Strategy Formulation and Implementation

Chapter 8

Strategic Planning

Strategic planning has taken on new importance in todays world of globalization, deregulation, advancing technology, and changing demographics, and lifestyles
Managers Challenge: Nintendo

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Strategic Management

Set of decisions and actions used to implement strategies that will provide a competitively superior fit between the organization and its environment so as to achieve organizational goals

Responsibility = top managers & chief executive

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Strategic Management
Managers ask such questions as...
What changes and trends are occurring? Who are our customers? What products or services should we offer? How can we offer these products or services most efficiently?

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Purpose of Strategy
The plan of action that prescribes resource allocation and other activities for dealing with the environment, achieving a competitive advantage, that help the organization attain its goals Strategies focus on: Core competencies Developing synergy Creating value for customers

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Core Competency

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A companys core competence is something that the organization does especially well in comparison to its competitors It can be in the area of R&D, technological know-how, exceptional customer service. E.g. HUL Distribution network Honda gasoline powered engine Tata Motors providing one of the most efficient & low cost vehicles.

Apple Innovative design & technology

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Building Synergy

When organizational parts interact to produce a joint effect that is greater than the sum of the parts acting alone. E.G- PepsiCo to buy Frito Lay Oracle to buy Sun Microsystem

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Three Levels of Strategy in Organizations

Corporate-Level Strategy: What business are we in?
Corporation

Business-Level Strategy: How do we compete?

Textiles Unit Chemicals Unit

Auto Parts Unit

Functional-Level Strategy: How do we support the business-level strategy?

Finance
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R&D

Manufacturing

Marketing

Strategic Management Process

Scan External Environment National, Global Evaluate Current Mission, Goals, Strategies Scan Internal Environment Core Competence, Synergy, Value Creation Identify Strategic Factors Opportunities, Threats Formulate Strategy Corporate, Business, Functional

SWOT

Define new Mission Goals, Grand Strategy

Identify Strategic Factors Strengths, Weaknesses

Implement Strategy via Changes in: Leadership culture, Structure, HR, Information & control systems

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Checklist for Analyzing Organizational Strengths and Weaknesses

Management and Organization Management quality Staff quality Degree of centralization Organization charts Planning, information, control systems Finance Marketing Human Resources

Distribution channels Market share

Advertising efficiency Customer satisfaction Product quality Service reputation Sales force turnover Production

Employee experience, education

Union status Turnover, absenteeism Work satisfaction Grievances Research and Development Basic applied research

Profit margin
Debt-equity ratio Inventory ratio Return on investment Credit rating
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Plant location Machinery obsolescence Laboratory capabilities Research programs Purchasing system New-product innovations Quality control
Productivity/efficiency Technology innovations

Sources: Based on Howard H. Stevenson, Defining Corporate Strengths and Weaknesses, Sloan Management Review 17 (spring 1976), 51 -68; and M.L.Kastens, Long-Range Planning for Your Business (New York: American Management Association, 1976).

SWOT of Pepsi
Strength: Pepsi has a broader product line and outstanding reputation. Merger of Quaker Oats produced synergy across the board. Record revenues and increasing market share. Lack of capital constraints (availability of large cash flow). Great brands, strong distribution, innovative capabilities. Number of maker of snacks, such as corn chips and potato chips. PepsiCo sells three products through the same distribution channel.
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SWOT of Pepsi
Weakness: Pepsi hard to inspire vision and direction for large global company. Not all PepsiCo products bears the company name. PepsiCo is far away from leader Coca-cola in the international market demand is highly elastic.
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SWOT of Pepsi
Opportunity: Food division should expand internationally. Noncarbonated drinks are the fastestgrowing part of the industry. There are increasing trend towards healthy foods. Focus on most important customer trend Convenience
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SWOT of Pepsi
Threats: F&B industry is mature. Pepsi is blamed for pesticide residues in their products in one of their promising emerging market e.g. in India. PepsiCo now competes with Cadbury Schweppes, Coca-cola, and Kraft foods (because of their broader product line) which are well-run and financially sound competitors. Size of company will demand a varied marketing program; Social, cultural, economic, political and . governmental constraints.
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SWOT of Nokia

STRENGTH 1. Nokia has largest network of distribution and selling as compared to other mobile phone company in the world. 2.The financial aspect is very strong in case of Nokia as it has many more profitable businesses. 3.The product being user friendly and have all the accessories one want. 4. Nokia with wide range of products for all classes. 5.The re-sell value of Nokia phones are high compared to other companys product
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SWOT of Nokia

WEAKNESS 1.Some of the products are not user friendly. 2.Some of the weakness includes the price of the product offered by the company. 3.Nokia does not like to adopt change very quickly. 4.The service canters in third world countries are very few.
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SWOT of Nokia

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OPPORTUNITY 1.Nokia is also thinking of moving from mobile manufacture to personal computer manufacture. 2.As the standard of living in third world countries has increased the purchasing power of the people has increased as well 3.Nokia has to target right customer at right time to gain the most out of the situation

SWOT of Nokia

THREAT 1.The threats like emerging of other mobile companies in the market. 2.The new mobile operating systems from Google and Microsoft. 3.The biggest threat is not adopting new technology and putting in good use.
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Strategy Formulation vs. Implementation

