with customers and suppliers
– Such interactions provide valuable information for strategic decision makers
Responsibilities for External Analysis at Different Managerial Levels – cont’d
• In large organizations, doing a single analysis for the entire organization can be insufficient– The large structure, with its many units and
functions, creates varying needs for information– The value of the information will depend on the
organizational level and function– The role of different level managers will vary
based on whether their role is to gather, disseminate, or utilize the information gathered
For Your Information• Competitor Intelligence, a form of
environmental scanning– Seeks to identify who competitors are, what
they are doing, how their actions will affect your firm
– It does not involve spying or illegal actions– It can involve buying competitors products to
understand them, accessing published materials, interacting at trade shows
• What role does this place in external analysis?
Learning Review:
• What does the five-forces model look at and how is it used?
• What is examined in each of the five components and the general environment?
• How is external analysis done for a company that is doing business globally?
• How is information on the external environment found and evaluated?
• Describe the different responsibilities for doing an external analysis.
Benefits of Doing an External Analysis
• Enables managers to be proactive, not reactive– Anticipate change– Create plans for those changes– Influence the organizational performance
• External analysis is key– To providing information to use in planning,
decision making, and strategy formulation
Benefits of Doing an External Analysis – cont’d
• External analysis enables strategies to– Adapt to opportunities and threats– Neutralize competitor moves– Improve organizational opportunities
• Altering strategies should align the organization based on information about:– Markets– Customers– Technology
Benefits of Doing an External Analysis – cont’d
• Environment is a source of resource– The ability to acquire and control needed
resources depends on understanding the environment and taking advantage of the resources available
• Dynamic environment requires awareness of– Turbulent and fragmented markets– Changing customer tastes– Innovative technologies
Benefits of Doing an External Analysis – cont’d
• Intense global competition makes it imperative to complete an external analysis
• Research shows that firms doing an external analysis have higher performance– Performance evaluated on financial
measures like return on assets or increased profit
Challenges of Doing an External Analysis
• Rapidly changing environment– Keeping track of current situation and
changing trends can be a challenge– New technology– New competitors– New laws– New customers
Challenges of Doing an External Analysis – cont’d
• Doing an external analysis is time consuming– Key is making the process efficient and effective– Requires making value judgments about what to
monitor and evaluate
• No process of analysis provides perfect information– Forecasts are not fact– Analysis that is flexible and open is more likely to
be able to create adaptive strategies
Review
Describe what an external analysis is• External analysis
– Process of scanning and evaluating the external environment in order to identify opportunities and threats
• Opportunities– Positive external trends or changes that may
help to improve the organization’s performance
Review
• Threats– Negative trends or changes that may hinder
the organization’s performance
• Open systems– The concept that organizations interact with
and respond to their environment
• Environmental uncertainty– The greater the change and complexity in the
environment, the greater need for information
Review: Learning Outcome
• Environment is a source of resources– The more hostile the environment, the greater
the need to obtain and control resources– Managers monitor the environment in order to
acquire and control those needed resources• It is important to scan and evaluate the
external environment
Review: Learning Outcome
Explain how to do an external analysis of an organization’s specific and general environments
• Specific external environments include:– Customers– Competitors– Suppliers– Other industry-competitive variables
Review: Learning Outcome cont’d
• General external environments include:– Economic – Demographic– Sociocultural– Political-Legal– Technological
Review: Learning Outcome
• Specific environment analyzed using Porter’s five-forces model– Current rivalry– Potential entrants– Bargaining power of buyers– Bargaining power of suppliers– Threat of substitute products
Review: Learning Outcome – cont’d
• The general environment requires looking at:– Economic data– Demographic characteristics– Sociocultural values, attitudes, behavior– Political-Legal regulations, decisions, forces– Technological innovations
Review: Learning Outcome
• External information– Includes data, analyses, trends, forecasts,
inferences, expert opinions
• External analysis– Formal or informal– Provides managers with needed information– In small companies, analysis done by all– In larger companies, analysis more often
done by management or special groups
Review: Learning Outcome
Discuss the benefits and challenges of doing an external analysis
• Benefits– Makes managers proactive, anticipating and
planning for change instead of reacting– Provides information for planning, decision
making, and formulating strategy– Helps get needed resources– Helps cope with uncertainty
Review: Learning Outcome
• Challenges– Rapidly changing environment is hard to keep
up with– The process of analysis is time consuming– Forecasts and trend analysis are not perfect
Building Your Skills as Strategic Decision Maker
1. Looking at the US/UK Census data, how might this benefit strategic decision makers?
2. What is the value of the following questions/– What is happening in the world today?– What does it mean for us? For others?– What would have to happen for us to achieve
the desired results?– What do we have to do? What’s next?– Is our external analysis good? Why?
