strategy management slides_ 2009

8/8/2019 Strategy Management Slides_ 2009

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In most (large) corporations there are several levels of

management.

Strategic management is the highest of these levels in thesense that it is the broadest - applying to all parts of thefirm - while also incorporating the longest time horizon.

It gives direction to corporate values, corporate culture,corporate goals, and corporate missions.

Under corporate strategy there are typically business-level competitive strategies and functional unit

strategies.

The strategy hierarchy


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Corporate strategy refers to the overarching strategy of thediversified firm. Such a corporate strategy answers the questionsof "in which businesses should we be in?" and "how does being in

these business create synergy and/or add to the competitiveadvantage of the corporation as a whole?"

Business strategy refers to the aggregated strategies of singlebusiness firm or a strategic business unit (SBU) in a diversifiedcorporation. A strategic business unit is a semi-autonomous unitthat is usually responsible for its own budgeting, new productdecisions, hiring decisions, and price setting. An SBU is treated asan internal profit centre by corporate headquarters.

Functional strategies include marketing strategies, new product

development strategies, human resource strategies, financialstrategies, legal strategies, supply-chain strategies, andinformation technology management strategies. The emphasis ison short and medium term plans and is limited to the domain ofeach departments functional responsibility. Each functionaldepartment attempts to do its part in meeting overall corporate

objectives, and hence to some extent their strategies are derivedfrom broader corporate strategies.


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Management by objectives (MBO): An additional level ofstrategy called operational strategy was encouraged byPeter Drucker in his theory of management by objectives

(MBO).

MBO is very narrow in focus and deals with day-to-dayoperational activities such as scheduling criteria. It must

operate within a budget but is not at liberty to adjust or createthat budget. Operational level strategies are informed bybusiness level strategies which, in turn, are informed by

corporate level strategies.Management By Walking Around (MBWA). Senior H-P managers wereseldom at their desks. They spent most of their days visitingemployees, customers, and suppliers. This direct contact with keypeople provided them with a solid grounding from which viable

strategies could be crafted. The MBWA concept was popularized in1985 by a book by Tom Peters and Nancy Austin. Japanese managersemploy a similar system, which originated at Honda, and issometimes called the 3 G's (Genba, Genbutsu, and Genjitsu, whichtranslate into actual place, actual thing, and actual situation).


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The Art of Japanese Managementclaimed that the main reason for

Japanese success was their superior management techniques. They

divided management into 7 aspects (which are also known as

McKinsey 7S Framework): Strategy, Structure, Systems, Skills, Staff,Style, and Supraordinate goals (which we would now call shared

values). The first three of the 7 S's were called hard factors and this is

where American companies excelled. The remaining four factors

(skills, staff, style, and shared values) were called soft factors and

were not well understood by American businesses of the time.
http://en.wikipedia.org/w/index.php?title=McKinsey_7S_Framework&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=McKinsey_7S_Framework&action=edit&redlink=1


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Why Strategy

Instead of producing products then trying to sell them tothe customer, businesses should start with the customer,find out what they wanted, and then produce it for them.

The customer became the driving force behind allstrategic business decisions.


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Strategic decay, the notion that the value of allstrategies, no matter how brilliant, decays over timewhat was a strength yesterday becomes the root ofweakness today, We tend to depend on what workedyesterday and refuse to let go of what worked so well forus in the past. Prevailing strategies become self-confirming. In order to avoid this trap, businesses must

stimulate a spirit of inquiry and healthy debate. Theymust encourage a creative process of self renewal basedon constructive conflict.

strategic windows and stressed the importance of thetiming (both entrance and exit) of any given strategy.

Strategic decay


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Henry Mintzberg

Says there are five types of strategies. They are:

Strategy as plan - a direction, guide, course of action - intentionrather than actual

Strategy as ploy - a maneuver intended to outwit a competitor

Strategy as pattern - a consistent pattern of past behaviour - realizedrather than intended

Strategy as position - locating of brands, products, or companies

within the conceptual framework of consumers or other stakeholders -strategy determined primarily by factors outside the firm

Strategy as perspective - strategy determined primarily by a masterstrategist


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In 1998, Mintzberg developed these five types of managementstrategy into 10 schools of thought. These 10 schools are groupedinto three categories.

The first group is prescriptive or normative. It consists of theinformal design and conception school, the formal planning school,and the analytical positioning school.

The second group, consisting of six schools, is more concerned withhow strategic management is actually done, rather than prescribingoptimal plans or positions. The six schools are the entrepreneurial,visionary, or great leader school, the cognitive or mental processschool, the learning, adaptive, or emergent process school, thepower or negotiation school, the corporate culture or collectiveprocess school, and the business environment or reactive school.

The third and final group consists of one school, the configuration ortransformation school, an hybrid of the other schools organized intostages, organizational life cycles, or episodes


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The firm must engage in strategic planning thatclearly defines objectives and assesses both theinternal and external situation to formulate strategy,implement the strategy, evaluate the progress, and

make adjustments as necessary to stay on track.

A simplified view of the strategic planning process isshown

Mission &Objectives

EnvironmentalScanning

StrategyFormulation

StrategyImplementation

Evaluation& Control

The Strategic Planning Process


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Probably the most influential strategist of the decade was Michael

Porter. He introduced many new concepts including; 5 forcesanalysis, generic strategies, the value chain, strategic groups, and

clusters.


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Competitive Advantage

When a firm sustains profits that exceed the average for

its industry, the firm is said to possess a competitive

advantage over its rivals. The goal of much of business

strategy is to achieve a sustainable competitiveadvantage.

Michael Porter identified two basic types of competitive

advantage:cost advantage

differentiation advantage


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A competitive advantage exists when the firm is able to deliver

the same benefits as competitors but at a lower cost (cost

advantage), or deliver benefits that exceed those of competing

products (differentiation advantage). Thus, a competitiveadvantage enables the firm to create superior value for its

customers and superior profits for itself.

Cost and differentiation advantages are known aspositional

advantages since they describe the firm's position in the industry

as a leader in either cost or differentiation.

