Strategic Planning Notes 2013.pdf

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Strategic Planning

Notes 2013

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SLEPTD ...69

PEST...69

SWOT...69

Porter’s five forces...69

Robert Miles / Charles Snow...70

Product life cycle ...70

Market strategies... 70

D: Selected Student Answers matrix ...71

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1: The strategic process model

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2: Who decides to do what

2.1: Strategists

Topics as defined in the augmented process model:

-‐ Principal-agent problem

-‐ General type

o Prospector

o Analyser

o Defender

o Reactor

-‐ Risk aversion

-‐ Team composition

-‐ Group dynamics

Bold items are discussed in more detail below.

Evolution of companies

The typical company is continuously evolving, and the roles undertaken by

decision makers are to some extent dependent on the stage of the company’s evolution, which can be classified in three stages:

1. The small single-‐product company

2. The integrated company

3. The large diversified company

Only a very small minority of companies actually ‘evolve’ in the sense that they end up as large diversified companies.

Strategists

The implication of the life cycle approach to company evolution is that strat-

egists with different characteristics are required for companies at different stages. This leads to problems in ensuring that the right type of person is in charge. For example, there are many instances of entrepreneurial strategists who develop a company but are unsuited to running a conglomerate in a stable

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The four (five) main steps of the process model serve to identify several roles as follows:

-‐ Strategist, entrepreneur and goal setter

-‐ Analyser and competitor

-‐ Strategy decision maker

-‐ Implementer and controller

-‐ (Communicator)

Strategic planning can be regarded as a multidimensional role which is under-

taken by many individuals working at different levels. For example, there are corporate level strategists, typically the Board of Directors and the CEO; below these are the SBU strategists, who comprise executives, planning departments and consultants. In some cases the pinnacle of the strategic planning process is occupied by the General Manager who sits at the top of the decision making process. Thus control of the strategic planning process can rest in the hands of different people. This does not mean that the process itself cannot be identified and analysed, but it does suggest that companies should give some thought to how the function is undertaken in their organisations. If no one is very sure about who is carrying out the strategic planning function, it could well be that the

process itself could be greatly improved.

Principal-‐agent problem

The problem which permeates management at all levels is the need to strike a

bargain with subordinates which ensures that the manager’s objectives are met without the need for constant monitoring of activity.

The personal objectives of an individual manager may include maximisation of wealth, ambition, desire for a quiet life, desire to avoid confrontation, and so on.

There is no guarantee that the manager will place the company’s objectives

high in this personal set of priorities.

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General type

The Prospector is primarily concerned with the identification of new market

opportunities so issues relating to internal organisation take second place.

The Analyser is characterised by sophisticated internal information systems and

detailed investigation of options, but this is unlikely to be followed up by the type of action undertaken by the Prospector.

The Defender is concerned with maintaining the current market position without

exhibiting a great deal of initiative in developing new market opportunities.

The Reactor simply deals with circumstances as they arise.

Risk aversion

A particular manager may feel that even though the probability of losing 100% is only one in ten, this is still an unacceptable risk because it would result in the

company going bankrupt. This is known as risk aversion, and results in the

manager preferring an investment with a lower expected value which did not contain the risk of bankruptcy in the probability distribution.

The expected value approach can conceal the fact that risks are not symmetrical, and therefore it would be folly to base decisions on the expected values alone no

matter what the ‘law of large numbers’ states, because the company may end up

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2.2: Objectives

-‐ Business definition

-‐ Mission

-‐ Shareholder wealth

-‐ Gap analysis

-‐ Means and ends

-‐ Ethics

-‐ Profit maximisation

-‐ Growth vector

-‐ Stakeholder map

-‐ Credible, quantifiable, disaggregated, economic, financial

From vision to mission to objectives

Vision

One of the primary roles of the CEO is to develop a long-‐term view of what the company is about and the markets within which it should be operating. This is

sometimes referred to as the vision because it is not expressed in detailed terms

and is perhaps no more than a broad thrust within which the company will be directed.