Building Your Skills as Strategic Decision Maker – cont’d
3. Find three different sources of online economic data. Are they valuable? Why?
4. What strategic implications (positive/negative) do trends toward a US/UK workforce that is smaller, move diverse, more mobile, and more vulnerable to global competition?
Building Your Skills as Strategic Decision Maker – cont’d
5. What opportunities and threats might arise for companies, in light of the aging baby boomers and struggling financial markets?
6. Two of the major competitors in fast-food – Wendy’s and McDonald’s – have positioned themselves differently. How would their unique interpretation of trends and changes affect their choice of strategy? Which might be better positioned? Why?
Business StrategyUnit 7b
Internal Analysis
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Three Learning Outcomes
1. Describe what an internal analysis is
2. Explain how to do an internal analysis
3. Discuss why an internal analysis is important
Learning Outcome
Describe What an Internal Analysis Is• To formulate appropriate and effective
strategies, it is important to know what an organization can and cannot do particularly well and what assets it does or does not have– Internal analysis is the process of evaluating
an organization’s assets, skills, and work activities; what it does well or what is lacking
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Organizational Resources• Resources are simply the assets an
organization has for doing whatever it is in business to do (e.g., make burgers, provide healthcare, create and sell greetings cards)– Resources can be financial, physical, human,
tangible, intangible, structural-cultural– Among the financial resources are debt
capacity, credit lines, available equity, cash reserves
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Organizational Resources – cont’d• Other examples of Resources
– Human resources, which include experiences, knowledge, judgment, skills, accumulated wisdom, competencies of employees
• The value of resources is context dependent; based on it seeks to do to make money– Resources can be a source of competitive
advantage for a company
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The Strategic Role of Organizational Resources and Organizational Capabilities
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From Resources to Organizational Capabilities
• An organization’s resources are that which are needed to perform its work– For example: A top chef needs pots, pans,
utensils, spices, raw food materials to do their job
• To reach its goals an organization must generate value from its resources and does so through capabilities– Using the same example: A chef needs skills
to combine ingredients to create a quality meal
From Resources to Organizational Capabilities – cont’d• Organizational capabilities
– Are the various routines and processes that transform resources (inputs) into products/services (outputs)
• Organizational routines and processes– Are regular, predictable, sequential work
activities done by organizational members– Complex network of these routines and
processes encompass all work activities
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From Resources to Organizational Capabilities –
cont’d• Employees learn how to best use organizational resources and processes, creating core competencies and distinctive organizational capabilities– Capabilities result from learning and are more than
the mere possession of resources– Some organizations do it better than others; they
are unable to develop capabilities to survive in an increasingly dynamic and competitive marketplace
From Resources to Organizational Capabilities –
cont’d• Southwest Airlines is an example of a firm that has developed valuable capabilities and competitive advantages– Loading, unloading planes– Reservations– Safety inspections– Customer service
From Resources to Organizational Capabilities –
cont’d• Capabilities are not self-sustaining in today’s complex and dynamic environment– Future conditions and competitors change
• Today’s environment demands dynamic capabilities– The ability to build, integrate, and reconfigure
capabilities to address the rapidly changing environment
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Characteristics of Distinctive Organizational Capabilities
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From Capabilities to Core Competencies and Distinctive
Capabilities• Core competencies
– Value creating capabilities that an organization possesses that are essential to their business
– Contribute to improving and enhancing other organizational capabilities
– They are the result of accumulated knowledge and actual work activities
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From Capabilities to Core Competencies and Distinctive
Capabilities – cont’d• Examples of usable core competencies
– Product design and customer research (Nokia)
• Organizational capabilities – Are fundamental building blocks of core
competencies that are created out of processes and routines
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From Capabilities to Core Competencies and Distinctive
Capabilities – cont’d• Distinctive organizational capabilities
– These are special and unique organizational capabilities that distinguish an organization from its competitors
• Examples of distinctive capabilities– Southwest Airlines: gate turnaround, ticketing,
and employee-customer interactions– Hallmark: creative product design
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Characteristics of Distinctive Capabilities
1. Must contribute to superior customer value and offer real benefits to customers– Being good at what customers value– Requires adaptiveness
2. Must be difficult for competitors to imitate– Requires balancing a complex array of
employee skills and knowledge– Harnessing learning in the organization– Utilizing cross-functional interaction
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Characteristics of Distinctive Capabilities
3. A distinctive capability should be used in a variety of ways– Organizational routines and processes
developed in one area should be transferable to other areas
