Chapter 3C Strategy Formulation and choce of alternatives

Strategic Choice

Strategic Choice

Selection of the Best Strategy –

Ability of the proposed strategy to deal with strategic factors developed earlier in SWOT analysis.

Ability of each alternative to satisfy agreed-on objectives with the least resources and the fewest negative side affects.

Strategic choice

Strategic choice is evaluation of alternative strategies and selection of the best alternative.

The best strategic decisions are not arrived at through consensus. They actually involve a certain amount of heated disagreement and even conflict.

Process of Strategic Choice

Key Issues: Key Issues: Strategic ChoiceStrategic Choice in Single Businessesin Single Businesses

1. What strategies are most effective at building sustainable competitive advantages for single business units?

2. Should dominant-product/service businesses diversify to build value and competitive advantage? What grand strategies are most appropriate?

6Prominent Sources of Prominent Sources of Competitive Advantage Competitive Advantage ((Porter’s 3 Generic Strategies)

Cost leadership

Differentiation

Speed

Market focus

Sources of competitive advantage

7

Evaluating A Business’s Cost Evaluating A Business’s Cost Leadership OpportunitiesLeadership Opportunities

A. Skills and Resources Fostering Cost Leadership• Sustained capital investment and access to capital• Process engineering skills• Intense supervision of labor or core technical operations• Products or services designed for ease of manufacture or

delivery• Low-cost distribution system

B. Organizational Requirements Supporting Cost Leadership• Tight cost control• Frequent, detailed control reports• Continuous improvement and benchmarking orientation• Structured organization and responsibilities• Incentives based on meeting strict, usually quantitative targets

8Evaluating A Business’s Evaluating A Business’s Cost LeadershipCost Leadership Opportunities Opportunities ----C. Examples of Ways Businesses Achieve Competitive C. Examples of Ways Businesses Achieve Competitive AdvantageAdvantage

Technology development

Process innovations lowering production costs

Product redesign to reduce number of components

Global, online suppliers provide automatic restocking of orders based on sales

Inbound logistics Operations Outbound logistics Marketing & sales

Serv

iceEconomy of

scale in plant reduces equipment costs and depreciation

Computerized routing lowers transportation expense

Cooperative advertising with distributors creates local cost advantage in buying media space and time

Subcontractedservicetechniciansrepairproductcorrectlyfirst timeor bearcosts

Reduced levels of management cuts corporate overhead

Computerized, integrated information system reduces errors and costs

Safety training for all employees reduces absenteeism, downtime, and accidents

Human resource

management

General administration

Favorable long-term contracts; captive suppliers or key customer for supplier Procurement

margin

Profit

9

Advantages of a Cost Leadership Advantages of a Cost Leadership StrategyStrategy

Low-cost advantages reduce likelihood of pricing pressure from buyers

Low-cost advantages reduce likelihood of pricing pressure from buyers

Sustained low-cost advantages may push rivals into other areas, lessening price competition

Sustained low-cost advantages may push rivals into other areas, lessening price competition

New entrants must face an entrenched cost leader without experience to replicate cost advantages

New entrants must face an entrenched cost leader without experience to replicate cost advantages

Low-cost advantages should lessen attractiveness of substitutes

Low-cost advantages should lessen attractiveness of substitutes

Higher margins allow low-cost producers to withstand supplier cost increases

Higher margins allow low-cost producers to withstand supplier cost increases

10

Key Risks of Cost LeadershipKey Risks of Cost Leadership

Many cost-saving activities are easily duplicated Many cost-saving activities are easily duplicated

Exclusive cost leadership can become a trapExclusive cost leadership can become a trap

Obsessive cost cutting can shrink other competitive advantages involving key product attributes

Obsessive cost cutting can shrink other competitive advantages involving key product attributes

Cost differences often decline over timeCost differences often decline over time

11

Evaluating A Business’s Evaluating A Business’s Differentiation OpportunitiesDifferentiation Opportunities

A. Skills and Resources Fostering Differentiation• Strong marketing abilities• Product engineering• Creative talent and flair• Strong capabilities in basic research• Corporate reputation for quality or technological leadership• Long tradition in an industry or unique combination of skills• Strong cooperation from channels and suppliers of major components

