Strategic Management MGT 406 PDF

MGT 406 - STRATEGIC MANAGEMENT CHAPTER 6 - STRATEGY FORMULATION: SITUATIONAL GENERATING A STRATEGIC FACTORS ANALYSIS ANALYSIS AND BUSINESS STRATEGY SUMMARY (SFAS) MATRIX SITUATIONAL ANALYSIS (SW...

MGT 406 - STRATEGIC MANAGEMENT CHAPTER 6 - STRATEGY FORMULATION: SITUATIONAL GENERATING A STRATEGIC FACTORS ANALYSIS ANALYSIS AND BUSINESS STRATEGY SUMMARY (SFAS) MATRIX SITUATIONAL ANALYSIS (SWOT ANALYSIS) The EFAS and IFAS Tables plus the SFAS Matrix have been Strategy formulation, often referred to as strategic planning or developed to deal with the criticisms of SWOT analysis. When long-range planning, is concerned with developing a used together, they are a powerful analytical set of tools for corporation’s mission, objectives, strategies, and policies. strategic analysis. It begins with situation analysis: the process of finding a strategic The SFAS (Strategic Factors Analysis Summary) Matrix fit between external opportunities and internal strengths while summarizes an organization’s strategic factors by combining the working around external threats and internal weaknesses. external factors from the EFAS Table with the internal factors SWOT is an acronym used to describe the particular Strengths, from the IFAS Table. Weaknesses, Opportunities, and Threats that are strategic factors The SFAS Matrix requires a strategic decision maker to condense for a specific company. these strengths, weaknesses, opportunities, and threats into fewer SWOT analysis should not only result in the identification of a than 10 strategic factors. corporation’s distinctive competencies—the particular This is done by reviewing and revising the weight given each capabilities and resources that a firm possesses and the superior factor. The revised weights reflect the priority of each factor as a way in which they are used—but also in the identification of determinant of the company’s future success. The highest- opportunities that the firm is not currently able to take advantage weighted EFAS and IFAS factors should appear in the SFAS of due to a lack of appropriate resources. Matrix. SWOT analysis, by itself, is not a panacea. Some of the primary As shown in Figure 6–1, you can create an SFAS Matrix by criticisms of SWOT analysis are: following these steps: It generates lengthy lists. It uses no weights to reflect priorities. 1. In Column 1 (Strategic Factors), list the most important EFAS and It uses ambiguous words and phrases. IFAS items. After each factor, indicate whether it is a Strength (S), The same factor can be placed in two categories (e.g., a strength Weakness (W), an Opportunity (O), or a Threat (T). may also be a weakness). 2. In Column 2 (Weight), assign weights for all of the internal and There is no obligation to verify opinions with data or analysis. external strategic factors. As with the EFAS and IFAS Tables presented It requires only a single level of analysis. earlier, the weight column must total 1.00. This means that the weights calculated earlier for EFAS and IFAS will probably have to be There is no logical link to strategy implementation. adjusted. 3. In Column 3 (Rating), assign a rating of how the company’s FINDING A PROPITIOUS NICHE management is responding to each of the strategic factors. These A niche is a need in the marketplace that is currently unsatisfied. ratings will probably (but not always) be the same as those listed in the The goal is to find a propitious niche - an extremely favorable EFAS and IFAS Tables. niche - that is so well suited to the firm’s internal and external 4. In Column 4 (Weighted Score), multiply the weight in Column 2 for environment that other corporations are not likely to challenge or each factor by its rating in Column 3 to obtain the factor’s rated score. dislodge it. 5. In Column 5 (Duration), depicted in Figure 6–1, indicate short-term A niche is propitious to the extent that it currently is just large (less than one year), intermediate-term (one to three years), or long- enough for one firm to satisfy its demand. After a firm has found term (three years and beyond). and filled that niche, it is not worth a potential competitor’s time 6. In Column 6 (Comments), repeat or revise your comments for each or money to also go after the same niche. Such a niche may also strategic factor from the previous EFAS and IFAS Tables. The total be called a strategic sweet spot weighted score for the average firm in an industry is always 3.0. GENERATING ALTERNATIVE STRATEGIES BY USING A TOWS MATRIX SWOT can also be used to generate a number of possible Finding such a niche or sweet spot is not always easy. alternative strategies. A firm’s management must be always looking for a strategic The TOWS Matrix (TOWS is just another way of saying SWOT) window - that is, a unique market opportunity that is available illustrates how the external opportunities and threats facing a only for a particular time. particular corporation can be matched with that company’s The first firm through a strategic window can occupy a propitious internal strengths and weaknesses to result in four sets of possible niche and discourage competition (if the firm has the required strategic alternatives. internal strengths). This is a good way to use brainstorming to create alternative strategies that might not otherwise be considered. It forces REVIEW OF MISSION AND OBJECTIVES strategic managers to create various kinds of growth as well as A reexamination of an organization’s current mission and retrenchment strategies. It can be used to generate corporate as objectives must be made before alternative strategies can be well as business strategies. generated and evaluated. Even when formulating strategy, decision makers tend to SO Strategies are generated by thinking of ways in which a company concentrate on the alternatives—the action possibilities—rather or business unit could use its strengths to take advantage of than on a mission to be fulfilled and objectives to be achieved. opportunities. If the mission does not provide a common thread (a unifying ST Strategies consider a company’s or unit’s strengths as a way to theme) for a corporation’s businesses, managers may be unclear avoid threats. about where the company is heading. WO Strategies attempt to take advantage of opportunities by overcoming weaknesses.  MGT 406 - STRATEGIC MANAGEMENT WT Strategies are basically defensive and primarily act to minimize brands for Albertson’s, Safeway, Jewel, and many other grocery weaknesses and avoid threats. store chains. It matches the quality of the well-known brands, but keeps costs low by eliminating advertising and promotion BUSINESS STRATEGIES expenses. As a result, Spokane-based Potlach makes 92% of the Business strategy focuses on improving the competitive position private-label bathroom tissue and one third of all bathroom tissue of a company’s or business unit’s products or services within the sold in Western U.S. grocery stores. specific industry or market segment that the company or business unit serves. RISKS IN COMPETITIVE STRATEGIES Business strategy is extremely important because research shows No one competitive strategy is guaranteed to achieve success, and that business unit effects have double the impact on overall some companies that have successfully implemented one of company performance than do either corporate or industry effects. Porter’s competitive strategies have found that they could not Business strategy can be competitive (battling against all sustain the strategy. competitors for advantage) and/or cooperative (working with one Deere responded by building high-tech flexible manufacturing or more companies to gain advantage against other competitors). plants using mass-customization to cut its manufacturing costs Just as corporate strategy asks what industry(ies) the company and using innovation to create differentiated products which, should be in, business strategy asks how the company or its units although higher-priced, reduced customers’ labor and fuel should compete or cooperate in each industry. expenses. PORTER’S COMPETITIVE STRATEGIES Michael Porter proposes two “generic” competitive strategies for outperforming other corporations in a particular industry: lower cost and differentiation.10 These strategies are called generic because they can be pursued by any type or size of business firm, even by notfor- profit organizations: Lower cost strategy is the ability of a company or a business unit to design, produce, and market a comparable product more efficiently than its competitors. Differentiation strategy is the ability of a company to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service. Issues in Competitive Strategies Porter further proposes that a firm’s competitive advantage in an Porter argues that to be successful, a company or business unit industry is determined by its competitive scope, that is, the must achieve one of the previously mentioned generic breadth of the company’s or business unit’s target market. competitive strategies. Otherwise, the company or business unit Before using one of the two generic competitive strategies (lower is stuck in the middle of the competitive marketplace with no cost or differentiation), the firm or unit must choose the range of competitive advantage and is doomed to below-average product varieties it will produce, the distribution channels it will performance. employ, the types of buyers it will serve, the geographic areas