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2002 Edition
Vitale and Giglierano
Chapter 5Concepts and Context of Business Strategy
Prepared by John T. Drea, Western Illinois University
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Business Strategy Basics
GoalsA general statement of desirable outcomes, directly supportive of and aligned with the mission.
Mission
A qualitative description/definition of who the organization is and what it expects to accomplish. It is further defined by goals and objectives.
ObjectivesSpecific, measurable expressions of the stated goals, with specific targets and time periods.
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Key Strategy Concepts:Fit and Providing Superior Value
1. Business strategydesigners should seek
a fit between the businessstrategy and the
environment
2. The key elementof fit in business strategyrevolves around providing
superior value forcustomers.
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Key Strategy Concepts:Providing Superior Value,
Differentiation, and Core Competencies
3. Superior value – the offering must be differentiated from
offerings of competitors (in the minds of
targeted customers)
4. Differentiation is produced by using core
competencies to advantage.As core competencies become more distinct,
customer valueIncreases.
Core competencies: a company’s skills, capabilities, and knowledge assets necessary to compete in its markets.
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Key Strategy Concepts: Providing Superior Value, Quality, Measuring and Tracking Results
5. Quality and processImprovement are
fundamental to providing superior value.
6. Measuring and trackingresults creates learningand sets the stage forlater improvements.
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Additional Observations on Strategy1. Changes in customers, channels and competitors interact to create discontinuities in industries or markets.
2. Companies may influence how markets change, but theyseldom influence the pace of change.
3. Companies need to look for ways to change the rules of the markets in which they compete.
4. Changes in the rules are still subject to constraints in thebusiness environment.
5. Companies need to identify the core competencies that will translate into advantages in the future.
6. Advantages are not sustainable for long – companies must innovate and change the rules to stay ahead.
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Hierarchy of Strategy
Corporate Strategy
Business UnitStrategy
Product
Strategies
Business UnitStrategy
Product
Strategies
Functional area strategies Functional area strategies
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Strategic Business Units
• SBU– Organizational entities within within a
corporation that address a single business.– SBUs must be capable of being planned
and measured separately from the rest of the organization (though this does not imply independence from the larger organization).
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Business Portfolio
• A collection of strategic business units that serve various needs in the corporate structure.
• An ongoing firm will need1. Sources of cash to fund investment in
growing markets
2. New possibilities emerging from research and development that may be valuable business opportunities in the future.
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Exhibit 5-2 Growth-Share Matrix
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Growth Share Matrix: Stars
Stars
Cash Cows
Dogs
QuestionMarks
+ Relative market share -
- M
arke
t Gro
wth
Ra t
e +
Stars-•Must invest heavily to maintain position in the growing market.•Likely a SBU with a prominent position in a market in the growth stage of the product life cycle•Should be managed with market ownership as an objective.
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Growth Share Matrix: Cash Cows
Stars
Cash Cows
Dogs
QuestionMarks
+ Relative market share -
- M
arke
t Gro
wth
Ra t
e +
Cash Cows-•Found in slower-growth markets where the SBU may be the market owner.•SBUs generate cash that fuels other parts of the organization.•“Cash cows” are often found in the late growth, maturity, or decline stages of the product life cycle.
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Growth Share Matrix: Dogs
Stars
Cash Cows
Dogs
QuestionMarks
+ Relative market share -
- M
arke
t Gro
wth
Ra t
e +
Dogs-•Slow or negative growth relative to organizational goals, and a less than prominent market share.•Can occur at any stage of the product life cycle.•Must choose to either divest of the business or continue to harvest it for short-term cash.
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Growth Share Matrix: Question Marks
Stars
Cash Cows
Dogs
QuestionMarks
+ Relative market share -
- M
arke
t Gro
wth
Ra t
e +
Question Marks-•Significant market potential, but the SBU does not have a significant share.•The SBU may require significant investment, may not be associated with the competencies of the firm, and may never grow to be prosperous.•Can exist when a business discovers an opportunity not aligned with corporate goals or core lines.
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Potential Issues with the Growth-Share Matrix
• The relationship between market share and profitability is suspect.
• There is inherent subjectivity in the analysis of shares and growth.
• Investment implications of the categories are not consistent.
• The matrix is a snapshot in time.
