LECTURE E DECISION MAKING [COU]

The nature of STRATEGIC management

Organizations have to decide what strategies to adopt and when to change strategies. Strategy is a comprehensive plan for accomplishing the organizational mission.

Strategic management is a comprehensive and ongoing management process aimed at formulating and implementing effective strategies that promote a superior alignment between the organization and its environment and the achievement of strategic goals.

Components of strategy

Well-conceived strategies deal with three areas:

scope of a strategy specifies the range of markets in which the organization will compete
resource deployment is how a company will distribute its resources across various areas.
distinctive competence is something the organization does extremely well.

Synergy refers to how different areas of the business complement or enhance other areas.

Levels of strategy

Corporate strategy is the course charted for the total organization.

Business strategy is focused less on scope and resource deployment than on competitive advantage and synergy and answers the question "How should we compete in each of the markets we have chosen to enter?"

A functional strategy is developed for each major area in which the company engaged.

Strategy formulation and implementation

Strategy formulation is the process of creating or determining the strategies of the organization (the what).

Strategy implementation is the methods by which the strategies are operationalized or executed within the organization (the how).

Strategy formulation

Strategic goals

Strategic goals, are goals set by top management that focus on broad, general issues and have a long-range time horizon.

Environmental analysis

An environmental analysis is performed by gathering information from a variety of sources to determine the primary opportunities and threats confronting the organization.

Organizational analysis

Organizational analysis involves the detailed diagnosis of the strengths and weaknesses of the organization.

Evaluating an Organisation's Strengths.

The skills and capabilities that enable an organization to conceive of and implement its strategies are organizational strengths.

Different strengths are needed for accomplishing different strategies.

There are two categories of organizational strengths: common strengths and distinctive competencies.

Common organizational strengths:

A common strength is an organizational capability possessed by a large number of competing firms.

Distinctive competencies:

As defined earlier, a distinctive competence is an organizational strength possessed by only a small number of competing firms.

Organizations that capitalize on their distinctive competencies often gain a competitive advantage because they are able to implement valuable strategies that other organizations cannot implement. Above-normal economic performance is often attained by companies with a competitive advantage.

One key purpose of the SWOT analysis is to determine an organization's distinctive competencies so strategies that exploit them can be selected.

Imitation of distinctive competencies:

Strategic imitation is the practice of duplicating another firm's distinctive competence and thereby implementing a valuable strategy.

Some distinctive competencies, however, cannot be imitated. A sustained competitive advantage is a competitive advantage that exists after all attempts at strategic imitation have ceased.

Three reasons explain why a distinctive competence might not be imitated:

the acquisition or development of the distinctive competence may depend on unique historical circumstances:
its nature and character might not be known or understood by competing firms; and
it is based on complex social phenomena.

The VRIO framework:

If an organization concentrates on the value, rareness, immutability, and organization of its skills and abilities, it is possible to estimate the economic value of the competitive advantages generated by its skills and abilities.

An organization must address four questions:

Are these skills and abilities valuable?
Are these skills and abilities rare?
Are these skills and abilities difficult to imitate?
Does the firm organize itself to implement strategies that exploit these skills and abilities?

Evaluating an Organization's Weaknesses.

Organizational weaknesses are skills and capabilities that do not enable an organization to choose and implement strategies that support its mission.

There are two ways to address weaknesses:

by making investments to obtain the strengths necessary to accomplish the mission,
by modifying the mission so it can be accomplished with current skills and capabilities.

When organizations fail either to recognize their weaknesses or to work to overcome them, they may suffer from competitive disadvantages. A competitive disadvantage arises when the organization is not implementing valuable strategies that are being implemented by its competitors. Operating at a competitive disadvantage invariably leads to below-normal levels of economic performance.

Evaluating An Organization's Opportunities And Threats.

Identifying opportunities and threats requires an analysis of the environment. Organizational opportunities are events or phenomena in an organization's environment that, if exploited, may generate above-normal economic performance.

