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Strategic Processes

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  1. 5 Chapter Strategic Processes

  2. Nature of Strategy • Defines the long-term plans, policies and culture of an organization • Strategic planning is a dynamic process that requires inputs from all segments of the organization • Acquisition and restructuring policies and decisions should be part of the company's overall strategic plans and processes • Ultimate responsibility for strategic planning resides in the top executive group

  3. Successful Strategies

  4. Importance of Economic Environment • Business cycle not dead – stock prices and merger activity overshoot on both the up and downside • Investment accelerator principle • Small changes in consumer spending can cause large changes in investment levels • Example: Cisco’s rise and fall • Sales-to-capacity relationships • Investment may be excessive in relation to sales • Example: Telecom industry

  5. Strategic Planning Processes • Essential elements in strategic planning • Assessment of changes in the environments • Evaluation of company capabilities and limitations • Assessment of expectations of stakeholders • Analysis of company, competitors, industry, domestic economy and international economies • Formulation of the missions, goals and policies for the master strategy • Development of sensitivity to critical environmental changes

  6. Strategic Planning Processes • Essential elements in strategic planning • Formulation of organization performance measurements and benchmarks • Formulation of long-range strategy programs • Formulation of mid-range programs and short-run plans • Organization, funding and other methods to implement all of the preceding elements • Information flow and feedback system for continued repetition of above activities and for adjustments and changes at each stage • Review and evaluation of above processes

  7. Strategic Planning Processes • Monitoring environments • Should encompass both domestic and international dimensions • Include analysis of economic, social, technological, political, and legal factors • Strategy also deals with stakeholders – groups with interests in the firm and its actions • Organization cultures • Firm cultures affect strategic thought and plans • Failure to combine cultures is a key obstacle to merger integration

  8. Alternative Strategy Methodologies • SWOT or WOTS UP – inventory and analysis of organizational strengths, weaknesses, environmental opportunities and threats • Gap analysis – assessment of goals versus forecasts or projections • Top-down or Bottom-up – relate to company forecasts vs. aggregation segment forecasts • Computer models – allow detail and complexity • Logical incrementalism – well-supported moves from current bases • Comparative histories – learn from the experiences of others

  9. Alternative Strategy Methodologies • Competitive analysis – assess customers, suppliers, new entrants, products, etc. • Muddling through – incremental changes selected from ongoing policy alternatives • Delphi technique – iterated opinion reactions from selected groups • Discussion group technique – stimulating ideas by discussions aimed at consensus decisions • Synergy – look for complementarities • Adaptive processes – periodic reassessment of environmental opportunities and organization capability adjustments required

  10. Alternative Strategy Methodologies • Environmental scanning – continuous analysis of all relevant environments • Intuition – insights of brilliant managers • Entrepreneurship – creative leadership • Discontinuities – crafting strategy from recognition of trend shifts • Brainstorming – free-form repeated exchange of ideas • Game theory – logical analysis of competitor actions and reactions • Game playing – assign roles and simulate alternative scenarios

  11. Alternative Analytical Frameworks • Product life cycle – introduction, growth, maturity, decline stages with changing opportunities, threats • Learning curve – costs decline with cumulative volume experience (first mover advantage) • Competitive analysis – industry, suppliers, customers, complemetors, etc. • Value chain analysis – seek to add product characteristics valued by customers • Niche opportunities – specialize in particular needs or interests of customer groups • Cost leadership – low-cost advantages

  12. Alternative Analytical Frameworks • Product differentiation – develop products that achieve customer preference • Product breadth – carryover of organizational capabilities • Correlations with profitability – statistical studies of factors associated with profitability • Market share – high market share associated with competitive superiority • Product quality – customer allegiance and price differentials for higher quality • Technological leader – keep at knowledge frontiers

  13. Alternative Analytical Frameworks • Resource-based view – capabilities are inimitable • Relatedness matrix – unfamiliar markets and products involve greatest risk • Focus matrix – narrow versus broad product families • Growth/share matrix – aim for high market share in high growth markets • Attractiveness matrix – aim to be strong in attractive industries • Global matrix – aim for competitive strength in attractive countries

  14. Alternative Analytical Frameworks • Product-market matrix • Competitive-position matrix

  15. Alternative Analytical Frameworks • Growth-share matrix • Strength-market attractiveness matrix

  16. Alternative Analytical Frameworks • Global strategy

  17. Strategy Formulation Approaches • Boston Consulting Group Approach • Historical emphasis: experience curve, product life cycle, product portfolio balance • Recent approaches • Impact of the Internet and other innovations • Performance measurements - cash flow return on investment (CFROI) • Michael Porter Approach (1980, 1985, 1987) • Select attractive industry using “Five Forces” • Develop competitive advantage through cost leadership, product differentiation, or focus • Develop attractive value chains

