Strategic Analysis and Decision Making

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Strategic Analysis and Decision Making
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What is Strategy?

• Art of the general
• Thinking with regard to the whole business, not
  just the functional pieces
• Plan which results from a set of activities that
  focuses on helping the organization manage its
  relationship to its environment
• Central, integrated, externally oriented concept
  of how the business will achieve its objectives
  (Hambrick Fredrickson, 2001)

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What is the purpose of strategic planning?

• Provides overall and long-term direction to the
  firm
• Allows firm to anticipate and adapt to challenges
  
• Helps company identify market threats and
  opportunities
• Helps firm examine internal strengths and
  weaknesses and determine core competence
• Results in allocation of resources to align
  organization with the environment (strategic
  fit)

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Process of Strategic Analysis, Formulation, and
Implementation
Strategic Analysis
Strategy
Objectives
Mission
Implementation (Design)
Hambrick Fredrickson, 2001
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Mission, Goals and Objectives

• Mission
• Domain statement (Hambrick Fredrikson arena)
• Products categories, market segments, geographic
  areas, core technologies
• Mission Statements
• Broad statements that include strategic vision,
  shared beliefs and values, reason for being,
  domain
• Official goals vague and for image purposes

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Mission, Goals and Objectives

• Goals
• Specific ends to be achieved through actions and
  policies
• Act as constraints on actions and criteria for
  evaluation of performance
• Multiple, conflicting, and politically determined
• Objectives
• Specific targets (who, what, where, when)

URI Strategic Plan, 2006-2009
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Strategic Analysis Tools

• External Analysis
• Stakeholder analysis
• Specific and general environment factors
• Industry structure (Porter)
• Home country advantages
• Strategic Groups and Cognitive Communities
• Inter-organizational Network Analysis
• Blue ocean strategy
• Internal Analysis
• Distinctive competence
• Value chain

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General Environmental Analysis

• Identify segments, agencies, actors (specific and
  general factors)
• Examine past and current trends and try to
  forecast future trends
• Tools forecasting, trend analysis, scenario
  analysis, simulations, delphi forecasting, etc.
• Result identification of opportunities and
  threats in the external environment (half of SWOT
  analysis)
• Opportunities potential for profitable action
• Threats events or conditions that can harm
  organizational interests

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Industry Attractiveness and Competition (Porters
Model)

• Competition is a function of industry structure
  and firm behavior
• Industry structure determines the profitability
  of the average competitor (return on invested
  capital)
• Competitive advantage determines the
  profitability of an individual firm over the
  average competitor
• Only sustained profitability provides long term
  economic value to the firm
• Should firm enter or exit the industry?

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Industry Attractiveness and Profitability
Porter (1980)
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Threat of New Entrants

• Potential entrants can use existing capabilities
  and cash flow from other businesses to enter
• Result pressure on prices, costs, and rate of
  investment of industry incumbents
• Barriers to entry patents, raw materials
  monopolies, supply side economies of scale, buyer
  demand effects, consumer switching costs, large
  capital requirements, regulations, lobbying
  activities, unequal access to distribution
  channels, high technological barriers, etc.
• Concern retaliation by incumbents

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Rivalry among Competitors

• Includes price discounting, new service or
  product improvements, advertising.
• Intensity of competition and basis on which
  rivals compete determines the extent to which
  rivalry reduces industry profitability
• Some factors that increase rivalry
• High numbers of competitors and relative equal
  power/size
• Lack of market segmentation and diverse customers
• Low industry growth rate
• High fixed costs and low marginal costs
• Lack of or low consumer switching costs
• Large stakes in the industry
• High exit barriers
• Price competition rather than competition based
  on product features, support services, delivery
  time, brand image

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Bargaining Power of Suppliers

• High concentration of (few) suppliers (Microsoft
  and PC providers)
• Low importance of industry to suppliers
• High threat of forward integration among
  suppliers
• Switching costs in changing suppliers
• Suppliers have differentiated products or
  services
• No substitute for supplies
• Suppliers include labor

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Bargaining Power of Buyers

• High concentration of (few) buyers
• Low degree of product differentiation
• Low buyer switching costs
• High threat of backward integration by buyer
• Low impact of product on buyers product quality
• Large amount of information available to buyer

