Strategy Formulation

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Strategy Formulation

• HCAD 5390

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Strategies
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Defining Future Direction

• At what levels is future direction defined?
• Who is responsible for defining future direction?
• How is future direction expressed? Where can it
  be seen?

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Strategy-Making Levels in an Organization

• Corporate Center
• ??
• Individual SBUs
• ??
• Functional Areas
• ??
• Departments
• ??
• Teams and Task Forces
• ??
• Individual Employees

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Responsibility for Defining Future Direction

• Board of Directors
• CEO
• Top Executive Team
• Strategic Planning Unit
• Middle Level Managers
• All Employees
• Suppliers and Customers

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Future Direction Documents

• Mission
• Vision
• Values
• Objectives

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Mission Statement

• Current purpose of the organization
• What it is, what it does, and what it does not do
• The business of the firm, its domain
• The areas in which it operates and the means by
  which it competes in those areas
• The current activities and operations of the firm

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Mission Statement - Spheres of Operation and
Competition

• Industry
• Industry value chain
• Products or services
• Technologies and competencies
• Customers and market segments
• Distribution channels
• Geographic areas

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Reasons for a Mission Statement

• Fosters organization-wide unanimity of purpose
• Point of identification for employees and
  stakeholders
• Steers operations and activities in certain
  directions and away from others
• Basis for allocating resources
• Projects coherent, positive image to external
  stakeholders

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Characteristics of a Good Mission Statement (I)

• Succinct one page, 200-300 words
• Memorable and recitable
• Broad enough to allow management creativity
• Narrow enough to limit management recklessness
• Distinguishes firm from its competitors
• Reconciles differences among stakeholders
• Arouses positive feelings about the organization

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Characteristics of a Good Mission Statement (II)

• Tells managers where to look and where to avoid
  in seeking strategic opportunities
• Conveys image of a successful, well managed,
  self-aware organization worthy of investment and
  support
• Understood and embraced by all organization
  members
• More immediate and pragmatic than a vision
  statement

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Vision Statement (I)

• Describes an ideal, desirable future state for
  the organization
• A future that the organization will work actively
  to create for itself
• Antithesis of allowing the future to shape the
  organization, or adapting the organization to the
  future

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Vision Statement (II)

• Empowers and motivates employees to higher levels
  of achievement
• Value of creating shared vision
• Can be prepared at all organizational levels
• Join all stakeholders in a future search for a
  vision

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Characteristics of a Good Vision Statement (I)

• A kind of dream that inspires and drives
• Different from what is being done now
• Improvement over what is being done now
• A stretch for the organization with uncertainty
  about the chances of achievement
• Grounded in reality and possible of achievement

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Characteristics of a Good Vision Statement (II)

• Reflects understanding of resources and
  competencies, as well as external opportunities
  and threats
• A challenge for employees to accomplish,
  requiring new abilities and performance at the
  highest levels
• All stakeholders see an aspect of the vision that
  serves their interests

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Values Statement

• Guidelines for employee behavior on the job
• Address beliefs and attitudes of all organization
  members
• Implicit (organizational culture) vs.
• Explicit (code of ethics)

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Values

• Johnson Johnsons credosets its
  responsibilities to
• JJ product users.
• JJ employees.
• Communities in which JJemployees live and work.
• JJ stockholders.

Source Courtesy of Johnson Johnson.
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Texas Health Resources

• Mission, Vision and Values
• MissionTo improve the health of the people in
  the communities we serve.
• VisionTexas Health Resources, a faith-based
  organization joining with physicians, will be the
  health care system of choice.
• Values
• RespectRespecting the dignity of all persons,
  fostering a corporate culture characterized by
  teamwork, diversity and empowerment.
• IntegrityConduct our corporate and personal
  lives with integrity Relationships based on
  loyalty, fairness, truthfulness and
  trustworthiness.
• CompassionSensitivity to the whole person,
  reflective of God's compassion and love, with
  particular concern for the poor.
• ExcellenceContinuously improving the quality of
  our service through education, research,
  competent and innovative personnel, effective
  leadership and responsible stewardship of
  resources

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Arlington Memorial Hospital

• Arlington Memorial Hospital (AMH) is a
  full-service acute-care medical center with 417
  beds, serving Arlington and its surrounding
  communities. Since opening its doors in 1958, AMH
  has contributed to the medical and health
  education needs of area residents, who pooled
  their resources to help build the original 75-bed
  hospital.
• Today, with more than 550 physicians on the
  medical staff, 1,900 employees and 300
  volunteers, AMH is larger and more advanced than
  the founders could have imagined.
• But its community-oriented focus,
  established more than five decades ago, has not
  changed. AMH remains a not-for-profit, community
  hospital dedicated to providing quality,
  compassionate health care.

