MAN 4720

Module 5
Strategy Formulation
Ch. 5-7 Coulter and Viable Vision
Dr. Janice Cerveny
CervenyJ@fau.edu
 Objectives of the Module
 How far you’ve come
 Understanding the Coulter text’s
summary of approaches
• Functional vs. Competitive vs. Corporate
Strategies
 BEYOND the traditional stuff (as per
Coulter)…
• Viable Vision

MAN 4720 Module 5 Slide 2

 Conventional “picture”
company performance
(The goal of strategic
planning)

Pretty simple, Strategies

huh?

Facts/Observations
Facts about
about the External
the Internal
Environment
Environment
Statements re: Inferences about
current performance current structure
MAN 4720 Module 5 Slide 3
 The Big Picture
company performance
(The goal of strategic
planning)

Pretty simple,
General huh?
Environment:
Economic, technological, Competitor Analysis:
Strategies
political-legal (regulatory), Defenders, prospectors,
socio-cultural trends analyzers, reactors
IPW 2
Facts/Observations
Facts about
Industry analysis (Porter):
about the External Substitutes, new e(ntrants,
the Internal
Environment bargaining power of
Environment
suppliers/buyers/other
Statements re: Inferences
stakeholders, etc.about
current performance current structure
MAN 4720 Module 5 Slide 4
 The Big Picture
company performance
(The goal of strategic
planning)
Value, Rareness, Imitability,
Organization (VRIO): what are
the company’s verifiable areas
Strategies
of Distinctive Competence?
Value Chain Analysis (which IPW 1
company functions (activities) are
strengths, which are weaknesses +
Facts/Observations
linkages across activities/functions) Facts about
about the External
Functional Area Analysis the Internal
Environment
(how good a job Finance, Environment
HR, Marketing, R&D, Assessment of the
Statements re: Inferences about Culture
Company’s
Operations, etc. are doing)
current performance current structure
MAN 4720 Module 5 Slide 5
 The Big Picture
company performance
(The goal of strategic
planning)

Strategic
Options
Strategies
External
Environmental Scan Internal Analysis
(Opportunities and (Strengths,
Facts/Observations
Facts about
Weaknesses +
aboutThreats)
the External
the Internal
Cause-Effect)
Environment
Situation Environment
Statements re: Analysis
Inferences about
current performance current structure
MAN 4720 Module 5 Slide 6
 Objectives of the Module
 How far you’ve come
 Understanding the Coulter text’s
summary of approaches
• Functional vs. Competitive vs.
Corporate Strategies
 BEYOND the traditional stuff (as per
Coulter)…
• Viable Vision

MAN 4720 Module 5 Slide 7

 Understand what we mean when
we say Business Strategy
Competitive vs. Cooperative
• Cost (price) or • Collusion (active effort to
Differentiation affect normal economic
supply/demand)
• Head to Head for share
of most desirable piece of • Strategic Alliances
the market or a Niche of
less desirable market
 Mutual service consortia
 Joint Ventures
 Licensing
 Value Chain Partnerships
Module 5 – Slide 8
 Competitive Strategies: Ch. 6
 Miles and Snow (pp. 188-189, Table 6.2)
• Prospector, Defender, Analyzer, Reactor
 Abell’s “Business Definition Framework”
(pp. 189-190, Fig. 6.4)
• Market Scope vs. Level of Market
Differentiation
 Porter’s Generic Strategies (pp. 190-197,
Fig. 6.5 and 6.6)
• Competitive Scope and Competitive
Advantage

Module 5 – Slide 9
 A Bit More on Porter
 An industry’s “attractiveness” (i.e. profit
potential) is tied to market size and the
company’s position in the industry (i.e. is its
advantage based upon cost or product
differentiation).
 Competitive advantage is POSITIONAL
• Company has a cost advantage if it can deliver the
SAME BENEFITS as competitors at a lower cost.
• Company has a differentiation advantage if its
benefit EXCEED those of firms delivering competing
products.
 GIVEN the above  three generic strategies
Module 5: Part B – Slide 10
 Porter’s Generic Competitive Strategies
(Fig. 6.5)
Resource Execute/Deliver
Efficiencies “Better”

“Breadth”
(mass market)

“Niche”