• Examples of transferred capabilities– Reliable, fuel efficient drive trains for cars,
motorcycles, boats, lawnmowers, snow blowers, power generators (Honda)
– Energy conservation (United Technologies) 4- 84
Competitive Advantage and Performance Results
• Competitive advantage– Sets the organization apart from competitors– Must come from unique resources or
distinctive capabilities– Will positively affect performance results– Benefits may be short or long term– Demands that decision makers know the
strengths and weaknesses of its resources, capabilities, and competencies
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The Role of Strengths and Weaknesses
Strengths• These are resources that the organization
possesses and capabilities that is has developed– These can be exploited and developed into a
sustainable competitive advantage– Not all strengths will lead to competitive
advantage, but they can be competitive weapons if nurtured and reinforced
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The Role of Strengths and Weaknesses – cont’d
Weaknesses• Are resources and capabilities that are lacking
or deficient and prevent the organization from developing competitive advantage– Organizational weaknesses must be corrected if
they are in critical areas that prevent the organization from competing effectively
– Organization with limited resources to correct the problem will simply seek to minimize the impact
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Value Chain Analysis• Every organization (for profit or not-for-
profit) needs “customers” to survive– The premise is that there is a demand for some
type of value in the goods/services they purchase or obtain
• To assess the ability to provide value it is important that strategic decision makers use a systematic process to examine organizational activities and how they produce value
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Value Chain Analysis – cont’d
• Value chain activities are specific organizational routines and processes that create varying levels of customer value and organizational costs– The concern for organizations is that the
value created outweighs the cost of creating that value (often referred to as the margin)
– The effort is to assess the organization’s ability to create value through its work activities
Value Chain Analysis – cont’d
• Value chain analysis evaluates the internal environment, the organization’s strengths and weaknesses
• Value chain analysis assesses nine activities– Five primary– Four support
Value Chain Analysis
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Value Chain Analysis – cont’d
Primary activities – create customer value
• Inbound logistics – routines and processes that bring resources into the organization
• Operations – processing the resources into goods and services
• Outbound logistics – physically distributing these to customers
• Marketing/Sales – appealing to customers• Customer service – serving customer needs
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Value Chain Analysis – cont’d
Support activities – support primary activities and each other
• Procurement – gathering resources• Technology – provide efficiencies and improve
operational efforts• Human Resources – recruit, select, train, retain
employees• Infrastructure – capabilities to identify external
opportunities and threats
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Value Chain Analysis – cont’d
• Assessment of both primary and support activities is essential– The effective or efficient performance of these
activities helps create potential competitive advantage
– This analysis is not easily done because organizational activities do not always fit nicely and neatly into the analytical framework
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Assessing the Primary Activities of the Value Chain
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Assessing the Support Activities of the Value Chain
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Product Life Cycle
• The product life cycle is the ‘natural’ life span of a particular product or service.
• There are five (5) stages of the product life cycle:1. Introduction
2. Growth
3. Maturity
4. Saturation
5. Decline.97
The product lifecycle
Introduction
• High costs, low sales – and no profit is made
• Aim to recover development costs• Successful new product will move to
growth phase.
Growth
• Steady costs, sales increase rapidly and high profits can be made by pioneering firms.
• Aim to attract first-time customers and build market share.
Maturity
• Steady costs, sales increase more slowly and profits peak
• Aim to keep existing customers and persuade other consumers to switch from competing brands.
Saturation
• Steady costs, sales peak (no more growth) and reasonable profits
• Profit margins start to decline, owing to increased price competition.
Decline
• Low costs, falling sales and falling profits – maybe loss making
• Withdraw loss-making product• Keep decline product if it makes a
profit in a niche market.
Product lifecycle and extension strategies
Extending the product lifecycle (Continued)
– product development
which is minor product
modification or improvement
e.g. new model of a car – Vauxhall Corsa.
• Aim to keep the product in the saturation phase of lifecycle as:– profits are reasonable– sales peak– costs are steady.
Extending the product lifecycle (Continued)
Customer growth matrix
Customer loyalty
Customer extension
Customer acquisition
Customer diversification.
The customer growth matrixSource: Jenkins, M (1997), The Customer Centred Strategy, Prentice Hall. Reproduced with permission
Customer loyalty
• Loyal customers will bring greater profitability by:– making frequent repeat purchases– telling friends of the benefits of the
company’s products.
Customer extension
• Customer extension is:– extending the range of products and
services available to customers– achieved via product development
and diversification.
• Product development is used by companies:– structured around product divisions– with strong R & D and
design functions.
Customer extension (Continued)
– whose products have short lifecycles
e.g. consumer electronic companies like SONY.