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Parkland

• Mandate
• To furnish medical aid and hospital care to
  indigent and needy persons residing in the
  hospital district.
• Vision
• By our actions, we will define the standards of
  excellence for public academic health systems.
• Mission
• Dedicated to the health and well-being of
  individuals and communities entrusted to our care.

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Values Issues

• Violations of the law
• Integrity, honesty, and ethics
• Attitude toward and treatment of coworkers,
  customers, and suppliers
• Acceptance of risk taking and failure
• Attitude toward innovation and the future
• Tolerance for change within the organization
• Balance of profit-making and patient welfare

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Complications in Values

• How to communicate
• How to enforce
• Differences among organizational units
• Differences among professions and specialties
• Effect on implementation of strategies

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Strategic Objectives

• Long-term strategic thrusts
• Designed to realize the organizational vision
• Explicit and workable
• Provide guidelines for specific strategies
• Set at both the corporate and SBU levels

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Criteria for Strategic Objectives

• Based on measurable attributes
• Specific unit of measurement for each attribute
• Specific attribute level to be achieved
• Time deadline for reaching the level
• Delegate responsibility to a named person for
  reaching the level by the deadline

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Typical Corporate Strategic Objectives

• Improve market price of common stock
• Increase economic profit of SBU portfolio
• Increase total annual revenues of SBU portfolio
• Increase portfolio cash flow to support
  rapid-growth SBUs
• Diversify portfolio into new industries
• Divest no longer related SBUs
• Increasing resource sharing among SBUs

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Typical SBU Strategic Objectives

• Conduct a turnaround of the business
• Improve the businesss market share
• Increase the businesss revenues or profits
• Improve the quality of products and services
• Acquire or develop specific new technologies
• Acquire or develop new employee competencies

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Tips on Setting Strategic Objectives

• Stretch the abilities of employees assigned to
  achieve them
• Support them with appropriate resources
• Tolerate risk-taking and innovation
• Watch for objectives and incentives that motivate
  undesirable behavior
• Employees assigned to achieve objectives
  participate in setting them

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Challenges in Documents Defining Future Direction

• Confusing mission and vision statements with each
  other
• Defining visions distinguished from the
  competition
• Overly long vision statements and too many
  strategic objectives
• Vision and values that inspire employees
• Creating documents useful in strategic management
  process

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Distinguishing Corporations from Strategic
Business Units (SBUs)

• Multi-SBU Corporations
• Sole separate legal entity
• Authorized to execute contracts
• Able to borrow money and sell equity
• Produces no goods or services
• Quite small staff
• Primary function is to assemble and manage a
  portfolio of SBUs

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Distinguishing Corporations from Strategic
Business Units (SBUs)

• Strategic Business Units
• No separate legal existence
• No separate ability to contract or raise capital
• Produce goods and services
• Compete in one or more markets
• Relative autonomy to manage operations and
  strategy

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Value-Adding Functions of the Corporate Center

• Manage the Portfolio of SBUs
• Raise Financial Capital for Allocation to SBUs
• Allocate Resources and Services to SBUs
• Facilitate Synergies Among SBUs
• Choose Parenting Style for SBU Interactions
• Participate in SBU Strategic Planning Process
• Oversee and Monitor SBU Performance
• Manage Corporate Relations With Stakeholders

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Corporate Management of an SBU Portfolio (I)

• In pursuit of a corporate vision
• Acquires, merges with, or develops internally new
  SBUs
• Divests existing, unwanted SBUs
• Set performance goals for SBU management
• Provide input to SBU strategic decisions
• Count upon SBUs to perform unique strategic
  functions

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Corporate Management of an SBU Portfolio (II)

• Balance between central corporate direction and
  individual SBU autonomy
• Control vs spontaneity
• Hire good SBU managers, give them general
  guidelines, and let them loose or
• Give detailed directions, watch closely, and
  intervene frequently

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Model Portfolio Management Process

