Strategy Formulation: Situation Analysis and Business Strategy

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Strategy Formulation Situation Analysis and
Business Strategy
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Strategy Formulation Situation Analysis and
Business Strategy

• Gain competitive advantage by exploiting core
  competencies
• in specific, individual product markets
  (Strategic Business Unit).
• Success depends on Os and Ts in external
  environment and leveraging of resources,
  capabilities distinctive competencies to meet
  the Os and Ts.
• Cost Leadership
• Perform value chain activities cost effectively
• Differentiation
• Perform value chain activities in unique manner.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Cost Leadership
• Drivers for Controlling Costs
• Economies of Scale (longer production runs for
  fewer products, geographically organized sales
  forces, multiple product promotions, etc.)
• Learning and experience curve effects (modify
  product design to enhance manufacturing
  efficiencies, on-going discussion with suppliers,
  responsiveness to changes in customer
  preferences, etc.)
• Cost of key resource inputs (locational input
  factors, bargaining power vs. suppliers)

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Cost Leadership
• Revamping Makeup of Value Chain
• Simplifying product design
• Offering stripped down versions
• Shifting to streamlined or flexible
  manufacturing processes
• Using direct to end use approaches
• Relocating facilities close to suppliers,
  buyers, or both

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Cost Leadership
• Implications for Pursing Cost Leadership Strategy
• Low-cost advantages that reduce the likelihood
  of pricing pressures from buyers
• Truly sustained low-cost advantage may push
  rivals into other areas.
• New entrants competing on price must face an
  entrenched cost leader without the experience to
  replicate every cost advantage
• Low-cost advantages should lessen the
  attractiveness of substitute products.
• Higher margins allow low-cost producers to
  withstand supplier cost increases and often gain
  supplier loyalty over time.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Cost Leadership
• Risks of Cost Leadership Strategy
• Many cost-saving activities are easily
  duplicated.
• Exclusive cost leadership can become a trap.
• Obsessive cost cutting can shrink other
  competitive advantages involving key product
  attributes (or firm may fail to detect consumer
  or competitor changes to differentiate in
  traditionally undifferentiated market).
• Cost differences often decline over time
  (obsolescence of technology providing original
  advantage)

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Differentiation
• Reminder Acceptable cost higher quality
• Unique Performance of Value Chain Activities
• Purchasing and procurement activities
  (McDonalds specifications on potatoes)
• Product R D activities (greater recycling in
  Japanese electronics products)
• Production R D activities (flexible
  manufacturing in automobile plants)
• Outbound logistics activities (faster and more
  accurate delivery in express services)
• Marketing and sales activities (number of
  technical sales reps available by phone in PC
  companies)

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Differentiation
• Implications of Pursing Differentiation Strategy
• Rivalry is reduced when a business successfully
  differentiates itself.
• Buyers are less sensitive to prices for
  effectively differentiated products.
• Brand loyalty is hard for new entrants to
  overcome.
• Risks of Pursing Differentiation Strategy
• Imitation narrows perceived differentiation,
  rendering differentiation meaningless.
• Technological changes that nullify past
  investments or learning.
• The cost difference between low-cost
  competitors and the differentiated business
  becomes too great for differentiation to hold
  brand loyalty.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage - Speed
• Can be created around
• Product development cycles
• Product or service improvements
• Speed in delivery or distribution
• Information sharing and technology.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage in Emerging Industries
• Business strategies require one or more of these
  features.
• 1) Ability to shape industrys structure based on
• a) Timing of entry
• b) Reputation
• c) success in related industries or
  technologies
• d) role in industry associations
• 2) Ability to rapidly improve product quality and
  performance features
• 3) Advantageous relationships with key suppliers
  and promising distribution channels