A resource-based viewemphasizes that a firm utilizes its

resources and capabilities to create a competitive advantage thatultimately results in superior value creation. The following

diagram combines the resource-based and positioning views to

illustrate the concept of competitive advantage:

Recommended Reading

Porter, Michael E., Competitive Advantage:Creating and Sustaining Superior Performance
http://www.amazon.com/exec/obidos/ASIN/0684841460/quickmbahttp://www.amazon.com/exec/obidos/ASIN/0684841460/quickmba


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Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the

firm must have resources and capabilities that are superior to those of its competitors.

Without this superiority, the competitors simply could replicate what the firm was doing andany advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation

advantage and that few competitors can acquire easily. The following are some examples

of such resources:

Patents and trademarksProprietary know-how

Installed customer base

Reputation of the firm

Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of acapability is the ability to bring a product to market faster than competitors. Such

capabilities are embedded in the routines of the organization and are not easily

documented as procedures and thus are difficult for competitors to replicate.

The firm's resources and capabilities together form its distinctive competencies. These

competencies enable innovation, efficiency, quality, and customer responsiveness, all of

which can be leveraged to create a cost advantage or a differentiation advantage.


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Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilitiesto achieve either a lower cost structure or a differentiated product. A

firm positions itself in its industry through its choice of low cost ordifferentiation. This decision is a central component of the firm'scompetitive strategy.

Another important decision is how broad or narrow a market

segment to target. Porter formed a matrix using cost advantage,differentiation advantage, and a broad or narrow focus to identify aset of generic strategies that the firm can pursue to create andsustain a competitive advantage.

According to Michael Porter, a firm must formulate a business strategy that

incorporates either cost leadership, differentiation or focus in order to achieve

a sustainable competitive advantage and long-term success in its chosen

arenas or industries.


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Porter's generic strategies detail the interaction betweencost minimization strategies, product differentiationstrategies, and market focus strategies the role ofstrategic management is to identify your corecompetencies, and then assemble a collection of assets that

will increase value added and provide a competitiveadvantage. MP claims that there are 3 types of capabilitiesthat can do this; innovation, reputation, and organizationalstructure. The search for best practices is also calledbenchmarking. This involves determining where you need

to improve, finding an organization that is exceptional inthis area, then studying the company and applying its bestpractices in your firm.


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Porter's Generic Strategies

Target Scope Advantage

Low Cost Product Uniqueness

Broad

(Industry Wide)

Cost Leadership

Strategy

Differentiation

Strategy

Narrow(Market

Segment)

FocusStrategy

(low cost)

FocusStrategy

(differentiation)


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Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a

given level of quality. The firm sells its products either at average industry

prices to earn a profit higher than that of rivals, or below the average industry

prices to gain market share. In the event of a price war, the firm can maintain

some profitability while the competition suffers losses. Even without a price

war, as the industry matures and prices decline, the firms that can produce

more cheaply will remain profitable for a longer period of time. The cost

leadership strategy usually targets a broad market.

Some of the ways that firms acquire cost advantages are by improving

process efficiencies, gaining unique access to a large source of lower cost

materials, making optimal outsourcing and vertical integration decisions, or

avoiding some costs altogether.

Each generic strategy has its risks, including the low-cost strategy. For

example, other firms may be able to lower their costs as well. As technology

improves, the competition may be able to leapfrog the production capabilities,

thus eliminating the competitive advantage.


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Differentiation Strategy

A differentiation strategy calls for the development of a product or service thatoffers unique attributes that are valued by customers and that customers

perceive to be better than or different from the products of the competition.

The value added by the uniqueness of the product may allow the firm to

charge a premium price for it. The firm hopes that the higher price will morethan cover the extra costs incurred in offering the unique product. Because of

the product's unique attributes, if suppliers increase their prices the firm may

be able to pass along the costs to its customers who cannot find substitute

products easily.

Firms that succeed in a differentiation strategy often have the following

internal strengths:

Access to leading scientific research.

Highly skilled and creative product development team.

Strong sales team with the ability to successfully communicate the perceivedstrengths of the product.

Corporate reputation for quality and innovation.

The risks associated with a differentiation strategy include imitation by competitors and

changes in customer tastes. Additionally, various firms pursuing focus strategies may

be able to achieve even greater differentiation in their market segments.

ocus ra egy


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ocus ra egy

The focus strategy concentrates on a narrow segment and within that

segment attempts to achieve either a cost advantage or differentiation.

The premise is that the needs of the group can be better serviced by

focusing entirely on it. A firm using a focus strategy often enjoys a high

degree of customer loyalty, and this entrenched loyalty discourages

other firms from competing directly.

Because of their narrow market focus, firms pursuing a focus strategy

have lower volumes and therefore less bargaining power with their

suppliers. However, firms pursuing a differentiation-focused strategymay be able to pass higher costs on to customers since close

substitute products do not exist.

Firms that succeed in a focus strategy are able to tailor a broad range

of product development strengths to a relatively narrow market

segment that they know very well.

Some risks of focus strategies include imitation and changes in the

target segments. Furthermore, it may be fairly easy for a broad-market

cost leader to adapt its product in order to compete directly. Finally,

other focusers may be able to carve out sub-segments that they can

serve even better.

Generic Strategies and Industry Forces


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Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against

competitive forces. The following table compares some characteristics of the generic

strategies in the context of the Porter's five forces.

IndustryForce

Generic Strategies

Cost Leadership Differentiation Focus

EntryBarriers

Ability to cut price in retaliationdeters potential entrants.

Customer loyalty can discouragepotential entrants.

Focusing develops corecompetencies that can actas an entry barrier.

BuyerPower

Ability to offer lower price to

powerful buyers.

Large buyers have less

power to negotiatebecause of few closealternatives.

Large buyers have less

power to negotiatebecause of fewalternatives.

SupplierPower

Better insulated from powerfulsuppliers.

Better able to pass onsupplier price increases tocustomers.

Suppliers have powerbecause of low volumes,but a differentiation-focused firm is better ableto pass on supplier priceincreases.

Threat ofSubstitutes

Can use low price to defendagainst substitutes.

Customer's becomeattached to differentiatingattributes, reducing threatof substitutes.