• Choose strategic thrust of the corporation
• Growth
• Stability
• Retrenchment
• Choose geographic areas, markets, and products or
  services to offer in them
• Decide how many SBUs in the portfolio and which
  businesses they will be

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Texas Health Resources

• Texas Health Resources (THR) is one of the
  largest faith-based, nonprofit health care
  delivery systems in the United States and the
  largest in North Texas in terms of patients
  served. The system's primary service area
  consists of 16 counties in north central Texas,
  home to more than 6.2 million people.  THR was
  formed in 1997 with the assets of Fort
  Worth-based Harris Methodist Health System and
  Dallas-based Presbyterian Healthcare Resources.
  Later that year, Arlington Memorial Hospital
  joined the THR system.  THR has 12 acute-care
  hospitals and one long-term care hospital that
  total 3,100 licensed hospital beds, employs more
  than 18,000 people, and counts more than 3,600
  physicians with active staff privileges at its
  hospitals.  THR is also a corporate member or
  partner in six additional hospitals and surgery
  centers. 

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Adaptive Strategies
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Adaptive Strategies

• Expansion Adaptive Strategy
• Orientation toward growth
• Expand, cut back, status quo?
• Concentrate within current industry, diversify
  into other industries?
• Growth and expansion through internal development
  or acquisitions, mergers, or strategic
  alliances?

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Corporate-Level Strategic OptionsGrowth
Expand the Portfolio

• Most common corporate-level strategy direction
• Critical to maintaining share in a growing market
• In pursuit of economies of scale and scope
• Increase in experience and learning
• Top executive egos to be satisfied

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Growth By Concentration

• All businesses start here
• Dedicate all resources and competencies to one or
  a few products or services
• Achieved in one of three ways
• Sell more of current products in current markets
• Sell current products in new markets
• Sell new products in current markets
• To sell new products in new markets is
  diversification

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Adaptive Strategies

• Basic Growth Strategies
• Concentration
• Current product line in one industry
• Vertical Integration
• Market Development
• Product Development
• Penetration
• Diversification
• Into other product lines in other industries

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Adaptive Strategies

• Expansion of Scope
• Basic Concentration Strategies
• Vertical growth
• Horizontal growth

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Adaptive Strategies
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Adaptive Strategies

• Horizontal Growth
• Horizontal integration

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Concentration on a Single Business

• Advantages
• Operational focus on a single familiar industry
  or market.
• Current resources and capabilities add value.
• Growing with the market brings competitive
  advantage.

• Disadvantages
• No diversification of market risks.
• Vertical integration may be required to create
  value and establish competitive advantage.
• Opportunities to create value and make a profit
  may be missed.

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Concentration No Longer Sufficient to Maintain
Growth

• Unlikely to capture a greater share of current
  market
• Current market is stagnating, maturing,
  shrinking, or otherwise lacking growth potential
• Excess cash on hand needs to be invested
  productively
• Management has greater ambitions for further
  strategic achievement

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Growth By Related Diversification

• Move beyond existing markets and products
• Employ existing resources and competencies
• New businesses are closely connected (related)
  to existing businesses
• Directions of related diversification
• Vertical forward integration (toward customers)
• Vertical backward integration (toward suppliers)
• Horizontal expansion

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Forms of Relatedness

• Products or services
• Markets
• Processes, systems, or other operating features
• Manufacturing facilities, distribution channels,
  marketing media, or support services
• Brand image, corporate reputation, creativity or
  innovation skills, or general managerial expertise

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Adaptive Strategies

• Basic Diversification Strategies
• Concentric Diversification
• Conglomerate Diversification

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Adaptive Strategies

• Concentric Diversification
• Growth into related industry
• Search for synergies

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Adaptive Strategies
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Adaptive Strategies

• Unrelated (Conglomerate) Diversification
• Growth into unrelated industry
• Concern with financial considerations

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Adaptive Strategies
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Reasons for Diversification
Reasons to Enhance Strategic Competitiveness

• Economies of scope/scale
• Market power
• Financial economics

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Reasons for Diversification
Incentives with Neutral Effects on Strategic
Competitiveness

• Anti-trust regulation
• Tax laws
• Low performance
• Uncertain future cash flows
• Firm risk reduction

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Incentives to Diversify

• External Incentives
• Relaxation of anti-trust regulation allows more
  related acquisitions than in the past
• Before 1986, higher taxes on dividends favored
  spending retained earnings on acquisitions
• After 1986, firms made fewer acquisitions with
  retained earnings, shifting to the use of debt to
  take advantage of tax deductible interest payments