Organizational threats are events or phenomena in an organization's environment that make it difficult for an organization to create or maintain above-normal or even normal economic performance. Porter's five forces model can be used to determine the extent of opportunity or threat in an environment. Whether a firm attains normal or above-normal economic performance depends not only on the opportunities and threats in the industry but also on the firm's distinctive competencies.

Matching organizations and environments

To match the organization and environment, the organization must align itself with the environment by pairing its strengths and weaknesses with the environment's opportunities and threats.

Corporate-level strategy

Grand strategy

Grand strategy is an overall framework for action developed at the corporate level.

One type of grand strategy is a growth strategy which calls for overall corporate growth. When growth is in the same or a somehow related business (acquisition, merger, or joint venture), it is referred to as related diversification. When the growth is in areas unrelated to the current operations it is called unrelated diversification.

A second type of grand strategy is a retrenchrnent strategy. Organizations using this strategy are trying to shrink current operations by cutting back in a variety of areas or eliminating unprofitable operations altogether.

The business portfolio

The business portfolio involves viewing the corporation as a collection of businesses, each of which can have its own competitive business strategy.

A strategic business unit (SBU) is usually a separate division within a company that has its own mission, competitors, and strategy apart from that of the other SBUs in the organization.

Using the BCG matrix, each SBU is evaluated in terms of the growth rate of its market and its relative share of that market. Four outcomes, stars, cash cows, question marks, and dogs are possible.

A star is an SBU that has a relatively large share of a high-growth market.

A cash cow is an SBU that has a large share of a low-growth market.

A question mark is an SBU with a relatively low share of a high-growth market.

A dog is an SBU that has a small share of a low-growth market.

The GE business screen is an extension of the BCG matrix. It has nine possible outcomes based on three levels of industry attractiveness and three levels of business strengths.

Business-level strategy

Adaptation model

The adaptation model of business strategy argues that the managers of a business should attempt to match the business's strategy with basic conditions in its environment.

A defender strategy is appropriate when the business operates in an environment characterized by relative stability and little uncertainty or risk.

The prospector strategy usually works best when the environment is dynamic, growing, and characterized by uncertainty and risk.

The analyzer strategy is a mid-range approach appropriate when the environment is moderately stable but still offers some degree of uncertainty and risk.

The reactor strategy occurs when a company responds to its environment in inappropriate ways. Reactors are strategic failures.

Porter's competitive strategies

The differentiation strategy involves developing an image of the business's product or service such that customers perceive it as being different.

The cost leadership strategy attempts to maximize sales by minimizing cost per unit.

The focus strategy targets certain products and services at certain geographic locations, certain customer groups, and so on.

Product Life Cycle

The concept of the product life cycle, though not a strategy, is a useful framework for managers to use as they plot their strategy over time. It is based on the idea that a product, after it is introduced, will move through several phases before it declines or disappears.

Functional Strategies

Marketing Strategy

The marketing strategy focuses on how an organization decides to advertise and market its products

Financial Strategy

The financial strategy determines the most appropriate capital structure for the organization

Production Strategy

The production strategy is linked to the marketing strategy because it must supply the type of products being advertised, but it also includes how, when and where the products will be produced.

Human Resources Strategy

The human resources strategy deals with compensation, selection, performance, appraisal, labor relations, executive development and governmental relations.

Research and Development Strategy

The R&D strategy helps make decisions about product development.

Strategy implementation

Strategy implementation is the process of allocating resources to support the chosen strategies. An organization can expect to gain a competitive advantage if it properly implements its strategies.

Henry Mintzberg proposes that the traditional view of strategy implementation, focuses only on deliberate strategies, plans of action that an organization chooses and implements in order to support its mission and goals. Not all organizations use this approach.

Some organizations begin implementing strategies before they clearly specify mission, goals, or objectives and before they conduct formal SWOT analyses.

Strategies that unfold in this way are called emergent strategies. Implementation of emergent strategies, involves allocating resources even though the organization has not explicitly chosen its strategies.

Most organizations use both deliberate and emergent strategies.

Locus of Implementation
Implementation through structure

Strategy implementation is affected by the structure of the organization.