in which it will sell, and the array of related industries in which it will also compete. Cost leadership is a lower-cost competitive strategy that aims at the broad mass market and requires “aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on.” Because of its lower costs, the cost leader is able to charge a lower price for its products than its competitors and still make a satisfactory profit. Differentiation is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company or business unit may then INDUSTRY STRUCTURE AND COMPETITIVE STRATEGY charge a premium for its product. This specialty can be associated with design or brand image, technology, features, a dealer In a fragmented industry, for example, where many small- and network, or customer service. medium-sized local companies compete for relatively small shares of the total market, focus strategies will likely Differentiation is a viable strategy for earning above-average predominate. Fragmented industries are typical for products in the returns in a specific business because the resulting brand loyalty early stages of their life cycles. If few economies are to be gained lowers customers’ sensitivity to price. Increased costs can usually through size, no large firms will emerge and entry barriers will be be passed on to the buyers. Buyer loyalty also serves as an entry low - allowing a stream of new entrants into the industry. barrier; new firms must develop their own distinctive competence to differentiate their products in some way in order to compete As an industry matures, fragmentation is overcome, and the successfully. industry tends to become a consolidated industry dominated by a few large companies. Although many industries start out being fragmented, battles for market share and creative attempts to overcome local or niche market boundaries often increase the market share of a few companies. The strategic rollup was developed in the mid-1990s as an efficient way to quickly consolidate a fragmented industry. With the aid of money from venture capitalists, an entrepreneur acquires hundreds of owner-operated small businesses. Rollups differ from conventional mergers and acquisitions in three ways: (1) they involve large numbers of firms, (2) the acquired firms are typically owner operated, and (3) the objective is not to gain incremental advantage, but to reinvent an entire industry. Cost focus is a low-cost competitive strategy that focuses on a COMPETITIVE TACTICS particular buyer group or geographic market and attempts to serve Studies of decision-making report that half the decisions made in only this niche, to the exclusion of others. In using cost focus, the organizations fail because of poor tactics. company or business unit seeks a cost advantage in its target A tactic is a specific operating plan that details how a strategy is segment. A good example of this strategy is Potlach Corporation, to be implemented in terms of when and where it is to be put into a manufacturer of toilet tissue. Rather than compete directly against Procter & Gamble’s Charmin, Potlach makes the house  MGT 406 - STRATEGIC MANAGEMENT action. By their nature, tactics are narrower in scope and shorter conclude that an attack is unattractive. These tactics deliberately in time horizon than are strategies. reduce short-term profitability to ensure long-term profitability: Raise structural barriers. Entry barriers act to block a challenger’s logical avenues of attack. Some of the most important, according to Porter, are to: 1. Offer a full line of products in every profitable market segment to close off any entry points (for example, Coca Cola offers unprofitable noncarbonated beverages to keep competitors off store shelves); 2. Block channel access by signing exclusive agreements with distributors; 3. Raise buyer switching costs by offering low-cost training to users; 4. Raise the cost of gaining trial users by keeping prices low on items new users are most likely to purchase; 5. Increase scale economies to reduce unit costs; 6. Foreclose alternative technologies through patenting or licensing; 7. Limit outside access to facilities and personnel; TIMING TACTICS: WHEN TO COMPETE 8. Tie up suppliers by obtaining exclusive contracts or purchasing key A timing tactic deals with when a company implements a locations; strategy. 9. Avoid suppliers that also serve competitors; and The first company to manufacture and sell a new product or 10. Encourage the government to raise barriers, such as safety and service is called the first mover (or pioneer). pollution standards or favorable trade policies. Some of the advantages of being a first mover are that the company is able to establish a reputation as an industry leader, Increase expected retaliation: This tactic is any action that increases move down the learning curve to assume the cost-leader position, the perceived threat of retaliation for an attack. For example, and earn temporarily high profits from buyers who value the management may strongly defend any erosion of market share by product or service very highly. drastically cutting prices or matching a challenger’s promotion through A successful first mover can also set the standard for all a policy of accepting any price-reduction coupons for a competitor’s subsequent products in the industry. A company that sets the product. This counterattack is especially important in markets that are standard “locks in” customers and is then able to offer further very important to the defending company or business unit. products based on that standard. Late movers may be able to imitate the technological advances Lower the inducement for attack: A third type of defensive tactic is of others (and thus keep R&D costs low), keep risks down by to reduce a challenger’s expectations of future profits in the industry. waiting until a new technological standard or market is Like Southwest Airlines, a company can deliberately keep prices low established, and take advantage of the first mover’s natural and constantly invest in cost-reducing measures. With prices kept very inclination to ignore market segments. low, there is little profit incentive for a new entrant. MARKET LOCATION TACTICS: WHERE TO COMPETE COOPERATIVE STRATEGIES A market location tactic deals with where a company implements A company uses competitive strategies and tactics to gain a strategy. competitive advantage within an industry by battling against other A company or business unit can implement a competitive strategy firms. either offensively or defensively. These are not, however, the only business strategy options An offensive tactic usually takes place in an established available to a company or business unit for competing competitor’s market location. A defensive tactic usually takes successfully within an industry. place in the firm’s own current market position as a defense A company can also use cooperative strategies to gain competitive against possible attack by a rival. advantage within an industry by working with other firms. The Offensive Tactics. Some of the methods used to attack a two general types of cooperative strategies are collusion and competitor’s position are: strategic alliances. Frontal assault: The attacking firm goes head-to-head with its competitor. It matches the competitor in every category from price to COLLUSION promotion to distribution channel. To be successful, the attacker must Collusion is the active cooperation of firms within an industry to have not only superior resources, but also the willingness to persevere. reduce output and raise prices in order to get around the normal This is generally a very expensive tactic and may serve to awaken a economic law of supply and demand. Collusion may be explicit, in sleeping giant, depressing profits for the whole industry. which case firms cooperate through direct communication and Flanking maneuver: Rather than going straight for a competitor’s negotiation, or tacit, in which case firms cooperate indirectly through position of strength with a frontal assault, a firm may attack a part of an informal system of signals. Explicit collusion is illegal in most the market where the competitor is weak. countries and in a number of regional trade associations, such as the Bypass attack: Rather than directly attacking the established European Union. competitor frontally or on its flanks, a company or business unit may Collusion can also be tacit, in which case there is no direct choose to change the rules of the game. This tactic attempts to cut the communication among competing firms. According to Barney, tacit market out from under the established defender by offering a new type collusion in an industry is most likely to be successful if (1) there are of product that makes the competitor’s product unnecessary. a small number of identifiable competitors, ( 2) costs are similar among Encirclement: Usually evolving out of a frontal assault or flanking firms, (3) one firm tends to act as the price leader, (4) there is a maneuver, encirclement occurs as an attacking company or unit common industry culture that accepts cooperation, (5) sales are encircles the competitor’s position in terms of products or markets or characterized by a high frequency of small orders, (6) large inventories both. The encircler has greater product variety (e.g., a complete and order backlogs are normal ways of dealing with fluctuations in product line, ranging from low to high price) and/or serves