B. Organizational Requirements Supporting Differentiation• Strong coordination among functions in R&D, product development, and

marketing• Subjective measurement and incentives instead of quantitative measures• Amenities to attract highly skilled labor, scientists, and creative people• Tradition of closeness to key customers• Some personnel skilled in sales and operations - technical and marketing

12Evaluating A Business’s Differentiation Evaluating A Business’s Differentiation Opportunities --Opportunities --C. Examples of Ways Businesses Achieve Competitive C. Examples of Ways Businesses Achieve Competitive AdvantageAdvantage


Cutting edge production technology and product features to maintain a distinct image and actual product

Purchase superior quality, well-known components, raising quality and image of final products


Serv

ice

Careful inspection of products at each step in production to improve performance and lower defect rates

JIT coordination with buyers; use of own or captive transportation service to ensure timeliness

Expensive, informative advertising and promotion to build brand image

Allowing servicepersonnelconsiderablediscretion tocreditcustomersforrepairs

Comprehensive, personalized database to build knowledge of customers to be used in customizing how products are sold, serviced, and replaced

Programs to ensure technical competence of sales staff and marketing orientation of service personnel

Human resource

management


Quality control presence at key supplier facilities; work with suppliers’ new product development activities Procurement

margin

Profit

13

Advantages of a Differentiation Advantages of a Differentiation StrategyStrategy

Rivalry is reduced when a business successful differentiates itself

Rivalry is reduced when a business successful differentiates itself

Buyers are less sensitive to prices for effectively differentiated products

Buyers are less sensitive to prices for effectively differentiated products

Brand loyalty is hard for new entrants to overcome

Brand loyalty is hard for new entrants to overcome

14

Key Risks of DifferentiationKey Risks of Differentiation

Imitation narrows perceived differentiation, rendering differentiation meaningless

Imitation narrows perceived differentiation, rendering differentiation meaningless

Technological changes that nullify past investments or learning

Technological changes that nullify past investments or learning

Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

Cost difference between low-cost competitors and the differentiated business becomes too great for differentiation to hold brand loyalty

15

Creating a Competitive Creating a Competitive Advantage Based on SpeedAdvantage Based on Speed

Has become a major source of competitive advantage for many firms

Involves the availability of a rapid response to customers by Providing current products quicker

Accelerating new product development or improvement

Quickly adjusting production processes

Making decisions quickly

16Evaluating A Business’s Evaluating A Business’s Rapid Response Rapid Response OpportunitiesOpportunities

A. Skills and Resources Fostering Speed• Process engineering skills• Excellent inbound and outbound logistics• Technical people in sales and customer service• High levels of automation• Corporate reputation for quality or technical leadership• Flexible manufacturing capabilities• Strong downstream partners• Strong cooperation from suppliers of major components

B. Organizational Requirements Supporting Rapid Response• Strong coordination among functions in R&D, product development, and

marketing• Major emphasis on customer satisfaction in incentive programs• Strong delegation to operating personnel• Tradition of closeness to key customers• Some personnel skilled in sales and operations - technical and marketing• Empowered customer service personnel

17Evaluating A Business’s Evaluating A Business’s Rapid ResponseRapid Response Opportunities --Opportunities --C. Examples of Ways Businesses Achieve Competitive C. Examples of Ways Businesses Achieve Competitive AdvantageAdvantage


Use of companywide technology sharing activities and autonomous product development teams to speed new product development

Working very closely with suppliers to include their choice of warehouse location to minimize delivery time


Serv

iceStandardize

dies, components, and production equipment to allow quick changeover to new or special orders

JIT delivery plus partnering with express mail services to ensure very rapid delivery

Use of laptops linked directly to operations to speed the order process and shorten the sales cycle

Locate servicetechniciansat customerfacilities thataregeograph-icallyclose

Highly automated and integrated information processing system; include major buyers in the systems on a real-time basis

Develop self-managed work teams and decision making at lowest levels to increase responsiveness

Human resource

management


Pre-approved, online suppliers integrated into productionProcurement

margin

Profit

18

Advantages of a Speed-Based Advantages of a Speed-Based StrategyStrategy

Creates a way to lessen rivalry because firm has the availability of something a rival may not

Creates a way to lessen rivalry because firm has the availability of something a rival may not

Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers

Allows firm to charge buyers more, engender loyalty, or enhance its’ position relative to its buyers

Generates cooperation and concessions from suppliers since they benefit from increased revenues

Generates cooperation and concessions from suppliers since they benefit from increased revenues

Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

Substitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

19

Key Risks of a Speed-Based Key Risks of a Speed-Based Strategy Strategy

Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering

Speeding up activities that have not been conducted in a fashion prioritizing rapid response should only be done after attention to training, reorganization, and/or reengineering

Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

Some industries - stable, mature ones - may not offer much advantage to a firm introducing some forms of rapid response

Service Blueprinting

It is a picture or a map that accurately portrays the service system so that different people involved in providing it can understand and deal with it objectively regardless of their roles from their individual point of view.

