Strategy, Structure and Effectiveness 1

3 LEVELS OF STRATEGY

How do we compete?

BUSINESS UNIT B

BUSINESS UNIT C

FIN R&D MFRG MKTGHow do we supportbusiness level strategy?

Corporate Level

Business Level

Functional Level

Corporate level examples:Travelers acquires Salomon Brothers, Disney acquires ABC, AT&T acquires TCI, GE sells Kidder Peabody.

Business level examples:CBS adopts strategy of trying to capture younger viewers, Pfizer founds a developing “life style” drugs; e.g. Viagra

Functional level examples:Cigarette companies adverting campaign to convince people to oppose Tobacco Bill.

What businesses are we in?CORPORATION

BUSINESS UNIT A

Strategy, Structure and Effectiveness 2

RATE OF PROFIT ABOVE THE

COMPETITIVE LEVEL

How do we make money?

RATE OF PROFIT ABOVE THE

COMPETITIVE LEVEL

How do we make money?

INDUSTRY ATTRACTIVENESS

Which industries should we be in?

INDUSTRY ATTRACTIVENESS

Which industries should we be in?

COMPETITIVE ADVANTAGE

How should we compete?

COMPETITIVE ADVANTAGE

How should we compete?

CORPORATESTRATEGY

CORPORATESTRATEGY

BUSINESSSTRATEGY

BUSINESSSTRATEGY

Sources of Superior ProfitabilitySources of Superior Profitability

Strategy, Structure and Effectiveness 3

BOSTON CONSULTING GROUP FRAMEWORKFOR CORPORATE LEVEL BUSINESS PORTFOLIO

NEW VENTURE• Small share of expanding market

• Risky• May be prize heifer or problem child

STAR•Large share of expanding market

•Rapid growth and expansion

DOG•Small share of mature market

•Consider divestment

CASH COW• Large share of mature market

• Milk cash to fund new venture

High

Low

MA

RK

ET

GR

OW

TH

MARKET SHARELow High

Strategy, Structure and Effectiveness 4

GE’s Nine-Cell Business Screen

Relative market shareProfit marginsAbility to compete on price and qualityKnowledge of customer and marketCompetitive strengths and weaknessesTechnological capabilityCaliber of management

LowMediumHigh

Business Strengths

Low

Med

ium

Hig

h

Indu

stry

Att

ract

iven

ess

Market size and growth rateIndustry profit marginsCompetitive intensitySeasonalityCyclicalityEconomies of scaleTechnologySocial, environmental, legal,

and human impacts

Invest in, employgrowth strategy

Monitor performance,selective strategybased on earnings

No growth or investment,consider divestmentor liquidation

Strategy, Structure and Effectiveness 5

Corporate-Level Strategies for Entering New Domains

InputDomains

Forwardvertical Integration

Relateddiversification

Unrelateddiversification

Backwardverticalintegration

RelatedDomains

OutputDomains

UnrelatedDomains

Core Domain:

Strategy, Structure and Effectiveness 6

Input domains(e.g., sugar plantations;bottle makers)

Related domains(e.g., snack foods,candy maker)

Output domains(e.g., bottling and truckingcompany that distributessoft drinks; fast-foodrestaurants)

A Soft-Drink Company’s Corporate-Level Strategies for Entering New Domains

Unrelated domains(e.g., department stores,financial networks,cable companies)

Core Domain:Soft drinks

Strategy, Structure and Effectiveness 7

CORPORATE GROWTH STRATEGIES

GROWTH STRATEGY

INTERNAL

EXTERNAL

I. INTEGRATION A. Horizontal Coors’ move into

Eastern U.S. Chrysler purchase of American Motors

B. Vertical 1. Backward Ford’s River Rouge

Steel Mill Turner Broadcasting purchase of MGM/United Artist

2. Forward Goodyear &

Firestone’s retail stores

Boeing’s purchase of Part of Allegis (UA)

II. DIVERSIFICATION A. Related Annheuser-Bush’s

Eagle Snacks Philip Morris purchase of Miller Brewing

B. Unrelated CSX’s use of its land

for resorts, hotels, office buildings

Xerox’s purchase of Crumb Forster Insurance

Strategy, Structure and Effectiveness 8

Potential New Entrants

Substitute Products from Other Industries

Buyers

Suppliers

Threat ofsubstituteproducts

Bargaining power of suppliers

Bargainingpower of buyers

The Five Forces Affecting Industry Competition

Rivalry AmongCompetitors

Threat of new entrants

Strategy, Structure and Effectiveness 9

BroadTarget

COMPETITIVESCOPE

NarrowTarget

PORTER’S GENERIC STRATEGIES

Lower Cost Differentiation

1. Cost Leadership 2. Differentiation

3A. Cost Focus 3B. Differentiation Focus

COMPETITIVE ADVANTAGE

Strategy, Structure and Effectiveness 10

ORGANIZATIONAL CHARACTERISTICS FOR PORTER’S STRATEGIES

Strategy Organizational Characteristics

Differentiation Organic structure with strong coordination between departments Strong capability in basic research Emphasis on creativity Strong marketing abilities Incentives based on innovation and other subjective criteria Reputation for quality or technological leadership