more demand, and (7) there are high entry barriers to keep out new markets (e.g., it dominates every secondary market). competitors. Guerrilla warfare: Instead of a continual and extensive resource- expensive attack on a competitor, a firm or business unit may choose STRAGEIC ALLIANCES to “hit and run.” Guerrilla warfare is characterized by the use of small, Strategic Alliances. A strategic alliance is a long-term cooperative intermittent assaults on different market segments held by the arrangement between two or more independent firms or business units competitor. In this way, a new entrant or small firm can make some that engage in business activities for mutual economic gain.52 gains without seriously threatening a large, established competitor and Alliances between companies or business units have become a fact of evoking some form of retaliation. life in modern business. Companies or business units may form a strategic Defensive Tactics. According to Porter, defensive tactics aim to lower alliance for a number of reasons, including: the probability of attack, divert attacks to less threatening avenues, or 1. To obtain or learn new capabilities: For example, General Motors lessen the intensity of an attack. Instead of increasing competitive and Chrysler formed an alliance in 2004 to develop new fuel-saving advantage per se, they make a company’s or business unit’s hybrid engines for their automobiles. Alliances are especially useful if competitive advantage more sustainable by causing a challenger to the desired knowledge or capability is based on tacit knowledge or on  MGT 406 - STRATEGIC MANAGEMENT new poorly-understood technology. A study found that firms with strategic alliances had more modern manufacturing technologies than did firms without alliances. 2. To obtain access to specific markets: Rather than buy a foreign company or build breweries of its own in other countries, Anheuser- Busch chose to license the right to brew and market Budweiser to other brewers, such as Labatt in Canada, Modelo in Mexico, and Kirin in Japan. As another example, U.S. defense contractors and aircraft manufacturers selling to foreign governments are typically required by these governments to spend a percentage of the contract/purchase value, either by purchasing parts or obtaining sub-contractors, in that country. This is often achieved by forming value-chain alliances with foreign companies either as parts suppliers or as sub-contractors.64 In a survey by the Economist Intelligence Unit, 59% of executives stated that their primary reason for engaging in alliances was the need for fast and low-cost expansion into new markets. 3. To reduce financial risk: Alliances take less financial resources than do acquisitions or going it alone and are easier to exit if necessary. CHAPTER 7 - STRATEGY FORMULATION: CORPORATE For example, because the costs of developing new large jet airplanes STRATEGY were becoming too high for any one manufacturer, Aerospatiale of France, British Aerospace, Construcciones Aeronáuticas of Spain, and CORPORATE STRATEGY Daimler-Benz Aerospace of Germany formed a joint consortium called The vignette about Nike illustrates the importance of corporate strategy Airbus Industrie to design and build such planes. Using alliances with to a firm’s survival and success. Corporate strategy deals with three suppliers is a popular means of outsourcing an expensive activity. key issues facing the corporation as a whole: 4. To reduce political risk: Forming alliances with local partners is a 1. The firm’s overall orientation toward growth, stability, or good way to overcome deficiencies in resources and capabilities when retrenchment (directional strategy). expanding into international markets. To gain access to China while 2. The industries or markets in which the firm competes through its ensuring a positive relationship with the often restrictive Chinese products and business units (portfolio analysis). government, Maytag Corporation formed a joint venture with the 3. The manner in which management coordinates activities and Chinese appliance maker, RSD. transfers resources and cultivates capabilities among product lines and business units (parenting strategy). Mutual Service Consortia. A mutual service consortium is a partnership of similar companies in similar industries that pool their Corporate strategy is primarily about the choice of direction for resources to gain a benefit that is too expensive to develop alone, such a firm as a whole and the management of its business or product as access to advanced technology. For example, IBM established a portfolio. This is true whether the firm is a small company or a research alliance with Sony Electronics and Toshiba to build its next large multinational corporation (MNC). generation of computer chips. The result was the “cell” chip, a Corporate strategy, therefore, includes decisions regarding the microprocessor running at 256 gigaflops—around ten times the flow of financial and other resources to and from a company’s performance of the fastest chips currently used in desktop computers. product lines and business units. Through a series of coordinating Referred to as a “supercomputer on a chip,” cell chips were to be used devices, a company transfers skills and capabilities developed in by Sony in its PlayStation 3, by Toshiba in its high-definition one unit to other units that need such resources. televisions, and by IBM in its super computers. The mutual service Organized into three parts that examine corporate strategy in consortia is a fairly weak and distant alliance—appropriate for partners terms of directional strategy (orientation toward growth), that wish to work together but not share their core competencies. There portfolio analysis (coordination of cash flow among units), and is very little interaction or communication among the partners. corporate parenting (the building of corporate synergies through resource sharing and development). Joint Venture. A joint venture is a “cooperative business activity, formed by two or more separate organizations for strategic purposes, DIRECTIONAL STRATEGY that creates an independent business entity and allocates ownership, Just as every product or business unit must follow a business operational responsibilities, and financial risks and rewards to each strategy to improve its competitive position, every corporation must member, while preserving their separate identity/autonomy. “Along decide its orientation toward growth by asking the following three with licensing arrangements, joint ventures lie at the midpoint of the questions: continuum and are formed to pursue an opportunity that needs a 1. Should we expand, cut back, or continue our operations unchanged? capability from two or more companies or business units, such as the 2. Should we concentrate our activities within our current industry, or technology of one and the distribution channels of another. Joint should we diversify into other industries? ventures are the most popular form of strategic alliance. They often 3. If we want to grow and expand nationally and/or globally, should occur because the companies involved do not want to or cannot legally we do so through internal development or through external merge permanently. Joint ventures provide a way to temporarily acquisitions, mergers, or strategic alliances? combine the different strengths of partners to achieve an outcome of value to all. A corporation’s directional strategy is composed of three general orientations (sometimes called grand strategies): A licensing arrangement is an agreement in which the licensing firm Growth strategies expand the company’s activities. grants rights to another firm in another country or market to produce Stability strategies make no change to the company’s current and/or sell a product. The licensee pays compensation to the licensing activities. firm in return for technical expertise. Licensing is an especially useful Retrenchment strategies reduce the company’s level of strategy if the trademark or brand name is well known but the MNC activities. does not have sufficient funds to finance its entering the country directly. A value-chain partnership is a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage. GROWTH STRATEGIES Continuing growth means increasing sales and a chance to take advantage of the experience curve to reduce the per-unit cost of products sold, thereby increasing profits. This cost reduction becomes extremely important if a corporation’s industry is growing quickly or consolidating and if  MGT 406 - STRATEGIC MANAGEMENT competitors are engaging in price wars in at tempts to increase With taper integration (also called concurrent sourcing), a firm their shares of the market. internally produces less than half of its own requirements and Firms that have not reached “critical mass” (that is, gained the buys the rest from outside suppliers (backward taper integration). necessary economy of large-scale production) face large losses With quasi-integration, a company does not make any of its key unless they can find and fill a small, but profitable, niche where supplies but purchases most of its requirements from outside higher prices can be offset by special product or service features. suppliers that are under its partial control (backward quasi- A corporation can grow internally by expanding its operations integration). both globally and domestically, or it can grow externally