Specialized products &core competency protectagainst substitutes.

RivalryBetter able to compete onprice.

Brand loyalty to keepcustomers from rivals.

Rivals cannot meetdifferentiation-focusedcustomer needs.

M Porters The Value Chain


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M.Porters The Value Chain

To analyze the specific activities through which firms can create a competitive

advantage, it is useful to model the firm as a chain of value-creating activities.

Michael Porter identified a set of interrelated generic activities common to a

wide range of firms. The resulting model is known as the value chain and is

depicted below:

Primary Value Chain Activities

InboundLogistics

> Operations > OutboundLogistics

> Marketing& Sales

> Service


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Porters Value Chain

INBOUND

LOGISTICSOPERATIONS OUTBOUND

LOGISTICS

MARKETING

AND SALESSERVICE

PRIMARY ACTIVITIES

PROCUREMENT

TECHNOLOGY DEVELOPMENT

HUMAN RESOURCE MANAGEMENT

FIRM INFRASTRUCTURE

SUPPORTACTIVIT

I

ES

Figure 3-6Adapted with the permission of the Free Press, an imprint of Simon & Schuster Inc.. from

COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael Porter. Copyright

1985 by Michael E. Porter.


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The goal of these activities is to create value that exceeds the cost of providing

the product or service, thus generating a profit margin.

Inbound logistics include the receiving, warehousing, and inventory control of

input materials.

Operations are the value-creating activities that transform the inputs into the

final product.

Outbound logistics are the activities required to get the finished product to the

customer, including warehousing, order fulfillment, etc.

Marketing & Sales are those activities associated with getting buyers to

purchase the product, including channel selection, advertising, pricing, etc.

Service activities are those that maintain and enhance the product's value

including customer support, repair services, etc.

Any or all of these primary activities may be vital in developing a competitive

advantage. For example, logistics activities are critical for a provider of

distribution services, and service activities may be the key focus for a firmoffering on-site maintenance contracts for office equipment.

These five categories are generic and portrayed here in a general manner. Each

generic activity includes specific activities that vary by industry.


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How do firms create Value:

The firm creates value by performing a series ofactivities that Porter identified as the value chain. Inaddition to the firm's own value-creating activities,the firm operates in a value system of vertical

activities including those of upstream suppliers anddownstream channel members.

To achieve a competitive advantage, the firm mustperform one or more value creating activities in a way

that creates more overall value than do competitors.Superior value is created through lower costs orsuperior benefits to the consumer (differentiation).


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Support Activities

The primary value chain activities described above are facilitated by

support activities. Porter identified four generic categories of supportactivities, the details of which are industry-specific.

Procurement - the function of purchasing the raw materials and other

inputs used in the value-creating activities.

Technology Development - includes research and development,

process automation, and other technology development used to support

the value-chain activities.

Human Resource Management - the activities associated with

recruiting, development, and compensation of employees.

Firm Infrastructure - includes activities such as finance, legal, quality

management, etc.

Support activities often are viewed as "overhead", but some firmssuccessfully have used them to develop a competitive advantage, for

example, to develop a cost advantage through innovative management of

information systems.


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Value Chain Analysis

In order to better understand the activities leading to a competitive

advantage, one can begin with the generic value chain and then identify the

relevant firm-specific activities. Process flows can be mapped, and theseflows used to isolate the individual value-creating activities.

Once the discrete activities are defined, linkages between activities should

be identified. A linkage exists if the performance or cost of one activity affects

that of another. Competitive advantage may be obtained by optimizing and

coordinating linked activities.

The value chain also is useful in outsourcing decisions. Understanding the

linkages between activities can lead to more optimal make-or-buy decisions

that can result in either a cost advantage or a differentiation advantage.

The Value System

The firm's value chain links to the value chains of upstream suppliers and

downstream buyers. The result is a larger stream of activities known as the

value system. The development of a competitive advantage depends not only

on the firm-specific value chain, but also on the value system of which the

firm is a part.


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Type of integration

Verticle integration

Horizontal integration


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Vertical Integration

The degree to which a firm owns its upstream suppliers and its

downstream buyers is referred to as vertical integration. Because it

can have a significant impact on a business unit's position in itsindustry with respect to cost, differentiation, and other strategic

issues, the vertical scope of the firm is an important consideration in

corporate strategy.

Expansion of activities downstream is referred to as forwardintegration, and expansion upstream is referred to as backward

integration.

The concept of vertical integration can be visualized using the value

chain. Consider a firm whose products are made via an assemblyprocess. Such a firm may consider backward integrating into

intermediate manufacturing or forward integrating into distribution, as

illustrated below:


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Raw Materials

IntermediateManufacturing

Assembly

Distribution

End Customer

Raw Materials


Assembly

Distribution

End Customer

Raw Materials


Assembly

Distribution

End Customer

No Integration Backward Integration Forward Integration


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Two issues that should be considered when deciding whether to vertically integrate is

cost and control. The cost aspect depends on the cost of market transactions between

firms versus the cost of administering the same activities internally within a single firm.

The second issue is the impact of asset control, which can impact barriers to entry

and which can assure cooperation of key value-adding players.

Benefits of Vertical Integration

Vertical integration potentially offers the following advantages:

Reduce transportation costs if common ownership results in closer geographic

proximity.

Improve supply chain coordination.

Provide more opportunities to differentiate by means of increased control over inputs.

Capture upstream or downstream profit margins.

Increase entry barriers to potential competitors, for example, if the firm can gain sole

access to a scarce resource.

Gain access to downstream distribution channels that otherwise would beinaccessible.

Facilitate investment in highly specialized assets in which upstream or downstream

players may be reluctant to invest.

Lead to expansion of core competencies.


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Drawbacks of Vertical Integration

While some of the benefits of vertical integration can be quite attractive to the firm,the drawbacks may negate any potential gains. Vertical integration potentially has

the following disadvantages:

Capacity balancing issues. For example, the firm may need to build excess

upstream capacity to ensure that its downstream operations have sufficient supply

under all demand conditions.

Potentially higher costs due to low efficiencies resulting from lack of suppliercompetition.

