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Strategy, Structure and Effectiveness 1
3 LEVELS OF STRATEGY
How do we compete?
BUSINESS UNIT B
BUSINESS UNIT C
FIN R&D MFRG MKTGHow do we supportbusiness level strategy?
Corporate Level
Business Level
Functional Level
Corporate level examples:Travelers acquires Salomon Brothers, Disney acquires ABC, AT&T acquires TCI, GE sells Kidder Peabody.
Business level examples:CBS adopts strategy of trying to capture younger viewers, Pfizer founds a developing “life style” drugs; e.g. Viagra
Functional level examples:Cigarette companies adverting campaign to convince people to oppose Tobacco Bill.
What businesses are we in?CORPORATION
BUSINESS UNIT A
Strategy, Structure and Effectiveness 2
RATE OF PROFIT ABOVE THE
COMPETITIVE LEVEL
How do we make money?
RATE OF PROFIT ABOVE THE
COMPETITIVE LEVEL
How do we make money?
INDUSTRY ATTRACTIVENESS
Which industries should we be in?
INDUSTRY ATTRACTIVENESS
Which industries should we be in?
COMPETITIVE ADVANTAGE
How should we compete?
COMPETITIVE ADVANTAGE
How should we compete?
CORPORATESTRATEGY
CORPORATESTRATEGY
BUSINESSSTRATEGY
BUSINESSSTRATEGY
Sources of Superior ProfitabilitySources of Superior Profitability
Strategy, Structure and Effectiveness 3
BOSTON CONSULTING GROUP FRAMEWORKFOR CORPORATE LEVEL BUSINESS PORTFOLIO
NEW VENTURE• Small share of expanding market
• Risky• May be prize heifer or problem child
STAR•Large share of expanding market
•Rapid growth and expansion
DOG•Small share of mature market
•Consider divestment
CASH COW• Large share of mature market
• Milk cash to fund new venture
High
Low
MA
RK
ET
GR
OW
TH
MARKET SHARELow High
Strategy, Structure and Effectiveness 4
GE’s Nine-Cell Business Screen
Relative market shareProfit marginsAbility to compete on price and qualityKnowledge of customer and marketCompetitive strengths and weaknessesTechnological capabilityCaliber of management
LowMediumHigh
Business Strengths
Low
Med
ium
Hig
h
Indu
stry
Att
ract
iven
ess
Market size and growth rateIndustry profit marginsCompetitive intensitySeasonalityCyclicalityEconomies of scaleTechnologySocial, environmental, legal,
and human impacts
Invest in, employgrowth strategy
Monitor performance,selective strategybased on earnings
No growth or investment,consider divestmentor liquidation
Strategy, Structure and Effectiveness 5
Corporate-Level Strategies for Entering New Domains
InputDomains
Forwardvertical Integration
Relateddiversification
Unrelateddiversification
Backwardverticalintegration
RelatedDomains
OutputDomains
UnrelatedDomains
Core Domain:
Strategy, Structure and Effectiveness 6
Input domains(e.g., sugar plantations;bottle makers)
Related domains(e.g., snack foods,candy maker)
Output domains(e.g., bottling and truckingcompany that distributessoft drinks; fast-foodrestaurants)
A Soft-Drink Company’s Corporate-Level Strategies for Entering New Domains
Unrelated domains(e.g., department stores,financial networks,cable companies)
Core Domain:Soft drinks
Strategy, Structure and Effectiveness 7
CORPORATE GROWTH STRATEGIES
GROWTH STRATEGY
INTERNAL
EXTERNAL
I. INTEGRATION A. Horizontal Coors’ move into
Eastern U.S. Chrysler purchase of American Motors
B. Vertical 1. Backward Ford’s River Rouge
Steel Mill Turner Broadcasting purchase of MGM/United Artist
2. Forward Goodyear &
Firestone’s retail stores
Boeing’s purchase of Part of Allegis (UA)
II. DIVERSIFICATION A. Related Annheuser-Bush’s
Eagle Snacks Philip Morris purchase of Miller Brewing
B. Unrelated CSX’s use of its land
for resorts, hotels, office buildings
Xerox’s purchase of Crumb Forster Insurance
Strategy, Structure and Effectiveness 8
Potential New Entrants
Substitute Products from Other Industries
Buyers
Suppliers
Threat ofsubstituteproducts
Bargaining power of suppliers
Bargainingpower of buyers
The Five Forces Affecting Industry Competition
Rivalry AmongCompetitors
Threat of new entrants
Strategy, Structure and Effectiveness 9
BroadTarget
COMPETITIVESCOPE
NarrowTarget
PORTER’S GENERIC STRATEGIES
Lower Cost Differentiation
1. Cost Leadership 2. Differentiation
3A. Cost Focus 3B. Differentiation Focus
COMPETITIVE ADVANTAGE
Strategy, Structure and Effectiveness 10
ORGANIZATIONAL CHARACTERISTICS FOR PORTER’S STRATEGIES
Strategy Organizational Characteristics
Differentiation Organic structure with strong coordination between departments Strong capability in basic research Emphasis on creativity Strong marketing abilities Incentives based on innovation and other subjective criteria Reputation for quality or technological leadership
Cost leadership Mechanistic structure with strong central authority and cost controls Standard operating procedures Efficient production and distribution systems Close supervision with limited empowerment Incentives based on meeting strict quantitative targets Frequent, detailed cost reports
Focus Combination of the above Values and rewards flexibility and customer contact Measures cost of providing service and customer loyalty Pushes empowerment to employees with customer contact
Strategy, Structure and Effectiveness 11
Characteristic of Organizational Structure Associated with Business-Level Differentiation and Low-Cost
Strategies
Differentiation Strategy
Complex Structure
Decentralized decision making
High differentiation
High integration
Organic structure
Low-Cost Strategy
Simple Structure
Centralized decision making
Low differentiation
Low integration
Mechanistic structure
Matrix structure
Product teamstructure
Product, market,or geographic
structure
Functional structure
Strategy, Structure and Effectiveness 12
Value-Creating Function Source of Low-Cost Advantage Source of Differentiation Advantage
Manufacturing Development of skills in flexible manufacturing technology
Increase in product quality and reliability
Human resources management
Reduction of turnover and absenteeism
Hiring of highly skilled personnel
Development of innovative training programs
Materials management Use of just-in-time inventory system/computerized warehousing
Development of long-term relationships with suppliers and customers
Use of company reputation and long-term relationships with suppliers and customers to provide high-quality inputs and efficient distribution and disposal of outputs
Sales and marketing Increased demand and lower production costs
Targeting of customer groups Tailoring products to customers Promoting brand names
Research and development Improved efficiency of manufacturing technology
Creation of new products Improvement of existing
products
Low-Cost and Differentiation Advantages Resulting From Functional-Level Strategy
Strategy, Structure and Effectiveness 13
Miles and Snow’s Strategic Types
Characteristics Defender Analyzer Prospector Reactor
Environment: Stable Moderatelychanging
Dynamic, growing Any
Strategy: Seal off share ofmarket. Protect turf.Advertise to holdcustomers
Maintain marketbut innovate atedges. Locateopportunities forexpansion whileprotecting currentposition.
Find and exploitnew marketopportunities.Scan environment,take risks.
No definedstrategy. Drift.React toconditions adhoc.
InternalCharacteristics:
Efficient production.Retrench. Tightcontrol. Centralized,mechanistic.
Efficientproduction, yetflexibility for newlines. Tightcontrol overcurrent activities,looser for newlines.
Flexibleproduction.Innovation andcoordination.Expansion.Decentralized,organic.
Not a definedorganizationalapproach.Depends onimmediatecircumstances.
Strategy, Structure and Effectiveness 14
Strategic ApproachesType of ProblemOrganizationalStrategy Entrepreneurial Engineering Administrative
Defender How to “seal off” aportion of the totalmarket to create astable set of productsand customers
How to produce anddistribute goods orservices as efficientlyas possible
How to maintain strictcontrol of theorganization to ensureefficiency.
Prospector How to locate andexploit new productand marketopportunities
How to avoidlongtermcommitments to asingle technologicalprocess
How to facilitate andcoordinate numerousand diverseoperations
Analyzer How to locate andexploit new productand marketopportunities whilesimultaneouslymaintaining a firmbase of traditionalproducts andcustomers
How to be efficient instable portions of thedomain and flexiblein changing portions
How to differentiatethe organization’sstructure andprocesses toaccommodate bothstable and dynamicareas of operation
Strategy, Structure and Effectiveness 15
Strategic Decision-Making Process
Scanexternalenvironment.
Evaluatecurrentperform-anceresults.
Analyze strategicfactors(S.W.O.T.)in light ofcurrentsituation
Review andrevise asnecessary:• Mission• Objectives
Generate,evaluate,and selectbest strate-gic alterna-tives.
Implementstrategies.
Evaluateand
control.
Scaninternal
environment.
Select strategicfactors:• Strengths• Weaknesses
Select strategicfactors:• Opportunities• Threats
Examine andevaluate thecurrent•Mission•Objectives•Strategies•Policies
Strategy Formulation
StrategyImplementation
Evaluation& Control
Strategy, Structure and Effectiveness 16
Strategic Management Model
External
Objectives
SocietalEnviron-ment
TaskEnviron-ment
Internal
StructureCultureResources
Env
iron
men
tal S
can
ning
Strategy Formulation
Mission
Strategies
Policies
Programs
Budgets
Procedures
Performance
Strategy Implementation Evaluation& Control