through Long-term contracts are agreements between two firms to mergers, acquisitions, and strategic alliances. provide agreed-upon goods and services to each other for a A merger is a transaction involving two or more corporations in specified period of time. This cannot really be considered to be which stock is exchanged but in which only one corporation vertical integration unless it is an exclusive contract that specifies survives. Mergers usually occur between firms of somewhat that the supplier or distributor cannot have a similar relationship similar size and are usually “friendly.” with a competitive firm. An acquisition is the purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring corporation. Acquisitions usually occur between firms of different sizes and can be either friendly or hostile. Hostile acquisitions are often called takeovers. Horizontal Growth. A firm can achieve horizontal growth by expanding its operations into other geographic locations and/or Growth is a very attractive strategy for two key reasons: by increasing the range of products and services offered to current 1. Growth based on increasing market demand may mask flaws markets. Research indicates that firms that grow horizontally by in a company—flaws that would be immediately evident in a broadening their product lines have high survival rates. stable or declining market. A growing flow of revenue into a Horizontal growth results in horizontal integration—the degree to highly leveraged corporation can create a large amount of which a firm operates in multiple geographic locations at the same organization slack (un used resources) that can be used to point on an industry’s value chain. quickly resolve problems and conflicts between departments Horizontal growth can be achieved through internal development and divisions. Growth also provides a big cushion for or externally through acquisitions and strategic alliances with turnaround in case a strategic error is made. Larger firms also other firms in the same industry. Horizontal growth is have more bargaining power than do small firms and are more increasingly being achieved in today’s world through likely to obtain support from key stakeholders in case of international expansion. difficulty. 2. A growing firm offers more opportunities for advancement, International Entry Options for Horizontal Growth promotion, and interesting jobs. Growth itself is exciting and Research indicates that growing internationally is positively associated ego-enhancing for CEOs. The marketplace and potential with firm profitability. A corporation can select from several strategic investors tend to view a growing corporation as a “winner” or options the most appropriate method for entering a foreign market or “on the move.” Executive compensation tends to get bigger as establishing manufacturing facilities in another country. The options an organization increases in size. Large firms are also more vary from simple exporting to acquisitions to management contracts. difficult to acquire than are smaller ones; thus an executive’s Some of the most popular options for international entry are as follows: job in a large firm is more secure. The two basic growth Exporting: A good way to minimize risk and experiment with a strategies are concentration on the current product line(s) in one specific product is exporting, shipping goods produced in the industry and diversification into other product lines in other company’s home country to other countries for marketing. The industries. company could choose to handle all critical functions itself, or it could contract these functions to an export management company. CONCENTRATION Exporting is becoming increasingly popular for small businesses If a company’s current product lines have real growth potential, because of the Internet, fax machines, toll-free numbers, and concentration of resources on those product lines makes sense as a overnight express services, which reduce the once-formidable strategy for growth. The two basic concentration strate gies are vertical costs of going international. growth and horizontal growth. Growing firms in a growing industry Licensing: Under a licensing agreement, the licensing firm grants tend to choose these strategies before they try diversification. rights to another firm in the host country to produce and/or sell a Vertical Growth. Vertical growth can be achieved by taking over product. The licensee pays compensation to the licensing firm in a function previously provided by a supplier or by a distributor. return for technical expertise. This is an especially useful strategy The company, in effect, grows by making its own supplies and/or if the trademark or brand name is well known, but the company by distributing its own products. This may be done in order to does not have sufficient funds to finance its entering the country reduce costs, gain control over a scarce resource, guarantee directly. quality of a key input, or obtain access to potential customers. Franchising: Under a franchising agreement, the franchiser This growth can be achieved either internally by expanding grants rights to another company to open a retail store using the current operations or externally through acquisitions. franchiser’s name and operating system. In exchange, the Vertical growth results in vertical integration—the degree to franchisee pays the franchiser a percentage of its sales as a royalty. which a firm operates vertically in multiple locations on an Franchising provides an opportunity for a firm to establish a industry’s value chain from extracting raw materials to presence in countries where the population or per capita spending manufacturing to retailing. More specifically, assuming a function is not sufficient for a major expansion effort. previously provided by a supplier is called backward integration Joint Ventures: Forming a joint venture between a foreign (going backward on an industry’s value chain). Assuming a corporation and a domestic company is the most popular strategy function previously provided by a distributor is labeled forward used to enter a new country. Companies often form joint ventures integration (going forward on an industry’s value chain). to combine the resources and expertise needed to develop new Transaction cost economics proposes that vertical integration is products or technologies. A joint venture may be an association more efficient than contracting for goods and services in the between a company and a firm in the host country or a marketplace when the transaction costs of buying goods on the government agency in that country. A quick method of obtaining open market become too great. When highly vertically integrated local management, it also reduces the risks of expropriation and firms become excessively large and bureaucratic, however, the harassment by host country officials. costs of managing the internal transactions may be come greater Acquisitions: A relatively quick way to move into an than simply purchasing the needed goods externally—thus international area is through acquisitions—purchasing another justifying outsourcing over vertical integration. company already operating in that area. Synergistic benefits can Harrigan proposes that a company’s degree of vertical integration result if the company acquires a firm with strong complementary can range from total ownership of the value chain needed to make product lines and a good distribution network. and sell a product to no ownership at all. Under full integration, Green-Field Development: If a company doesn’t want to a firm internally makes 100% of its key supplies and completely purchase another company’s problems along with its assets, it controls its distributors. may choose green-field development and build its own manufacturing plant and distribution system. Research indicates that firms possessing high levels of technology, multinational  MGT 406 - STRATEGIC MANAGEMENT experience, and diverse product lines prefer green-field strategies are the pause/proceed-with-caution, no-change, and profit development to acquisitions. This is usually a far more strategies. complicated and expensive operation than acquisition, but it allows a company more freedom in designing the plant, choosing PAUSE/PROCEED WITH CAUTION STRATEGY suppliers, and hiring a workforce. A pause/proceed-with-caution strategy is, in effect, a timeout—an Production Sharing: Coined by Peter Drucker, the term opportunity to rest before continuing a growth or retrenchment production sharing means the process of combining the higher strategy. It is a very deliberate attempt to make only incremental labor skills and technology available in developed countries with improvements until a particular environmental situation changes. It is the lower-cost labor available in developing countries. Often typically conceived as a temporary strategy to be used until the called outsourcing. environment becomes more hospitable or to enable a company to Turnkey Operations: Turnkey operations are typically contracts consolidate its resources after prolonged rapid growth. for the construction of operating facilities in exchange for a fee. The facilities are transferred to the host country or firm when they NO-CHANGE STRATEGY are complete. A no-change strategy is a decision to do nothing new—a choice to BOT Concept: The BOT (Build, Operate, Transfer) concept is continue current operations and policies for the foreseeable