Chapter 8Strategy Formulation and Execution

• 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

Strategy

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• The long-term view of the organization and competition

• Thinking strategically impacts performance and financial success

• Today’s environment requires everyone to think strategically (not just top manager)

Thinking Strategically

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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

Strategic Management

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Purpose of Strategy

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8.1 Levels of Strategy

8.2 The Strategic Management Process

Strategy Formulation versus 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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• 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

SWOT Analysis

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8.3 SWOT: Audit Checklist

• Strength:

• Weakness:

• Opportunities:

• Threats:

• Strategies

Case Study – SWOT: FACEBOOK.COM

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Strategic Business Units (SBUs) have a unique mission, products, and competitors

Companies manage the mix of SBUs for synergy and competitive advantage

Organizations should not become too dependent on one business – Related to the diversification strategy (Diversification lowers business risk)

Formulating Corporate-Level Strategy: Portfolio Strategy

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• A Manager (CEO) is an agent for shareholders (owners). • 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) .”

Agency Theory, Agency Cost

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• 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 & A creates Agency Cost.• Cases in Point: • M & A b/w HP & Compaq• M & A b/w BoA & Merrill Lynch• M & A b/w Disney & ABC Television

M & A, Corporate Strategy, Agency Cost

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• 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 a manager: Stockholders can use a

carrot-and-stick approach to control the manager. o Stock Option: A widely used carrot to motivate the

manager to work hard for the best interest of shareholders.

Agency Cost, Stock Option

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• Organizes business along two dimensions– Business growth rate – potential (future)– Market share - current

• Four categories for corporate portfolio– The combination of high/low market share and

high/low business growth

Formulating Corporate-Level Strategy: The BCG Matrix

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8.4 The BCG Matrix

• New CEO – Jeff Immelt• Cash Cow: Home & Business Solutions• Star: GE Technology & Infrastructure, GE Energy• Question Mark:– Media Division – NBC Universal– Finance – GE Capital– The Question Mark can become a Dog or Star.

• Dog:– If a division falls into a dog, GE sells it off.

Case Study – The BCG Matrix: General Electric

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• 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

• Related Diversification vs. Unrelated Diversification– Example of Related Diversification: Facebook + Search Engine– Example of Unrelated Diversification: An airline company like

DELTA merges with an oil company like SHELL

Formulating Corporate-Level Strategy: Diversification Strategy

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• 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.

Unrelated Diversification Strategy – Corporate Strategy

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• 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

• Hypothetical Examples:– Starbucks in VI– GM in VI

Vertical integration (VI) – Corporate Strategy

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Strategy within the business units (SBU): How do we compete?

Biz-Level Strategy vs. Corporate-Level Strategy:At the business level, strategies are accomplished through competitive actions rather than acquisition or divestment

Porter’s Five Forces are widely used to develop biz-level strategy

Formulating Business-Level Strategy

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• SBU – an autonomous organization within a firm:

• Budgeting authority

• Personnel decision-making

• Examples of SBU:

• ABC Television – one of four SBUs in Disney

• Division in Army

• College at LSSU

Strategic Business Unit (SBU)

8.5 Porter’s Five Forces

8.6 Porter’s Competitive Strategies

Action plans used by major departments (Marketing, Production, Finance, HR, R&D)

To support the execution of biz-level strategyTo coordinate with biz-level strategy to achieve

the organization’s strategic goals

Formulating Functional-Level Strategy

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• Strategic Flexibility – managers must be prepared to change and adjust strategy quickly

• Strategic Partnerships – collaboration with other organizations is important – Partners must share resources & information.

• Global Strategy – organizations pursue a distinctive focus for global business

New Trends in Strategy

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8.7 Global Corporate Strategies

• “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

• Dynamic approaches:

– Vision, intuition and employee participation

– Leadership, structure, information and control systems, and human resources

Strategy Execution - The final step!

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8.8 Six Silent Killers of Strategy

8.9 Tools for Putting Strategy into Action

• Truth vs. Spin

• Strategic Planning - Strategy Map

• Agency Theory – Agency Cost: HP & Compaq, BoA & Merrill

• SWOT Analysis: Facebook case

• SBU - BCG Matrix

• Porter’s 5 Competitive Force Model - 3 Competitive Strategies

• Tools for Strategy Execution – Leadership, Clear Roles, Accountability, HR, Candid Communication

• Management: Leadership, Organization, Planning, Control

Strategic Planning & Management