Decreased flexibility due to previous upstream or downstream investments. (Note

however, that flexibility to coordinate vertically-related activities may increase.)

Decreased ability to increase product variety if significant in-house development is

required.

Developing new core competencies may compromise existing competencies.Increased bureaucratic costs.


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Factors Favoring Vertical Integration

The following situational factors tend to favor vertical integration:

Taxes and regulations on market transactions

Obstacles to the formulation and monitoring of contracts.

Strategic similarity between the vertically-related activities.

Sufficiently large production quantities so that the firm can benefit from economiesof scale.

Reluctance of other firms to make investments specific to the transaction.


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Factors Against Vertical Integration

The following situational factors tend to make vertical integration less attractive:

The quantity required from a supplier is much less than the minimum efficient

scale for producing the product.

The product is a widely available commodity and its production cost decreases

significantly as cumulative quantity increases.The core competencies between the activities are very different.

The vertically adjacent activities are in very different types of industries. For

example, manufacturing is very different from retailing.

The addition of the new activity places the firm in competition with another player

with which it needs to cooperate. The firm then may be viewed as a competitorrather than a partner


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Alternatives to Vertical Integration

There are alternatives to vertical integration that may provide some of the same

benefits with fewer drawbacks. The following are a few of these alternatives for

relationships between vertically-related organizations:long-term explicit contracts

franchise agreements

joint ventures

co-location of facilities

implicit contracts (relying on firms' reputation)


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Horizontal Integration

The acquisition of additional business activities at the same level of the value chain is

referred to as horizontal integration. This form of expansion contrasts with vertical

integration by which the firm expands into upstream or downstream activities. Horizontalgrowth can be achieved by internal expansion or by external expansion through mergers

and acquisitions of firms offering similar products and services. A firm may diversify by

growing horizontally into unrelated businesses.

Some examples of horizontal integration include:

The Standard Oil Company's acquisition of 40 refineries.

An automobile manufacturer's acquisition of a sport utility vehicle manufacturer.A media company's ownership of radio, television, newspapers, books, and magazines.


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Advantages of Horizontal Integration

The following are some benefits sought by firms that horizontally integrate:

Economies of scale - acheived by selling more of the same product, for example, by

geographic expansion.

Economies of scope - achieved by sharing resources common to different products.Commonly referred to as "synergies."

Increased market power (over suppliers and downstream channel members)

Reduction in the cost of international trade by operating factories in foreign markets.

Sometimes benefits can be gained through customer perceptions of linkages between

products. For example, in some cases synergy can be achieved by using the same

brand name to promote multiple products. However, such extensions can havedrawbacks, as pointed out by Al Ries and Jack Trout in their marketing classic,

Positioning.


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Pitfalls of Horizontal Integration

Horizontal integration by acquisition of a competitor will increase a firm's market

share. However, if the industry concentration increases significantly then anti-trust

issues may arise.

Aside from legal issues, another concern is whether the anticipated economic gains

will materialize. Before expanding the scope of the firm through horizontal integration,

management should be sure that the imagined benefits are real. Many blunders have

been made by firms that broadened their horizontal scope to achieve synergies that did

not exist, for example, computer hardware manufacturers who entered the software

business on the premise that there were synergies between hardware and software.

However, a connection between two products does not necessarily imply realizable

economies of scope.

Finally, even when the potential benefits of horizontal integration exist, they do notmaterialize spontaneously. There must be an explicit horizontal strategy in place. Such

strategies generally do not arise from the bottom-up, but rather, must be formulated by

corporate management.


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Ansoff Matrix

To portray alternative corporate growth strategies, Igor Ansoff

presented a matrix that focused on the firm's present and potential

products and markets (customers). By considering ways to grow viaexisting products and new products, and in existing markets and new

markets, there are four possible product-market combinations.

Ansoff's matrix is shown below:

Ansoff Matrix


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Existing Products New Products

ExistingMarkets

Market Penetration Product Development

NewMarkets

Market Development Diversification

Market Penetration - the firm seeks to achieve growth with existing products in their current

market

segments, aiming to increase its market share.Market Development - the firm seeks growth by targeting its existing products to new marke

segments.Product Development - the firms develops new products targeted to its existing market

segments.

Diversification - the firm grows by diversifying into new businesses by developing new prodfor new markets.


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Selecting a Product-Market Growth Strategy

The market penetration strategy is the least risky since it leverages many of

the firm's existing resources and capabilities. In a growing market, simplymaintaining market share will result in growth, and there may exist opportunities

to increase market share if competitors reach capacity limits. However, market

penetration has limits, and once the market approaches saturation another

strategy must be pursued if the firm is to continue to grow.

Market development options include the pursuit of additional market

segments or geographical regions. The development of new markets for the

product may be a good strategy if the firm's core competencies are related

more to the specific product than to its experience with a specific market

segment. Because the firm is expanding into a new market, a marketdevelopment strategy typically has more risk than a market penetration

strategy.


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A product development strategy may be appropriate if the firm's strengths

are related to its specific customers rather than to the specific product itself.In this situation, it can leverage its strengths by developing a new product

targeted to its existing customers. Similar to the case of new market

development, new product development carries more risk than simply

attempting to increase market share.

Diversification is the most risky of the four growth strategies since it

requires both product and market development and may be outside the core

competencies of the firm. In fact, this quadrant of the matrix has been

referred to by some as the "suicide cell". However, diversification may be a

reasonable choice if the high risk is compensated by the chance of a high

rate of return. Other advantages of diversification include the potential to

gain a foothold in an attractive industry and the reduction of overall business

portfolio risk.


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BCG Growth-Share Matrix

Companies that are large enough to be organized into strategic business

units face the challenge of allocating resources among those units. In theearly 1970's the Boston Consulting Group developed a model for managing a

portfolio of different business units (or major product lines). The BCG

growth-share matrix displays the various business units on a graph of the

market growth rate vs. market share relative to competitors:
http://www.quickmba.com/marketing/market-share/http://www.quickmba.com/marketing/market-share/


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Product portfolio strategy - introduction to the boston consulting

box

Introduction

The business portfolio is the collection of businesses and products that

make up the company. The best business portfolio is one that fits the

company's strengths and helps exploit the most attractive opportunities.