future. a variation of the turnkey operation. Instead of turning the facility Rarely articulated as a definite strategy, a no change strategy’s success (usually a power plant or toll road) over to the host country when depends on a lack of significant change in a corporation’s situation. completed, the company operates the facility for a fixed period of The relative stability created by the firm’s modest competitive position time during which it earns back its investment plus a profit. It then in an industry facing little or no growth encourages the company to turns the facility over to the government at little or no cost to the continue on its current course, making only small adjustments for host country. inflation in its sales and profit objectives. Management Contracts: A large corporation operating throughout the world is likely to have a large amount of PROFIT STRATEGY management talent at its disposal. Management contracts offer a A profit strategy is a decision to do nothing new in a worsening means through which a corporation can use some of its personnel situation but instead to act as though the company’s problems are only to assist a firm in a host country for a specified fee and period of temporary. The profit strategy is an attempt to artificially support time. profits when a company’s sales are declining by reducing investment and short-term discretionary expenditures. Rather than announce the DIVERSIFICATION STRATEGIES company’s poor position to shareholders and the investment According to strategist Richard Rumelt, companies begin community at large, top management may be tempted to follow this thinking about diversification when their growth has plateaued and very seductive strategy. Blaming the company’s problems on a hostile opportunities for growth in the original business have been depleted. environment (such as anti-business government policies, unethical This often occurs when an industry consolidates, becomes mature, and competitors, finicky customers, and/or greedy lenders), management most of the surviving firms have reached the limits of growth using defers investments and/or cuts expenses (such as R&D, maintenance, vertical and horizontal growth strategies. Unless the competitors are and advertising) to stabilize profits during this period. able to expand internationally into less mature markets, they may have no choice but to diversify into different industries if they want to RETRENCHMENT STRATEGIES continue growing. A company may pursue retrenchment strategies when it has a weak The two basic diversification strategies are concentric and competitive position in some or all of its product lines resulting in poor conglomerate. performance—sales are down and profits are becoming losses. These Concentric (Related) Diversification. Growth through strategies impose a great deal of pressure to improve performance. In concentric diversification into a related industry may be a very an attempt to eliminate the weaknesses that are dragging the company appropriate corporate strategy when a firm has a strong down, management may follow one of several retrenchment strategies, competitive position but industry attractiveness is low. ranging from turnaround or becoming a captive company to selling out, The search is for synergy, the concept that two businesses will bankruptcy, or liquidation. generate more profits together than they could separately. The point of commonality may be similar technology, customer usage, TURNAROUND STRATEGY distribution, managerial skills, or product similarity. Turnaround strategy emphasizes the improvement of operational efficiency and is probably most appropriate when a corporation’s Conglomerate (Unrelated) Diversification. When management problems are pervasive but not yet critical. Research shows that poorly realizes that the current industry is unattractive and that the firm performing firms in mature industries have been able to improve their lacks outstanding abilities or skills that it could easily transfer to performance by cutting costs and expenses and by selling off assets. related products or services in other industries, the most likely strategy is conglomerate diversification—diversifying into an Contraction is the initial effort to quickly “stop the bleeding” industry unrelated to its current one. Rather than maintaining a with a general, across-the board cut back in size and costs.The common thread throughout their organization, strategic managers second phase, consolidation, implements a program to stabilize who adopt this strategy are primarily concerned with financial the now leaner corporation. To streamline the company, plans considerations of cash flow or risk reduction. are developed to reduce unnecessary overhead and to make functional activities cost-justified. The emphasis in conglomerate diversification is on sound investment and value-oriented management rather than on the CAPTIVE COMPANY STRATEGY product-market synergy common to concentric diversification. A captive company strategy involves giving up independence in exchange for security. A company with a weak competitive position CONTROVERSIES IN DIRECTIONAL GROWTH may not be able to engage in a full-blown turnaround strategy. The STRATEGIES industry may not be sufficiently attractive to justify such an effort from Previous experience between an acquirer and a target firm in either the current management or investors. Nevertheless, a company terms of R&D, manufacturing, or marketing alliances improves the in this situation faces poor sales and increasing losses unless it takes likelihood of a successful acquisition. Realizing that an acquired some action. Management desperately searches for an “angel” by company must be carefully assimilated into the acquiring firm’s offering to be a captive company to one of its larger customers in order operations, Cisco uses three criteria to judge whether a company is a to guarantee the company’s continued existence with a long-term suitable candidate for takeover: contract. It must be relatively small. It must be comparable in organizational culture. SELL-OUT/DIVESTMENT STRATEGY It must be physically close to one of the existing affiliates. If a corporation with a weak competitive position in an industry is unable either to pull itself up by its bootstraps or to find a customer to STABILITY STRATEGIES which it can become a captive company, it may have no choice but to A corporation may choose stability over growth by continuing its sell out. The sell-out strategy makes sense if management can still current activities without any significant change in direction. They are obtain a good price for its shareholders and the employees can keep very popular with small business owners who have found a niche and their jobs by selling the entire company to another firm. The hope is are happy with their success and the manageable size of their firms. that another company will have the necessary resources and Stability strategies can be very useful in the short run, but they can be determination to return the company to profitability. dangerous if followed for too long. Some of the more popular of these  MGT 406 - STRATEGIC MANAGEMENT If the corporation has multiple business lines and it chooses to sell off gain enough market share to become a market leader and thus a a division with low growth potential, this is called divestment. star, money must be taken from more mature products and spent Divestment is often used after a corporation acquires a multi-unit on the question mark. This is a “fish or cut bait” decision in corporation in order to shed the units that do not fit with the which management must decide if the business is worth the corporation’s new strategy. Divestment was also a key part of Lego’s investment needed. turnaround strategy when management decided to divest its theme Stars are market leaders that are typically at the peak of their parks to concentrate more on its core business of making toys. product life cycle and are able to generate enough cash to maintain their high share of the market and usually con tribute BANKRUPTCY/LIQUIDATION STRATEGY to the company’s profits. When a company finds itself in the worst possible situation with a poor Cash cows typically bring in far more money than is needed to competitive position in an industry with few prospects, management maintain their market share. In this declining stage of their life has only a few alternatives—all of them dis tasteful. Because no one is cycle, these products are “milked” for cash that will be invested interested in buying a weak company in an unattractive industry, the in new question marks. Expenses such as advertising and R&D firm must pursue a bankruptcy or liquidation strategy. Bankruptcy are reduced. involves giving up management of the firm to the courts in return for Dogs have low market share and do not have the potential some settlement of the corporation’s obligations. (because they are in an unat tractive industry) to bring in much In contrast to bankruptcy, which seeks to perpetuate a corporation, cash. According to the BCG Growth-Share Matrix, dogs should liquidation is the termination of the firm. When the industry is be either sold off or managed carefully for the small amount of unattractive and the company too weak to be sold as a going concern, cash they can generate. management may choose to convert as many saleable assets as possible to cash, which is then distributed