Module 5 – Slide 11
Porter’s Competitive Strategies
Cost Leadership:
FUNCTIONAL strategies (see Ch. 5)
MARKETING (Table 5.2): Price
Discounts
Aggressively invest HR (Table 5.4): Staffing/Downsizing
in construction
What’s requiredor
Operations (Table 5.1): JIT/Inventory
creation of efficient,
to achieve this?
large scale facilities Cost
Reduction/
Cost Broad mass market
Minimization
Sell a lot via
lower price
Module 5 – Slide 12
Porter’s Competitive Strategies
Differentiation
FUNCTIONAL strategies (see Ch. 5)
MARKETING (Table 5.2): Value
Pricing
Invest in making HR (Table 5.4):  Tech Staff Training
product or service
Operations (Table 5.1): Proj. Mgmt.
unique/appealing

Premium Broad mass market

Pricing
Sell a lot
because ‘it’s
General observation: worth it”

Module 5 – Slide 13
Porter’s Competitive Strategies
Cost FOCUS
FUNCTIONAL strategies (see Ch. 5)
MARKETING (Table 5.2): Segmentation &
geographic pricing
Aggressively invest
HR (Table 5.4): Controlled work flow
in small s
to methods of Operations (Table 5.1): Repetitive processes
operation Cost Segment or
Reduction/ Geographic Area
Cost
Minimization
Niche Market
Sell deep to a
target market
General observation: via lower price

Module 5 – Slide 14
Porter’s Competitive Strategies
Differentiation
FOCUS FUNCTIONAL strategies (see Ch. 5)
MARKETING (Table 5.2): Value
Selling
HR (Table 5.4): Job Rotation
Invest in
customization of Operations (Table 5.1): Flexible
product or service
Provide specific
needs or reqs in
superior fashion Niche Market
Sell a lot
because ‘it’s
worth it”
Module 5 – Slide 15
 Risks of Competitive Strategies
Risks of Cost Leadership Risks of Differentiation Risks of Focus
Strategy is imitated:
Not sustainable: Not sustainable:
• Competitors imitate. • Competitors imitate. The target segment
• Technology changes. • Bases for differentiation becomes structurally
• Other bases for cost become less important unattractive:
leadership erode. • Structure erodes.
to buyers. • Demand disappears.
Proximity in differentiation Broadly targeted competitors
is lost. Cost proximity is lost. overwhelm the segment:
• The segment’s
Cost focusers achieve even Differentiation focusers differences from other
lower cost in segments. achieve even greater segments narrow.
differentiation in • The advantages of a
segments. broad line increase.
Six Sigma New focusers sub-segment
the industry.
The QUALITY paradigm
Module 5 – Slide 16
 Generic Strategies
Industry
Force Cost Leadership Differentiation Focus
Ability to cut price in Customer loyalty can Focusing develops core
Entry
retaliation deters potential discourage potential competencies that can act as
Barriers
entrants. entrants. an entry barrier.
Large buyers have less
Large buyers have less
Buyer Ability to offer lower price power to negotiate
power to negotiate because
Power to powerful buyers. because of few close
of few alternatives.
alternatives.
Suppliers have power
Better able to pass on because of low volumes, but
Supplier Better insulated from
supplier price increases to a differentiation-focused firm
Power powerful suppliers.
customers. is better able to pass on
supplier price increases.
Customer's become
Specialized products & core
Threat of Can use low price to attached to differentiating
competency protect against
Substitutes defend against substitutes. attributes, reducing threat
substitutes.
of substitutes.
Rivals cannot meet
Better able to compete on Brand loyalty to keep
Rivalry differentiation-focused
price. customers from rivals.
customer needs.
The generic strategies each have attributes that can serve to defend against competitive forces. The
table compares some characteristics of the generic strategies in the context of the Porter's five forces.
Module 5: Part B – Slide 17
 Objectives of the Module
 How far you’ve come
 Understanding the Coulter text’s
summary of approaches
• Functional vs. Competitive vs.
Corporate Strategies
 BEYOND the traditional stuff (as per
Coulter)…
• Viable Vision

MAN 4720 Module 5 Slide 18

 GENERIC Conflicts?

ALL organizations’ managers or key

decision-makers are fundamentally torn
on either of two, generic conflicts:

• Local vs. Global optimization

• Short term vs. Long Term

MAN 4720 Module 5 Slide 19

 B D
Contain Take actions that
Costs protect (my) unit’s
A performance
Successful
company
C D′
Protect or Take actions that
Ensure enhance company’s
Throughput performance

Generic Strategy Conflict 1

MAN 4720 Module 5 Slide 20

 D
B Protect the Take actions that
company’s emphasize short
A CURRENT health term improvements
Successful
company
C Protect the D′
Take actions that
company’s emphasize long
FUTURE health term growth

Generic Strategy Conflict 2

MAN 4720 Module 5 Slide 21

Objective: to check that the conflict DRIVES or
CAUSES the organization’s problems.
For example:
Expedite new work
before scheduled We accept as many
work [Ops]. new orders as we
can [Sales].

We did not order

from suppliers in We delay sending
time [Purch]. the delivery
trucks [Shipping].

D D′
Take actions that Take actions that
protect (my) unit’s enhance company’s
performance performance
MAN 4720 Module 5 Slide 22
 The “Policy” Constraint (cont.)
 The D and D' entities spawn the base
“rules” each organization’s managers use
to make decisions regarding:

• Product mix
• Pricing
• Capital investment and process improvement
expenditures
• Additions of products or pursuit of a market
niche, and/or
• Deletion of a product or business segment.

Module 5 – Slide 23
 The Two Roles of
Finance

Scorekeeper Monitoring the

 Judgment of the system as a
Money
whole  Payroll
 Judgment on investment  Payables
 Receivables
 Judgment on make/buy  Banking
alternatives Relationships
 Judgment on the sub-
systems
 Judgment on
product/service profit Which is more
important – and why?
VV Ch. 4 pp. 32-33!
Module 5 – Slide 24
 The Two Roles of Finance

What does finance use

Scorekeeper to make each decision?

 Judgment of the system Balance sheet, P & L,

as a whole cash statements
 Judgment on investment ROI, price of equipment
and resulting cost savings
 Judgment on make/buy
Outside price vs. internal
alternatives
cost
 Judgment on the sub-
systems Ind’l P&L performance
 Judgment on
product/service profit Each one’s product cost
Module 5 – Slide 25
 Product Cost (product or service
profit)
The Theory The Reality
Then… There are many
Company makes companies that are losing
money by producing money yet every one of its
and selling that products/ services is
Product or Service selling at prices higher
than the costs…
If…
Company’s
Selling Price > Cost
for a Product or Usual explanation: “data used
Service to calculate cost was not captured
accurately or was dated.”
Module 5 – Slide 26
 Let’s explore whether the
theory or the stated reality is
correct using Goldratt’s
“P & Q Problem”

Module 5 – Slide 27
 GOLDRATT'S "P & Q" PROBLEM

How much of P & Q

P Q
should be produced and Price = $90 Price = $100
what is the maximum Mkt. demand = Mkt. demand =
profit? 100 units/wk 50 units/wk

Resource D Resource D
15 min/unit 5 min/unit

Purchased Resource C Resource C Resource B

part $5/unit 10 min/unit 5 min/unit 15 min/unit

Perfect market Resource A Resource B Resource A

Perfect suppliers 15 min/unit 15 min/unit 10 min/unit
Perfect Resources
Operating Expense RM 1 RM 2 RM 3
$20/unit $20/unit $20/unit
= $6000/week
Copyright © Avraham Y. Goldratt Institute, 1995 Module 5 – Slide 28
 Theoretical Solution

Make or produce: ________ of P ________ of Q

Total Revenue:

Our Net

Less OE: _________

Net profit should be:

Module 5 – Slide 29
 Reality
To make 100 P To make 50 Q
Resource
A 15 min * 100=1500 10 min * 50= 500 → 2000 min.
B 15 min * 100=1500 30 min * 50=1500 → 3000 min.
C 15 min * 100=1500 5 min * 50= 250 → 1750 min.
D 15 min * 100=1500 5 min * 50= 250 → 1750 min.

You CANNOT make ALL that

the market demands of BOTH products?

So WHICH product would you make first?

Module 5 – Slide 30
 Conventional (local)
Make or produce: 50 of Q basis of selecting
Gross revenues of:
Less materials cost:
product priorities do NOT
Net revenue from 50 Q: yield correct results

Making 50 Q used 1500 of 2400 minutes of Resource B’s capacity.