The company must:

(1) Analyse its current business portfolio and decide which businesses

should receive more or less investment, and

(2) Develop growth strategies for adding new products and businesses to

the portfolio, whilst at the same time deciding when products and

businesses should no longer be retained.


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BCG Matrix

On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market

On the vertical axis: market growth rate - this provides a measure of market attractiveness

Resources are allocated to business units according to where they are


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Resources are allocated to business units according to where they are

situated on the grid as follows:

Cash Cow - a business unit that has a large market share in a mature, slow

growing industry. Cash cows require little investment and generate cash that

can be used to invest in other business units.

Star- a business unit that has a large market share in a fast growing

industry. Stars may generate cash, but because the market is growing rapidly

they require investment to maintain their lead. If successful, a star will

become a cash cow when its industry matures.

Question Mark (or Problem Child) - a business unit that has a small

market share in a high growth market. These business units require

resources to grow market share, but whether they will succeed and become

stars is unknown.

Dog - a business unit that has a small market share in a mature industry. A

dog may not require substantial cash, but it ties up capital that could better be

deployed elsewhere. Unless a dog has some other strategic purpose, it

should be liquidated if there is little prospect for it to gain market share.


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By dividing the matrix into four areas, four types of SBU can be distinguished:

Stars - Stars are high growth businesses or products competing in markets

where they are relatively strong compared with the competition. Often they needheavy investment to sustain their growth. Eventually their growth will slow and,

assuming they maintain their relative market share, will become cash cows.

Cash Cows - Cash cows are low-growth businesses or products with a

relatively high market share. These are mature, successful businesses with

relatively little need for investment. They need to be managed for continued

profit - so that they continue to generate the strong cash flows that the companyneeds for its Stars.

Question marks - Question marks are businesses or products with low market

share but which operate in higher growth markets. This suggests that they have

potential, but may require substantial investment in order to grow market share

at the expense of more powerful competitors. Management have to think hard

about "question marks" - which ones should they invest in? Which ones should

they allow to fail or shrink?

Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that

have low relative share in unattractive, low-growth markets. Dogs may generate

enough cash to break-even, but they are rarely, if ever, worth investing in.


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Using the BCG Box to determine strategy

Once a company has classified its SBU's, it must decide what to do with them.In the diagram above, the company has one large cash cow (the size of the

circle is proportional to the SBU's sales), a large dog and two, smaller stars and

question marks.

Conventional strategic thinking suggests there are four possible strategies for

each SBU:

(1) Build Share: here the company can invest to increase market share (forexample turning a "question mark" into a star)

(2) Hold: here the company invests just enough to keep the SBU in its present

position

(3) Harvest: here the company reduces the amount of investment in order to

maximise the short-term cash flows and profits from the SBU. This may havethe effect of turning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing it out or selling it - in

order to use the resources elsewhere (e.g. investing in the more promising

"question marks").

Strategy - portfolio analysis - GE matrix


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Strategy - portfolio analysis - GE matrix

The business portfolio is the collection of businesses and products that make up the

company. The best business portfolio is one that fits the company's strengths andhelps exploit the most attractive opportunities.

The company must:

(1) Analyse its current business portfolio and decide which businesses should receive

more or less investment, and

(2) Develop growth strategies for adding new products and businesses to the portfolio,

whilst at the same time deciding when products and businesses should no longer be

retained.

The two best-known portfolio planning methods are the Boston Consulting Group

Portfolio Matrix and the McKinsey / General Electric Matrix (discussed in this revision

note). In both methods, the first step is to identify the various Strategic Business Units

("SBU's") in a company portfolio. An SBU is a unit of the company that has a separate

mission and objectives and that can be planned independently from the other

businesses. An SBU can be a company division, a product line or even individual

brands - it all depends on how the company is organised.


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GE / McKinsey Matrix

In consulting engagements with General Electric in the 1970's,

McKinsey & Company developed a nine-cell portfolio matrix as a

tool for screening GE's large portfolio of strategic business units(SBU). This business screen became known as the GE/McKinsey

Matrix and is shown below:

Business Unit Strength

High Medium Low

High

Medium

Low


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The GE / McKinsey matrix is similar to the BCG growth-share matrix in

that it maps strategic business units on a grid of the industry and the

SBU's position in the industry. The GE matrix however, attempts toimprove upon the BCG matrix in the following two ways:

The GE matrix generalizes the axes as "Industry Attractiveness" and

"Business Unit Strength" whereas the BCG matrix uses the market growth

rate as a proxy for industry attractiveness and relative market share as a

proxy for the strength of the business unit.

The GE matrix has nine cells vs. four cells in the BCG matrix.

Industry attractiveness and business unit strength are calculated by first

identifying criteria for each, determining the value of each parameter in thecriteria, and multiplying that value by a weighting factor. The result is a

quantitative measure of industry attractiveness and the business unit's

relative performance in that industry.

Industry Attractiveness


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The vertical axis of the GE / McKinsey matrix is industry attractiveness,

which is determined by factors such as the following:

Market growth rate

Market size

Demand variability

Industry profitability

Industry rivalry

Global opportunities

Macroenvironmental factors (PEST)

Business Unit Strength

The horizontal axis of the GE / McKinsey matrix is the strength of the business unit.

Some factors that can be used to determine business unit strength include:

Market share

Growth in market share

Brand equity

Distribution channel access

Production capacity

Profit margins relative to competitors

The business unit strength index can be calculated by multiplying the estimated value of

each factor by the factor's weighting, as done for industry attractiveness.
http://www.quickmba.com/strategy/pest/http://www.quickmba.com/strategy/pest/


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Strategic Implications

Resource allocation recommendations can be made to grow, hold, or

harvest a strategic business unit based on its position on the matrix as

follows:

Grow strong business units in attractive industries, average business unitsin attractive industries, and strong business units in average industries.

Hold average businesses in average industries, strong businesses in weak

industries, and weak business in attractive industies.

Harvest weak business units in unattractive industries, average business

units in unattractive industries, and weak business units in average

industries.