Implementation through leadership

Effective leadership is necessary to implement a strategy successfully.

Implementation through information and control systems

Information and control systems are required for a successful strategy implementation so that managers have the information they need to make decisions and be aware of the strategies that must be implemented.

Implementation through human resources

Appropriate human resources are needed to implement strategies.

Implementation through technology

To ensure the successful implementation of a strategy, an organization must have the appropriate technology.

IMPLEMENTING PORTER'S GENERIC STRATEGIES.
Differentiation strategy:

A differentiation strategy indicates that the organization is trying to distinguish itself from its competitors

Marketing emphasizes high-quality product performance, perceived value, and snob appeal; it avoids focusing on low prices.
Sales avoids price competition, which emphasizes a product's price over its other attributes, and instead stresses personal relationships, quality reputation, and perceived image.
Accounting and finance aim to control the flow of funds without stifling creativity, innovation and customer service.
Manufacturing focuses on quality, meeting customer needs, inventory, and customization.
The organizational culture encourages innovation, creativity, and responsiveness to customers.

Overall cost leadership strategy:

An overall cost leadership strategy indicates that the firm is attempting to gain a competitive advantage by having costs lower than its competitors'

Marketing features simple product attributes, meeting customer needs, and value for price.
Sales focuses on price and value, a standardized product, and high sales volume.
Accounting and finance set tight cost controls and provide strong budgets.
Manufacturing emphasizes large runs of standardized products and ease of manufacture through correct design.
The organizational culture is strongly oriented toward control.

Focus strategy:

A focus strategy has either a differentiation focus or an overall cost leadership focus.

The organizational functions that support an overall cost leadership focus are the same as those discusses above.

IMPLEMENTING MILES AND SNOW'S STRATEGIES.

The four Miles and Snow business-level strategies are prospector, defender, analyzer and reactor.

Prospector strategy:

An organization pursuing this strategy needs to be creative, innovative, flexible, and decentralized and have an emphasis on new-product development.

Defender strategy:

Organizations desiring to implement this strategy need to be efficient and emphasize low costs by maintaining the position of current products.

Analyzer strategy:

This strategy requires simultaneous emphasis on improving operations in the current business and encouraging creativity, innovativeness, flexibility, and decentralization in new businesses.

Reactor strategy:

Organizations following this strategy have no clear purpose or direction. Their attributes tend to vary significantly over time.

IMPLEMENTING CORPORATE-LEVEL STRATEGIES

Implementing corporate-level strategies means focusing on the ways organizations manage their operations across multiple businesses and markets.

Two important questions arise in implementing corporate-level strategies:

How will the organization move from a single-product strategy to some form of diversification?
How can diversification be managed most effectively?

BECOMING A DIVERSIFIED FIRM.

Most organizations do not start out as diversified firms. The process is shown on the following figure;

Firms can become diversified by developing new products internally, replacing suppliers and customers (vertical integration), and engaging in mergers and acquisitions.

Internal development of products:

An organization that diversifies by developing new products internally creates new products or services within the boundaries of the traditional business operation.

Vertical integration:

Organizations can diversify by vertically integrating. Backward vertical integration occurs when an organization stops buying supplies from other companies and begins to provide its own supplies.

Forward vertical integration occurs when an organization stops selling to one customer and sells instead to that customer's customers.

Mergers and acquisitions:

A merger occurs when a company purchases another company of approximately the same size. An acquisition occurs when one company purchases another and one of the two organizations involved is considerably larger than the other.

Most organizations use mergers and acquisitions to acquire complementary products or complementary services - products or services linked by a common technology and a common customer. The purpose of most mergers and acquisitions is to create or exploit synergies.

In evaluating the performance potential of mergers and acquisitions, two questions are important:

Is the price of the acquisition less than the value of the acquisition?
Will the combined organization be able to exploit potential synergies? Placing a value on an acquisition or a merger and integrating merger or acquisition partners are difficult tasks that need to be done if the merger or acquisition is become part of a successful diversification strategy.