Customer extension (Continued)
• Product diversification occurs when a company moves away from current products
• Related diversification – remains in same industry
• Unrelated diversification – changes industry.
Customer extension (Continued)
Customer acquisition
• Customer acquisition is:– expanding the number of customers
for existing products– easiest in growing markets– difficult in mature markets.
• If home markets are mature, then seek new customers in overseas markets
• Engage in IB activities, e.g. Exporting or locating production or marketing activities overseas.
Customer acquisition (Continued)
Customer diversification
• Customer diversification:– is achieved by selling a new product
or service to new customers– often involves innovative use of
technology.
The BCG matrix
Question marks
Stars
Cash cows
Dogs.
The Boston Consulting Group matrixSource: Henderson, B (1970) The Product Portfolio, Boston Consulting Group. Used with permission of The Boston Consulting Group
Question marks
• High growth markets• Low market share• Another product is current market
leader.• Unlikely to be profitable• High investment is required if a
question mark is to become a market leader
Stars
• Successful question marks become stars.
• Stars are market leaders in growth markets.
• require investment to maintain market leadership in a high growth market
• are marginally profitable
Cash cows
• Cash cows:– are mature products– occupy slower growth markets– need less investment– are the most profitable products in a
portfolio– are used to fund products in other
quadrants.
Dogs
• Dogs:– occupy no growth markets– have low market share– may be previous cash cows– may be marginally profitable– should be withdrawn before they
become loss making.
A successful / unsuccessful product
• A successful product moves around the BCG matrix
• A question mark to … a star to …
• … a cash cow to … a dog or back to a question mark.
• A less successful product remains in right-hand side of the BCG matrix, and is therefore a low cash generator.
• A question mark may move to … a dog.
BCG matrix and product lifecycle links
• BCG ----------- plc– Q marks ------- introduction– Stars ----------- growth– Cash cow ----- maturity and
saturation– Dogs ---------- decline.
Balanced BCG matrix
• Tomorrow's products:– question marks and stars
• Today's products:– cash cows
• Yesterday’s products– Dogs.
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The Seven S Model
• Describes the interconnectivity of an organisation by a series of seven elements within the organisation.
• These elements are mutually independent & serves as an trigger mechanism to the management to coordinate the whole organisation.
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Structure
Strategy Systems
Super-ordinateGoals
Skills Style
Staff
The Seven S s Model
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The Seven S s ModelSuper-ordinate goals
– Aspirations of the organisation – value, beliefs, principles & aims.
Strategy
– The organisation’s future plans & directions.
– How it will overcome external factors & competition within the industry.
– Market it operates & products & services provided.
Structure
– Organisation structural framework, decision making process (top down/bottom up), planning process.
Systems
– The organisation’s internal process. (operating standards/ working procedures, etc)
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The Seven S s Model
Style– Culture of the
organisation.– Belief systems of its
employees.
Staff– Human resources of
an organisation.• Capabilities &
competences internally.
– HR management policies (bonuses/rewards, compensation, advancement, etc
Skills– Core competence of
the organisation and not skills of staff.
HND
Business Strategy
Lesson 3
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SWOT• SWOT stands for Strength (internal), Weaknesses
(internal), Opportunities (external) and Threats(External).
• The SWOT analysis points to the strategic issues organizational decision makers need to address in their pursuit of sustainable competitive advantage and high performance levels.
• A swot analysis allows managers to identify key internal and external issues they need to take into account in order to understand the context in which the organisation operates.
• By identifying key issues, it begins to focus managers on areas where they need to make choices and helps to identify some of the constraints and risks involved.131
Competitive Strategies• Competitive strategy is the way
organizations set themselves apart to create a sustainable competitive advantage.
• The choice of a competitive strategy is based on the competitive advantage(s) that the organization has been able to develop.
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Porter’s Generic Competitive Strategies (1980)
• Porter’s approach is based on an organization’s competitive advantage.
• Competitive advantage can come from only one of two sources:
1. Having the lowest costs in the industry
2. Possessing significant and desirable differences from competitors
• Another important strategic factor is the scope of the product-market in which the organization wishes to compete—that is, broad (i.e., all or most market segments) or narrow (i.e., only one segment or a few segments). 133
Porter’s Generic Competitive Strategies (1980)
• He identifies three strategies:
(1) cost leadership: a strategy in which an organization strives to have the lowest costs in its industry and produces products for a broad customer base;
(2) differentiation: a strategy in which an organization competes by providing unique (different) products in the broad market that customers value, perceive as different, and are willing to pay a premium price for; the differentiator works hard to establish brand loyalty: customers consistently and repeatedly seek out, purchase, and use a particular brand;
(3) focus: a strategy where an organization pursues either a cost or differentiation advantage in a limited customer segment.