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Threat of Substitute Products/Services

• Substitutes perform the same service or similar
  function as industry products by different means
• Threat is greater when
• Low buyer switching costs
• Attractive price-performance trade-off offered
• Availability of alternative products or services
  grows
• Availability of substitute raw materials,
  components, subassemblies, processes grow
• Availability of new technology-enabled processes
  makes older products/services obsolete

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Other Issues Regarding Industry Structure

• Mistaken focus on industry factors rather than
  industry forces
• Industry growth rate, government, technology and
  innovation, complementary products and services
• Understand industry change by examining the
  effects of above developments on the five forces

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How does the internet affect industry
attractiveness?

• Consider
• 1. Threat to entry
• Rivalry among competitors
• Bargaining power of suppliers
• Bargaining power of customers
• Threat of substitutes

Internet has become a table stake Necessary
but not sufficient condition for competition
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Industry Structure and Strategy

• Understanding industry structure is a starting
  point for developing strategy
• Clarify sources of profitability
• Identify appropriate units for which to set
  strategy
• Know average profitability of industry and try to
  find a way to make above-average profits
• Five forces provide a baseline for examining any
  one companys strengths and weaknesses
• Develop strategic actions from the analysis
• Positioning the company
• Exploiting industry change
• Shaping the industry proactively

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Other Types of External Analysis

• 1. Competitive advantages of nations (Porter,
  1990)
• May provide competitive advantages of industries
  which are located in a particular
  state/nation/region
• Examples Factor conditions (human, physical,
  knowledge, and capital resources
  infrastructure), demand conditions (buyers),
  related and supportive industries (suppliers and
  distributors) and rivalries among firms
  (governance issues, regulations, capital markets,
  stock ownership).
• Examples Swiss and German pharmaceuticals
  Japanese consumer electronics

World Economic Forum
Transparency International
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Other Types of External Analysis

• 2. Strategic Groups or Cognitive Communities
• Firms will pursue similar competitive strategies
  with similar performance results
• Thus, firms are clustered in groups based on
  these similar resource configurations
• Sophisticated economic analyses determine these
  clusters (size, market share, product
  differentiation, labor costs, technology, etc.)
• Act as benchmarking firms to determine
  appropriateness of strategy and effectiveness of
  performance
• Example Scottish knitwear communities hotel
  products

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Other Types of External Analysis

• 3. Inter-organizational Networks
• Globally competitive firms joined into networks
  to enter foreign markets to enhance competitive
  position (joint ventures, alliances)
• Resources and relationships must be analyzed to
  understand competitive structure
• Both competition and cooperation strategies must
  be considered, along with their opportunities and
  costs
• Example Major pharmaceuticals and biotech
  start-ups auto industry

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Other Types of External Analysis

• 4. Blue oceans (Kim Mauborgne, 2004)
• White space between industriesunknown market
  space untouched by competition
• Demand is created rather than fought over
• The important issue is the strategic move set
  of managerial actions and decisions that make a
  major market-creating business
• Examples? Cirque du Soleil the PC online
  community-generated media (e.g., YouTube)

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Internal Organizational Analysis Value Chain
Analysis

• All activities that contribute to the creation of
  the product or service and its delivery to the
  customer
• Primary activities inbound logistics,
  operations, outbound logistics, marketing and
  sales, and service
• Support activities organizational
  infrastructure, human resource management,
  technology development, procurement
• Analysis determines what areas are performing
  well or poorly in relation to competitors
  (strengths and weaknesses in SWOT)

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Support Activities
Primary Activities Pizza Restaurant
Obtain funds, carry out accounting and payroll
functions, and perform other administrative tasks
for each primary activity
Firm Infrastructure
Hire, train, evaluate, supervise kitchen workers
Hire, train, evaluate, supervise drivers
and warehouse workers
Hire, train, evaluate, supervise Marketing/ adve
rtisers
Hire, train, evaluate, supervise waitstaff
Human Resource Management
Develop new menus, and new food ordering
processes improve cooking methods
Improve truck routing and warehouse receiving
Improve restaurant layout improve service methods
Discover new promotional materials and media
Technology Development
Buy trucks Lease warehouse space
Buy TV and radio time and newspaper ad space
Procurement
Buy dough, cheese, ovens, and other cooking
supplies
Buy tables, chairs, silverware, to equip service
area
Inbound Logistics
Outbound Logistics
Marketing /Sales
Service
Operations
Example of a value chain for pizza restaurant
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Methodology for Evaluating Value Chain Activities

