Alternative Strategies

Forward Integration

Gaining ownership or increased control over distributors or retailers

Tandy Corporation opens new Radio Shack stores

Backward Integration

Seeking ownership or increased control over a firm’s suppliers

K-Mart purchases manufacturing facility for shoes

Horizontal Integration

Seeking ownership or increased control over competition

Merck, the world’s largest drug company, acquires Medco, the world’s largest marketer of discount prescription drugs

STRATEGY DEFINITION EXAMPLE

Alternative Strategies

Market Penetration

Seeking increased market share for present products or services in present markets through greater marketing efforts

Walt Disney pays Nancy Kerrigan $1million for appearances

Market Development

Introducing present product or services into new geographic area

Corning, Inc. becomes one of Russia’s first major suppliers of optical fiber

Product Development

Seeking increased sales by improving present products or services or developing new ones

Rayovac develops an alkaline battery recharger

STRATEGY DEFINITION EXAMPLE

Alternative Strategies

Concentric Diversification

Adding new, but related, products or services

Sonoco Products Co., a maker of industrial packages, acquired Engraph, Inc., a maker of consumer packages

Conglomerate Diversification

Adding new, unrelated products or services

Seagram acquires 13.1 percent of Time Warner

Horizontal Diversification

Adding new, unrelated products or services for present customers

Stratus Computer, a maker of fault-tolerant computers, acquires Shared Financial Systems, a software maker

STRATEGY DEFINITION EXAMPLE

Alternative Strategies

Joint Venture

Two or more sponsoring firms forming a separate organization for cooperative purposes

Home Shopping Network and Sumitomo offer television shopping in Japan

Retrenchment Regrouping through cost & asset reduction to reverse declining sales/profits

U.S. Surgical declares bankruptcy

Divestiture Selling a division or part of an organization

Ryder System, a truck-leasing co, divests its aviation business

Liquidation Selling all of a co’s assets, in parts, for their tangible worth

The Bank of Credit and Commerce Int’l (BCCI) liquidates

STRATEGY DEFINITION EXAMPLE

Strategic Analysis Products – Markets Market/Product Expansion Grid

Current Product

New Product

Current Markets

Market Penetration Strategy

Product Development Strategy

New Markets

Market Development Strategy

Diversification Strategy

M

A

R

K

E

T

S

P R O D U C T S

Market Analysis / Coors

HIGH(H) MEDIUM(M) LOW(L)

H China; India

M Brazil; Czech Republic

L Korea; Germany

H Poland

M Romania

L

L

O

W

R

I

S

K

H

I

G

H

MARKET ATTRACTIVENESS

Strategic Management Productivity Tree

T

Task Technical

P

Staff Performance

P

Efficiency Effectiveness

Adaptive

Plant/Office, Facilities, Methods, STDS

MGMT Plan Organize Direct Control

Knowledge, Skills, Ability

Communications Motivation

Job Design Staff Leadership

Feedback - Information

Strategic Management The Firm: Core Competencies

• Technology Operating System

• Management System

• Knowledge-Base Skills / Abilities

• Organizational Dynamics, Culture, Climate, Motivations

Work Sheet: Internal Assessment of Firms

Four Characteristics Resources-Capabilities Important in Sustaining Competitive Advantage

1.Durability

2.Transparency

3.Transferability

4.Replicability

Internal Assessment of Firms • Durability

– Rate at which firms underlying resources and capabilities depreciate or become obsolete

• Transparency – Speed with which other firms can understand the

relationship of resources and capabilities supporting a successful firm’s strategy. Capability that requires a complex pattern of various resources and is more difficult to comprehend than a capability based on a single key resource.

Internal Assessment of Firms • Transferability

– Ability of competitors to gather the resources necessary to support a competitive challenge. (e.g., Duplicating the primary source of Rocky Mountain spring water may be difficult. Also, brand names may be impossible to transfer with out purchase or a license.)

• Replicability – Ability of competitors to use resources and capabilities to

duplicate a firm’s success. (e.g., a brand manager from a P&G competitor may fail to identify least visible coordination mechanisms or fail to note behaviors of another company’s brand manager may conflict with company’s culture.)