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Cost Leadership• Cost leader
– Chooses to compete on the basis of having the lowest costs.– The main goal is to have the lowest (total unit) costs in the
industry (emphasis on costs, not prices).• With the lowest costs in its industry, the cost leader:
– Can potentially charge the lowest prices and– Still earn significant profits, even during a price war
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Cost Leadership• Successful pursuit of the cost leadership strategy
– Everything the cost leader does—every strategic decision made, every strategic action taken—is aimed at keeping costs as low as possible.
– Efficiency in all areas of operations is the main objective, and all resources, distinctive capabilities, and functional strategies are directed at that.
– The cost leader isn’t going to have deep and wide product lines as
providing these product or service variations is expensive.– The cost leader has chosen to compete on the basis of low costs, not on
being different than competitors.• The cost leader will market products aimed at the “average” customer.• Little or no product frills or differences will be available. No fancy artwork or
plush office furniture at corporate headquarters and no corporate jets.• Cost leader won’t have an elaborate high-tech, multimedia interactive Web
site unless it’s an extremely cost effective and efficient way to reach masses of potential customers.
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Other characteristics of cost leaders include:
• Strict attention to production controls• Rigorous use of budgets• Little product differentiation—just enough to
satisfy what the mass market might demand• Limited market segmentation—products or
services aimed at the mass market• Emphasis on productivity improvements• Resources, distinctive capabilities and core
competencies found in production-operations and materials management 137
Drawbacks of the cost leadership strategy:
• The main danger is that competitors might find ways of lowering costs even further; taking away the cost leader’s cost advantage.
• Competitors might be able to easily imitate what the cost leader is doing and erode the cost advantage.
• Cost leader, in its all-out pursuit of lowering costs, might lose sight of changing customer tastes and needs.
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Differentiation Strategy• Organization competes by providing unique (different) products
with features that:– Customers value, – Perceive as different, and – Are willing to pay a premium price for
• The main goal of the differentiator is to provide products or services that are truly unique and different in the eyes of customers.
• Doing this, the differentiator can charge a premium price because customers perceive that the product or service is different and that it uniquely meets their needs.
• This premium price provides the profit incentive to compete on the basis of differentiation.
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A Successful Differentiator• All its capabilities, resources and functional strategies are
aimed at isolating and understanding specific market segments and developing product features valued by customers in those various segments.
• Has broad and wide product lines—that is, many different models, features, price ranges and so forth.
• Has countless variations of market segments and product features so that the customer perceives the product or service as different and unique and worth the extra price.
• Because the differentiation strategy can be expensive, the differentiator also needs to control costs to protect profits, but not to the extent that it loses its source of differentiation.
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Other characteristics of differentiators include:
• Differentiating themselves along as many dimensions as possible and segmenting the market into many niches.
• Establish brand loyalty, where customers consistently and repeatedly seek out, purchase and use a particular brand. Brand loyalty can be a very powerful competitive weapon for the differentiator.
• The differentiator’s distinctive capabilities tend to be in marketing and research and development.
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Drawbacks of the differentiation strategy
• Must remain unique in customers’ eyes, which may be difficult depending on competitors’ abilities to imitate and copy successful differentiation features.
• Customers might become more price sensitive, and product differences might become less important.
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Focus Strategy • A focuser:
– Concentrates on serving a limited (narrow) customer group or segment known as a market niche
a. Geographical niche can be defined in terms of region or locality.
b. Type of customer niche focuses on a specific group of customers.
c. Product line niche would focus on a specific and specialized product line.
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Focus Strategy • Pursues either a cost or differentiation advantage
– Cost focuser competes• By having lower costs than the overall industry cost
leader in specific and narrow niches • Also successful if an organization can produce complex
or custom-built products that don’t lend themselves easily to cost efficiencies by the industry’s overall cost leaders
– Differentiation focuser can use whatever forms of differentiation the broad differentiator might use, such as:
a. Product features
b. Product innovations
c. Product quality
d. Customer responsiveness
e. Specializes in one or a few segments instead of all market segments.144
Advantages of the focus strategy:
• The focuser knows its market niche well and can build strong brand loyalty by responding to changing customers’ needs
• The focuser who can provide products or services that the broad competitors can’t or won’t, will have the niche all to itself.
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Drawbacks of the focus strategy• The focuser often operates on a small scale making it difficult to
lower costs significantly. • However, with technological advancements such as flexible
manufacturing systems, this drawback is not as critical as it once was.
