Transcript Slide 1

Chapter 8
Strategy Formulation and Execution
Strategy
• Every company is concerned with strategy
– It determines which organizations succeed and
which ones struggle
– Strategic blunders can hurt a company
• Strategic management is a specific type of
planning
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Thinking Strategically
• The long-term view of the organization and
competition
• Thinking strategically impacts performance and
financial success
• Today’s environment requires everyone to think
strategically
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Strategic Management
The set of decisions and actions used to formulate
and execute strategies that will provide
competitively superior fit (= competitive
advantage) between the organization and its
environment to achieve organizational goals
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Purpose of Strategy
• Explicit strategy is the plan of action that
describes resource allocation and activities for
dealing with the environment, achieving a
competitive advantage, and attaining the
organization’s goals
• Competitive advantage is the organization’s
distinctive edge for meeting customer needs
• Strategies should:
 Exploit Core Competencies
 Build Synergy
 Deliver Value
 Target Customers
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3 Levels of Strategy in Organizations
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The Strategic Management Process
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Strategy Formulation vs. Execution
Formulation:
Assessing the
external
environment and
internal problems
to create goals
and strategy
Execution:
The use of
managerial and
organizational
tools to direct
resources
toward
accomplishing
strategic results
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SWOT Analysis
• Formulating strategy often begins with an
audit of internal and external factors
– Internal Strengths and Weaknesses
– External Opportunities and Threats
• Information is acquired from reports,
surveys, discussions, and meetings
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SWOT: Audit Checklist
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Strategic Business Unit (SBU)
SBU – an autonomous organization within a firm:
 Budgeting authority
 Personnel authority
Examples of SBU:
 ABC Television – one of four SBUs in Disney
 Division in Army – the division commander (two star
general)
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Formulating Corporate-Level
Strategy: Portfolio Strategy
Strategic Business Units (SBUs) have a unique
mission, products, and competitors
Companies manage the mix (portfolio) of SBUs
for synergy and competitive advantage
Organizations should not become too
dependent on one business
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Agency Theory, Agency Cost
• A Manager (CEO) is an agent for shareholders.
• Owners of the firm are clients of the manager.
• The manager is supposed to work for the best
interest of the shareholders, that is, to maximize
shareholders’ wealth – increase the stock price, by
boosting the profit, increasing revenue and/or
decreasing cost.
• In reality, a manager works for his own best interest,
not for the shareholders.
• When this problem occurs, we call it “agency cost
(problem) .”
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M & A, Corporate Strategy,
Agency Cost
• Merge & Acquisition is an example of corporate
strategy.
• Like any other strategy, M & A should focus on
synergy, efficiency, shareholders’ wealth
maximization.
• However, some M & As create Agency Cost.
• Cases in Point (Real World Applications):
• M & A b/w HP & Compaq
• M & A b/w BoA & Merrill Lynch
• M & A b/w Disney & ABC Television
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Agency Cost, Stock Option
• How do shareholders know whether the
manager (CEO)’s corporate strategy works or
not?
o If the stock price does not go up after the M & A
announcement, the strategy is not working.
• Managing (Controlling) a manager: Shareholders
can use a carrot-and-stick approach to control
the manager.
o Carrot  Stock Option: A widely used carrot to
motivate the manager to work hard for the best
interest of shareholders.
o Stick  Termination
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Formulating Corporate-Level
Strategy: The BCG Matrix
• Organizes business along two dimensions
– Business growth rate
– Market share
• Four categories for corporate portfolio
– The combination of high/low market share
and high/low business growth
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The BCG Matrix
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Formulating Corporate-Level
Strategy: Diversification Strategy
• Moving into new lines of business
– Expand into new valuable products and services
• Why does a firm attempt to diversify its business?
– Manage/control/minimize the risk
• A Case in Point:
– DELTA (Airline Company) vs. SHELL (Oil Company)
– When oil price goes up, DELTA stock goes down, but SHELL stock
goes up.
– If DELTA merges/acquires SHELL (diversification), DELTA can
lower the risk of uncertainty (a sudden spike of oil price due to
the war in the Middle East)
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Unrelated Diversification
Strategy – Corporate Strategy
• Expansion into new lines of business
• Can be a difficult strategy
• Many companies are giving up on unrelated
diversification
• Unattractive to investors; hard to value the firm
– Hard to measure the profit, cost of capital
– Hard to measure the firm value
– Hard to measure the firm’s stock price
• Hypothetical Example: GM enters a clothing business.
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Vertical integration (VI) –
Corporate Strategy
• Vertical integration expands into businesses that
supply to the business or are distributors
• Benefits of VI: Securing supply & distribution
chains  cost savings  efficiency
• Limitations of VI: Less competition  less
productive  inefficiency [Soviet Economic Model]
• Hypothetical Examples:
– Starbucks in VI
– GM in VI
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Formulating Business-Level
Strategy
Strategy within the business units (SBU): How do
we compete?