Thus, use the remaining 900 minutes of resource B time (2400
minutes – 1500 minutes used) to make all the Product P’s possible

Thus, I can make:

Gross revenues of:
Less materials cost:
Net revenue from 60 P:

Total net revenue is

Less my operating expense:

Net profit will be:

Module 5 – Slide 31
 What if we ignore the traditional
“product cost” judgment?
Make or produce: 100 of P
Gross revenues of: $90 * 100 = $9000
Less materials cost: $45 * 100 = ($4500)
Net revenue from 100 P: $4500

Once again, we used 1500 of 2400 minutes of Resource B’s time.

Thus, 900 minutes of Resource B time remains.

Thus, I can make: 900/30 min. = 30 of Q

Gross revenues of: $100 * 30 = $3000
Less materials cost: $40 * 30 = ($1200)
Net revenue from 30 Q: $1800
Total net revenue is $4500 + $1800 = $6300
Less my operating expense: ($6000)

Net profit will be: $ 300/wk

Module 5 – Slide 32
 Product Cost
(product or service profit)
The Theory
Then… There are many
Company makes companies that are losing
money by producing money yet every one of its
and selling that products/ services is
Product or Service selling at prices higher
than the costs…
If…
Company’s
Selling Price > Cost
for a Product or Usual explanation:.
Service

Module 5 – Slide 33
OE = $6000/wk
Traditional
Resource Time = 5 days * 8 hrs./day*60 min.hr.
Accounting &
Per unit cost of 4 work stations (or resources), Mgmt. Science
($6000 per wk / 4 stations * 2400 min per station and the P & Q
 $0.63/station (or resource) minute
Problem
Time or Cost per station (@ $0.63 per minutes)
Product P Product Q
Resource A: 15/ $9.45 10/ $ 6.30
Resource B: 15/ $9.45 30/ $18.90
Resource C: 15/ $9.45 5/ $ 3.15
Resource D: 15/ $9.45 5/ $ 3.15
TOTALS 60/$37.80 50/$31.50

Margin Calculations:
Price $90.00 $100.00
Less RM $45.00 $ 40.00
Per Unit Profit $45.00 $ 60.00
Overhead -37.80 - 31.50
Margin $ 7.20 per P $ 28.50 per Q
MAN 4720 Module 5 Slide 34
Linear Programming:
Q
240
15P + 10Q < 2400
220

200 15P + 5 Q < 2400

180

160

140

120

100 1P + 0Q < 100

80
0P + 1Q < 50
60

40
Feasible 15P + 30Q < 2400
20 Region
20 40 60 80 100 120 140 160 180 200 220 240
P
MAN 4720 Module 5 Slide 35
 Linear Programming Solution
• Maximize: Z= $7.20 P + $28.50 Q
• Subject to:
– Resource A Labor: 15 P + 10 Q < 2400 minutes
– Resource B Labor: 15 P + 30 Q < 2400 minutes
– Resource C Labor: 15 P + 5 Q < 2400 minutes
– Resource D Labor: 15 P + 5 Q < 2400 minutes
– Market P Demand:1
Demand: P + 0 Q < 100 each
– Market Q Demand: 0 P + 1 Q < 50 each
• “Optimal” Solution: Produce 60 P and 50 Q w/ expected profit of $1,857
• Actual profit = (60 P*$45 + 50 Q*$60) - $6000 = $-300 loss!
The paradigm (mental) Constraint is

What are some of the results of doing so?

•
•
•
MAN 4720 Module 5 Slide 36
According to Eli Goldratt:
“The product cost judgment is arbitrary. It does
not necessarily direct us to promote products that
will increase the profitability of the company – and
might promote products that will jeopardize
profitability.”
(TOC Insights for Finance and Accounting)
We face, two issues:
1.

2.

Module 5 – Slide 37
 The Missing Link

We need a mechanism to guide or ensure every

entities’ “local” decisions/ actions  good
organization performance (system throughput)

Throughput is The entities of The weakest link

achieved by the organization determines the
strengthening the (the system) are strength of the
system. links in a chain. system (chain)
Module 5 – Slide 38
 Mechanism so local actions
  system
POOGI
1. Identify the constraint

2. Decide how to exploit it

3. Subordinate to that
decision
4. Elevate the constraint

5. Repeat the process

Module 5 – Slide 39
 We need to clarify what we should use to
make product decisions properly.

1. Identify the constraint Resource B

2. Exploit the constraint Decide which product (P or

Q) will yield maximum T
Throughput T = Sales – RM

Throughput for P: =

Throughput for Q: =

Module 5 – Slide 40