There are strategy variations within these three groups. For example, within

the harvest group the firm would be inclined to quickly divest itself of a weak

business in an unattractive industry, whereas it might perform a phased

harvest of an average business unit in the same industry.

While the GE business screen represents an improvement over the moresimple BCG growth-share matrix, it still presents a somewhat limited view by

not considering interactions among the business units and by neglecting to

address the core competencies leading to value creation. Rather than

serving as the primary tool for resource allocation, portfolio matrices are

better suited to displaying a quick synopsis of the strategic business units.


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The McKinsey / General Electric Matrix

The McKinsey/GE Matrix overcomes a number of the disadvantages of

the BCG Box. Firstly, market attractiveness replaces market growth asthe dimension of industry attractiveness, and includes a broader range of

factors other than just the market growth rate. Secondly, competitive

strength replaces market share as the dimension by which the

competitive position of each SBU is assessed.


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Factors that Affect Market Attractiveness

Whilst any assessment of market attractiveness is necessarily subjective, there are several factors which

can help determine attractiveness. These are listed below:

- Market Size- Market growth

- Market profitability

- Pricing trends

- Competitive intensity / rivalry

- Overall risk of returns in the industry

- Opportunity to differentiate products and services

- Segmentation

- Distribution structure (e.g. retail, direct, wholesale

Factors that Affect Competitive Strength

Factors to consider include:

- Strength of assets and competencies

- Relative brand strength- Market share

- Customer loyalty

- Relative cost position (cost structure compared with competitors)

- Distribution strength

- Record of technological or other innovation

- Access to financial and other investment resources

Strategy -


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Strategy benchmarking

Definition

Benchmarking is the process of identifying "best practice" in relation to both products

(including) and the processes by which those products are created and delivered. The

search for "best practice" can taker place both inside a particular industry, and also in other

industries (for example - are there lessons to be learned from other industries?).

The objective of benchmarking is to understand and evaluate the current position of a

business or organisation in relation to "best practice" and to identify areas and means of

performance improvement.

The Benchmarking Process

Benchmarking involves looking outward (outside a particular business, organisation,

industry, region or country) to examine how others achieve their performance levels and tounderstand the processes they use. In this way benchmarking helps explain the processes

behind excellent performance. When the lessons learnt from a benchmarking exercise are

applied appropriately, they facilitate improved performance in critical functions within an

organisation or in key areas of the business environment.


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Application of benchmarking involves four key steps:

(1) Understand in detail existing business processes

(2) Analyse the business processes of others

(3) Compare own business performance with that of others

analysed

(4) Implement the steps necessary to close the performancegap

Benchmarking should not be considered a one-off exercise. To be

effective, it must become an ongoing, integral part of an ongoing

improvement process with the goal of keeping abreast of ever-

improving best practice.


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Core Competencies

The Core Competence of the Corporation, C.K. Prahalad and Gary Hamelcoined the term core competencies, or the collective learning and

coordination skills behind the firm's product lines. They made the case that

core competencies are the source of competitive advantage and enable the

firm to introduce an array of new products and services.

According to Prahalad and Hamel, core competencies lead to the

development of core products. Core products are not directly sold to end

users; rather, they are used to build a larger number of end-user products.

For example, motors are a core product that can be used in wide array of

end products. The business units of the corporation each tap into the

relatively few core products to develop a larger number of end user productsbased on the core product technology. This flow from core competencies to endproducts is shown in the following diagram:

Core Competencies to End Products


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Core Competencies to End Products

End Products

1 2 3 4 5 6 7 8 9 10 11 12

Business1

Business2

Business3

Business4

Core Product 1

Core Product 2

Competence1

Competence2

Competence3

Competence4


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The intersection of market opportunities with core competencies forms

the basis for launching new businesses. By combining a set of core

competencies in different ways and matching them to market

opportunities, a corporation can launch a vast array of businesses.Without core competencies, a large corporation is just a collection of

discrete businesses. Core competencies serve as the glue that bonds

the business units together into a coherent portfolio.

Developing Core CompetenciesAccording to Prahalad and Hamel, core competencies arise from the

integration of multiple technologies and the coordination of diverse production

skills. Some examples include Philip's expertise in optical media and Sony's

ability to miniaturize electronics.

There are three tests useful for identifying a core competence. A corecompetence should:

provide access to a wide variety of markets, and

contribute significantly to the end-product benefits, and

be difficult for competitors to imitate.


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Core competencies tend to be rooted in the ability to integrate and coordinate

various groups in the organization. While a company may be able to hire a

team of brilliant scientists in a particular technology, in doing so it does not

automatically gain a core competence in that technology. It is the effective

coordination among all the groups involved in bringing a product to market thatresults in a core competence.

It is not necessarily an expensive undertaking to develop core competencies.

The missing pieces of a core competency often can be acquired at a low cost

through alliances and licensing agreements. In many cases an organizationaldesign that facilitates sharing of competencies can result in much more

effective utilization of those competencies for little or no additional cost.

To better understand how to develop core competencies, it is worthwhile to

understand what they do not entail. According to Prahalad and Hamel, core

competencies are not necessarily about:

outspending rivals on R&D

sharing costs among business units

integrating vertically

While the building of core competencies may be facilitated by some of these

actions, by themselves they are insufficient.

The Loss of Core Competencies


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p

Cost-cutting moves sometimes destroy the ability to build core

competencies. For example, decentralization makes it more difficult to build

core competencies because autonomous groups rely on outsourcing of

critical tasks, and this outsourcing prevents the firm from developing core

competencies in those tasks since it no longer consolidates the know-how

that is spread throughout the company.

Failure to recognize core competencies may lead to decisions that result in

their loss. For example, in the 1970's many U.S. manufacturers divested

themselves of their television manufacturing businesses, reasoning that theindustry was mature and that high quality, low cost models were available

from Far East manufacturers. In the process, they lost their core

competence in video, and this loss resulted in a handicap in the newer

digital television industry.

Similarly, Motorola divested itself of its semiconductor DRAM business at

256Kb level, and then was unable to enter the 1Mb market on its own. By

recognizing its core competencies and understanding the time required to

build them or regain them, a company can make better divestment

decisions.


