CHAPTER 4: PLANNING

PART 2: STATEGY FORMULATION

AND IMPLEMENTATION
 Learning objectives

• Define the component of strategic management

• Describe the strategic planning process and
SWOT analysis
• Define corporate-level strategies and explain
the portfolio approach- the BCG matrix
• Describe business- level strategies, including
Porter’s competitive forces and strategies, and
cooperative strategies
• Explain the major considerations in formulating
functional- level strategies
 OUTLINE

1. What is strategic management?

2. Level of strategy
3. Strategy formulation
a. Formulating Corporate-level strategy
b. Formulating Business-level strategy
c. Formulating Functional-level strategy
4. The strategic planning process
Common elements in successful strategies

Successful
strategy

EFFECTIVE IMPLEMENTATION

Simple, Profound understanding Objective

consistent, of competitive appraisal of
long-term goals environment resources

Source: Robert M. Grant. (2008). Contemporary Strategy Analysis

(6th edition)
 1. What is strategic management?
• Strategic management is the set of decisions and
actions used to formulate and implement environment so
as to achieve organizational goals.

• Why Strategic Management is Important?

1. It results in higher organizational performance.
2. It requires that managers examine and adapt to
business environment changes.
3. It coordinates diverse organizational units, helping them
focus on organizational goals.
4. It is very much involved in the managerial decision-
making process.
 2. Level of strategy
Corporate-level strategy:
‘What business are we in?’

Corporation

Business- level strategy:

‘How do we compete?’

Textiles unit Chemicals unit Auto parts unit

Functional- level strategy:

‘How do we support the business- level strategy?’

Finance Manufacturing R&D Marketing HRM

 2. Level of strategy
• Corporate- level strategy
Corporate- level strategy relates to the organization as a
whole and to the combination of business units and
product lines that make up the corporate entity
• Business- level strategy
Business-level strategy relates to each business unit or
product line. It focuses on the way the business unit
competes within its industry for customers
• Functional- level strategy
It relates to the major functions, including finance,
research and development, marketing and
manufacturing
 Types of Growth Strategies
Growth strategy is when an organization expands the number of markets served
or products offered, either through its current business(es) or through new
business(es).
Concentration focuses on its primary line of business and increases the
number of products offered or markets served in this primary
business.

Vertical - In backward vertical integration, the organization becomes its

integration own supplier so it can control its inputs.
- In forward vertical integration, the organization becomes its
own distributor and is able to control its outputs.

Horizontal company grows by combining with competitors

integration

- Related diversification happens when a company combines

Diversification with other companies in different, but related, industries.
- Unrelated diversification is when a company combines with
firms in different and unrelated
industries
Growth Strategies
 Corporate level strategies
 Renewal strategy
When an organization is in trouble, something needs to be
done. Managers need to develop strategies, called
renewal strategies, that address declining performance

 Retrenchment strategy
A retrenchment strategy is a short-run renewal strategy
used for minor performance problems. This strategy helps
an organization stabilize operations, revitalize
organizational resources and capabilities, and prepare to
compete once again.
• Turnaround strategy
When an organization’s problems are more serious more
drastic action—the turnaround strategy—is needed.
Manager must to do: cut costs and restructure
organizational operations
 Corporate level strategies
 Stability strategy
Stability, sometimes called a pause strategy, means that the organization wants to remain the
same size or grow slowly and in a controlled fashion.

Stability
 3. Strategy formulation
- Portfolio Analysis is used to formulate Corporate-level
strategy and relates to the mix of business units and product
lines that fit together in a logical way to provide synergy and
competitive advantage for the organization

- Competitive advantage is an advantage over competitors

that cannot easily be imitated, especially advantages that can
be sustained over time Sustainable Competitive Advantage
(SCA)
 The BCG Matrix
• BCG Matrix
- Developed by the Boston Consulting Group
- Considers market share and industry growth rate
+ Business growth rate relates to how rapidly the entire
industry is increasing.
+ Market share defines whether a business unit has a
larger or smaller share than competitors.
- Classifies firms as:
• Cash cows: low growth rate, high market share
• Stars: high growth rate, high market share
• Question marks: high growth rate, low market
share
• Dogs: low growth rate, low market share
 The BCG matrix
High

Stars Question
Marks
Business
growth
rate

Cash cows Dogs

Low

High Market share of SBU Low

 The BCG matrix
High
Star: dominant competitive Question mark: poor competitive
position in a growing industry position in a growing industry
- Recommended strategy= - Recommended strategy= growth
growth; add resources and or retrenchment; apply resources
build the business further based to accomplish positive turnaround
Business on market projections or pull back if outlook poor
growth
rate
Cash cow: dominant position in Dog: poor competitive position in
low-growth industry low-growth industry
- Recommended strategy= - Recommended strategy=
stability or modest growth; retrenchment; divest, sell,
maintain benefits of strong cash liquidate the business to eliminate
flow while keeping resource resource drain
investment minimum
Low

High Market share of SBU products/services Low

 3. Strategy formulation
b. Formulating Business-level strategy
(Competitive strategy)

Formulating Business-level strategy- Porter’s competitive forces and strategies

Porter’s competitive forces and strategies
• Threat of New Entrants
– The ease or difficulty with which new competitors can enter
an industry.
• Threat of Substitutes
– The extent to which switching costs and brand loyalty affect
the likelihood of customers adopting substitutes products
and services.
• Bargaining Power of Buyers
– The degree to which buyers have the market strength to
hold sway over and influence competitors in an industry.
• Bargaining Power of Suppliers
– The relative number of buyers to suppliers and threats from
substitutes and new entrants affect the buyer-supplier
relationship.
• Current Rivalry
– Intensity among rivals increases when industry growth
rates slow, demand falls, and product prices descend.
 Analyzing 5 competitive forces
• Porter’s five forces framework was originally developed as a
way of assessing the attractiveness (profitability) of
different industries. As such it can help in identifying the
sources of competition in an industry or sector.