Basic Principles of Organizations 1. The organization plan should be developed from the

point of view of the activities required to achieve the objectives of the enterprise.

2. Group the activities according to the natural likings of the activities and the usual combinations of abilities and interests of the team members.

3. Assign persons to natural groupings according to their abilities and interests.

4. Personal responsibilities, authorities and relationships should be clearly understood and completely accepted not only by the individual but also by all persons affected.

5. Delegation of authority and the freedom to act should be clearly and appropriately defined and be adequate for the responsibilities assigned.

Basic Principles of Organizations 6. As many as possible of the decisions affecting specific

operations and requiring approval before action should be made only one organization step (level) above the person putting the decision into effect.

7. No person should report to more than one superior. (However, an individual may be assigned by his or her superior to serve or assist another organization unit and receive directions within the assigned sphere of service.

8. (Span of Control) The number of persons reporting to a superior should be few enough so that he or she can give each person adequate attention and still have time for responsibilities other than direction and supervision such as investigations, planning, etc…

Basic Principles of Organizations 9. Recognize and make good use of the informal

organization: I.e., the natural groupings of persons based on friendships and like interests. Watch that cliques or “gangs” do not handicap the official organization.

10. Titles should be appropriate and consistent. 11. Keep the organization plan flexible and sensitive to

changing conditions.

“Pure Project” Dedicated Task Force Organization

General Manager

Marketing

Network

Engineering

Manufacturing

Project Manager Other Operations

• Is a separate project organization with most or all personnel needed on the project working under the direct control of the project manager?

• Used for major or special projects: I.e., “skunk works”

• Hybrid matrix = a project organization with some functions directly controlled and others controlled through a matrix

Matrix Project Management

Within this category are three types of matrix organizations which primarily differ in the relative amount of influence/decision-making

power between functional discipline managers and the project management organization. Matrix management generally increases conflict as functional managers and project management often stress

different project aspects and goals.

General Manager

Project Manager A

Project Manager B

Marketing Network Engineering Manufacturing

p e r s o n n e l

p e r s o n n e l

p e r s o n n e l

p e r s o n n e l

Matrix Project Management: Descriptions

• Strong or Project Matrix – Here, a project management orientation predominates: a full-

fledged project office with support staff may exist

• Balanced or “Classical” Matrix – Balanced influence between functional managers and project

managers characterizes this arrangement. The full-time project manager has expert power and formal position power. A high level of conflict is often evident.

• Weak or Functional Matrix – Functional managers exert a stronger influence than the project

manager who is really a coordinator and can be part or full-time. Team members may only be liaisons, linking the project to the functional department.

Matrix Management and The Team Member

Ground Rules for Behavior •Keep both bosses informed. •As soon as a conflict emerges (or before), get the bosses together for a meeting and get one to change his or her priorities. •Do not make the mistake of telling each boss what he or she want to hear—You will get squeezed. •Try to work out an agreement in writing that spells out your responsibilities and reporting relationships.

Team Member

Project Manager

Functional Manager

The Problem of Two or More

Bosses

Influence Project Management Weakest Project Organization

•Influence project management occurs in a standard functional or hierarchical management organization. •A “project activator” (often staff member) is asked to coordinate a project. This is frequently part-time and with no formal authority. The “activator” merely works through the “influence” of the general manager’s position (“the division manager asked that I do this for him/her.”)

General Manager Project Activator

Marketing Network Engineering Manufacturing

p e r s o n n e l

p e r s o n n e l

p e r s o n n e l

p e r s o n n e l

Matrix Project Management General Manager

Project Manager A

Project Manager B

p e r s o n n e l

p e r s o n n e l

p e r s o n n e l

p e r s o n n e l

Strategic Management Firm-Industry Value Chain—A Model

Inbound Logistics

Operations, R&D, Technology, Manufacturing, Staff

Outbound Logistics

Marketing, Advertising, Sales

Service

Elements of Industry Structure: Porter’s Five-Forces

B u y e r s

S u p p l i e r s

Industry Competitors

Intensity of Rivalry

Bargaining Power

of Buyers

Bargaining Power

of Suppliers

New Entrants Threat of New Entrants

Threat of Substitutes

Substitutes

Adapted from Michael E. Porter, “Competitive Advantage,”

New York, The Free Press, 1985. Reprinted by Permission.