Service Blueprinting

It is a tool for simultaneously depicting the service process, the points of customer contacts, and the evidence of service from the point of view of the customer.

PROCESS

CONTACT PTS.

EVIDENCE

SERVICE BLUEPRINT

Service Blueprint of Luxury Hotel

4-22

23

Industry Environments and Industry Environments and Strategy ChoicesStrategy ChoicesEmerging IndustriesGrowth IndustriesMature IndustriesDeclining IndustriesFragmented IndustriesGlobal Industries

24

Strategic Options for Emerging Strategic Options for Emerging IndustriesIndustries1. Ability to shape industry’s structure 1. Ability to shape industry’s structure

2. Ability to rapidly improve product quality 2. Ability to rapidly improve product quality

3. Establish favorable relations with key suppliers 3. Establish favorable relations with key suppliers

4. Ability to establish technology as dominant force 4. Ability to establish technology as dominant force

5. Acquire a core group of loyal customers 5. Acquire a core group of loyal customers

6. Ability to forecast future competitors 6. Ability to forecast future competitors

25

Strategic Options for Strategic Options for Maturing IndustriesMaturing Industries

1. Prune the product line1. Prune the product line

2. Emphasize process innovation2. Emphasize process innovation

3. Emphasize cost reductions3. Emphasize cost reductions

4. Focus on selecting loyal buyers4. Focus on selecting loyal buyers

5. Pursue horizontal integration5. Pursue horizontal integration

6. Expand internationally6. Expand internationally

26

Strategic Options for Strategic Options for Mature/Declining IndustriesMature/Declining Industries

1. Focus on key market segments offering growth opportunities

1. Focus on key market segments offering growth opportunities

2. Emphasize product innovation and quality improvement

2. Emphasize product innovation and quality improvement

3. Emphasize production and distribution efficiency

3. Emphasize production and distribution efficiency

4. Gradually harvest the business4. Gradually harvest the business

27

Strategic Options for Fragmented Strategic Options for Fragmented IndustriesIndustries1. Tightly managed decentralization - Intense local

coordination, high personal service, local autonomy

1. Tightly managed decentralization - Intense local coordination, high personal service, local autonomy

2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations

2. Formula facilities - Standardized, efficient, low-cost facilities at multiple locations

3. Increased value added - Difficult to differentiate products/services

3. Increased value added - Difficult to differentiate products/services

4. Specialization - Product type, customer type, type of order, geographic areas

4. Specialization - Product type, customer type, type of order, geographic areas

5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)

5. Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)

28

Characteristics of Global Characteristics of Global IndustriesIndustries Differences in prices and costs among

countries due to Currency exchange fluctuations Differences in wage and inflation rates Other economic factors

Differences in buyer needs across countries Differences in competitors and ways of

competing among countries Differences in trade rules and governmental

regulations across countries

29

Strategic Options: Pursuing Global Market Strategic Options: Pursuing Global Market

CoverageCoverage

1. License foreign firms to produce and distribute a firm’s products

1. License foreign firms to produce and distribute a firm’s products

2. Maintain a domestic production base and export products

2. Maintain a domestic production base and export products

3. Establish foreign-based plants and distribution in foreign countries

3. Establish foreign-based plants and distribution in foreign countries

30

Strategic Options: Choosing a Generic Competitive Strategic Options: Choosing a Generic Competitive

StrategyStrategy

1. Broad-line global competition 1. Broad-line global competition

2. Global focus strategy 2. Global focus strategy

3. National focus strategy 3. National focus strategy

4. Protected niche strategy 4. Protected niche strategy

31

Grand Strategy Selection MatrixGrand Strategy Selection MatrixOvercome weaknesses

Maximize strengths

External (acquisition

or merger for resource

capability)