The five forces framework

• Must be used at the level of strategic business units (and not at
the level of the whole organization)
• Understanding the connections between competitive forces
and the key drivers in the macro-environment is essential
• The five forces are not independent
 Types of Business-level strategy
(Competitive strategies)
 Differentiation strategy

 Cost leadership strategy

 Focus strategy
 Competitive strategies
 Differentiation strategy

- Differentiation strategy- the ability of a company or

a business unit to provide a unique or superior
value to the buyer in terms of product quality, special
features, or after sale service.

- The differentiation strategy involves an attempt to

distinguish the firm’s products or services from the
others in the industry.
 Porter’s competitive strategies

Lower cost strategy- the ability of a company or

a business unit to design, produce and market a
comparable product more efficiently than its
competitors.

The organization aggressively seeks efficient facilities,

pursue cost reductions, and use tight cost control
to produce products more effectively than
competitors

Prentice Hall, Inc. ©2009 6-21

 Porter’s competitive strategies

Cost leadership- a lower-cost competitive

strategy that aims at
• the broad mass market,
• requires efficient scale facilities,
• cost reductions, cost and overhead control;
• avoids marginal customers,
• cost minimization in R&D, service, sales force and
advertising

Prentice Hall, Inc. ©2009 6-22

 Porter’s competitive strategies

Cost Focus- low-cost competitive strategy that focuses

on a particular buyer group or geographic
market and attempts to serve only this niche to the
exclusion of others

Differentiation Focus- concentrates on a particular

buyer group, product line segment, or geographic
market to serve the needs of a narrow strategic
market more effectively than its competitors

Prentice Hall, Inc. ©2009 6-23

 Organizational characteristics for Porter’s competitive strategies

- Acts in a flexible, loosely knit way, with strong coordination

Differentiation among departments.
- Strong capability in basic research
- Creative flair, think ‘out of the box’
- Strong marketing abilities
- Rewards employee innovation
- Corporate reputation for quality or technological leadership

- Strong central authority, tight cost controls

- Maintain standard operating procedure
Cost leadership - Easy to use manufacturing technologies
- Highly efficient procurement and distribution system
- Close supervision, finite employee empowerment
- Frequent, detailed control reports

- May use combination of above policies directed at particular

Focus strategic target
- Values and rewards flexibility and customer intimacy
- Measures cost of providing service and maintaining customer
loyalty
- Pushes empowerment to employees with customer contact
 Issues in Competitive Strategies
? Is it possible for a company or business unit to follow a
cost leadership strategy and a differentiation strategy
simultaneously? Why or why not?
c. Formulating functional-level strategy
 c. Formulating functional-level strategy

• Functional- level strategies are the action plan

adopted by major departments to support the
execution of business- level strategy
• Major organizational functions include
o marketing,
o production,
o finance,
o human resources,
o research and development (R&D)
 4. The strategic planning process
Scan external Identify strategic
environment: factors:
- National - Opportunities
- Threats
- Global

Define new: Formulate Implement strategy by

Evaluate changes in:
current: SWOT strategy:
- Leadership/culture
- Mission - Mission - Corporate - Structure
- Goals - Goals - Business - Human resource
- Functional - Information & control
system

Scan internal Identify

environment: strategic
- Core competence factors:
- Synergy
- Strengths
- Value creation
- Weaknesses

Source: Danny and Richard L. Daft; 2009, p.302

 Strategic Planning Process
• Step 1: Identifying the organization’s current
mission, goals, and strategies
– Mission: the firm’s reason for being
• The scope of its products and services
– Goals: the foundation for further planning
• Measurable performance targets
• Step 2: Scanning an external analysis
– The environmental scanning of specific and general
environments
• Focuses on identifying opportunities and threats
 Strategic Planning Process
• Step 3: Scanning an internal analysis
– Assessing organizational resources, capabilities, and
activities:
• Strengths create value for the customer and
strengthen the competitive position of the firm.
• Weaknesses can place the firm at a competitive
disadvantage.

– Analyzing financial and physical assets is fairly easy,

but assessing intangible assets (employee’s skills,
culture, corporate reputation, and so forth) isn’t as
easy.

• Steps 2 and 3 combined are called a SWOT analysis.

(Strengths, Weaknesses, Opportunities, and Threats
 Strategic Planning Process

• Step 4: Formulate Strategies

– Develop and evaluate strategic alternatives
– Select appropriate strategies for all levels in the
organization that provide relative advantage over
competitors
– Match organizational strengths to environmental
opportunities
– Correct weaknesses and guard against threats
 Strategic Planning Process

• Step 5: Implement Strategies

– Implementation: effectively fitting organizational
structure and activities to the environment
– The environment dictates the chosen strategy;
effective strategy implementation requires an
organizational structure matched to its
requirements

• Step 6: Evaluate Results

– How effective have strategies been?
- What adjustments, if any, are necessary