ADM 5261 Strategy Formulation

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ADM 5261 Strategy Formulation

• MBA Program
• Faculty of Administration
• University of Ottawa
• September 5th, 2001

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This Evening

• What is strategy about?
• Course overview
• Business plan project
• Break
• Business strategy
• Assignment 1

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A Research Agenda for Strategy(Source
Fundamental Issues in Strategy, 1994, Rumelt,
Schendel, and Teece)

• How do firms behave?
• Why are firms different?
• What is the function of, or value added by, the
  headquarters in a multibusiness unit?
• What determines the success or failure of the
  firm in international competition?

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History of Strategy Research

• 1960s Chandler, Andrews, Ansoff and consulting
  organizations
• 1970s Transition towards a research
  orientation
• 1980s Porter and industrial organization
  economics
• 1990s Resource-based strategy

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Important Strategic Concerns

• Strategic intent when is it important?
• Scope/boundaries of firm and partnerships
• Innovation
• Knowledge and competencies
• Investment and commitment
• Integration vs autonomy
• Timing and requirement for speed
• Uncertainty

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Chapter 2
The Strategic Management Process
External
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Formulation
Strategy Implementation
Chapter 4
Chapter 5
Chapter 6
Chapter 10
Chapter 11
Business-Level
Competitive
Corporate-Level
Corporate
Structure
Strategy
Dynamics
Strategy
Governance
Control
Actions
Strategic
Chapter 8
Chapter 9
Chapter 7
Chapter 12
Chapter 13
Entrepreneurship Innovation
International
Cooperative
Acquisitions
Strategic
Strategy
Strategies
Restructuring
Leadership
Strategic
Competitiveness
Above Average
Feedback
Returns
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New Competitive Landscape
Fundamental nature of competition is changing
The pace of change is relentless.... and
increasing
Rapid technological changes
Rapid technology diffusions
Traditional industry boundaries are
blurring...such as
Dramatic changes in information and communication
technologies
Computers
Increasing importance of knowledge
Telecommunications
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New Competitive Landscape
The global economy is changing
Traditional sources of competitive advantage no
longer guarantee success
People, goods, services and ideas move freely
across geographic boundaries
New keys to success include
New opportunities emerge in multiple global
markets
Flexibility
Innovation
Markets and industries become more
internationalized
Speed
Integration
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Alternative Model of Superior Returns
Industrial Organization Model
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Resource-Based Model
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I/O Model of Superior Returns
The Industrial Organization Model suggests that
above-average returns for any firm are largely
determined by characteristics outside the firm.
The I/O model largely focuses on industry
structure or attractiveness of the external
environment rather than internal characteristics
of the firm.
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Resource-Based Model of Superior Returns
The Resource-Based Model suggests that
above-average returns for any firm are largely
determined by characteristics inside the firm.
The Resource-Based view focuses on developing or
obtaining valuable resources and capabilities
which are difficult or impossible for rivals to
imitate.
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Strategic Intent
Winning competitive battles through deciding how
to leverage internal resources, capabilities, and
core competencies.
Strategic Mission
An application of strategic intent in terms of
products to be offered and markets to be served.
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Groups who are affected by a firms performance
and who have claims on its performance
Stakeholders
The firm must maintain performance at an adequate
level in order to maintain the participation of
key stakeholders
Capital Market
Firm
Product Market
Organizational
Employees Managers Non-Managers
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Business Plan Project

• Business strategy
• Value proposition
• Customers
• Impact of general and industry trends
• Competencies for sustained competitive advantage
• Competitive analysis
• Partnerships
• Financial statements

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Criteria for Evaluation

• Logical, comprehensive, succinct
• Based on relevant, accurate data
• Strategic and financial elements are mutually
  reinforcing
• Captures readers imagination and persuades them
  that business will be successful

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Actions taken to provide value to customers and
gain a competitive advantage by exploiting core
competencies in specific, individual product
markets.
Business Level Strategy
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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Cost Leadership Business Level Strategy
Key Criteria
Relatively standardized products
Features acceptable to many customers
Lowest competitive price
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Cost Leadership Business Level Strategy
Requirements
Relatively standardized products
Constant effort to reduce costs through
Features acceptable to many customers
Lowest competitive price
Building efficient scale facilities