to the shareholders after all The BCG Growth-Share Matrix is a very well-known obligations are paid. Liquidation is a prudent strategy for distressed portfolio concept with some clear advantages. It is quantifiable and firms with a small number of choices, all of which are problematic. easy to use. Cash cow, dog, question mark, and star are easy to- remember terms for referring to a corporation’s business units or PORTFOLIO ANALYSIS products. Unfortunately, the BCG Growth-Share Matrix also has Chapter 6 dealt with how individual product lines and business some serious limitations: units can gain competitive advantage in the marketplace by using The use of highs and lows to form four categories is too competitive and cooperative strategies. Companies with multiple simplistic. product lines or business units must also ask themselves how these The link between market share and profitability is questionable. various products and business units should be managed to boost overall Low-share businesses can also be profitable.80 For example, corporate performance: Olivetti is still profitably selling manual typewriters through How much of our time and money should we spend on our best mail-order catalogs. products and business units to ensure that they continue to be Growth rate is only one aspect of industry attractiveness. successful? Product lines or business units are considered only in relation to How much of our time and money should we spend developing one competitor: the market leader. Small competitors with fast- new costly products, most of which will never be successful? growing market shares are ignored. Market share is only one aspect of overall competitive position. In portfolio analysis, top management views its product lines and business units as a series of investments from which it expects a GE BUSINESS SCREEN profitable return. The product lines/business units form a portfolio of General Electric, with the assistance of the McKinsey & investments that top management must constantly juggle to ensure the Company consulting firm, developed a more complicated matrix. As best return on the corporation’s invested money. depicted in Figure 7–4, the GE Business Screen includes nine cells Two of the most popular portfolio techniques are the BCG Growth- based on long-term industry attractiveness and business strength Share Matrix and GE Business Screen. competitive position. The GE Business Screen, in contrast to the BCG Growth-Share Matrix, includes much more data in its two key factors BCG GROWTH-SHARE MATRIX than just business growth rate and comparable market share. Using the BCG (Boston Consulting Group) Growth-Share Matrix The individual product lines or business units are identified depicted in Figure 7–3 is the simplest way to portray a corporation’s by a letter and plotted as cir cles on the GE Business Screen. The area portfolio of investments. Each of the corporation’s product lines or of each circle is in proportion to the size of the in dustry in terms of business units is plotted on the matrix according to both the growth sales. The pie slices within the circles depict the market shares of the rate of the industry in which it competes and its relative market share. product lines or business units. To plot product lines or business units Aunit’s relative competitive position is defined as its market share in on the GE Business Screen, follow these four steps: the industry divided by that of the largest other competitor. By this 1. Select criteria to rate the industry for each product line or business calculation, a relative market share above 1.0 belongs to the market unit. Assess overall industry attractiveness for each product line or leader. The business growth rate is the percentage of market growth, business unit on a scale from 1 (very unattractive) to 5 (very attractive). that is, the percentage by which sales of a particular business unit 2. Select the key factors needed for success in each product line or classification of products have increased. The matrix assumes that, business unit. Assess business strength/competitive position for each other things being equal, a growing market is attractive. product line or business unit on a scale of 1 (very weak) to 5 (very strong). 3. Plot each product line’s or business unit’s current position on a matrix as that depicted in Figure 7–4. 4. Plot the firm’s future portfolio, assuming that present corporate and business strategies remain unchanged. Is there a performance gap between projected and desired portfolios? If so, this gap should serve as a stimulus to seriously review the corporation’s current mission, objectives, strategies, and policies. This portfolio matrix, however, does have some shortcomings: It can get quite complicated and cumbersome. The numerical estimates of industry attractiveness and business strength/competitive position give the appearance of objectivity, but they are in reality subjective judgments that may vary from one person to another. It cannot effectively depict the positions of new products or The BCG Growth-Share Matrix has a lot in common with the business units in developing industries product life cycle. As a product moves through its life cycle, it is categorized into one of four types for the purpose of funding decisions: Question marks (sometimes called “problem children” or “wildcats”) are new products with the potential for success, but they need a lot of cash for development. If such a product is to  MGT 406 - STRATEGIC MANAGEMENT ADVANTAGES AND LIMITATIONS OF PORTFOLIO What organizational structure, management processes, and ANALYSIS philosophy will foster superior performance from the Portfolio analysis is commonly used in strategy formulation company’s business units? because it offers certain advantages: Corporate parenting, in contrast, views a corporation in terms of It encourages top management to evaluate each of the resources and capabilities that can be used to build business unit value corporation’s businesses individually and to set objectives and as well as generate synergies across business units. allocate resources for each. Corporate parenting generates corporate strategy by focusing on It stimulates the use of externally oriented data to supplement the core competencies of the parent corporation and on the value management’s judgment. created from the relationship between the parent and its businesses. In It raises the issue of cash-flow availability for use in expansion the form of corporate headquarters, the parent has a great deal of power and growth. in this relationship. Its graphic depiction facilitates communication. DEVELOPING A CORPORATE PARENTING STRATEGY Portfolio analysis does, however, have some very real Campbell, Goold, and Alexander recommend that the search limitations that have caused some companies to reduce their use of this for appropriate corporate strat egy involves three analytical steps: approach: 1. Examine each business unit (or target firm in the case of Defining product/market segments is difficult. acquisition) in terms of its strategic factors: People in the It suggests the use of standard strategies that can miss business units probably identified the strategic factors when opportunities or be impractical. they were generating business strategies for their units. One It provides an illusion of scientific rigor when in reality popular approach is to establish centers of excellence positions are based on subjective judgments. throughout the corporation. According to Frost, Birkinshaw, and Ensign, a center of excellence is “an organizational unit Its value-laden terms such as cash cow and dog can lead to self- that embodies a set of capabilities that has been explicitly fulfilling prophecies. recognized by the firm as an important source of value creation, It is not always clear what makes an industry attractive or where with the intention that these capabilities be leveraged by and/or a product is in its lifecycle. disseminated to other parts of the firm.” Naively following the prescriptions of a portfolio model may 2. Examine each business unit (or target firm) in terms of areas actually reduce corporate profits if they are used in which performance can be improved: These are considered inappropriately. to be parenting opportunities. A parent company having world- class expertise in these areas could improve that unit’s MANAGING A STRATEGIC ALLIANCE PORTFOLIO performance. The corporate parent could also transfer some Just as product lines/business units form a portfolio of people from one business unit who have the desired skills to investments that top management must constantly juggle to ensure the another unit that is in need of those skills. People at corporate best return on the corporation’s invested money, strategic alliances can headquarters may, because of their experience in many also be viewed as a portfolio of investments—investments of money, industries, spot areas where improvements are possible that time, and energy. The way a company manages these intertwined even people in the business unit may not have noticed. relationships can significantly influence corporate competitiveness. 