Concepts and Context of Business Strategy

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Chapter 5 Concepts and Context of Business
Strategy
Prepared by John T. Drea, Western Illinois
University
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Business Strategy Basics
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Key Strategy ConceptsFit and Providing Superior
Value
1. Business strategy designers should seek a fit
between the business strategy and the environment
2. The key element of fit in business
strategy revolves around providing superior value
for customers.
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Key Strategy ConceptsProviding 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 value Increases.
Core competencies a companys 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 process Improvement are
fundamental to providing superior value.
6. Measuring and tracking results creates
learning and sets the stage for later
improvements.
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Additional Observations on Strategy
1. Changes in customers, channels and competitors
interact to create discontinuities in industries
or markets.
2. Companies may influence how markets change,
but they seldom 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 the business 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
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 need
• Sources of cash to fund investment in growing
  markets
• 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
Relative market share -

• 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.

Question Marks
Stars
- Market Growth Rate
Cash Cows
Dogs
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Growth Share Matrix Cash Cows
Relative market share -

• 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.

Question Marks
Stars
- Market Growth Rate
Cash Cows
Dogs
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Growth Share Matrix Dogs
Relative market share -

• 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.

Question Marks
Stars
- Market Growth Rate
Cash Cows
Dogs
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Growth Share Matrix Question Marks
Relative market share -

• 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.

Question Marks
Stars
- Market Growth Rate
Cash Cows
Dogs
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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
Market attractiveness
Build selectively
Protect position
Invest to build
High
Build selectively or manage for earnings
Limited expansion or harvest
Build selectively
Medium
Protect and refocus
Manage for earnings
Low
Divest
Strong
Medium
Weak
Business strength
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Strategic Management Steps in the
Business-to-Business Company
1. Develop goals and objectives
2. Environmental analysis
3. Strategy design
4. Implementation plan design
5. Strategy implementation
6. Monitoring of environment and performance
results
7. Analysis of performance
8. Performance
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Special Issues in Strategy Development
Strategy development and the Internet
Volatility and uncertainty require flexibility
Strategy implications of value networks
Strategic implications of market ownership
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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Volatility and Uncertainty Require Flexibility

• 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.

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Strategy Implications of Value Networks

• 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

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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 Distribution

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Introduction

• 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 Will Reshape the Distributor
The Distribution/Logistics Loop
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How E-Business Will Reshape the Distributor
Customer Lead Time Requirements Fill Rate Lost
Sales
ABC Policies Warehouse Constraints Transportation
Financial Constraints Obsolescence
Customer Service Requirements
Demand Patterns Variability
Inventory
Forecasting
Purchasing Decision
Supplier Lead Time Lead Time Variability Forecast
Error
The Distribution/Logistics Loop with Information
Activities
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Matching Distribution Processes to Information
Technology

• 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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Matching Distribution Processes to Information
Technology

• 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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Matching Distribution Processes to Information
Technology

• 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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Process Mapping Distribution

• Begin with the customer and work backward through
  the supply chain
• Customer
• Distribution customer support systems
• Warehouse operations
• Planning/replenishment
• Supplier
• Support processes (financials, human resources,
  etc.)

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From Process Mapping to Organizational Realities

• 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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Conclusions

• 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