Mission

It is necessary to translate this vision into a tangible set of directions which can

be used by employees to direct their efforts in a manner which is consistent throughout the organisation. There are a number of steps which are necessary to achieve this:

-‐ Develop the mission statement

-‐ Disaggregate the mission

-‐ Derive objectives

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Mission statement

The mission statement needs to have several characteristics including the following.

-‐ Serve as a definition of the business the organisation is in

-‐ Be clearly understood by employees

-‐ Provide a focus for activities

Setting objectives

Once the general vision of the company has been established, and the mission identified, it is necessary to determine what has to be achieved for the mission to be successful.

While the mission can be expressed in general terms, it is necessary to state the

objectives at least partly in terms of measurable performance targets. In the absence of identifiable targets the mission can have little operational significance and will probably be acknowledged but largely ignored by managers at all levels.

Objective setting introduces accountability into the pursuit of the company vision, so it is not productive to use vague terms such as ‘increase market share’ or ‘increase the return on assets employed’.

It is also essential to ensure that objectives are consistent.

The gap concept

The gap concept is concerned with the difference between expected and

desired future states. There are two steps in identifying a performance gap:

1. Decide what the desired future state is at a specified time in the future.

2. Analyse the state the company is likely to be in at that time if no changes to

strategy are made.

The difference between the expected and the desired state is the perform- ance gap.

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Once the gap has been identified, three questions can be tackled:

-‐ Does the gap arise because of external or internal factors?

-‐ Does the company have potential resources to close the gap?

-‐ Can a strategy be developed which will close the gap?

A revealing outcome of gap analysis is that while it may appear that the difference

between the current and the desired state is not large, there may well be a

substantial difference between expected and desired states.

Credible objectives

There is no point to setting objectives, even where these are derived from the

company mission, which employees think cannot be achieved and hence do not

serve as a guide for resource allocation.

The setting of realistic objectives is a dynamic process which is constantly under review. It would be naive to characterise objectives as immutable goals set by

isolated policy makers, and the process model emphasises the feedback which

makes it possible to adjust objectives in the light of experience.

Quantifiable and non-‐quantifiable objectives

Company objectives can be expressed in terms of a single variable, such as a target rate of return on investment. However, few companies claim to focus on only one objective, and companies typically express objectives in terms of a number of components or characteristics.

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quality’ product, as defined by the development engineers, and a dominant market share.

Aggregate objectives

The corporate objective as derived from the mission statement is an aggregate

concept in the sense that it applies to overall company performance, size, target markets, financial structure and so on. The specification of corporate aggregate objectives has profound implications for the structure of the company and the operations of SBUs.

Aggregate objectives are sometimes indistinguishable from mission statements and may be expressed in vague terms such as ‘being in the transport business’ or ‘being innovative and quality orientated’; this is possibly because it is difficult to visualise a single objective which applies to a range of products and SBUs.

One important reason for adopting a quantitative view of aggregate objectives is

that it can be used as a measure of the effectiveness of corporate executives.

Disaggregated objectives

The process of converting corporate or aggregate objectives to a series of

objectives for managers at lower levels raises many difficulties. This is because it

is necessary to interpret the aggregate objective in terms which are realistic,

consistent and achievable, and make sense to managers at each level in the company.

A prerequisite is to identify the individual objectives which must be achieved in

pursuit of the aggregate objectives.

For example, there is little point in telling a sales force manager that the corporate objective is to achieve 15 per cent rate of return on investment. Instead, the manager needs to be told what level of sales is consistent with the objective of a 15 per cent rate of return. In the absence of explicit guidance, the sales force manager may attempt to maximise the sales of all products in

response to the general objective, while the optimum corporate strategy may be to maintain market share at the current level and take-‐over a key competitor.

Means and ends

An issue which is closely related to the process of disaggregating objectives is the

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The distinction between means and ends is not always clear cut when applied to many real life situations, and this can lead to confusion as to the nature of

objectives.