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Exhibit 5-5 Attractiveness-Strength Matrix
High
Medium
Low
Strong Medium Weak
Protectposition
Buildselectively
Protect andrefocus
Invest tobuild
Build selectivelyor manage
for earnings
Manage forearnings
Buildselectively
Limitedexpansionor harvest
Divest
Business strength
Marketattractiveness
Invest/grow
Selectively earn
Harvest/divest
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Strategic Management Steps in the Business-to-Business Company
1. Develop goalsand objectives
2. Environmentalanalysis
3. Strategy design
4. Implementationplan design
5. Strategy implementation
6. Monitoring ofenvironment andperformance results
7. Analysis ofperformance
8. Performance
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Special Issues in Strategy
Development
Strategy development and the Internet
Strategy development and the Internet
Volatility and uncertaintyrequire flexibility
Volatility and uncertaintyrequire flexibility
Strategy implications of value networks
Strategy implications of value networks
Strategic implications ofmarket ownership
Strategic implications ofmarket ownership
Strategy development in new business
Strategy development in new business
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Strategy Development and the Internet
The Internet can be used to•Manage customer relationships•Streamline purchasing relationships•Increase the speed with which the
environment changes•Reduce transaction costs, shipping costs,
and inventory costs
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•Increased uncertainty and speed of change make visions of the future increasingly inexact.•Choices of which businesses to pursue are less enduring as business boundaries and definitions are blurred.•Budgets are more difficult to set, since it is difficult to know what investments will be needed to compete and grow.
Volatility and Uncertainty Require Flexibility
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•Successful strategies hinge on developing a portfolio of core competencies, including changing strategies and models rapidly: “Fast vertical integration”•Identification of SBUs that can generate cash flow, and identification of SBUs and markets in which the company can play a dominant role
Strategy Implications of Value Networks
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Strategy Implications of Market Ownership
•Developing competencies that are important in multiple businesses allows a company to produce value across a range of possible scenarios.•Companies can strive to shape the market by taking a proactive approach.•Yearly planning cycles are too slow – a time frame that recognizes the rapid life cycle of many offerings is needed.
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Strategy Development in New Business
•Some business-to-business Internet start-ups begin with only one customer – but this can result in becoming too dependent on a single customer, missing translation opportunities.•Increased pressures on time and other resources may make it difficult to get a strategy developed.
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Tactical Planning for Modern Tactical Planning for Modern DistributionDistribution
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IntroductionIntroduction
• Distributor functions and customer expectations are changing rapidly
• Distributors expected to be more information-based
• Strategic decisions for distributor focus
• Tactical decisions for strategy implementation.
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How E-Business How E-Business Will Reshape the DistributorWill Reshape the Distributor
Customer Service
Requirements
Purchasing Decision
InventoryForecasting
The Distribution/Logistics Loop
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How E-Business How E-Business Will Reshape the DistributorWill Reshape the Distributor
Customer Service Requirements
Purchasing Decision
InventoryForecasting
Customer Lead Time Requirements
Fill Rate
Lost Sales
Supplier Lead Time
Lead Time Variability
Forecast Error
Demand Patterns
Variability
ABC Policies
Warehouse Constraints
Transportation
Financial Constraints
Obsolescence
The Distribution/Logistics Loop with Information Activities
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MatchingMatching DistributionDistribution ProcessesProcesses toto InformationInformation TechnologyTechnology
IT Problems– E-Business and internal information
systems have little performance history – Inability to apply traditional financial
measures to information technology – Technology shortcomings – Poor match between traditional
business processes and the new technology
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MatchingMatching DistributionDistribution ProcessesProcesses toto InformationInformation TechnologyTechnology
Lack of Internet utilization– Lack of data standardization made setting up
web sites for selling product very expensive. – The Internet was not accessible enough
because of bandwidth problems. – Business procedures used by many end
users still required a written purchase order process.
– Trust and security issues hampered the process as firms jockeyed for position.
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MatchingMatching DistributionDistribution ProcessesProcesses toto InformationInformation TechnologyTechnology
The Information Automation Process– Identify and document business
processes– Determine the value these processes
generate for the firm's customers– Consider non-critical processes for
elimination – Business Process Redesign – Document processes resistant to
automation
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ProcessProcess MappingMapping DistributionDistribution
Begin with the customer and work backward through the supply chain
1. Customer2. Distribution customer support systems 3. Warehouse operations 4. Planning/replenishment 5. Supplier 6. Support processes (financials, human
resources, etc.)
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FromFrom ProcessProcess MappingMapping toto OrganizationalOrganizational RealitiesRealities
• Start use of improved processes that are friendly or compatible with the IT system
• Be comfortable with changes in the way the company communicates with its customers, suppliers, and within its own four-walls.
• Reduction in flexibility• Cost reduction and supply chain reliability
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ConclusionsConclusions
• Year 2000, a warning against jumping into expensive technology without a full understanding
• E-Business, in the short-term does not look like the death of distributors
• E-Business environment is uncharted territory, the business models new, and the technology complicated.
• Understanding E-Business and profitability is a challenge