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Core Products

Core competencies manifest themselves in core products that serve as alink between the competencies and end products. Core products enable valuecreation in the end products. Examples of firms and some of their coreproducts include:

3M - substrates, coatings, and adhesives

Black & Decker - small electric motors

Canon - laser printer subsystems

Matsushita - VCR subsystems, compressors

NEC - semiconductors

Honda - gasoline powered engines

The core products are used to launch a variety of end products. For

example, Honda uses its engines in automobiles, motorcycles, lawn mowers,and portable generators.


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Because firms may sell their core products to other firms that use

them as the basis for end user products, traditional measures of

brand market share are insufficient for evaluating the success ofcore competencies. Prahalad and Hamel suggest that core product

share is the appropriate metric. While a company may have a low

brand share, it may have high core product share and it is this share

that is important from a core competency standpoint.

Once a firm has successful core products, it can expand the

number of uses in order to gain a cost advantage via economies of

scale and economies of scope.


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Implications for Corporate Management

Prahalad and Hamel suggest that a corporation should be organized

into a portfolio of core competencies rather than a portfolio ofindependent business units. Business unit managers tend to focuson getting immediate end-products to market rapidly and usuallydo not feel responsible for developing company-wide corecompetencies. Consequently, without the incentive and directionfrom corporate management to do otherwise, strategic business

units are inclined to underinvest in the building of corecompetencies.

If a business unit does manage to develop its own corecompetencies over time, due to its autonomy it may not sharethem with other business units. As a solution to this problem,Prahalad and Hamel suggest that corporate managers should havethe ability to allocate not only cash but also core competenciesamong business units. Business units that lose key employees forthe sake of a corporate core competency should be recognized fortheir contribution.

Strategic planning - the link


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g p gwith marketing plan

Introduction

Businesses that succeed do so by creating and keeping customers. Theydo this by providing better value for the customer than the competition.

Marketing management constantly have to assess which customers they

are trying to reach and how they can design products and services thatprovide better value (competitive advantage).

The main problem with this process is that the environment in whichbusinesses operate is constantly changing. So a business must adapt toreflect changes in the environment and make decisions about how to

change the marketing mix in order to succeed. This process of adaptingand decision-making is known as marketing planning.


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Where does marketing planning fit in with the overall strategicplanning of a business?

Strategic planning is concerned about the overall direction of the

business. It is concerned with marketing, of course. But it also involvesdecision-making about production and operations, finance, human resourcemanagement and other business issues.

The objective of a strategic plan is to set the direction of a businessand create its shape so that the products and services it providesmeet the overall business objectives.

Marketing has a key role to play in strategic planning, because it is the jobof marketing management to understand and manage the links between thebusiness and the environment.

Sometimes this is quite a straightforward task. For example, in many smallbusinesses there is only one geographical market and a limited number ofproducts (perhaps only one product!).

However, consider the challenge faced by marketing management in a

multinational business, with hundreds of business units located around theglobe, producing a wide range of products. How can such management keepcontrol of marketing decision-making in such a complex situation? This callsfor well-organised marketing planning.


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What are the key issues that should be addressed instrategic and marketing planning?

The following questions lie at the heart of any marketing and

strategic planning process:

Where are we now?

How did we get there?

Where are we heading?

Where would we like to be?

How do we get there?

Are we on course?


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Why is marketing planning essential?

Businesses operate in hostile and increasingly complex environment.The ability of a business to achieve profitable sales is impacted by

dozens of environmental factors, many of which are inter-connected. It

makes sense to try to bring some order to this chaos by understanding

the commercial environment and bringing some strategic sense to the

process of marketing products and services.

A marketing plan is useful to many people in a business. It can help to:

Identify sources of competitive advantage

Gain commitment to a strategy

Get resources needed to invest in and build the business

Inform stakeholders in the business Set objectives and strategies

Measure performance

Strategy competitor analysis


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Strategy - competitor analysis

Competitor Analysis is an important part of the strategic planning process. This

revision note outlines the main role of, and steps in, competitor analysis

Why bother to analyse competitors?

Some businesses think it is best to get on with their own plans and ignore the

competition. Others become obsessed with tracking the actions of competitors

(often using underhand or illegal methods). Many businesses are happy simply to

track the competition, copying their moves and reacting to changes.

Competitor analysis has several important roles in strategic planning:

To help management understand their competitive advantages/disadvantages

relative to competitors

To generate understanding of competitors past, present (and most importantly)

future strategies

To provide an informed basis to develop strategies to achieve competitive

advantage in the future

To help forecast the returns that may be made from future investments (e.g.

how will competitors respond to a new product or pricing strategy?


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What questions should be asked when undertaking competitor analysis? The

following is a useful list to bear in mind:

Who are our competitors? (see the section on identifying competitors further

below)

What threats do they pose?

What is the profile of our competitors?

What are the objectives of our competitors?

What strategies are our competitors pursuing and how successful are these

strategies?

What are the strengths and weaknesses of our competitors?

How are our competitors likely to respond to any changes to the way we do

business?

Sources of information for competitor analysis


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Sources of information for competitor analysis

Davidson (1997) describes how the sources of competitor information can beneatly grouped into three categories:

Recorded data: this is easily available in published form either internally or

externally. Good examples include competitor annual reports and product

brochures;

Observable data: this has to be actively sought and often assembled from

several sources. A good example is competitor pricing;

Opportunistic data: to get hold of this kind of data requires a lot of planning

and organisation. Much of it is anecdotal, coming from discussions with

suppliers, customers and, perhaps, previous management of competitors.

:

The table below lists possible sources of competitor datausing Davidsons categorisation


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Recorded DataObservable Data Opportunistic Data

Annual report &

accounts

Pricing / price lists Meetings with suppliers

Press releases Advertising campaigns Trade shows

Newspaper articles Promotions Sales force meetings

Analysts reports Tenders Seminars / conferences

Regulatory reports Patent applications Recruiting ex-employees

Government reports Discussion with shareddistributors

Presentations /

speeches

Social contacts with

competitors


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What businesses need to know about their competitors

The tables below lists the kinds of competitor information that would

help businesses complete some good quality competitor analysis.