  18. Evaluation of Strategic Approaches • Strategy decisions are usually ill-structured problems • In practice, all approaches are eclectic • Computers allow approaches to become more closely tied • Results of strategy viewed differently: • Firms can develop and implement strategic planning to obtain competitive advantage • Adaptive process approach — competitive advantage not permanent; planning as a continual learning and adjustment process

  19. Evaluation of Strategic Approaches • Steps taken in checklists and iterations: • State objectives • Define environment • Analyze strengths/weaknesses relative to environment • Assess potential in environment • Compare potential to objectives • If gap, search for alternative ways to close gap • Select alternatives for analysis • Cost/benefit analysis of alternatives • Tentative selection — formulate plans and actions

  20. Evaluation of Strategic Approaches • Steps taken in checklists and iterations: • Repeat process from several viewpoints (research, production, marketing, financial, etc.) and all over system standpoint • Commit resources to implement plan • Competitive reactions • Follow-up to compare performance to plan • Repeat comparison of objectives and potential • Goal is effective alignment to changing environments

  21. Formulating a Merger Strategy • Requires continuing reassessment • Industry analysis • Competitor analysis • Supplier analysis • Customer analysis • Substitute products • Complementors • Technology changes • Societal factors • Firm's strengths/weaknesses relative to present/future industry conditions

  22. Formulating a Merger Strategy • Goal/capability analysis • Are current goals, policies appropriate? • Do goals, policies match resources? • Does timing of goals/policies reflect ability of firm to change? • Work out strategic alternatives • May not include current strategy • Choose best • Mergers represent one set of alternatives

  23. Formulating a Merger Strategy • Grove (1996) • Firm must adjust to six forces • Existing competitors • Potential competitors • Complementors • Customers • Suppliers • Industry transformation • Eclectic adaptive processes approach to strategy

  24. Formulating a Merger Strategy • Business goals - general or specific, but must be quantifiable to facilitate progress assessment • Size objectives • Large enough to use fixed factors effectively • Critical mass necessary to attain cost levels for profitable operation at market prices • Growth objectives - sales, assets, EPS, values • To get favorable P/E multiple for shares • To increase market to book value of shares

  25. Formulating a Merger Strategy • Business goals • Stability objectives - two kinds of instability • Large erratic fluctuations in total size and abrupt program shifts (e.g., defense industry) • Cyclical instability of durable goods industries • Flexibility objectives - ability to operate in variety of product markets and responsive to consumers • Breadth of capabilities, e.g., research, manufacturing, marketing • Technological breadth • Stay close to customers

  26. Formulating a Merger Strategy • Aligning firm to changing environments • Gap between objectives and potential based on current capabilities • Various approaches: • Choose products related to needs of customer that provide large markets • Focus on technological bottlenecks • Be at frontier of technology and aim for attractive product fallout • Emphasize economic criteria – ex. value

  27. Formulating a Merger Strategy • Strategic planning and mergers • Diversification strategy may be necessary if firm must alter product-market mix or capabilities to reduce or close strategic gap • Both involve evaluation of current capabilities relative to those needed to reach objectives • Related diversification involves lower risks

  28. Strategy and Structure • Unitary or U-Form • Highly centralized under the president • Broken into functional departments - no departments can stand alone • No easy way to measure each department as a profit center • Allows rapid decision-making • Only successful in small organizations • Difficult to handle multiple products

  29. Strategy and Structure • Holding company or H-Form • Arranged around various unrelated operating businesses • Leadership can evaluate each unit individually • Resources can be allocated according to projected returns

  30. Strategy and Structure • Multidivisional organization (M-form) • Each division is autonomous enough to be judged a profit center • Divisions share some general staff assistance • Can handle related product and geographic market extensions

  31. President Product A Product B Product C Research Manager Production Manager Marketing Manager Strategy and Structure • Matrix form • Managers of functional departments such as finance, manufacturing and development • Employees are assigned to subunits organized around products, geography, or other criteria • Effective in firms characterized by many new products or projects

  32. Structure and Acquisition Strategy

  33. Strategy and Structure • Virtual integration (Dell Computers) • Links of value chain brought together by informal arrangements among suppliers and customers • Effective customer ordering and services • Arrangement of supply shipments and customer needs facilitated by efficient computer systems • Represents a blurring of company boundaries • Strengthen communication ties between different firms in value chain creates a "form of organization"