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Incentives to Diversify

• Internal Incentives
• Poor performance may lead some firms to diversify
  an attempt to achieve better returns
• Firms may diversify to balance uncertain future
  cash flows
• Firms may diversify into different businesses in
  order to reduce risk

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Resources and Diversification

• Besides strong incentives, firms are more likely
  to diversify if they have the resources to do so
• Value creation is determined more by appropriate
  use of resources than incentives to diversify

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Reasons for Diversification
Managerial Motives (Value Reduction)

• Diversifying managerial employment risk
• Increasing managerial compensation

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Managerial Motives to Diversify

• Managers have motives to diversify
• diversification increases size size is
  associated with executive compensation
• diversification reduces employment risk
• effective governance mechanisms may restrict such
  motives

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Bureaucratic Costs and the Limits of
Diversification

• Number of businesses
• Information overload can lead to poor resource
  allocation decisions and create inefficiencies.
• Coordination among businesses
• As the scope of diversification widens, control
  and bureaucratic costs increase.
• Resource sharing and pooling arrangements that
  create value also cause coordination problems.
• Limits of diversification
• The extent of diversification must be balanced
  with its bureaucratic costs.

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Relationship Between Diversification and
Performance
Performance
Dominant Business
Unrelated Business
Related Constrained
Level of Diversification
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RestructuringContraction of Scope

• Why restructure?
• Pull-back from overdiversification.
• Attacks by competitors on core businesses.
• Diminished strategic advantages of vertical
  integration and diversification.
• Contraction (Exit) strategies
• Retrenchment
• Divestment spinoffs of profitable SBUs to
  investors management buy outs (MBOs).
• Harvest halting investment, maximizing cash
  flow.
• Liquidation Cease operations, write off assets.

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Why Contraction of Scope?

• The causes of corporate decline
• Poor management incompetence, neglect
• Overexpansion empire-building CEOs
• Inadequate financial controls no profit
  responsibility
• High costs low labor productivity
• New competition powerful emerging competitors
• Unforeseen demand shifts major market changes
• Organizational inertia slow to respond to new
  competitive conditions

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The Main Steps of Turnaround

• Changing the leadership
• Replace entrenched management with new managers.
• Redefining strategic focus
• Evaluate and reconstitute the organizations
  strategy.
• Asset sales and closures
• Divest unwanted assets for investment resources.
• Improving profitability
• Reduce costs, tighten finance and performance
  controls.
• Acquisitions
• Make acquisitions of skills and competencies to
  strengthen core businesses.

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Adaptive Strategies

• Maintenance of Scope
• Enhancement
• Status Quo

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Market Entry Strategies

• Acquisition a strategy through which one
  organization buys a controlling interest in
  another organization with the intent of making
  the acquired firm a subsidiary business within
  its own portfolio
• Licensing a strategy where the organization
  purchases the right to use technology, process,
  etc.
• Joint Venture a strategy where an organization
  joins with another organization(s) to form a new
  organization

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Reasons for Making Acquisitions
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Reasons for Making Acquisitions
Increased Market Power

• Factors increasing market power
• when a firm is able to sell its goods or services
  above competitive levels or
• when the costs of its primary or support
  activities are below those of its competitors
• usually is derived from the size of the firm and
  its resources and capabilities to compete
• Market power is increased by
• horizontal acquisitions
• vertical acquisitions
• related acquisitions

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Reasons for Making Acquisitions
Overcome Barriers to Entry

• Barriers to entry include
• economies of scale in established competitors
• differentiated products by competitors
• enduring relationships with customers that create
  product loyalties with competitors
• acquisition of an established company
• may be more effective than entering the market as
  a competitor offering an unfamiliar good or
  service that is unfamiliar to current buyers
• Cross-border acquisition

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Reasons for Making Acquisitions

• Significant investments of a firms resources are
  required to
• develop new products internally
• introduce new products into the marketplace
• Acquisition of a competitor may result in
• lower risk compared to developing new products
• increased diversification
• reshaping the firms competitive scope
• learning and developing new capabilities
• faster market entry
• rapid access to new capabilities

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Reasons for Making Acquisitions
Lower Risk Compared to Developing New Products