You can probably think of many more pieces of information about a

competitor that would be useful. However, an important challenge in

competitor analysis is working out how to obtain competitor

information that is reliable, up-to-date and available legally(!).


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What businesses probably already know their competitorsOverall sales and profits

Sales and profits by marketSales by main brand

Cost structure

Market shares (revenues and volumes)

Organisation structure

Distribution system

Identity / profile of senior management

Advertising strategy and spending

Customer / consumer profile & attitudes

Customer retention levels


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What businesses would really like to know about competitors

Sales and profits by productRelative costs

Customer satisfaction and service levels

Customer retention levels

Distribution costs

New product strategies

Size and quality of customer databases

Advertising effectiveness

Future investment strategy

Contractual terms with key suppliers

Terms of strategic partnerships

pyramid


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pyramidIntroduction

This model is similar in some respects to the well-established AnsoffModel. However, it looks at growth strategy from a slightly different

perspective.

The McKinsey model argues that businesses should develop their growth

strategies based on:

Operational skills

Privileged assets

Growth skills

Special relationships

Growth can be achieved by looking at business opportunities along

several dimensions, summarised in the diagram below:

i h id


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McKinsey growth pyramid

The model outlines seven ways of achieving growth, which are summarised below:

Existing products to existing customers


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Existing products to existing customers

The lowest-risk option; try to increase sales to the existing customer base; this is about increasing

the frequency of purchase and maintaining customer loyalty

Existing products to new customers

Taking the existing customer base, the objective is to find entirely new products that these

customers might buy, or start to provide products that existing customers currently buy fromcompetitors

New products and services

A combination of Ansoffs market development & diversification strategy taking a risk by

developing and marketing new products. Some of these can be sold to existing customers who

may trust the business (and its brands) to deliver; entirely new customers may need more

persuasion

New delivery approaches

This option focuses on the use of distribution channels as a possible source of growth. Are there

ways in which existing products and services can be sold via new or emerging channels which

might boost sales?

New geographies

With this method, businesses are encouraged to consider new geographic areas into which to sell

their products. Geographical expansion is one of the most powerful options for growth but also

one of the most difficult.

New industry structure

This option considers the possibility of acquiring troubled competitors or consolidating the industry

through a general acquisition programme

New competitive arenas

This option requires a business to think about opportunities to integrate vertically or consider

whether the skills of the business could be used in other industries.

strategic planning - values andvision


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vision

Introduction to Values and Vision

Values form the foundation of a business management style.Values provide the justification of behaviour and, therefore, exert significant influence on

marketing decisions.

Consider the following examples of a well-known business BT Group - defining its

values:

BT's activities are underpinned by a set of values that all BT people are asked to

respect:- We put customers first

- We are professional

- We respect each other

- We work as one team

- We are committed to continuous improvement.

These are supported by our vision of a communications-rich world - a world in which

everyone can benefit from the power of communication skills and technology.A society in which individuals, organisations and communities have unlimited access to

one another and to a world of knowledge, via a multiplicity of communications

technologies including voice, data, mobile, internet - regardless of nationality, culture,

class or education.

Our job is to facilitate effective communication, irrespective of geography, distance, time

or complexity.

Source: BT Group plc web site


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Operational skills are the core competences that a business has which can

provide the foundation for a growth strategy. For example, the business may

have strong competencies in customer service; distribution, technology.

Privileged assets are those assets held by the business that are hard to

replicate by competitors. For example, in a direct marketing-based business

these assets might include a particularly large customer database, or a well-

established brand. Growth skills are the skills that businesses need if they are to successfully

manage a growth strategy. These include the skills of new product

development, or negotiating and integrating acquisitions.

Special relationships are those that can open up new options. For example,

the business may have specially string relationships with trade bodies in the

industry that can make the process of growing in export markets easier thanfor the competition.

Why are values important?

Many Japanese businesses have used the value system to provide the motivation to make them global market


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Many Japanese businesses have used the value system to provide the motivation to make them global market

leaders. They have created an obsession about winning that is communicated at all levels of the business that has

enabled them to take market share from competitors that appeared to be unassailable.

For example, at the start of the 1970s Komatsu was less than one third the size of the market leader Caterpillar

and relied on just one line of smaller bulldozers for most of its revenues. By the late 1980s it had passed Caterpillar

as the world leader in earth-moving equipment. It had also adopted an aggressive diversification strategy that led it

into markets such as industrial robots and semiconductors.

If values shape the behaviour of a business, what is meant by vision?

To succeed in the long term, businesses need a vision of how they will change and improve in the future. The vision

of the business gives it energy. It helps motivate employees. It helps set the direction of corporate and marketing

strategy.

What are the components of an effective business vision?

Davidson identifies six requirements for success:

- Provides future direction

- Expresses a consumer benefit

- Is realistic

- Is motivating

- Must be fully communicated

- Consistently followed and measured


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Failure to obtain sufficient company

resources to accomplish task

Failure to obtain employee commitmentNew strategy not well explained to employees

No incentives given to workers to embrace the new

strategy

Under-estimation of time requirements

No critical path analysis done

Failure to follow the plan

No follow through after initial planningNo tracking of progress against plan

No consequences for above

Failure to manage change

Inadequate understanding of the internal resistance to

change

Lack of vision on the relationships between processes,

technology and organization

Poor communicationsInsufficient information sharing among stakeholders

Exclusion of stakeholders and delegates

Reasons why strategic plans fail

Th h t t i l f il i ll


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There are many reasons why strategic plans fail, especially:

Failure to understand the customer

Why do they buy

Is there a real need for the productinadequate or incorrect marketing research

Inability to predict environmental reaction

What will competitors do

Fighting brands

Price wars

Will government intervene

Over-estimation of resource competence

Can the staff, equipment, and processes handle the new strategy

Failure to develop new employee and management skills

Failure to coordinate

Reporting and control relationships not adequate

Organizational structure not flexible enough

Failure to obtain senior management commitment

strategy management slides_ 2009

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