Formulation

Formulation Overview
Want to create a sustainable competitive advantage Grounded in current mission, objectives, and strategies 1. Identify rich range of strategic alternatives 2. Balanced evaluation of + and - of alternatives 3. Decide on alternatives to be implemented/recommended

Three Levels of Strategy

Corporate level strategy
Competitive (business level) strategy

Functional strategies
all need to be consistent and in alignment

Corporate Level Strategy

Directional strategy (retrenchment through growth)
Portfolio strategy (what LOBs for future) Parenting strategy (allocation of resources + connections)

Directional Growth Strategies

Concentration
Vertical integration
Horizontal growth

Diversification
Related (concentric) