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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

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

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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 (not just top manager)

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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 Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

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Purpose of Strategy • Explicit strategy is the plan of action • Competitive advantage is the organization’s distinctive edge for meeting customer needs Strategies should:  Exploit Core Competencies  Build Synergy  Deliver Value Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

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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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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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8.3 SWOT: Audit Checklist

Case Study – SWOT: FACEBOOK.COM • Strength: • Weakness:

• Opportunities: • Threats: • Strategies 11

Formulating Corporate-Level Strategy: Portfolio Strategy 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)

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Agency Theory, Agency Cost • 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) .” 13

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 & 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 14

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 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. 15

Formulating Corporate-Level Strategy: The BCG Matrix • 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

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8.4 The BCG Matrix

Case Study – The BCG Matrix: General Electric • • • •

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.

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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

• 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

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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. 20

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 • Hypothetical Examples: – Starbucks in VI – GM in VI Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

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Formulating Business-Level Strategy 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 22

Strategic Business Unit (SBU) • 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

8.5 Porter’s Five Forces

8.6 Porter’s Competitive Strategies

Formulating Functional-Level Strategy  Action plans used by major departments (Marketing, Production, Finance, HR, R&D)

 To support the execution of biz-level strategy  To coordinate with biz-level strategy to achieve the organization’s strategic goals

Copyright ©2012 by South-Western, a division of Cengage Learning. All rights reserved.

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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 – Partners must share resources & information. • Global Strategy – organizations pursue a distinctive focus for global business

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8.7 Global Corporate Strategies

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

• Dynamic approaches: – Vision, intuition and employee participation – Leadership, structure, information and control systems, and human resources 29

8.8 Six Silent Killers of Strategy

8.9 Tools for Putting Strategy into Action

Strategic Planning & Management • 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