For example, the objective of a company may be to achieve a 15 per cent rate of return on investment. The extent to which this is best achieved by a happy and stable workforce, or by being associated with high-‐quality products, depends on subjective judgements concerning the contribution of each to the profit objective; because of the importance a company lays on a happy and stable workforce, many managers, and their subordinates, may gain the impression that this is an objective of the company. Strictly speaking, it is a means to an end.

Ethical considerations

Moral behaviour is difficult to define for companies and for managers. The

manager may find it counter-‐productive to take a stand ‘for the sake of principle’ when that principle is based on a series of dubious premises.

Some companies impose a code of ethics on their employees, such as never

accepting bribes. This is somewhat difficult to enforce in countries where bribery is socially acceptable, and is not seen as immoral behaviour.

It may simply be the case that such companies are using moral values as a means towards the end of promoting an image of honesty, integrity and dependability which will enhance their competitive potential.

SMART objectives

A useful acronym that captures many of the dimensions of objectives discussed

above is SMART which stands for objectives that are:

-‐ Specific

-‐ Measurable

-‐ Achievable

-‐ Relevant

-‐ Time-‐bound

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and ends, given that it is typically easier to be specific about the means than the ends.

Measurable

Some objectives are by their nature non-‐quantifiable, such as ‘to have a happy and stable workforce’. But just because they are not strictly measurable does not mean they should be left out of the equation.

Achievable

Different things can appear achievable and credible to different people. It is often possible to identify after the event that the objective was not achievable but this may not be apparent when the decision is being made.

Relevant

It is clearly important that objectives are aligned with the resource capabilities of the company – or the other way round.

Time-bound

While it may appear to add definition to the objectives to relate them to a time scale it has to be recognised that it is impossible to predict the future with any degree of certainty.

Social objectives

The notion that companies have a wider responsibility to the community gained momentum after 2000 and has gained the formal title of Corporate Social

Responsibility (CSR). Many companies claim to take CSR into account in their decision making and Annual Reports often contain a section on CSR.

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Financial objectives

The application of financial concepts makes it possible to quantify the profit maximisation objective. In economics, the profit maximisation objective is expressed in terms of comparative statics, i.e. it is assumed that all future cash flows can be collapsed to a present value so that projects which are undertaken at the present with different cash flows in the future can be compared.

Financial concepts that can help define financial objectives are:

-‐ NPV

-‐ Cost of capital

-‐ Return on investment (ROI)

-‐ Shareholder wealth

Stakeholders

A variety of individuals and groups have an interest in the organisation and some influence on the way it is managed; those individuals and groups are categorised as the stakeholders.

The notion of stakeholder extends well beyond the shareholders, or owners of the company, to include:

-‐ Shareholders

-‐ Managers

-‐ Employees

-‐ Suppliers

-‐ Customers

-‐ Creditors

-‐ Local community

-‐ Government

Stakeholder influence

While it can be argued that in principle some stakeholders should have little interest in the company, the existence of legislative, institutional and historical factors can imbue stakeholders with a significant degree of influence; for

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Stakeholder map

Stakeholder influence and priority can have a significant impact on how an

organisation operates and on its potential for change. The constraints imposed by stakeholder influence are not always recognised and one of the reasons why things often do not turn out as expected is that the interests of stakeholders have not been taken into account. One approach is to map the potential importance of stakeholders according to their influence and priority as shown below:

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3: Analysis and diagnosis

3.1: The macro environment

-‐ Macroeconomic analysis

o Unemployment

o Inflation

o Interest rates

o Exchange rates

-‐ Forecasting

-‐ Competitive advantage of nations

-‐ Environmental scanning

-‐ PEST analysis

-‐ Scenarios

-‐ ETOP

Macroeconomic analysis

-‐ Unemployment

-‐ Inflation

-‐ Interest rates

-‐ Exchange rates

Forecasting

No one can look into the future with any degree of certainty. This amounts to

trying to ascertain what is likely to happen. Even vague predictions can be

valuable.

While it might not be possible to forecast the amount of change in a key value

needed for a strategic decision, it might be possible to get a reasonable feeling for

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Competitive advantage of nations

National market factors which relate to the source of competitive advantage:

-‐ domestic factor conditions

-‐ related and supporting industries

-‐ demand conditions

-‐ strategy, structure and rivalry

Environmental scanning

Environmental scanning is the process of keeping in touch with changes in the environment and is an important component of the feedback part of the strategic process.