• Consider resources and capabilities in each area
• Are resources valuable and costly to copy?
• How are capabilities deployed and do they
  integrate skills and resources?
• Criteria to evaluate value to customers,
  rareness, ease of imitation, and sustainability
• Rating inadequate, adequate, attractive,
  potential, competitive, distinctive

See handout of process by Duncan, Ginter, Swayne
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Distinctive or Core Competence

• Knowledge base or set of skills general enough to
  apply in variety of settings
• Results in clear benefits for customers
• Is difficult, if not impossible, for other firms
  to replicate
• Sources first mover status, scales of
  operation, experience, intra- and
  inter-organizational relationships
• Hambrick Fredricksons differentiators

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Pitfalls to avoid in internal analysis

• All strengths are not necessarily advantages
• Dynamic process which requires continuous
  examination
• Extend value chain analysis beyond the firm if
  necessary (inter-organizational relationships)
• Outsource non-value adding activities

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Result of External and Internal Analysis

• Determine the competitive advantage of the firm
  in its environment
• Basis upon which one is going to compete with
  others and succeed Economic Logic
• Cost (amazon.com)
• Differentiation (quality, brand image, service,
  proprietary technology, etc.) (Prada)
• Focus on market segment (Edward Jones brokerage)
• Combination (Discount Tire service and price)
• Formulation of Strategic Plan

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Strategic Plans (Vehicles)

• Types
• Corporate (in what businesses do we compete?)
• Business (how do we compete in each of our
  business units?)
• Functional (how will functional units such as
  marketing, human resources, operations, etc.
  carry out strategic plans?)
• SBU-Strategic Business Unit
• Product/service unit that competes in defined
  market with identifiable sets of customers and
  competitors
• Example GE Financial Services of General
  Electric Corporation

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Corporate Level Plans

• Growth Strategies
• Organic (Starbucks)
• Vertical integration
• Global expansion
• Inter-organizational strategies (Corning)
• Diversification (related and unrelated) (Textron,
  Frito-Lay)
• Retrenchment Strategies
• Downsizing, divestment, liquidation, bankruptcy

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Business Level Plans

• Low cost strategy efficiency in operations and
  service are key to provided low prices to
  customers
• Product/service differentiation provide unique
  product/service to customer
• Focus strategy concentrate on serving one/few
  customer segments (Paccar heavy trucks)
• Others market penetration, market development,
  product diversification, product development

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Functional Level Plans

• Example Low cost
• HR productivity and efficiency performance
  measures
• Marketing inexpensive methods
• Production just-in-time inventory advanced
  technology waste reduction
• Finance tight control of costs low debt

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• Comprehensive
• Alignment
• Ready to design
• supporting
• structures

Economic Logic Competitive Advantage
Arenas (Domains)
Economic Logic
Vehicles (Plans Structures)
Staging (Speed Sequencing)
Differentiators (Distinctive Competencies)
Model of Strategy
(Hambrick Fredrickson, 2001)
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Strategy Evaluation Criteria

• Does your strategy fit with what is happening in
  the environment?
• Does your strategy exploit your key resources?
• Will your differentiators (distinctive
  competencies) be sustainable?
• Are the elements of your strategy internally
  consistent?
• Do you have enough resources to pursue this
  strategy?
• Can you implement your intended strategy?

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Business Models

• Not the same as strategy not as comprehensive
  or analytical
• Provides a nice story or picture of how the
  business works, but does not deal with
  competitive conditions in the environment and how
  the business will deal with these
• Example
• Business model internet retailing
• Strategy How is a particular internet retailer
  going to compete effectively in the domain it has
  identified?

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Strategy Execution(Neilson, Martin, Powers,
2008)

• Four key areas
• Clarify information flows
• Clarify decision rights roles,
  responsibilities, and accountabilities for making
  decisions
• Align performance with rewards (motivation)
• Re-structure the organization both vertically and
  horizontally

Problem we often re-structure without
thinking about the other three aspects of
strategy execution
Organizational Effectiveness Simulator