Internal (redirected resources within the

firm)

Turnaround or retrenchmentDivestitureLiquidation

Vertical integrationConglomerate diversification

Concentrated growthMarket developmentProduct developmentInnovation

Horizontal integrationConcentric diversificationJoint venture

IIIIVIII

32

Model of Grand Strategy Model of Grand Strategy ClustersClustersRapid market growth

Slow market growth

Weak competitive

position

Strong competitive

position

1. Concentrated growth

2. Vertical integration3. Concentric

diversification

1. Reformulation of concentrated growth

2. Horizontal integration3. Divestiture4. Liquidation

1. Concentric diversification

2. Conglomerate diversification

3. Joint venture

1. Turnaround or retrenchment2. Concentric diversification3. Conglomerate diversification4. Divestiture5. Liquidation

IIIIIIIV

33Conclusion: Selecting a Business Conclusion: Selecting a Business Strategy toStrategy toAchieve a Competitive AdvantageAchieve a Competitive Advantage

Focusing on key sources of competitive advantage requiring

total, consistent commitment

Weighing skills, resources, organizational requirements, and

risks of each source of competitive advantage

Considering unique effects of the generic industry environment on a

firm’s value chain activities

Selection of appropriate business strategie(s) involves

Chapter 4Strategy Implementation

Inter relationship between strategy formulation and implementation Some says it is one and same Some says it is distinctive The others says it is inter-related Successful strategy formulation does not guarantee

successful strategy implementation Strategy formulation is similar for different types

of organizations but strategy formulation varies among different types & sizes of organizations

Strategy formulation affects an organization from top to bottom; it affects all the functional and divisional areas of an organization

Strategic formulation

It is largely an intellectual process and where as strategic implementation is more operational character (Fred David)

Strategic formulation requires good conceptual, integrative and analytical skills but strategy implementation requires special skills in motivating and managing others.

Strategy formulation occurs primarily at corporate level of an organisation while strategy implementation is permeates all hierarchical levels.

Both are interdependent

Formulation positions forces before the action Implementation manages forces during the action

Formulation focuses on effectiveness Implementation focuses on efficiency

Formulation is primarily an intellectual process Implementation is primarily an operational process

Formulation requires good intuitive and analytical skills Implementation requires special motivational and leadership skills

Formulation requires coordination among a few individuals=> Implementation requires coordination among many individuals

Nature of Strategy ImplementationFormulation vs. Implementation

Altering sales territories Adding new departments Closing facilities Hiring new employees Cost-control procedures Modifying advertising strategies Building new facilities

Nature of Strategy Implementation

Examples of implementation activities

Shift in responsibility

Nature of Strategy Implementation

Management Perspectives

Division or FunctionalManagers

Strategists

A TALE OF TWO STORES

1891

1970

1990 2005 1924

Sears launches catalog business

Takes control of production and distribution

Moves into on-premise retailing/General Robert Wood takes over

1960

Rapid growth, driven by end-based locations and company-controlled factories

Experts believe Sears way was the only way to compete “The paragon of retailers”

2000 1980

Expands into banking, investments, real estate services, and insurance

Financial trouble; sells off all non-retail businesses

Acquired by KMart

1970

Sam Walton opens first Wal-Mart with focus on low-prices

30 stores located in “one-horse towns which everybody else was ignoring”; Sam Walton

1962 2000 1980

Dizzying growth

Invests $500 million in inventory management technology

Perfects model; grows; expands into new markets (international) and store concepts (Sam’s clubs)

A Firm’s performance is directly related to the quality of its strategy and its competency in implementing it

Strategy Implementation

• Sears exampleSears example

In 1983 Sears implements one-stop shopping banking-In 1983 Sears implements one-stop shopping banking-financialfinancial services power. services power.

Sears retail unit fell to #3 behind low-cost providers (Walmart Sears retail unit fell to #3 behind low-cost providers (Walmart and K-Mart).and K-Mart).

Specialty retailers (focused differentiators) such as The Gap, Specialty retailers (focused differentiators) such as The Gap, The Limited, Toys-R-Us, and Kids-R-Us took market share. The Limited, Toys-R-Us, and Kids-R-Us took market share.

Sears was outperformed by both low-cost and focused differentiators.Sears was outperformed by both low-cost and focused differentiators.