Strategy Formulation = stage of strategic management that involves planning and decision making that lead to the establishment of the organizations goals and of a specific strategic plan Strategy Implementation = stage of strategic management that involves the use of managerial and organizational tools to direct resources toward achieving strategic outcomes
Experiential Exercise: Developing Strategy for a Small Business

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Corporate Level Strategy :Portfolio Strategy

BCG Matrix

Mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage
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BCG MATRIX

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BCG of ITC

STAR Hotels, Paperboards/Packaging, Agri business Cash Cow Cigarettes Question mark FMCG others Dog Maybe ITC Infotech

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BCG of AMUL

STAR Amul Butter, Amul Tazza UTH, Amulya Dairy Whitner Question Mark Amul Chocolate, Amul Masti Dahi, Amul Lassi, Mithaimate Cash Cows Mozarella Cheese, Amul Pizza base, Amul tazza fresh milk Dog Infant milk range, nutramul
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Five Forces Affecting Industry Competition

Internet reduces barriers to entry

Potential New Entrants

Internet blurs differences among competitors in an industry

Threat of Substitute Products

Internet expands market size, but creates new substitution threats

Rivalry among Competitors

Bargaining Power of Buyers

Internet shifts greater power to end consumers

Internet tends to increase the bargaining power of suppliers

Bargaining Power of Suppliers

Source: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980).

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Potential New entrant

Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation
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Products

Bargaining Power of supplier

Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of backward integration Cost relative to total purchases in industry
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Bargaining Power of Buyer

Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Product differentiation Buyer concentration vs. industry Substitutes available
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Threat of substitute product

Switching costs -Buyer inclination to substitute -Price-performance trade-off of substitute

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Rivalry among competitors

Exit barriers -Industry concentration -Fixed costs/Value added -Industry growth -Product differences -Switching costs -Brand identity -Diversity of rivals
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Potential New entrant (coca-cola)

Entry barriers are relatively low for beverage industry: there is almost 0 consumer switching cost and very low capital requirement. There are more and more new brands appearing in the market with usually lower price than Coke products However Coca-Cola is seen not only as a beverage but also as a brand. It has a very significant market share for a long time and loyal customers are not very likely to try a new brand beverage.
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Threat of substitute product

There are many kinds of energy drink and soda products in the market. Coca-cola doesnt really have a special flavor. In a blind taste test, people couldnt tell the difference between Coca-Cola coke and Pepsi coke.

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Bargaining Power of Buyer

The individual buyer has little to no pressure on Coca-Cola The main competitor, Pepsi is priced almost the same as Coca-Cola. Consumer could buy those new and less popular beverages with lower price but the flavor is different and the quality is not guaranteed. Large retailers, like Wal-Mart, have bargaining power because of the large order quantity, but the bargaining power is lessened because of the end consumer brand loyalty. People are getting concerns of negative effects of carbonated beverages. Increasing number of consumers begin to drink fruit juice, lemonade and . tea instead of soda products.

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Bargaining Power of supplier

The main ingredients for soft drink include carbonated water, phosphoric acid, sweetener, and caffeine. The suppliers are not concentrated or differentiated. Any supplier would not want to lose a huge customer like Coca-Cola.

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Rivalry among competitors

Currently, the main competitor is Pepsi which also has a wide range of beverage products under its brand. Both Coca-Cola and Pepsi are the predominant carbonated beverages and commit heavily to sponsoring outdoor festivals and activities. As Coca-Cola has a longer history, it is advertised in a more classical approach while Pepsi tried to attract younger generation by using pop stars as brand ambassadors. Currently Coca-Cola slightly topped Pepsi as the possessor of the most U.S market share. There are other soda brands in the market that become popular, like Dr. Pepper, because of their unique flavors.

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Competitive Edge Through

Competitive Strategies

Differentiation = attempt to distinguish products or services from that of competitors Cost leadership = aggressively seeks efficient facilities, pursues cost reductions, and uses tight cost controls to produce products more efficiently than competitors Focus = concentrates on a specific regional market or buyer group
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Differentiation

Air Deccan ( Kingfisher red) - focused on customer service Ritz carlton Its unique sevice Ritu berry apparel design & brand image Liberty comfort & durability of shoes Apple - product design

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Cost Leadership

Toyota Lexus line Mc. Donalds Dominos D Mart Spice Jet

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Focus

Ferrari Differentiation

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Global Strategy

Globalization strategy Multidomestic strategy Transnational strategy Export strategy

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Globalization strategy

Means that product design & advertising strategies are standardised throughout the world. E.g. Mc. Donalds Ritz - Carlton

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Multidomestic strategy

Handles markets independently for each country Adapts product/advertising to local tastes & needs.

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Transnational strategy

Seeks to balance global efficiencies and local responsiveness Combines standardization and customization for product/advertising strategies. E.g Coca cola coke, fanta and sprite globally

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Export Strategy

Domestically focused Exports a few domestically produced products to selected countries

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Implementing Strategy Tools

Leadership Candid communication Clear roles & accountability Human resources

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Environment
Organization

Tools for Putting Strategy into Action

Leadership Persuasion Motivation Culture/values

Strategy

Candid Communication Open lines of communication Encourage debate Be honest

Human Resources Recruitment/selection Transfers/promotions Training Layoffs/recalls

Performance

Clear roles & Accountability Delegate authority & responsibility Create team define roles
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