Porter’s Five-Forces: Described

• Barriers to Entry – Economies of Scale — Product Differentiation – Brand Identification — Switching Costs – Access to Distribution Channels — Capital Requirements – Access to Latest Technology — Experience and Learning Effects

• Government Action – Industry Protection — Industry Regulation – Consistency of Policies — Custom Duties – Foreign Exchange — Foreign Ownership – Capital Movements Among Countries – Assistance Provided to Competitors

Adapted from Michael E. Porter, “Competitive Advantage,”

New York, The Free Press, 1985. Reprinted by Permission.

Porter’s Five-Forces: Described

• Rivalry Among Competitors – Concentration and Balance Among Companies – Industry Growth — Fixed (or Storage) Costs – Product Differentiation — Switching Costs – Intermittent Capacity Increasing – Corporate Strategic Stakes

• Barriers to Exit – Asset Specialization – One-Time Cost of Exit – Strategic Interrelationships with other Businesses – Emotional Barriers – Government and Social Restrictions

Adapted from Michael E. Porter, “Competitive Advantage,”

New York, The Free Press, 1985. Reprinted by Permission.

Porter’s Five-Forces: Described

• Power of Suppliers – Number of Important Suppliers – Availability of Substitutes for the Suppliers’ Products – Differentiation or Switching Cost of Suppliers’ Products – Suppliers’ Threat of Forward Integration – Suppliers’ Contribution to Quality or Service of the Industry Products – Total Industry Cost Contributed by Suppliers – Importance of the Industry to Suppliers’ Profit

Adapted from Michael E. Porter, “Competitive Advantage,”

New York, The Free Press, 1985. Reprinted by Permission.

Porter’s Five-Forces: Described

• Power of Buyers – Number of Important Buyers – Availability of Substitutes for the Industry Products – Buyers’ Switching Costs – Buyers’ threat of Backward Integration – Industry Threat of Forward Integration – Contribution to Quality or Service of Buyers’ Products – Total Buyers’ Cost Contributed by the Industry – Buyers’ Profitability

• Availability of Substitutes – Availability of Close Substitutes – User’s Switching Costs – Substitute Producer’s Profitability and Aggressiveness – Substitute Price-Value

Adapted from Michael E. Porter, “Competitive Advantage,”

New York, The Free Press, 1985. Reprinted by Permission.

Porter’s Five Forces: As Applied to the Pharmaceutical Industry in the early 1990’s

B u y e r s

S u p p l i e r s

Industry Competitors

Intensity of Rivalry—

Attractive

Very Attractive

New Entrants Very Attractive

Mildly Unattractive

Substitutes

Adapted from Michael E. Porter, “Competitive Advantage,”

New York, The Free Press, 1985. Reprinted by Permission.

Mildly Unattractive

Porter’s Five-Forces: The Pharmaceutical Industry--Applied

• Barriers to Entry (Very Attractive) – Steep R&D experience curve effects – Large economies of scale bariers in R&D and sales force – Critical mass in R&D and marketing require global scale – Significant R&D and marketing costs – High risk inherent in the drug development process – Increasing threat of new entrants coming from biotechnology

companies

• Bargaining Power of Suppliers (Very Attractive) – Mostly commodities – Individual scientists may have some personal leverage

Porter’s Five-Forces: The Pharmaceutical Industry--Applied

• Bargaining Power of Buyers (Mildly Unattractive) – Traditional purchasing process highly price insensitive: the

consumer (the patient) did not buy and the buyer (the physician) did not pay

– Large power of buyers—plan sponsors and cost containment orgs—influence decisions to prescribe less expensive drugs