Cost leadership Mechanistic structure with strong central authority and cost controls Standard operating procedures Efficient production and distribution systems Close supervision with limited empowerment Incentives based on meeting strict quantitative targets Frequent, detailed cost reports

Focus Combination of the above Values and rewards flexibility and customer contact Measures cost of providing service and customer loyalty Pushes empowerment to employees with customer contact

Strategy, Structure and Effectiveness 11

Characteristic of Organizational Structure Associated with Business-Level Differentiation and Low-Cost

Strategies

Differentiation Strategy

Complex Structure

Decentralized decision making

High differentiation

High integration

Organic structure

Low-Cost Strategy

Simple Structure

Centralized decision making

Low differentiation

Low integration

Mechanistic structure

Matrix structure

Product teamstructure

Product, market,or geographic

structure

Functional structure

Strategy, Structure and Effectiveness 12

Value-Creating Function Source of Low-Cost Advantage Source of Differentiation Advantage

Manufacturing Development of skills in flexible manufacturing technology

Increase in product quality and reliability

Human resources management

Reduction of turnover and absenteeism

Hiring of highly skilled personnel

Development of innovative training programs

Materials management Use of just-in-time inventory system/computerized warehousing

Development of long-term relationships with suppliers and customers

Use of company reputation and long-term relationships with suppliers and customers to provide high-quality inputs and efficient distribution and disposal of outputs

Sales and marketing Increased demand and lower production costs

Targeting of customer groups Tailoring products to customers Promoting brand names

Research and development Improved efficiency of manufacturing technology

Creation of new products Improvement of existing

products

Low-Cost and Differentiation Advantages Resulting From Functional-Level Strategy

Strategy, Structure and Effectiveness 13

Miles and Snow’s Strategic Types

Characteristics Defender Analyzer Prospector Reactor

Environment: Stable Moderatelychanging

Dynamic, growing Any

Strategy: Seal off share ofmarket. Protect turf.Advertise to holdcustomers

Maintain marketbut innovate atedges. Locateopportunities forexpansion whileprotecting currentposition.

Find and exploitnew marketopportunities.Scan environment,take risks.

No definedstrategy. Drift.React toconditions adhoc.

InternalCharacteristics:

Efficient production.Retrench. Tightcontrol. Centralized,mechanistic.

Efficientproduction, yetflexibility for newlines. Tightcontrol overcurrent activities,looser for newlines.

Flexibleproduction.Innovation andcoordination.Expansion.Decentralized,organic.

Not a definedorganizationalapproach.Depends onimmediatecircumstances.

Strategy, Structure and Effectiveness 14

Strategic ApproachesType of ProblemOrganizationalStrategy Entrepreneurial Engineering Administrative

Defender How to “seal off” aportion of the totalmarket to create astable set of productsand customers

How to produce anddistribute goods orservices as efficientlyas possible

How to maintain strictcontrol of theorganization to ensureefficiency.

Prospector How to locate andexploit new productand marketopportunities

How to avoidlongtermcommitments to asingle technologicalprocess

How to facilitate andcoordinate numerousand diverseoperations

Analyzer How to locate andexploit new productand marketopportunities whilesimultaneouslymaintaining a firmbase of traditionalproducts andcustomers

How to be efficient instable portions of thedomain and flexiblein changing portions

How to differentiatethe organization’sstructure andprocesses toaccommodate bothstable and dynamicareas of operation

Strategy, Structure and Effectiveness 15

Strategic Decision-Making Process

Scanexternalenvironment.

Evaluatecurrentperform-anceresults.

Analyze strategicfactors(S.W.O.T.)in light ofcurrentsituation

Review andrevise asnecessary:• Mission• Objectives

Generate,evaluate,and selectbest strate-gic alterna-tives.

Implementstrategies.

Evaluateand

control.

Scaninternal

environment.

Select strategicfactors:• Strengths• Weaknesses

Select strategicfactors:• Opportunities• Threats

Examine andevaluate thecurrent•Mission•Objectives•Strategies•Policies

Strategy Formulation

StrategyImplementation

Evaluation& Control

Strategy, Structure and Effectiveness 16

Strategic Management Model

External

Objectives

SocietalEnviron-ment

TaskEnviron-ment

Internal

StructureCultureResources

Env

iron

men

tal S

can

ning

Strategy Formulation

Mission

Strategies

Policies

Programs

Budgets

Procedures

Performance

Strategy Implementation Evaluation& Control