• As information and computer technology become more affordable, focusers have discovered that economies (cost efficiencies) don’t necessarily have to come from large-scale production runs.
• The niche customers might change their tastes or needs.• Because it is often difficult for a focuser to change niches easily
and quickly, this could be a serious problem. • In addition, any technological changes that might impact the
niche can have a similar effect. 146
Stuck in the Middle • Happens when an organization is not
successfully pursuing either a low-cost or a differentiation competitive advantage
• Occurs when an organization’s:a. Costs are too high to compete with the low-cost leader.
b. Products and services aren’t differentiated enough to compete with the differentiator.
• This is not a preferred or profitable strategic direction.• Becoming “unstuck” means making consistent
strategic decisions about what competitive advantage to pursue and then doing so by aligning resources, distinctive capabilities and core competencies. 147
Top down• By definition, top managers are
ultimately responsible for every decision and action of every organizational employee, therefore will need to be strategic leaders.
• Top managers can also be strategic leaders through their ability to anticipate, envision, maintain flexibility, think strategically and work with others in the organization to initiate changes that will create a viable and valuable future for the organization.
• Specifically top managers can be strategic leaders by:
• Determining the organization’s purpose or vision;
• Exploiting and maintaining the organization’s core competencies;
• Developing the organization’s human capital;
• Creating and sustaining a strong organizational culture; Emphasizing ethical organizational decisions and practices; and
• Establishing appropriately balanced organizational control.
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Strategic Planning Techniques• PIMS (Profit Impact on Marketing
Strategies)• The Growth Share Matrix• The scenario or Vision Building Approach
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PIMS (Profit Impact on Marketing Strategies)
• The model is based on the belief that there are three major factors which determines a business unit performance;– It strategy– Its competitive position and – Market or industry characteristics which it competes (Moore
1992) • It collects information from member companies relating to such
factors as market share, profitability, product quality and investment.
• PIMS, then answers questions such as:– What profit rate is ‘normal’ for a given business?– What strategic changes are likely to improve performance?– What are the likely effects of profitability, cash flow, etc, of adopting a
particular strategy?151
The Growth Share Matrix• The BCG is based on the relation between
growth, investment and return.• Growth-Shared Matrix is based on two
concepts:1. The company with the largest market share
should also have the greatest competitive advantage and it follows the highest profit margin.
2. Also the companies with the highest rate of return on investment can theoretically growth the fastest.
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BCG GROWTH-SHARE MATRIX
BCG GROWTH-SHARE MATRIX• The matrix pre-supposes that most
organisations are composed of more than one business.
• The collection of businesses within an organisation is termed business portfolio.
• It posits that an organisation portfolio can be classified into stars, cash cows, dogs and problem children (Smith 1985)
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Growth Strategies• A growth strategy is one that expands
products offered or markets served or expands its activities or operations through current or new businesses– Growth helps achieve goals through increasing
revenues, profits, or other measures
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Growth Strategies
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Possible Growth Strategies• Concentration
– When an organization focuses on its primary line of business and looks for ways to meet its growth goals by expanding its core business
• There are three concentration options– Product – market exploitation– Product development option– Market development option
Concentration Strategies• Product-Market exploitation
– Attempt to increase sales of current products in current markets and might include incentives or advertizing
• Product development option– Creates new products or new features on
current products, which would be sold in current markets
• Market development option– When selling current products in new markets
Concentration Strategies – cont’d• A concentration strategy is one that looks
for ways to grow the core business using different combinations of products and markets– Product market diversification is not usually
viewed as a concentration option as it involves expansion into both new products and new markets
Concentration Strategies – cont’d• The advantage of a concentration strategy
is an organization becomes good at what it does– The develop knowledge of the industry and of
their competitors– Functional and competitive strategies can be
tuned to know what customers want and how to best provide it
– Everyone can concentrate on exploiting resources, competencies, and capabilities critical to success
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Concentration Strategies – cont’d
• The main drawback is that the organization is vulnerable to changes in the industry and the external environment– The key is to recognize significant trends and
adjusting the organization’s direction• Concentration strategy may be effective
for small companies, but larger often start off by this approach and may continue using it