Sears initiated restructuring in 1992 after losing $3.8 billion.Sears initiated restructuring in 1992 after losing $3.8 billion.


• Sears exampleSears example

What happened? Why did Sears fail so dramatically?What happened? Why did Sears fail so dramatically?

- Lost ability to control core business (too diversified).- Lost ability to control core business (too diversified).

- Resources were taken from retail and given to new ventures.- Resources were taken from retail and given to new ventures.

- Managers spent too much time on diversified businesses.- Managers spent too much time on diversified businesses.

- Managed retail segment using financial controls.- Managed retail segment using financial controls.

- Sears suffered from post-merger drift.- Sears suffered from post-merger drift.

- Lost operational understanding of the competitive dynamics Lost operational understanding of the competitive dynamics in the retail industry.in the retail industry.

TWO RETAILERS AT A GLANCE

Sears Wal-Mart

Year founded 1891 1962

Stores 1980• Stores 2004

864• 2026

600• 5289

Revenues 1980• Revenues 2004

$25,194 million• $36,100 million

$1,643 million• $285,222 million

Net profits 1980• Net profits 2004

606M (2.4% return on sales)• 507M (-1.4% return on sales)

$55 M(3.3% return on sales)• $10,267 M • (3.6% return on sales)

Market capitalization 1980• Market capitalization 2004

USD 4.8 billion USD 12.2 billion

USD 1 billion USD 200.2 billion

A TALE OF TWO RETAILERS – PERFORMANCE MEASURES

USD millions

THREE OVERARCHING THEMES

Implementing a good strategy is at least as important as creating one, yet many managers give too little thought to implementation

Strategic leadership is responsible for

making substantive resource allocation decisions and

developing key-stakeholder support of the strategy

We need to see a firm’s competitive position, not as a snapshot, but as an ongoing movie

Firms and industries are

dynamic in nature

To succeed,the formulation

of a good strategy and its implementa-

tion should be inextricably connected

Strategic leader-ship is essential if a firm is able to both formulate

and imple-ment strategies that create

value

STRATEGY

General

Lower officer (e.g., supply logistics infantry, heavy

armored vehicles)

Strategos: “the general’s view”

Holistic “big picture”

Tactical details

THE STRATEGIC MANAGEMENT PROCESS

Strategic analyses Internal

External

Vision and mission

Fundamental organizational purpose

Organizational values

Strategy

Arenas Vehicles Differentiators Staging Economic logic

The central, integrated, externally oriented concept of

how a firm will achieve its objectives

Implementation levers

and

Strategic leadership

QUESTIONS OF CORPORATE-LEVEL AND BUSINESS-LEVEL STRATEGY

Unit of measure

??

Corporate-level strategy should ask

In which markets do we compete today?

In which markets do we want to compete tomorrow?

How does our ownership of a business ensure its competitiveness today and in the future?

How do we compete in this market today?

How will we compete in this market in the future?

Business-level strategy should ask`

STRATEGY AND IMPLEMENTATION ITERATE

WAL-MART EXAMPLE

Strategy:

The process of deciding what to do

Implementation:

The process of performing all the activities necessary to do what has been planned

Compete as discount retailer in rural markets

Leverage inventory and sourcing systems to be low-cost leader

Invest heavily in organizational structure, systems, and processes

UNPLANNED ACTIONS CAN DRIVE STRATEGY

Intel’s original focus (1970s & 1980s)

Design and manufacture of Dynamic, Random-Access Memory Chips (DRAM)

Unplanned experimental venture to make microprocessors for Busicom, a Japanese calculator maker

Focus on micro-processor segment

By 1984, 95%of Intel revenue came from the microprocessor segment

BUSINESS STRATEGY DIAMOND

Staging

Differentiators

Economic logic

Vehicles

Arenas

What will be our speed and sequence of moves? Speed of expansion? Sequence of initiatives

Staging

How will returns be obtained? Lowest costs through

scale advantages? Lowest costs through

scope and replication advantages

Premium prices due to unmatchable service?

Premium prices due to proprietary product features?

Economic logic

How will we get there? Internal development? Joint ventures? Licensing/franchising? Experimentation? Acquisitions?

Vehicles

How will we win? Image? Customization? Price? Styling? Product reliability? Speed to market?

