Topic 4 Strategy analysis and choice

1. Topic 4Strategyanalysisandchoice

2. “Strategic management is not a box of tricks or a bundle of techniques. It is analytical thinking and commitment of resources to action. But quantification alone is not planning. Some of the most important issues in strategic management cannot be quantified at all.” —Peter Drucker—

3. Strategic Analysis and Choice • •Generate feasible alternatives • •Evaluate alternatives • •Select specific course of action

4. Generating & Selecting Strategies • Develop set of most attractive alternative strategies • Determine for the set - Advantages - Disadvantages - Trade-offs - Costs - Benefits

5. Involve a broad mix of personnel - Representation from each department/function - Provides opportunity to gain understanding of firm’s direction - Provides vehicle to develop commitment to attainment of organizational objectives • Evaluate each alternative - Internal and external audit information - Firm’s mission statement - Listed in writing - Ranked in order of attractiveness

14. Boston Consulting Group Matrix(BCG) • Enhances multidivisional firms’efforts to formulate strategies • Autonomous divisions (or profit centers) constitute the business portfolio • Firm’s divisions may compete in different industries requiring separate strategy

15. Graphically portrays differences among divisions • Focuses on market share position and industry growth rate • Manage business portfolio through relative market share position and industry growth rate • Relative market share position defined: Ratio of a division’s own market share in a particular industry to the market share held by the largest rival firm in that industry

17. BCG Matrix • Question Marks - Low relative market share positionyet compete in high-growth industry - Cash needs are high - Case generation is low - Decision to strengthen (intensive strategies) or divest

18. Stars - High relative market share and high industry growth rate - Best long-run opportunities for growth and profitability - Substantial investment to maintain or strengthen dominant position - Integration strategies, intensive strategies, joint ventures

19. Cash Cows - High relative market share position, but compete in low-growth industry - Generate cash in excess of their needs - Milked for other purposes - Maintain strong position as long as possible - Product development, concentric diversification - If becomes weak—retrenchment or divestiture

20. Dogs - Low relative market share position and compete in slow or no market growth situation - Weak internal and external position - Decision to liquidate, divest, retrenchment

21. Grand Strategy Matrix • Popular tool for formulating alternative strategies • Based on two evaluative dimensions 1. Competitive position 2. Market growth

23. Grand Strategy Matrix • Quadrant I - Excellent strategic position - Concentration on current markets and products - Take risks aggressively when necessary • Quadrant II - Evaluate present approach seriously - How to change to improve competitiveness - Rapid market growth requires intensive strategy

24. Quadrant III - Compete in slow-growth industries - Weak competitive position - Drastic changes quickly - Cost and asset reduction indicated (retrenchment) • Quadrant IV - Strong competitive position - Slow-growth industry - Diversification indicated to more promising growth areas

25. Quantitative Strategic Planning Matrix (QSPM) • Comprises Stage 3 of the analytical framework • Analytical technique designed to determine the relative attractiveness of feasible alternative actions • Uses input from Stage 1 and Stage 2 • Tool for objective evaluation of alternative strategies • Based on identified external and internal crucial success factors • Requires good intuitive judgment

27. QSPM • List the firm’s key external opportunities & threats; list the firm’s key internal strengths and weaknesses • Assign weights to each external and internal critical success factor • Examine the Stage 2 (matching) matrices and identify alternative strategies that the organization should consider implementing • Determine the Attractiveness Scores (AS)

28. Compute the total Attractiveness Scores • Compute the Sum Total Attractiveness Score • Positives: - Sets of strategies examined simultaneously or sequentially - Requires the integration of pertinent external and internal factors in the decision-making process • Limitations: - Requires intuitive judgments and educated assumptions - Only as good as the prerequisite inputs

29. The Industry Environment There is the need to continually formulate and implement business-level strategies to sustain competitive advantage over time in different industry environments. • Different industry environments present different opportunities and threats. • A company’s business model and strategies have to change to meet the environment. • Companies must face the challenges of developing and maintaining a competitive strategy in: • Fragmented Industries • Mature Industries • Embryonic Industries •Declining Industries • Growth Industries

30. Fragmented Industries A fragmented industry is one composed of a large number of small and medium-sized companies. • Reasons for fragmented industries • Low barriers to entry due to lack of economies of scale • Low entry barriers permit constant entry by new companies • Specialized customer needs require small job lots of products - no room for a mass-production • Diseconomies of scale • Strategies • Chaining – networks of linked outlets to achieve cost leadership • Franchising – for rapid growth with proven business concepts, reputation, management skills and economies of scale • Horizontal Merger – acquisition to obtain economies and growth • IT and Internet – to develop new business models

31. Embryonic and Growth Industries • An embryonic industry is one that is just beginning to develop when technological innovation creates new market or product opportunities. • A growth industry is one in which first-time demand is expanding rapidly as many new customers enter the market. Companies must understand the factors that affect a market’s growth rate – in order to tailor the business model to the changing industry environment.

32. Market Characteristics: Embryonic and Growth Industries • Reasons for slow growth in market demand • Limited performance and poor quality of the first products • Customer unfamiliarity with what the new product can do for them • Poorly developed distribution channels • Lack of complementary products • High production costs • Mass markets typically start to develop when: • Technological progress makes a product easier to use and increases its value to the average customer. • Key complementary products are developed that do the same. • Companies find ways to reduce production costs allowing them to lower prices.

33. Market Development and Customer Groups Both innovators and early adopters enter the market while the industry is in its embryonic state.

34. Market Share of Different Customer Segments Most market demand and industry profits arise during the early and late majority customer segments.

35. Crossing the Chasm • Innovators and Early Adopters are (while the early majority are NOT): • Technologically sophisticated and tolerant of engineering imperfections • Typically reached through specialized distribution channels • Relatively few in number and not particularly price-sensitive • To cross the chasm between the early adopters and the early majority, companies must: • Correctly identify the needs of the first wave of early majority users. • Alter the business model in response. • Alter the value chain and distribution channels to reach the early majority. • Design the product to meet the needs of the early majority so that the product can be modified and produced or provided at low cost. • Anticipate the moves of competitors.

36. Strategic Implications of Market Growth Rates • Different markets develop at different rates. • Growth rate measures the rate at which the industry’s product spreads in the marketplace. • Growth rates for new kinds of products seem to have accelerated over time: • Use of mass media • Low-cost mass production • Factors affecting market growth rates: • Relative advantage • Complexity • Compatibility • Observability • Availability of • Trialability complementary products Business-level strategy is a major determinant of industry profitability. The choice of business model and strategies can accelerate or retard market growth.

37. Navigating Through the Life Cycle to Maturity Two crucial factors: • Competitive advantage of company’s business model • Stage of the industry life cycle • Embryonic stages – share building strategies • Development of distinctive competencies and competitive advantage • Requires capital to develop R&D and sales/service competencies • Growth stages – maintain relative competitive position • Strengthen business model to prepare to survive industry shakeout • Requires investment to keep up with rapid growth of the market • Shakeout stage – increase share during fierce competition • Invest in share-increasing strategies at expense of weak competitors • Weak companies should exit the industry during the harvest stage • Maturity stage – hold-and-maintain to defend business model • Dominant companies want to reap the reward of prior investments • A company’s investment depends on the level of competition and source of the company’s competitive advantage

38. Mature Industries A mature industry is dominated by a small number of large companies whose actions are so highly interdependent that success of one company’s strategy depends on the response of its rivals. • Evolution of mature industries • Industry becomes consolidated as a result of the fierce competition during the shakeout stage. • Business level strategy isbased on how established companies collectively try to reduce strength of competition. • Interdependent companies try to protect industry profitability. • Strategies • Deter entry into industry • Product proliferation  Maintaining • Price cutting excess capacity • Manage industry rivalry • Price signaling  Capacity control • Price leadership Nonprice competition

39. Strategies for Deterring Entry of Rivals Sending a Signal: to potential new entrants contemplating entry that new entry will be met with price cuts Warning of Retaliation: by increasing output and forcing down prices until market entry would be unprofitable to entrants Filling the Niches: making it difficult for new competitors to break into a new industry & establish a beachhead

40. Product Proliferation in the Restaurant Industry Where the product spaces have been filled, it is difficult for a new company to gain a foothold in the market and differentiate itself.

41. Strategies for Managing Industry Rivalry Convey intentions (e.g. Tit-for-Tat) regarding pricing to other companies to allow the industry to choose the most favorable pricing options. Intent is to improve industry profitability. Informal pricing when one company takes the responsibility for choosing the most favorable industry pricing option. Formal price setting jointly by companies is illegal. • Differentiation by offering products with different features or applying different marketing techniques: • Market development • Market penetration • Product development • Product proliferation Market Signaling to secure coordination with rivals as a capacity control strategy and to reduce industry investment risks. Collusion on timing of new investments is illegal.

42. Four Nonprice Competitive Strategies

43. Game Theory Companies in an industry can be viewed as players that are all simultaneously making choices about which business models and strategies to pursue in order to maximize their profitability. Basic principles that underlie game theory: • Look Forward and Reason Back –Decision Trees • Look forward, think ahead, and anticipate how rivals will respond to whatever strategic moves they make • Reason backwards to determine which strategic moves to pursue today based on how rivals will respond to future strategic moves • Know Thy Rival –how is the rival likely to act • Find the Dominant Strategy –Payoff Matrix • One that makes you better off if you play that strategy • No matter what strategy your opponent uses • Strategy Shapes the Payoff Structure of the Game

44. A Decision Treefor UPS Pricing Strategy

45. Declining Industries A declining industry is one in which market demand has leveled off or is falling and the size of total market starts to shrink. Competition tends to intensify and industry profits tend to fall. • Reasons for and severity of the decline • Reasons: technological change, social trends, demographic shifts • Intensity of competition is greater when: • The decline is rapid versus slow and gradual. • The industry has high fixed costs. • The exit barriers are high. • The product is perceived as a commodity. • Not all industry segments typically decline at the same rate • Creating pockets of demand • Strategies • Leadership – seeks to become dominant player in declining industry • Niche – focuses on pockets of demand that are declining more slowly • Harvest – optimizes cash flow • Divestment – sells business to others

46. Factors for Intensity of Competition in Declining Industries

47. Strategy Selection in a Declining Industry • Choice of strategy is determined by: • Severity of the • industry decline • Company strength • relative to the • remaining pockets • of demand

48. Factors Encouraging or Discouraging Innovation • Factors Encouraging Innovation • Vision and culture that support innovation, personal growth and risk taking • Top management support and organizational champions • Teamwork and collaboration; a flat management hierarchy • Decentralized approval process • The ideas of every employee are considered valuable • Excellent communications • Innovation grants and time off to pursue projects • Large rewards for successful entrepreneurs • Focus on learning

49. Factors Encouraging or Discouraging Innovation • Factors Discouraging Innovation • Rigid bureaucracy and conservatism in decision making • Absence of management support or champions • Authoritarian leadership and traditional hierarchy • Difficult approval process • Only the ideas of certain people (researchers or managers) are given attention • Closed-door offices • Inadequate resources devoted to entrepreneurial activities • Harsh penalties for failure • Exclusive emphasis on measurable outcomes

50. Primary Reasons Firms Make Foreign Investments • New Markets • Better Resources • Efficiency • Risk Reduction • Competitive Countermove