Monitoring costs of activities provided by
outsiders
Tight control of production costs and overhead


Minimizing costs of sales, RD and service


Simplification of processes
State of the Art manufacturing facilities

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Choices that Drive Costs
Economies of scale
Product features
Asset utilization
Performance
Capacity utilization pattern
Mix variety of products
- Seasonal, cyclical
Service levels
Interrelationships
Small vs. large buyers
- Order processing and distribution
Process technology
Value chain linkages
Wage levels
Product features
- Advertising Sales
- Logistics Operations
Hiring, training, motivation
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Three Key Questions
How can an activity be performed differently or
even eliminated?
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How can a group of linked value activities be
regrouped or reordered?
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How might coalitions with other firms lower or
eliminate costs?
3
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Dramatic technological change could take away
your cost advantage
The Major Risks involved with a Cost Leadership
Business Level Strategy
Competitors may learn how to imitate Value Chain
Focus on efficiency could cause Cost Leader to
overlook changes in customer preferences
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Differentiation Business Level Strategy
Key Criteria
Value provided by unique features and value
characteristics
Command premium price
High customer service
Superior quality
Prestige or exclusivity
Rapid innovation
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Differentiation Business Level Strategy
Requirements
Value provided by unique features and value
characteristics
Constant effort to differ-entiate products
through
Developing new systems and processes
Command premium price

High customer service

Shaping perceptions through advertising
Superior quality

Quality focus
Prestige or exclusivity
Capability in RD

Maximize Human Resource contributions through low
turnover and high motivation

Rapid innovation
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Drivers of Differentiation
Some Examples
Unique product features
Unique product performance
Exceptional services
New technologies
Quality of inputs
Exceptional skill or experience
Detailed information
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Customers may decide that the cost of
uniqueness is too great
The Major Risks involved with a Differentiation
Business Level Strategy
Competitors may learn how to imitate Value Chain
The means of uniqueness may no longer be valued
by customers
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Focused Business Level Strategies
Focused Business Level Strategies involve the
same basic approach as Broad Market Strategies
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Focused Business Level Strategies
Focused Business Level Strategies involve the
same basic approach as Broad Market Strategies
However.....
Opportunities may exist because
Large firms may overlook small niches

Firm may lack resources to compete industrywide


May be able to serve a narrow market segment more
effectively than industrywide competitors
Focus can allow you to direct resources to
certain value chain activities to build
competitive advantage

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Firm may be outfocused by competitors
The Major Risks involved with a
Focused Differentiation Business Level Strategy
Large competitor may set its sights on your niche
market
Preferences of niche market may change to match
those of broad market
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Generic Business Level Strategies
Source of Competitive Advantage
Cost
Uniqueness
Cost Leadership
Differen- tiation
Broad Target Market
Integrated Low Cost/ Differentiation
Breadth of Competitive Scope
Focused Differen- tiation
Focused Low Cost
Narrow Target Market
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Integrated Low Cost/Differentiation Strategy
Firms using an Integrated Strategy may
Adapt more quickly
Learn new skills and technologies
May utilize Flexible Manufacturing Systems to
create differentiated products at low costs
Leverage core competencies through Information
Networks across multiple business units
May utilize Total Quality Management (TQM) to
create high quality differentiated products which
simultaneously driving down costs
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Integrated Low Cost/Differentiation Strategy
Southwest Airlines
Differentiation
Low Cost
Use a single aircraft model (Boeing 737)
Focus on customer satisfaction
Use secondary airports
High level of employee dedication
Fly short routes
No meals
New flight services for business
travelers (Phones and faxes)
15 minute turnaround time
No reserved seats
No travel agent reservations
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Assignment 1 Business Strategy

• Present value proposition
• Identify customers and explain why customers will
  value offering
• Describe strategy (i.e. low cost,
  differentiation, focused, integrated)
• Identify risks associated with business strategy
• Five slides, five pages

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Gendron on DesignWhy do you consider design
important to business?
If you look at any business as a huge inverted
pyramid, it rests on one fundamental proposition
- differentiation. That is, each company claims
to offer a product or service that's better,
faster, cheaper. To me, the way in which you
broadcast that to the world, day in and day out,
is through your design. It's the most
consistent, dramatic statement of intent and
differentiation that a company has access to.