Differentiators

Where will we be active? ( and with how much emphasis?) Which product categories? Which channels? Which market segments? Which geographic areas? Which core technologies Which value-creation

strategies?

Arenas

JET BLUE STRATEGY

Objective

To “bring

Humanity

back to air travel”

Arenas Arenas

Low fare commercial air carrier Underserved but over-priced US cities

Vehicles Vehicles

Start from scratch and achieve all growth internally (i.e., do not purchase a regional airline)

DifferentiatorsDifferentiators

High level of service compared to low fare competitors (e.g., leather seating, satellite TV)

Strategy Strategy

Grow from one route between two cities to serving 20 cities in just 3 years

Economic logicEconomic logic

Secure cost advantage by being willing and able to perform key tasks differently One type of plan JFK home base Secondary location

GOALS OF STRATEGY IMPLEMENTATION

To make sure strategy formulation is comprehensive and well informed

1

To translate good ideas into actions that can be executed (and sometimes to use execution to generate or identify good ideas)

2

IMPORTANCE OF EXECUTION

“The important decisions, the decisions that really matter, are strategic . . . [But] more important and more difficult is to make effective the course of action decided upon.”

– Peter Drucker

FRAMEWORK FOR STRATEGY IMPLEMENTATION

Intended Strategy

Realized and

Emergent Strategies

Key Factors of Strategy Implementation Implementation levers

Organizational structure

Systems and processes

People and rewards

Strategic leadership Lever- and resource-allocation

decisions

Decision support among stakeholders

IMPLEMENTATION LEVERS

Description

Implementationlevers

Structure is the manner in which responsibilities, tasks, and people are organized. It includes the organization’s authority structure, hierarchy, units, divisions, and coordinating mechanisms

Organizationalstructure

Systems are all the organizational processes and procedures used In daily operations. These include control and incentive systems, resource‑allocation procedures, information systems, budgeting, and distribution

Systems andprocesses

The people and rewards lever points to the importance of using all organization members to implement a strategy. Competitive advantage is generally tied to your human resources. Successful implementation depends on having the right people and then developing and training them in ways that support the firm’s strategy. In addition, rewards – how you pay your people – can accelerate the implementation of your strategy or undermine it

People andrewards

COMPETITIVE ADVANTAGE

Competitive Advantage: a Firm’s ability to create value in a way that its rivals cannot

Key question: how do Firms create sustained above-average returns?

THREE PERSPECTIVES OF COMPETITIVE ADVANTAGE

Dynamic

Suggests that in dynamic, rapidly changing markets, a firm’s current market position is not an accurate prediction of future performance. Instead, we look at the past for clues about how the firm arrived at its current position and to future trends – both internal and external – in an effort to predict the future landscape

Internal

Often called the “resource view”, contends that firms are heterogeneous bundles of resources and capabilities and firms with superior resources and capabilities enjoy competitive advantage over other firms. This advantage makes it relatively easier to achieve consistently higher levels of performance

External

Also called the “positional view”, contends that variations in a firm’s competitive advantage and performance are primarily a function of industry attractiveness. Companies should therefore either (1) position themselves to compete in attractive industries or (2) adopt strategies that will make their current industries more attractive

So…..

Understand what a strategy is and identify the difference between business-level and corporate-level strategy

1

Understand the relationship between strategy formulationand implementation

2

Describe the determinants of competitive advantage3

Recognize the difference between a fundamental and a dynamic competitive advantage

4

Understand why we study strategic management5

Management Issues

ManagementIssues

ResourcesResources

Organizational structureOrganizational structure

RestructuringRestructuring

Rewards/IncentivesRewards/Incentives

Annual ObjectivesAnnual Objectives

PoliciesPolicies

Management Issues: Annual objectives

-- Decentralized activity

-- Directly involve all managers in the organization

Basis for resource allocation

Mechanism for management evaluation

Metric for gauging progress on long-term objectives

Establish priorities (organizational, division, & departmental)

Purpose of Annual Objectives --

Management Issues

Consistency of Annual Objectives --

Across hierarchical levels

Horizontally consistent

Vertically consistent


Management Issues

Requirements of Annual Objectives: Measurable

Consistent

Reasonable

Challenging

Clear

Understood

Timely

Quantity

Quality

Cost

Time

Be Verifiable

Annual Objectives Should State:


Management Issues (cont’d)