But in practice it is an extremely difficult activity to undertake; for example, what are the characteristics of the person to be given responsibility for environmental scanning? What specific direction can be given regarding what to look for? Many CEOs would be unconvinced of the productivity of such a role.

PEST analysis

The checklist of

-‐ Political

-‐ Economic

-‐ Social

-‐ Technological

factors provides a useful framework for assessing these influences. At one level the PEST analysis is nothing more than four lists, and as such is of little value. But

the identification of a range of relevant factors, and an analysis of the relation-

ships among them, can provide important insights into the company’s prospects.

Scenarios

Once some projections of possible futures have been made they can be used as

the basis of scenarios. A scenario is not a forecast, but it is an attempt to

investigate the implications of possible futures for the company.

A scenario is actually a narrative about a particular way in which the future might

take shape. It is therefore a story about what could happen if particular

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Environmental Threat and Opportunity Profile (ETOP)

The so-‐called ETOP profile is a method of systemising how changes in the economic environment might relate to the company’s strategy:

1. Use the PEST approach as a checklist

2. Apply macroeconomic ideas to economy wide influences

3. Consider international factors both in terms of exchange rates and inter-‐

national competitive influences

4. Use the environmental scanning approach to think beyond the immediate

situation

5. Put together some scenarios to help put factors into context

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3.2: The industry environment

-‐ Demand and supply

o Price determination

o Price elasticity

-‐ Forms of competition

o Perfect/imperfect competition

o Oligopoly

o Monopoly

-‐ Segmentation

-‐ Differentiation

o Perceived price/differentiation matrix

-‐ Quality

-‐ Strategic groups

Demand and supply

The market price is determined when supply and demand “meet”.

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If supply and demand change price might fluctuate:

Forms of competition

Perfect competition

In a perfectly competitive market

-‐ The product is homogeneous

-‐ There are no barriers to entry

-‐ No economies of scale

-‐ Universal availability of information on prices and quantities

-‐ Large number of sellers and buyers

The result is that no firm can charge more than the market price and the demand curve is horizontal.

Monopoly

The industry is comprised of only one producer whose demand curve is the

industry demand curve for the product. This demand curve slopes from left to right because the company is not a price taker, i.e. it can sell more by lowering the price.

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Oligopoly

In an oligopoly relatively few competitors have split the market between them.

Often a price-leader emerges whose actions (either increasing the price due to

increased costs or decreasing the price in an attempt to gain market share) are quickly mimicked by the competitors.

Barriers to entry

Structural barriers are outside the control of the firm while strategic barriers

depend on actions undertaken by the firm that deter entry. Structural barriers

include:

-‐ Size of the market

-‐ Capital requirements

-‐ Sunk costs

-‐ Control by legislation or tacit agreement

-‐ Economies of scale

-‐ Experience effect

Strategic barriers arise from competitive actions undertaken by the company, and include:

-‐ Reputation

-‐ Pricing

-‐ Access to distribution channels

It is doubtful if strategic barriers to entry can be effective in the absence of structural barriers.

Contestable markets

A market in which entry costs are not sunk, therefore exit is costless, is known as perfectly contestable. The ability to exit without having made any capital

commitment guarantees freedom of entry, and the fear of hit-‐and-‐run raids forces incumbents to set prices lower than they would have done otherwise.

In a contestable market it is likely that the monopolist is already efficient because

of potential competitive forces.

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Boston Consulting Group (BCG) Growth–Share Matrix

Four quadrants:

Relative market share

Market growth High Low

High Stars Question marks

Low Cash cows Dogs

Dogs

A product which has a low market share in a stable market, and which is not making profits currently, stands little chance of making profits in the future.

Question marks

The product in this sector is called a Question Mark because it may become either a Dog or a Star as the market matures. If market share can be increased before the growth in the market stops it will become a star; if not it will become a dog.