Business-level strategies are developed by
Porter’s Five Forces
Web technology is impacting all industries in
positive and negative ways
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Porter’s Five Competitive Force Model
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Porter’s Competitive Strategies
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Formulating Functional-Level Strategy
Action plans used by major departments
 Marketing
 Production
 Finance
 Human Resources
 Research and Development
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New Trends in Strategy
• Strategic Flexibility – managers must be
prepared to change and adjust strategy
quickly
• Strategic Partnerships – collaboration with
other organizations is important: Sharing
Resources & Information: eg. Boeing with Delta
on airplane engine cost sharing
• Global Strategy – organizations pursue a
distinctive focus for global business
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Global Corporate Strategies
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IB strategies
Wholly owned subsidiary
• Joint venture
• License
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Strategy Execution - The final step!
• “Strategy is easy, but execution is hard”
– Most important but most difficult part
• Strategy must be skillfully executed
• Alignment requires all aspects of the organization to focus
on strategy goals
– Everyone is moving in the same direction
• S.E. needs more dynamic approaches
• S. E. requires vision, intuition and employee participation
• S. E. is done through changes in leadership, org. structure,
information and control systems, and human resources.
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Six Silent Killers of Strategy
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4 Tools for Putting Strategy into Action
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Review: Strategic Planning & Strategic
Management
• Truth vs. Spin
• Strategic Planning - Strategy Map
• Agency Theory – Agency Cost
• SWOT Analysis
• SBU - BCG Matrix
• Porter’s 5 CFM & Competitive Strategies
• Tools for Strategy Execution – Leadership, Clear Roles,
Accountability, HR, Candid Communication
• Management: Leadership, Organization, Planning, Control
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Chapter 8 - Discussion Questions
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Explain briefly what "think strategically" means in practice. (class discussion)
Explain why a strategy matters for competitive advantage. (class discussion)
Explain briefly core competency of GM, Wal-Mart. (class discussion)
There are three types of strategies: corporate, business, and functional (operational)
strategy. Explain what kind of strategy Merge & Acquisition (M&A) belongs to. Explain
briefly the reason. (class discussion)
Explain briefly agency theory. (class discussion)
Explain briefly when the agency cost incurs in a firm. (class discussion)
Suppose you are a shareholder of GM. How would you control the agency cost?
Conduct a SWOT Analysis of Facebook Inc.. Explain briefly internal situations.
Conduct a SWOT Analysis of Facebook Inc.. Explain briefly external situations.
Explain briefly what makes a SBU unique in an organization. Give an example of SBU in
Disney, Army, LSSU. (class discussion)
Give an example of SBU in Lake Superior State University. Explain briefly why it can be a
SBU.
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Chapter 8 - Discussion Questions
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Explain briefly why the unrelated diversification strategy makes a firm unattractive to
investors. (class discussion)
Explain briefly why a manger must focus on profit. (class discussion)
Explain briefly what benefits a firm can gain from vertical integration strategy.(class
discussion)
Explain briefly why the vertical integration sometimes leads to inefficiency. (class
discussion)
Explain briefly potential new entrants in Porter's 5 Competitive Force Model.
Explain briefly bargaining power of buyers in Porter's 5 Competitive Force Model.
Explain briefly bargaining power of suppliers in Porter's 5 Competitive Force Model.
Explain briefly threat of substitute products in Porter's 5 Competitive Force Model.
Explain briefly rivalry among competitors in Porter's 5 Competitive Force Model.
Explain briefly the differentiation strategy in Porter's Competitive Strategy Model.
Explain briefly the cost leadership strategy in Porter's Competitive Strategy Model.
Explain briefly the focus strategy in Porter's Competitive Strategy Model.
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Chapter 8 - Discussion Questions
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Two firms want to become partners. Explain briefly the most important thing they need to
do in strategic planning, from the business partnership perspectives if they want to be
partners truly. (class discussion)
List Six Silent Killers of Strategy Implementation.
Among “six silent killers of strategy,” employees were not listed. Explain why.
Explain briefly the four tools for putting strategy into action.
Real World Applications: Avon Products Case (Feb. 2014) | MS-Word |: In this business
case, which U.S. federal law did Avon break? What was the background for drafting the
federal law? Give the main reason that the law was needed in the U.S. In class, we learned
the three international business strategies on foreign direct investment (wholly-owned
subsidiary, joint-venture, and licensing). Which strategy would you recommend Avon to
avoid such legal troubles? Explain how Avon can benefit from the strategy.
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