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage in Emerging Industries
• Business strategies require one or more of these
  features.
• 4) The ability to establish the firms technology
  as the dominant one before technological
  uncertainty decreases.
• 5) The early acquisition of a core group of
  loyal customers and then expansion of that
  customer base through model changes, alternative
  pricing, and advertising.
• 6) The ability to forecast future competitors
  and the strategies they are likely to employ.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage in the Transition to
  Industry Maturity
• Business strategies require one or more of these
  features.
• 1. Pruning product line by dropping unprofitable
  product models, sizes, and options from the
  firms product mix.
• 2. Emphasis on process innovation that permits
  low-cost product design, manufacturing methods,
  and distribution synergy.
• 3. Emphasis on cost reduction through exerting
  pressure on suppliers for lower prices, switching
  to cheaper components, introducing operational
  efficiencies, and lowering administrative and
  sales overhead.
• 4. Careful buyer selection to focus on buyers
  that are less aggressive, more closely tied to
  the firm, and able to buy more from the firm.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage in the Transition to
  Industry Maturity
• Business strategies require one or more of these
  features.
• 5. Horizontal integration to acquire rival firms
  whose weaknesses can be used to gain a bargain
  price and are correctable by the acquiring firm.
• 6. International expansion to markets where
  attractive growth and limited competition still
  exist and the opportunity for lower-cost
  manufacturing can influence both domestic and
  international costs.

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Strategy Formulation Situation Analysis and
Business Strategy

• Competitive Advantage in Mature and Declining
  Industries
• Business strategies require one or more of these
  features
• Focus on segments within the industry that
  offer a chance for higher growth or a higher
  return.
• Emphasize product innovation and quality
  improvement, where this can be done cost
  effectively, to differentiate the firm from
  rivals and to spur growth.
• Emphasize production and distribution
  efficiency by streamlining production, closing
  marginal production facilities, and costly
  distribution outlets, and adding effective new
  facilities and outlets.
• Gradually harvest the business generate cash by
  cutting down on maintenance, reducing models, and
  shrinking channels and make no new investments.

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Strategy Formulation Situation Analysis and
Business Strategy

• Offensive Tactics
• Frontal Assault (Head-to-Head)
• Key to Success need superior resources and/or
  capabilities to persevere
• Example Sprint and MCI/WorldComm versus ATT
• Flanking Maneuver
• Key to Success attack competitors weakness
• Example Cyrix introduced math coprocessor for
  Intels 386 chip that would run 20 times faster
  than Intels microprocessor.

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Strategy Formulation Situation Analysis and
Business Strategy

• Offensive Tactics
• Bypass Attack
• Key to Success change the rules of the game
• Example Netscape chose to use Java applets in
  its Internet browser so that an operating system
  and specialized programs were no longer necessary
  to run applications on a PC.

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Strategy Formulation Situation Analysis and
Business Strategy

• Defensive Tactics used to lower probability of
  attack, or lessen intensity of attack.
• Raise Structural Barriers
• Offer full line of products in every profitable
  market segment to close off entry points
• Block channel access by signing exclusive
  agreements with distributors
• Raise buyer switching costs by offering low-cost
  training to users.
• Raise the cost of gaining trial users by keeping
  prices low on items new users are most likely to
  purchase.

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Strategy Formulation Situation Analysis and
Business Strategy

• Defensive Tactics used to lower probability of
  attack, or lessen intensity of attack.
• Increase Expected Retaliation
• Defend any possible erosion of market share
  through
• Price cuts or
• Matching competitors promotional activities
• Lower the Inducement for Attack
• Keep industry profits low (Southwest Airlines)

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TOWS Matrix
Internal Factors External Factors Strengths (list key strengths) Weaknesses (list key weaknesses)
Opportunities (list key opportunities) SO Strategies strategies that use strengths to take advantage of opportunities WO Strategies strategies that alleviate weaknesses and take advantage of opportunities
Threats (list key threats) ST Strategies strategies that use strengths to overcome threats WT Strategies strategies that alleviate weaknesses and overcome threats
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TOWS Matrix
Internal Factors External Factors Strengths Distribution channels in Europe Weaknesses Manufacturing inefficiency
Opportunities Economic integration in Europe SO Strategies Push products through existing exclusive distribution channels SW Strategies Increase market presence through price cuts gained through mfg cost reductions
Threats New product advances ST Strategies Acquire new startup businesses creating innovative product solutions WT Strategies Sell off product lines in low growth markets