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Cash cows

This product achieves economies of scale, is further up the experience curve than competitors and, since demand has stabilised resources can be aligned closely with demand. It is now possible to apply JIT and reduce marketing expenditure.

Strategic groups

(Also applies to 2.4: Competitive position)

It may not be immediately obvious where in an industry competitive forces actually arise; there may be many firms in an industry but not all of them may be direct competitors.

One approach is to identify strategic groups, which are sets of firms in an

industry which are similar to one another and different from firms outside the group on one or more key dimensions of their characteristics and strategy.

Price and differentiation

The two most important determinants of a product’s success are likely to be the

perception of its price compared to similar products, and the degree to which

consumers perceive the product as a different offering. A product can be

approximately located in the price/differentiation matrix:

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3.3: Internal factors / analysis

-‐ Value chain

-‐ Shareholder value analysis

-‐ Core Competence

-‐ Experience curve

-‐ Economies of scale

-‐ Innovation

-‐ Economies of scope

-‐ Synergy

-‐ Joint production

-‐ Opportunity cost

-‐ Marginal analysis

-‐ Ratios

-‐ Gearing

-‐ Cash flow

-‐ Culture

o Power

o Role

o Task

o Personal

-‐ SAP

Value Chain

A company can be visualised as a chain of value producing activities which

starts with inputs at one end and sales at the other.

The primary activities in the value chain are:

-‐ In-‐bound logistics

-‐ Operations

-‐ Out-‐bound logistics

-‐ Marketing and sales

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The primary activities cannot operate on their own but need support in a variety of ways. The support activities are:

-‐ Procurement

The process by which resources are acquired -‐ Technology development

The technology associated with each of the value activities, including learning by doing, product design and process development

-‐ Human resources

The whole business of managing the workforce -‐ Management systems

Including quality control, finance and operational planning

Core competence

Core competencies are difficult to define and are by their nature unique to the situation, otherwise they would have been copied already:

-‐ Difficult to identify

-‐ Difficult to imitate

-‐ Do not reside within SBUs

Relatively rare

Corporate finance

To analyse the financial situation of the corporation one needs to look at the financial indicators and ratios that apply to the corporation as a whole. Later those indicators can be compared with the corresponding values from individual products.

Some values can be taken directly from the financial statements of the company that is being analysed. However often the interesting indicators and ratios need to be determined from the various numbers in the Accounts statement, Balance sheet and Cash flow statements.

Financial indicators and ratios

There are a lot of financial indicators and ratios that are potentially interesting in evaluating a company’s fortune. Which ones are applicable depends on the

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-‐ Return on owner’s equity (ROE) -‐ Return on total assets (ROTA)

Both ROE and ROTA need to be positive of course. They also need to exceed the company’s cost of capital (see below). If not the shareholders would be better off investing elsewhere!

Both values are calculated by taking the net cash flow (see below) and divid-‐ ing them by either the owner’s equity or the total assets of the company.

-‐ Cost of capital

How much the company has to pay for it’s capital. Usually calculated by di-‐ viding interest payments by the amount of long-‐term debt.

-‐ Gearing

High gearing makes it difficult to borrow more money. Gearing is calculated as the percentage of the long-‐term debt compared to owner’s equity (Long-‐ term debt / equity).

-‐ Net cash flow

After subtracting all costs the resulting net cash flow should be positive. One-‐time effects from sales (or investments) might distort the net cash flow number and should be taken into account appropriately.

-‐ Cash reserve

A good cash reserve allows the company to sustain losses or low profits for a while.

-‐ Corporate overhead

Company overhead and corporate centre costs need to be looked at relative to the profit numbers. Do overhead and corporate centre cost too much?

-‐ Hiring and redundancy costs

High hiring and redundancy costs indicate problems with the HR processes and a high turnover rate of the workforce. HR is a part of the value chain, indicating that problems exist in the value chain.

-‐ Marketing

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Product finance

As with the company as a whole there are a lot of financial indicators and ratios that are potentially interesting in evaluating the performance of an individual

product.