3. Analyze how well the parent corporation fits with the business Alliances are thus recognized as an important source of competitive unit (or target firm): Corporate headquarters must be aware of advantage and superior performance. its own strengths and weaknesses in terms of resources, skills, A study of 25 leading European corporations found four and capabilities. To do this, the corporate parent must ask tasks of multi-alliance management that are necessary for successful whether it has the characteristics that fit the parenting alliance portfolio management: opportunities in each business unit. 1. Developing and implementing a portfolio strategy for each business unit and a corporate policy for managing all the alliances HORIZONTAL STRATEGY AND MULTIPOINT of the entire company: Alliances are primarily determined by business COMPETITION units. The corporate level develops general rules concerning when, A horizontal strategy is a corporate strategy that cuts across how, and with whom to cooperate. The task of alliance policy is to business unit boundaries to build synergy across business units strategically align all of the corporation’s alliance activities with and to improve the competitive position of one or more business corporate strategy and corporate values. Every new alliance is thus units. When used to build synergy, it acts like a parenting strategy. checked against corporate policy before it is approved. When used to improve the competitive position of one or more 2. Monitoring the alliance portfolio in terms of implementing business units, it can be thought of as a corporate competitive business unit strategies and corporate strategy and policies: Each strategy. alliance is measured in terms of achievement of objectives (e.g., In multipoint competition, large multi-business corporations market share), financial measures (e.g., profits and cash flow), con compete against other large multi-business firms in a number of tributed resource quality and quantity, and the overall relationship. The markets. These multipoint competitors are firms that compete more a firm is di versified, the less the need for monitoring at the with each other not only in one business unit, but also in a number corporate level. of business units. At one time or another, a cash-rich competitor 3. Coordinating the portfolio to obtain synergies and avoid conflicts may choose to build its own market share in a particular market among alliances: Because the interdependencies among alliances to the disadvantage of another corporation’s business unit. within a business unit are usually greater than among different businesses, the need for coordination is greater at the business level Multipoint competition and the resulting use of horizontal than at the corporate level. The need for coordination increases as the strategy may actually slow the development of hypercompetition number of alliances in one business unit and the company as a whole in an industry. The realization that an attack on a market leader’s increases, the average number of partners per alliance increases, and/or position could result in a response in another market leads to the overlap of the alliances increases. mutual forbearance in which managers behave more 4. Establishing an alliance management system to support other conservatively toward multimarket rivals and competitive rivalry tasks of multi-alliance management: This infrastructure consists of is reduced. formalized processes, standardized tools and specialized organizational units. All but two of the 25 companies established CHAPTER 8: STRATEGY FORMULATION: FUNCTIONAL centers of competence for alliance management. The centers were STRATEGY AND STRATEGIC CHOICE often part of a department for corporate development or a department of alliance management at the corporate level. In other corporations, FUNCTIONAL STRATEGY specialized positions for alliance management were created at both the Functional strategy is the approach a functional area takes to corporate and business unit levels or only at the business unit level. achieve corporate and business unit objectives and strategies by maximizing resource productivity. It is concerned with devel CORPORATE PARENTING oping and nurturing a distinctive competence to provide a Campbell, Goold, and Alexander, authors of Corporate- company or business unit with a competitive advantage. Level Strategy: Creating Value in the Multi business Company, MARKETING STRATEGY contend that corporate strategists must address two crucial questions: Marketing strategy deals with pricing, selling, and distributing What businesses should this company own and why? a product. Using a market development strategy, a company or business unit can (1) capture a larger share of an existing market  MGT 406 - STRATEGIC MANAGEMENT for current products through market saturation and market OPERATIONS STRATEGY penetration or (2) develop new uses and/or markets for current Operations strategy determines how and where a product or products. service is to be manufactured, the level of vertical integration in Using the product development strategy, a company or unit the production process, the deployment of physical resources, and can (1) develop new products for existing markets or (2) relationships with suppliers. It should also deal with the optimum develop new products for new markets. level of technology the firm should use in its operations processes. Using a successful brand name to market other products is Advanced Manufacturing Technology (AMT) is revolutionizing called brand extension, and it is a good way to appeal to a operations worldwide and should continue to have a major impact company’s current customers. as corporations strive to integrate diverse business activities by Company decided a few years ago to change its emphasis from using computer assisted design and manufacturing (CAD/CAM) a push to a pull strategy, in which advertising “pulls” the principles. The use of CAD/CAM, flexible manufacturing products through the distribution channels. systems, computer numerically controlled systems, automatically When pricing a new product, a company or business unit can guided vehicles, robotics, manufacturing resource planning (MRP follow one of two strategies. For new-product pioneers, skim II), optimized production technology, and just-in-time techniques pricing offers the opportunity to “skim the cream” from the top contribute to increased flexibility, quick response time, and higher of the demand curve with a high price while the product is novel productivity. and competitors are few. Penetration pricing, in contrast, A firm’s manufacturing strategy is often affected by a product’s attempts to hasten market development and offers the pioneer life cycle. As the sales of a product increase, there will be an the opportunity to use the experience curve to gain market share increase in production volume ranging from lot sizes as low as with a low price and then dominate the industry. The use of the one in a job shop (one-of-a-kind production using skilled labor) Internet to market goods directly to consumers allows a through connected line batch flow (components are company to use dynamic pricing, a practice in which prices standardized; each machine functions such as a job shop but is vary frequently based upon demand, market segment, and positioned in the same order as the parts are processed) to lot product availability. sizes as high as 100,000 or more per year for flexible manufacturing systems (parts are grouped into manufacturing FINANCIAL STRATEGY families to produce a wide variety of mass-produced items) and Financial strategy examines the financial implications of dedicated transfer lines (highly auto mated assembly lines corporate and business-level strategic options and identifies the making one mass-produced product using little human labor). best financial course of action. It can also provide competitive Increasing competitive intensity in many industries has forced advantage through a lower cost of funds and a flexible ability to companies to switch from traditional mass production using raise capital to support a business strategy. Financial strategy dedicated transfer lines to a continuous improvement pro duction usually attempts to maximize the financial value of a firm. strategy. A mass-production system was an excellent method to The trade-off between achieving the desired debt-to-equity ratio produce a large number of low-cost, standard goods and services. and relying on internal long-term financing via cash flow is a Employees worked on narrowly defined, repetitious tasks under key issue in financial strategy. Many small- and medium sized close supervision in a bureaucratic and hierarchical structure. family-owned companies such as Urschel Laboratories try to Under the continuous improvement system developed by avoid all external sources of funds in order to avoid outside Japanese firms, empowered cross-functional teams strive entanglements and to keep control of the company within the constantly to improve production processes. Managers are more family. like coaches than like bosses. The result is a large quantity of low- In a leveraged buyout, a company is acquired in a transaction cost, standard goods and services, but with high quality. financed largely by debt, usually obtained from a third party, The automobile industry is currently experimenting with the such as an insurance company or an investment banker. strategy of modular manufacturing in which preassembled Ultimately the debt is paid with money generated from the subassemblies are delivered as they are needed (i.e., Just in-Time) acquired company’s operations or by sales of its assets. The to a company’s assembly-line