Concentration Strategy Options
Vertical Integration• Is a strategy that grows by gaining control of its
inputs (backward) or its outputs (forward)• Backward integration
– The organization becomes its own supplier– Example: eBay bought an online payment business
• Forward integration– The organization becomes its own distributor – Example: Apple Computer opened retail outlets
Vertical Integration – cont’d
• Vertical integration strategy is a growth strategy because an organization expands its activities and operations by becoming a source of supply or distribution– However, expanding into industries connected
to its primary business means it is still a single business organization
– It is taking another path to meeting growth goals by controlling different parts of the value chain
Horizontal Integration• This strategy is used to grow the organization
by combining operations with its competitors – It keeps the organization in the same industry,
but provides a way to expand market share and strengthen its competitive position
• In the US, Federal Trade Commission and Department of Justice regulates such activities through antitrust laws, assessing the impact of such combinations to allow fair competition
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Horizontal Integration – cont’d• The European Union regulates efforts
toward horizontal integration within member countries
• As a growth strategy, horizontal integration an be appropriate if:– It enables the company to meet growth plans– It can be strategically managed to attain
competitive advantage– It satisfies legal and regulatory guidelines
The Global Perspective
• Horizontal integration knows no borders• Coca-Cola sought to buy one of China’s
biggest beverage makers, Huiyuan Juice Group Ltd for $2.3 Billion– It would have given Coke a strong market
presence– The deal was rejected by the Chinese Ministry
of Commerce, which indicated it would have hurt competition in the local market
Figure 7.4 Types of Related Diversification
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Diversification• This strategy enables a company to grow
by moving into a different industry. • There are two types of diversification
– Related– Unrelated
• Related Diversification– Is diversifying into a different industry, but
related to the company’s current business
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Diversification – cont’d• Unrelated diversification
– Diversifying into a completely different industry, not related to the company’s current business
• Diversification is an attempt at a “strategic” fit– Effort is to transfer resources, distinctive
capabilities, and core competencies to the new industry
– It is an attempt at synergy that seeks to enhance performance of both businesses
Diversification – cont’d
• Synergy occurs when shared resources, capabilities, and competencies enable greater performance by two entities when combined.
• Unrelated diversification is when an organization seeks growth by moving into industries in which there is no strategic fit.
Diversification – cont’d
• Unrelated diversification can occur when a company does not believe its core industry offers growth potential– This approach is challenging because of the
need to develop an ability to effectively manage different businesses
– An example is Fortune Brands; which owns separate business that sell liquor, padlocks, cabinets, and golf balls
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Diversification – cont’d
• Research shows that related diversification is superior to unrelated diversification because it allows the effective use of current resources, capabilities, and core competencies– However, unrelated diversification can be a
valuable strategy at times, depending on how effectively the diverse operations are managed
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Implementing the Growth Strategies
• There are three basic ways that growth strategies can be implemented:– Mergers/Acquisitions– Internal development– Strategic partnering
• Mergers-Acquisitions– Involves the purchase of an organization that
enables a firm to combine operations with that company it has merged with or acquired
Implementing the Growth Strategies - cont’d
• Merger is a legal transaction in which two parties combined operations through an exchange of stock to create a new entity– Usually they take place between
organizations of similar size and it is considered “friendly”, it is acceptable to all parties
• Acquisition is an outright purchase of one company by another– Can be hostile and involve different sized
firms 7- 175
Implementing the Growth Strategies – cont’d
• The popularity of mergers and acquisitions go in cycles– The main feature of either effort is to implement
growth strategies• Internal development involves creating and
developing new business activities within– Rather than face risks and challenges of
combining new businesses, a company seeks to develop crucial capabilities to meet desired goals
For Your Information• Thinking Small
– IBM was reorganized into smaller, integrated global enterprise centers of expertise focused on industries and technical skills
– Rather than continuing to use massive divisions, the company create a more nimble global network that helped improve performance
– This effort also included decentralized decision making that was more conducive to creativity, collaboration, and innovation
Strategic Management in Action
• General Electric (GE) entered the airport security market by purchasing firms– These acquisitions enabled GE to leverage its
brand, size, and credibility with the acquired firms technology
– Why do you think GE chose acquisitions as its way to grow?