Products performing well compared to the company as a whole are obviously positive for the company while products whose indicators/ratios are below the company average need to be looked at in more detail.

Financial indicators and ratios

Some frequently used indicators are: -‐ Contribution margin

The contribution margin for the product must be evaluated with the PLC and BCG positions of the product in mind. Contribution of a ‘Cash cow’ needs to be high while the attempt to capture market share in a growth market for a ‘Star’ will reduce the contribution margin without indicating a problem exists with the product.

-‐ Inventory

Inventory levels (and production capacity) must be in line with PLC and BCG positions.

-‐ Gross profit

Gross profits for product lines need to be analysed with a sensitivity analy-‐ sis. Multiple factors might be involved in gross profit estimates and rela-‐ tively small changes in multiple parameters at the same time might change the gross profit number considerably!

-‐ Market share

The market share of a product can indicate in which phase of the PLC it is. Marketing and costs for development must match the position of the pro-‐ duct in the BCG matrix.

-‐ Attrition rate

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Company culture

The culture of a company can influence the strategies that are possible. Possible cultures and their possible implications for the selection and execution of

strategies:

Culture Achieve competitive advantage Cope with strategic change

Power Lacks analysis Unpredictable

Role Slow Resistant

Task Flexible Change is norm

Personal Lack focus Unpredictable

SAP (Strategic Advantage Profile)

Similar to the Environmental Threat and Opportunity Profile (ETOP), which looks at the macro-‐environment, the Strategic Advantage Profile (SAP)can be used for the internal characteristics of the company. By constructing a profile which summarises where competitive strengths or weaknesses are likely to lie, an attempt can then be made to rank the strengths and weaknesses to generate a balanced view of the company and its potential.

The SAP could look at the various departments and list the strengths and weaknesses of those departments, for example:

Internal area Competitive strength (+) or weakness (-)

Research + Recently invented a temperature control

-‐ Team has narrow vision

Development + Reduced lead time by 10%

-‐ Costs are usually overrun by 20%

Production + Working at full capacity

-‐ High labour turnover rate

Marketing + Computerised customer databank

-‐ Lack of technically qualified salespeople

Finance + Share price is buoyant

-‐ Lack of liquidity

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3.4: Competitive position

-‐ Porter’s Five Forces

-‐ PLC

-‐ Market share

Porter’s “5 Forces Model”

Five interactive competitive forces collectively determine an industry’s long-‐

term attractiveness:

-‐ Present competitors

-‐ Potential competitors (threat of new entrants)

-‐ Bargaining power of suppliers

-‐ Bargaining power of buyers

-‐ Threat of substitute products

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Product Life Cycle (PLC)

-‐ Introduction

-‐ Growth

-‐ (Shake-‐out)

-‐ Maturity

-‐ Decline

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4: Choice

4.1: Generic strategy alternatives

-‐ Corporate and business strategy

-‐ Stability, expansion, retrenchment

-‐ Combination

-‐ Cost leadership

-‐ Differentiation

-‐ Focus

-‐ Segmentation

Generic strategies are associated with broad classifications of strategy. The

business generic strategy options are usually represented differently at

corporate and business levels.

These generic strategies are the basis on which the company attempts to build its competitive advantage; without a clear idea of the generic strategy that it is

pursuing, a company is likely to end up with no identifiable strategy with the result that it will lack direction.

SWOT analysis comes in as a guide to the selection of the generic strategy and

the most appropriate strategy variation.

Corporate level

At the corporate level the generic options are related to the scope of the company and the directions it will pursue, for example the development of new products or the acquisition of companies to increase the product portfolio.

-‐ Stability

-‐ Expansion

-‐ Retrenchment

-‐ Combination

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Stability

The initial inclination is to regard this as being ‘no change’; however, the fact that managers do not perceive objectives in terms of increasing markets, introducing new products or acquiring new businesses, does not mean that the company is in a steady state.

Expansion

An expansion strategy can be pursued due to various reasons. An increase

product portfolio might be seen as a helping the company. Existing competencies are found to be useful in previously unexplored areas, etc.