workers, who quickly piece the acquired company, in effect, pays for its own acquisition. modules together into a finished product. A number of firms have been supporting the price of their stock Appropriate for an ever-changing environment, mass by using reverse stock splits. Contrasted with a typical forward customization requires that people, processes, units, and 2-for-1 stock split in which an investor receives an additional technology reconfigure themselves to give customers exactly share for every share owned (with each share being worth only what they want, when they want it. half as much), in a reverse 1-for-2 stock split, an investor’s shares are split in half for the same total amount of money (with PURCHASING STRATEGY each share now being worth twice as much). Purchasing strategy deals with obtaining the raw materials, parts, and supplies needed to perform the operations function. RESEARCH AND DEVELOPMENT (R&D) STRATEGY Purchasing strategy is important because materials and R&D strategy deals with product and process innovation and components purchased from suppliers comprise 50% of total improvement. It also deals with the appropriate mix of different manufacturing costs of manufacturing companies in the United types of R&D (basic, product, or process) and with the question Kingdom, United States, Australia, Belgium, and Finland. of how new technology should be accessed—through internal The basic purchasing choices are multiple, sole, and parallel development, external acquisition, or strategic alliances. sourcing. Under multiple sourcing, the purchasing company One of the R&D choices is to be either a technological leader, orders a particular part from several vendors. pioneering an innovation, or a technological follower, imitating Multiple sourcing has traditionally been considered superior to the products of competitors. Porter suggests that deciding to other purchasing approaches because (1) it forces sup pliers to become a technological leader or follower can be a way of compete for the business of an important buyer, thus reducing achieving either overall low cost or differentiation. purchasing costs, and (2) if one supplier cannot deliver, another A new approach to R&D is open innovation, in which a firm usually can, thus guaranteeing that parts and sup plies are always uses alliances and connections with corporate, government, on hand when needed. academic labs, and even consumers to develop new products W. Edward Deming, a well-known management consultant, and processes. strongly recommended sole sourcing as the only manageable way to obtain high supplier quality. Sole sourcing relies on only one supplier for a particular part. It can also simplify the purchasing company’s production process by using the Just-In Time (JIT) concept of having the purchased parts arrive at the plant just when they are needed rather than keeping inventories. In parallel sourcing, two suppliers are the sole suppliers of two different parts, but they are also backup sup pliers for each other’s parts. If one vendor cannot supply all of its parts on time, the other vendor is asked to make up the difference.  MGT 406 - STRATEGIC MANAGEMENT LOGISTICS STRATEGY The key to outsourcing is to purchase from outside only Logistics strategy deals with the flow of products into and out of those activities that are not key to the company’s distinctive the manufacturing process. Three trends related to this strategy competencies. are evident: centralization, outsourcing, and the use of the In determining functional strategy, the strategist must: Internet. To gain logistical synergies across business units, Identify the company’s or business unit’s core competencies corporations began centralizing logistics in the headquarters Ensure that the competencies are continually being strengthened group. This centralized logistics group usually contains Manage the competencies in such a way that best preserves the specialists with expertise in different transportation modes such competitive advantage they create as rail or trucking. They work to aggregate shipping volumes across the entire corporation to gain better contracts with shippers. Companies such as Georgia-Pacific, Marriott, and Union Carbide view the logistics function as an important way to differentiate themselves from the competition, to add value, and to reduce costs. HUMAN RESOURCE MANAGEMENT (HRM) STRATEGY HRM strategy, among other things, addresses the issue of whether a company or business unit should hire a large number of low- skilled employees who receive low pay, perform repetitive jobs, and are most likely quit after a short time (the McDonald’s restaurant strategy) or hire skilled employees who receive relatively high pay and are cross-trained to participate in self managing work teams. Companies are finding that having a diverse workforce can be a competitive advantage. Research reveals that firms with a high STRATEGIES TO AVOID degree of racial diversity following a growth strategy have higher Several strategies, that could be considered corporate, business, productivity than do firms with less racial diversity. or functional are very dangerous. Managers who have made poor analyses or lack creativity may be trapped into considering some of the INFORMATION TECHNOLOGY STRATEGY following strategies to avoid: Corporations are increasingly using information technology Follow the leader: Imitating a leading competitor’s strategy strategy to provide business units with competitive advantage. might seem to be a good idea, but it ignores a firm’s particular Multinational corporations are finding that having a sophisticated strengths and weaknesses and the possibility that the leader may intranet allows employees to practice follow-the-sun be wrong. management, in which project team members living in one Hit another home run: If a company is successful because it country can pass their work to team members in another country pioneered an extremely successful product, it tends to search for in which the work day is just beginning. another super product that will ensure growth and prosperity. Thus, the use of information technology through extranets makes Arms race: Entering into a spirited battle with another firm for it easier for a company to buy from others (outsource) rather than increased market share might increase sales revenue, but that make it themselves (vertically integrate). increase will probably be more than offset by increases in advertising, promotion, R&D, and manufacturing costs. THE SOURCING DECISION: LOCATION OF FUNCTIONS Do everything: When faced with several interesting For a functional strategy to have the best chance of success, it opportunities, management might tend to leap at all of them. At should be built on a distinctive competency residing within that first, a corporation might have enough resources to develop each functional area. If a corporation does not have a distinctive idea into a project, but money, time, and energy are soon competency in a particular functional area, that functional area exhausted as the many projects demand large infusions of could be a candidate for outsourcing. resources. Outsourcing is purchasing from someone else a product or Losing hand: A corporation might have invested so much in a service that had been previously provided internally. Thus, it is particular strategy that top management is unwilling to accept its the reverse of vertical integration. Outsourcing is becoming an failure. Believing that it has too much invested to quit, increasingly important part of strategic decision making and an management may continue to throw “good money after bad.” important way to increase efficiency and often quality. Offshoring is the outsourcing of an activity or a function to a STRATEGIC CHOICE: SELECTING THE BEST STRATEGY wholly owned company or an independent provider in another Another important consideration in the selection of a country. Offshoring is a global phenomenon that has been strategy is the ability of each alternative to satisfy agreed-on objectives supported by advances in information and communication with the least resources and the fewest negative side effects. It is, technologies, the development of stable, secure, and high-speed therefore, important to develop a tentative implementation plan in data transmission systems, and logistical advances like order to address the difficulties that management is likely to face. This containerized shipping. should be done in light of societal trends, the industry, and the company’s situation based on the construction of scenarios. A study of 91 outsourcing efforts conducted by European and North American firms found seven major errors that should be CONSTRUCTING CORPORATE SCENARIOS avoided: Corporate scenarios are pro forma (estimated future) balance 1. Outsourcing activities that should not be outsourced: Companies sheets and income statements that forecast the effect each failed to keep core activities in-house. alternative strategy and its various programs will likely have on 2. Selecting the wrong vendor: Vendors were not trustworthy or lacked division and corporate return on investment. state-of-the-art processes. 3. Writing a poor contract: Companies failed to establish a balance of To construct a corporate scenario, follow these steps: power in the relationship. 1. Use industry scenarios to develop a set of assumptions about 4. Overlooking personnel issues: Employees lost commi