• An acquisitions outcomes can be estimated more
  easily and accurately compared to the outcomes of
  an internal product development process
• Therefore managers may view acquisitions as
  lowering risk

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Reasons for Making Acquisitions
Increased Diversification

• It may be easier to develop and introduce new
  products in markets currently served by the firm
• It may be difficult to develop new products for
  markets in which a firm lacks experience
• it is uncommon for a firm to develop new products
  internally to diversify its product lines
• acquisitions are the quickest and easiest way to
  diversify a firm and change its portfolio of
  businesses

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Reasons for Making Acquisitions
Reshaping the Firms Competitive Scope

• Firms may use acquisitions to reduce their
  dependence on one or more products or markets
• Reducing a companys dependence on specific
  markets alters the firms competitive scope

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Reasons for Making Acquisitions
Learning and Developing New Capabilities

• Acquisitions may gain capabilities that the firm
  does not possess
• Acquisitions may be used to
• acquire a special technological capability
• broaden a firms knowledge base
• reduce inertia

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Problems With Acquisitions
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Problems With Acquisitions
Integration Difficulties

• Integration challenges include
• melding two disparate corporate cultures
• linking different financial and control systems
• building effective working relationships
  (particularly when management styles differ)
• resolving problems regarding the status of the
  newly acquired firms executives
• loss of key personnel weakens the acquired firms
  capabilities and reduces its value

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Problems With Acquisitions
Inadequate Evaluation of Target

• Evaluation requires that hundreds of issues be
  closely examined, including
• financing for the intended transaction
• differences in cultures between the acquiring and
  target firm
• tax consequences of the transaction
• actions that would be necessary to successfully
  meld the two workforces
• Ineffective due-diligence process may
• result in paying excessive premium for the target
  company

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Problems With Acquisitions
Large or Extraordinary Debt

• Firm may take on significant debt to acquire a
  company
• High debt can
• increase the likelihood of bankruptcy
• lead to a downgrade in the firms credit rating
• preclude needed investment in activities that
  contribute to the firms long-term success

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Problems With Acquisitions
Inability to Achieve Synergy

• Synergy exists when assets are worth more when
  used in conjunction with each other than when
  they are used separately
• Firms experience transaction costs (e.g., legal
  fees) when they use acquisition strategies to
  create synergy
• Firms tend to underestimate indirect costs of
  integration when evaluating a potential
  acquisition

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Problems With Acquisitions
Too Much Diversification

• Diversified firms must process more information
  of greater diversity
• Scope created by diversification may cause
  managers to rely too much on financial rather
  than strategic controls to evaluate business
  units performances
• Acquisitions may become substitutes for innovation

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Problems With Acquisitions
Managers Overly Focused on Acquisitions

• Managers in target firms may operate in a state
  of virtual suspended animation during an
  acquisition
• Executives may become hesitant to make decisions
  with long-term consequences until negotiations
  have been completed
• Acquisition process can create a short-term
  perspective and a greater aversion to risk among
  top-level executives in a target firm

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Problems With Acquisitions
Too Large

• Additional costs may exceed the benefits of the
  economies of scale and additional market power
• Larger size may lead to more bureaucratic
  controls
• Formalized controls often lead to relatively
  rigid and standardized managerial behavior
• Firm may produce less innovation

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Strategic Alliance

• A strategic alliance is a cooperative strategy in
  which
• firms combine some of their resources and
  capabilities
• to create a competitive advantage
• A strategic alliance involves
• exchange and sharing of resources and
  capabilities
• co-development or distribution of goods or
  services

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Strategic Alliance
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Types of Cooperative Strategies

• Joint venture two or more firms create an
  independent company by combining parts of their
  assets
• Equity strategic alliance partners who own
  different percentages of equity in a new venture
• Nonequity strategic alliances contractual
  agreements given to a company to supply, produce,
  or distribute a firms goods or services without
  equity sharing

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Strategic Alliances

• vertical complementary strategic alliance is
  formed between firms that agree to use their
  skills and capabilities in different stages of
  the value chain to create value for both firms
• outsourcing is one example of this type of
  alliance

Supplier
Vertical Alliance
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Strategic Alliances
Buyer
Buyer
Potential Competitors

• horizontal complementary strategic alliance is
  formed between partners who agree to combine
  their resources and skills to create value in the
  same stage of the value chain
• focus on long-term product development and
  distribution opportunities
• the partners may become competitors
• requires a great deal of trust between the
  partners