Retrenchment

Under this heading come the notions downsizing, delayering and restructuring.

These initiatives are undertaken in the quest for a more efficient organisation

either in terms of shedding businesses which are not seen as part of the com-‐ pany’s core competence or in terms of enhancing labour productivity.

This is the strategy which many managers often do not want to be associated with, because it implies that mistakes have been made in the past. This is why many companies find it necessary to appoint a new CEO when retrenchment is necessary.

Combination

When a multiple SBU company is pursuing different generic strategies in relation to individual SBUs, and it is impossible to characterise the generic strategy for the company as a whole as stability, expansion or retrenchment.

The company can also pursue a different generic policy sequentially, so that the current generic policy can only be interpreted in the context of the dynamic overall strategy.

Business level

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-‐ Cost leadership

-‐ Differentiation

-‐ Focus

-‐ Stuck in the middle

Cost leadership

The objective is to achieve a situation where unit costs are significantly lower

than those of other companies in the industry.

The company must attempt to achieve the market share which has the potential

to generate the cost advantages desired. This market share must be achievable!

The company must also be continually concerned with efficient resource

allocation, and be at the forefront of technological developments which have the potential to reduce costs.

Differentiation

The effect of differentiation is to increase profits by segmenting the market and

enabling different prices to be charged in different segments.

The strategic process involves searching for and adding some characteristic such as superior quality or service associated with the product; it may not be a real effect, but may be an image consciously created by the company.

Focus

The previous generic strategies involved different ways of meeting competition and achieving an advantage: in the first case this was by lower cost and in the second by altering product characteristics.

The focus strategy is different in that it typically involves the identification of

market niches where it is possible to avoid confrontation with competitors.

Within the niche the company can focus on cost or differentiation.

Stuck in the middle

A company which does not specialise is likely to be continuously adjusting its competitive focus in response to changes in the market, with the result that it is ‘stuck in the middle’.

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Such an undefined strategy is likely to be associated with relatively poor performance, because the marketing effort of such a company is likely to be confused: at any one time it may not be clear whether marketing managers are attempting to achieve market share, differentiate the product in the eyes of the consumer, or find unexploited opportunities.

Decision Maker Generic Strategies

Based on Miles/Snow typology of strategies:

The Prospector is primarily concerned with the identification of new market

opportunities so issues relating to internal organisation take second place.

The Analyser is characterised by sophisticated internal information systems and

detailed investigation of options, but this is unlikely to be followed up by the type of action undertaken by the Prospector.

The Defender is concerned with maintaining the current market position without

exhibiting a great deal of initiative in developing new market opportunities.

The Reactor simply deals with circumstances as they arise.

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4.2: Strategy variations

-‐ Diversification

o Related

o Unrelated

-‐ Vertical integration

-‐ Mergers and acquisitions

-‐ Joint ventures and alliances

-‐ Pricing

o Leadership

o Limit

o Predatory

Within the context of a given generic strategy some broad classifications can serve to reduce the options which have to be evaluated. The decision to pursue one of these variations immediately reduces the strategic options. It is at this

point that SWOT analysis is brought to bear – the alignment of strengths and

opportunities helps to identify the appropriate strategic variation.

Related and unrelated diversification

At first sight there appear to be many compelling arguments in favour of staying in the business that you know most about; for example, marketing and selling techniques are known, production processes are similar and many administrative and distributive overheads can be shared among similar products, and the nature of the competition is well known (or it should be).

There are four main incentives to diversify:

-‐ To minimise risk

Minimizes management risk but not shareholder risk!

-‐ To capture economies of scope

The pursuit of economies of scope might as easily lead to value destruc-‐ tion rather than value creation

-‐ To add value through the parenting function and

-‐ To benefit from synergy

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The factors which are likely to contribute to long run returns are:

-‐ The potential to reap economies of scope across SBUs that can share the

same strategic asset

-‐ The potential to use an existing core competence in the new SBU

-‐ The potential to utilise an existing core competence to create a new stra-‐

tegic asset in a new business faster

-‐ The potential to expand the company’s pool of core competencies as it

learns new skills

Vertical Integration

Vertical integration involves movement into other parts of the production chain. This can be a backward integration (towards raw materials) or a forward

integration (towards final products).