ManagementIssues

Supportive CultureSupportive Culture

Production/OperationsProduction/Operations

Human ResourcesHuman Resources

Resistance to ChangeResistance to Change

Natural EnvironmentNatural Environment

Management Issues: Structure

Matching Structure with Strategy

Changes in strategy = Changes in structure

Structure dictates how objectives & policies will be established

Structure dictates how resources will be allocated

New administrativeproblems emerge

New strategyIs formulated

Organizationalperformance

declines

Organizational performance

improves

New organizationalstructure is established

Chandler’s Strategy-Structure Relationship

Functional Structure

Divisional Structure

Strategic Business Unit Structure (SBU)

Matrix Structure

Basic Forms of Structure

Management Issues: Structure


Organization StructuresOrganization Structures

• Simple StructureSimple Structure

PresidentPresident

EmployeesEmployees

Owner-manager makes decisions.Owner-manager makes decisions. Little specialization of tasks.Little specialization of tasks. Few rules, little formalization.Few rules, little formalization. Advantages:Advantages:

- Provides high flexibilityProvides high flexibility- Rapid product introductionRapid product introduction- Few coordination problemsFew coordination problems

AccountingAccountingLegalLegal

AffairsAffairs

HRMHRM FinanceFinance MarketingMarketing R&DR&D ProductionProduction

PresidentPresident

Organization structureOrganization structure

• Functional structureFunctional structure



• Functional structureFunctional structure

AdvantagesAdvantages

- Centralized control of operationsCentralized control of operations- Promotes in-depth functional expertisePromotes in-depth functional expertise- Enhances operating efficiency where tasks are routineEnhances operating efficiency where tasks are routine

DisadvantagesDisadvantages

- Functional coordination problemsFunctional coordination problems- Inter-functional rivalryInter-functional rivalry- Overspecialization and narrow viewpointsOverspecialization and narrow viewpoints- Hinders development of cross-functional experienceHinders development of cross-functional experience- Slower to respond in turbulent environmentsSlower to respond in turbulent environments

GovernmentGovernmentAffairsAffairs

LegalLegalAffairsAffairs

CorporateCorporateR&D LabR&D Lab

StrategicStrategicPlanningPlanning

CorporateCorporateHumanHuman

ResourcesResources

CorporateCorporateMarketingMarketing

CorporateCorporateFinanceFinance

ProductProductDivisionDivision





PresidentPresident


• Product-divisional structureProduct-divisional structure




Organization based on products versus functionsOrganization based on products versus functions

Each division is a separate business in which day-to-day Each division is a separate business in which day-to-day decisions are delegated to divisional managers.decisions are delegated to divisional managers.

Divisions are managed using strategic controls – detailedDivisions are managed using strategic controls – detailed knowledge of firm operations allows managers to remain activelyknowledge of firm operations allows managers to remain actively involved.involved.

Overdiversification leads to inability to process detailed informationOverdiversification leads to inability to process detailed information and a reliance on financial controls to evaluate managers.and a reliance on financial controls to evaluate managers.




AdvantagesAdvantages

- Decentralized decision making- Decentralized decision making

- Each business is organized around products- Each business is organized around products

- Puts profit/loss accountability on managers- Puts profit/loss accountability on managers

- Facilitates rapid response to environmental changes- Facilitates rapid response to environmental changes

- Allows efficient management of a large number of units- Allows efficient management of a large number of units


- May lead to costly duplication of functions- May lead to costly duplication of functions

- Inter-divisional rivalry- Inter-divisional rivalry

- Corporate managers may lose in-depth understanding- Corporate managers may lose in-depth understanding

BusinessBusinessProjectProject



R&DR&D ProductionProduction MarketingMarketing FinanceFinance

SpecialistsSpecialists





SpecialistsSpecialists SpecialistsSpecialists






PresidentPresident• Matrix StructureMatrix Structure



• Matrix structureMatrix structure

Contains aspects of both functional and product-divisional Contains aspects of both functional and product-divisional structures.structures.

Advantages:Advantages:

- Creates checks and balances between competing viewpoints- Creates checks and balances between competing viewpoints

- Promotes holistic view of the firm- Promotes holistic view of the firm

- Encourages cooperation and consensus building- Encourages cooperation and consensus building

Disadvantages:Disadvantages:

- Very complex and costly- Very complex and costly

- Shared authority increases communication time- Shared authority increases communication time

- Difficult to respond rapidly- Difficult to respond rapidly

- May promote bureaucracy and reduce innovation (in large firms).- May promote bureaucracy and reduce innovation (in large firms).