Mergers-Acquisitions or Internal Development
Strategic Partnering• Strategic alliance
– Two or more organizations share different resources, capabilities, or competencies to pursue some business purpose; requires trust
– Different than joint venture because there is no separate legal entity formed
– The effort seeks to encourage product innovation, bring stability to cyclical businesses, expand product lines, or cement relationships with suppliers, distributors, or competitors
For Your Information• Why Alliances Make Sense
– Flexibility and informality of arrangements promote efficiencies
– Provide access to new markets or technologies
– Less complexity when creating/disbanding– Risks and expenses are shared– Brand identification is kept and exploited– Synergies created– Avoids issues related to antitrust
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Strategic Management in Action• Not all alliances work out
– Amazon.com and Toys R Us created an alliance in 2000 that combined the resources of a “bricks and mortar” business with an internet company
– It failed, each party claiming to be deceived by the other
– Amazon violated its promise to only sell those toys, games, and baby products on its site
– Toys R Us failed to provide certain items
Signs of Declining Performance
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Renewal Strategies• There are two main renewal strategies
– Retrenchment– Turnaround
• Retrenchment– Short run strategy designed to address
weaknesses that are leading to performance declines
– Not necessary to have negative financial returns, usually occurs if unable to meet strategic goals
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Renewal Strategies – cont’d
• Retrenchment (cont’d)– Is a military term refers to going back to the
“trenches” to stabilize, revitalize, and prepare for entering battle again
– The point is to address issues before they lead to severe problems
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Renewal Strategies – cont’d• Turnaround
– Is designed for situations in which the organization’s performance are more serious
– Often when the organization is facing severe external and internal pressures and must make strategic changes in order to remain viable
– There is no guarantee the turnaround will accomplish the desired results, but without it the organization will not survive
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Implementing Renewal Strategies
• Cost cutting– Reducing costs to bring performance results
back in line with expectations– It can be across the board or selective– The effort should avoid cutting costs in those
areas critical to retain or exploit competitiveness
– Redundancies, inefficiencies, or waste in activities should be eliminated
– Restructuring/downsizing are severe approaches 7- 187
Restructuring
• This includes refocusing on the primary businesses and involve– Selling or divestment– Spin off– Liquidation– Downsizing
• Divestment might occur when the business is desired by another company and is no longer a strategic fit
Restructuring – cont’d
• Spin off– Involves removing a business unit and setting
it up as a separate, independent business by distributing its shares of stock
• Liquidation• When no buyer exists or there is no
possible spin off, a business unit will be discontinued– This is a strategic action of last resort
Restructuring – cont’d
• Downsizing– Is a quick way to cut costs by elimination jobs– It can be effective when done strategically
BENCHMARKING• Benchmarking is the search for the best
practices inside or outside an organization.• Benchmarking is from other leading
organizations (competitors or noncompetitors) that are believed to have contributed to their superior performance.
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Common CharacteristicsOf Contemporary Benchmarking
• Its key purpose is to gather various types of business information about other companies;– the purpose of this information is to create new
business knowledge;– new business knowledge is gained by analysing
and comparing the specifics of various business factors of different companies; and
– on this basis, companies can make better business decisions and consequently enjoy more successful and more effective business.
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Internal And External Benchmarking
• Internal benchmarking focuses on activities within the organization. One area of the organization is compared with another.
• External benchmarking can either be competitive or functional. – In competitive benchmarking, an organization
focuses on companies within their own market, sometimes direct competitors, studying their business performance and processes.
– Functional benchmarking is performed by companies wanting to study a particular process. They choose organizations with similar processes regardless of their industry.
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Internal And External Benchmarking
• The goal of benchmarking of strategies is to create knowledge about the specifics of strategies used by competitors and other companies that lead to the successful achievement of objectives.
• The purpose is to use this knowledge in order to improve the effectiveness of strategies that lead to the realization of strategic objectives in the long run.
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The Benefits Of Benchmarking In Strategic Management (Bogan, 1994; Harrington, 1995;
Karlo¨f Et Al., 2001; Coers Et Al., 2001)• It enables more effective strategic planning and controlling;• It lowers the costs of incorrect business decisions;• It enables a company’s efficiency to increase through the
successful design and Implementation of restructuring business processes and their continuous improvement;
• It helps in solving business problems;• It adds an important element to the continuous education of
employees, encourages their Innovativeness, creativity and contributes to the creation of new ideas;
• It enables a relative assessment of the business success and effectiveness of diverse business factors; and
• It encourages changes and fosters special knowledge, which enables greater flexibility and faster adaptation to the changing business environment.
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Planning• Effective plans can clarify direction, motivate
people, use resources efficiently and allow people to measure progress towards objectives.
• Plans can be at strategic, tactical and operational levels; and in new businesses people prepare business plans to secure capital.
• Strategic business units also prepare plans relatively independently of the parent.
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The process of planning
Seven iterative tasks in making a plan
Planning• Planning is an iterative task, made up of seven
main steps – gathering information; developing a mission; setting goals; identifying actions and allocating resources; implementing plans; monitoring progress and evaluating results.
• Planners draw information from the competitive and general environments using tools such as Porter’s Five Forces analysis.
• They can do this within the framework of a SWOT analysis, and also use forecasting, sensitivity analysis, critical success factors and scenario planning techniques. 199
• Goal-setting theory predicts that goals can be motivational if people perceive the targets to be difficult but achievable.
• Goals can be evaluated in terms of whether they are specific, measurable, attainable, rewarded and timed.
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