The crucial question which must always be borne in mind is whether, taking everything into consideration, the company would add value by controlling other parts of the productive chain.

Acquisitions

Instead of undertaking internal action through the mobilisation of the company’s own resources to achieve objectives, the company can undertake external action

by taking over or merging with another company.

Many studies have demonstrated that the majority of acquisitions produce very little value for the acquiring company. Reasons for acquisitions are listed below:

Recognising Unrealised Value

Some chief executives have a skill in identifying companies which have not fully

exploited their value opportunities. The activities of such a company may be unrelated to the current business of the potential acquirer, whose competence is

in adding value independent of the type of business. It is instructive to try to

identify the areas in which the company’s performance might be inad- equate, because unless these can be identified it is difficult to understand the rationale for acquisition.

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Buying market share

Instead of investing in new plants and trying to obtain market share from

competitors by using marketing measure (and potentially creating a price-‐war) a take-‐over makes it possible to avoid the costs of the competitive thrust required to achieve the increase in market share. Also the labour force in the acquisition will be relatively high on the experience curve.

Reducing competitive pressure

Buying a competitor can be used to reduce the competitive pressure on a company. However the possible reaction from possible new entrants and also governments can make the positive effects smaller than anticipated.

Synergy

There may be potential gains from sharing resources and making better use of capacity. Capitalising on synergy is difficult and the history of acquisitions which attempted to take advantage of synergy has not been encouraging.

Balancing the portfolio

Rather than introduce a new product into the portfolio from scratch, the company may be on the lookout for a Star or Question Mark which fits with its existing portfolio and has the potential to be developed into a Cash Cow.

Core competencies

The acquisition may have the potential to fit with the strategic direction of the

company in the sense that it complements the set of difficult-‐to-‐replicate skills and attributes on which the company’s competitive advantage is based, while being consistent with the company’s dominant management logic.

It may also be seen as fitting with the company’s strategic architecture in terms of the linkages in the value chain. These characteristics of the acquisition may lead to a long-‐term addition to competitive advantage and hence to value added.

There is no obvious way of identifying the potential contribution to core

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Strategic fit

This appears to be a formidable list of reasons that can be marshalled in favour of

an acquisition. The trouble is that each factor is subject to interpretation and

different conclusions can be drawn for a given acquisition target.

Alliances and Joint Ventures

Alliances and joint ventures take many forms including licensing agreements, franchise agreements, relational contracting, relational management, consortia, virtual corporations, virtual functions and joint ventures.

It is known that the success rate of mergers and take-‐overs has been low; it is therefore important to determine whether or not this form of cooperative action

leads to better results. Research has found no significant long-term effects of

joint venture activity on profitability in any industrial sector. One reason for this

is probably the prisoner's dilemma: no contract can cover all eventualities and

one side always has an incentive to cheat in some way.

International Expansion

There is no difference in principle in moving into a foreign market compared with opening up new domestic markets. The same considerations of strategic

opportunities and threats and competitive advantage must be taken into account.

But it has to be recognised that competitive conditions may be significantly

different in another country.

The fact that a company has a competitive advantage in one location does not mean that it can be readily transferred abroad. Competitive advantage can be

country specific or company specific and this determines whether it is appropriate to export to a foreign market or shift production there.

Besides the problem of transferring advantages, there are several variables which complicate operations on the international scene:

-‐ Volatile exchange rates

-‐ Relative factor costs vary by country

-‐ Productivity varies widely among countries

-‐ Governments often protect home production

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From generics to variations

At the corporate level the generic strategy chosen requires the implementation of a variation. The process is illustrated below:

A strategic variation which is to contribute to long run competitive advantage must satisfy a number of criteria including the following:

-‐ Consistency with objectives

An option may appear to be attractive, but it may not fit with the com-‐ pany's stated objectives.

-‐ Suitability in terms of company resources

SWOT analysis is of crucial

Strategic Planning Notes 2013.pdf