FocalFocalFirmFirm

PartnerPartner

PartnerPartner

PartnerPartner

PartnerPartner

• Network structureNetwork structure Group of firms combine resources to Group of firms combine resources to achieve together what they can’t achieveachieve together what they can’t achieve alone.alone.

Advantages:Advantages:

- Firm’s emphasize their own core - Firm’s emphasize their own core competenciescompetencies

- Rapid response time- Rapid response time

- Very flexible- Very flexible

- Reduces capital intensity- Reduces capital intensity


- Asymmetric information- Asymmetric information

- Technology expropriation- Technology expropriation

- Trustworthiness of partners- Trustworthiness of partners

- Asset hold-up- Asset hold-up

Management Issues

ManagementIssues

ResourcesResources





PoliciesPolicies

Management Issues: Restructuring

Restructuring often involves reducing the size of the firm, number of employees, divisions and/or units, and the number of hierarchical levels

Downsizing

Rightsizing

Delayering

Management Issues: Restructuring

Reengineering: Reconfiguring or redesigning work, jobs, and processes to improve cost, quality, service, and speed

Process management

Process innovation

Process redesign

Management Issues

ManagementIssues

ResourcesResources





PoliciesPolicies

Management Issues: Pay/performance linkage

Linking Pay/Performance to Strategies involves the question: how can an organization’s reward system be more closely linked to performance?

Dual bonus systems: short-/long-term

Profit sharing systems: direct linkage to profitability

Gain sharing systems: linkage to achievement of targets and/or exceeding them

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Tests for Performance-Pay Plans

Does the plan capture attention?

Do employees understand the plan?

Is the plan improving communication?

Does the plan pay out when it should?

Is the company or unit performing better?


ManagementIssues






Management Issues: managing resistance to change

Resistance to change is the single greatest threat to successful strategy implementation

Change raises anxiety or fear concerning:

Economic loss

Inconvenience

Uncertainty

Break in status-quo

Management Issues

Change Strategies

Force Change Strategy

Educative Change Strategy

Rational or Self-Interest Change Strategy

Management Issues: managing resistance to change


ManagementIssues






Management Issues: Natural environment

-- Wide appreciation for firms that “mend” rather than “harm” the environment

Develop/acquire “green” businesses

Divesting environmental-damaging business

Low-cost producer through waste minimization & energy conservation

Natural Environment – Environmental Strategies:


ManagementIssues






Management Issues

Strategy-Supportive Culture

Preserve, emphasize, and build upon aspects of existing culture that support new strategies

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• Formal statements of philosophy, charters, etc. used for recruitment and selection, socialization

• Designing of physical spaces, facades, buildings• Deliberate role modeling, teaching and coaching• Explicit reward and status system, promotion criteria• Stories, legends, myths about key people and events• What leaders pay attention to, measure and control• Leader reactions to critical incidents and crises• How the organization is designed and structured• Organizational systems and procedures• Criteria used for recruitment, selection, promotion, retirement

Management Issues: Supportive culture

Elements linking culture to strategy:


ManagementIssues






Management Issues: Production/operations concerns

Production processes typically constitute more than 70% of firm’s total assets

Plant size

Inventory/Inventory control

Quality control

Cost control

Technological innovation

Production/Operations Decisions:


ManagementIssues






Management Issues

Human Resource Concerns

HR manager position has strategic responsibility and has changed dramatically as companies continue to reorganize, outsource, etc.

Management Issues

Human Resource Strategic Responsibilities

Assessing staffing needs/costs

Developing performance incentives

ESOP’s

Child-care policies

Work-life balance issues

Benefits of a Diverse Workforce

Improves corporate culture Improves employee morale Leads to a higher retention of employees Leads to easier recruitment of employees Decreases complaints and litigation Increases creativity Decreases interpersonal conflict Enables the organization to move into emerging markets Improves client relations Increases productivity Improves the bottom line Maximizes brand identity Reduces training costs

Chapter 3C Strategy Formulation and choce of alternatives

Documents

Transcript of Chapter 3C Strategy Formulation and choce of alternatives