– Mail order pharmacies obtain large discounts on volume drugs – Large aggregate buyers—hospital suppliers, large distributors,

gov’t institutions—progressively replace the role of individual customers

– Important influence of the government in the regulation of the buying process

Porter’s Five-Forces: The Pharmaceutical Industry--Applied

• Threat of Substitutes (Mildly Unattractive) – Generic and “me-too” drugs weakening branded, proprietary drugs – More than half of the drug patent is spent in product development

and approval processes – Technological development makes imitation easier – Consumer aversion to chemical substances erodes appeal for

pharmaceutical drugs

Porter’s Five-Forces: The Pharmaceutical Industry--Applied

• Intensity of Rivalry (Attractive) – Global competition concentrated among fifteen large companies – Most companies focus on certain types of disease therapy – Competition among incumbents limited by patent protection – Competition based on price and product differentiation – Government intervention and growth of “me-too” drugs increase

rivalry – Strategic alliances establish collaborative agreements among

industry players – Very profitable industry, however with declining margins

• Summary Assessment of Industry Attractiveness

Porter’s Five-Forces: The Pharmaceutical Industry--Applied

Attractive

Strategic Management External Factors Diagram

Global Micro

STRATEGIC MANAGEMENT

FIRM

Availability of Substitutes

Global Macro

Industry Value Chain

Strategic Alternatives

Strategic Management External Factors Diagram--Elaboration

• Global Micro – Industry Structure — Government action – Competition — Suppliers – Buyers — Resources: Labor / Unions

• Global Macro – Economic – Social / Demographics – Political-Legal: Taxes / Regulations – Technological: Product / Process

Strategic Management External Factors Diagram--Elaboration

• Strategic Alternatives – Cost vs. Product Differentiation — Integration: – Simplification: Product / Process Forward, Backward, Horizontal – Joint Venture / Alliance — Retrenchment – Divestiture / Liquidation

• Industry Value Chain – Inbound Logistics – Operations – R&D / Technology / Manufacturing – Outbound Logistics – Marketing – Sales / Advertising – Service

The Drucker Model Answer to 3 Key Questions

Mission Statement

• 8 Business Objectives (Drucker) – Market — Human Resources – Innovation — Financial Resources – Profit — Material Resources – Societal — Productivity

Strategic Planning is

a Continuous Process

Product Life Cycle

TIME -- Years

Cum

ulat

ive

Sale

s Phase I

Innovation Introduction

Phase II

Accelerated Growth

Phase III

Maintenance

Phase IV Discontinuance

Strategic Management Business Portfolio Matrix

Star Business (Invest Cash)

Problem Child (Draw)

Cash Cow Dog

(But – Exceptions)

Relative Market Share

(Firm vs. largest competitor)

Industry

Attractiveness Growth Rate

Average Rate of Growth

HIGH

HIGH

LOW

LOW

Poker Analogy – Where to Bet Technology Portfolio Matrix

Bet (Cash)

Draw

Cash In Fold

Relative Technological Position

(Firm vs. largest competitor)

Industry

Technology Importance to

Product / Service

HIGH

HIGH

LOW

LOW

Strategic Management R&D Model

Pure Research

Applied Research

Product/ Service

Configur-ation

Pilot Intro

Full Scale Ops

RESEARCH DEVELOPMENT

INNOVATION

RADICAL

INCREMENTAL

STRATEGIC MANAGEMENT MODEL PORTFOLIO MANAGEMENT

RESOURCE ALLOCATION

CASE II

IRR

II

FUNDS

DEFICIT

I

SURPLUS

FUNDS

PROGRAMS

PROJECTS INVESTMENTS $

DEMAND

FOR FUNDS

CASE I

IRR

INTERNAL

SUPPLY

FUND

PRODUCT LIFE CYCLE MODEL SALES AND COSTS

CU

MU

LATIVE

CO

STS

CU

MU

LATIVE

SALES

RESEARCH

DEVELOPMENT

INNOVATION

PHASE I

INTRODUCTION

TIME - YEARS

PHASE II

ACCELERATED

GROWTH

COST

PHASE IV

DISCONTINUANCE

PHASE III

MAINTENANCE

SALES

BE ANNUAL

BE PRODUCT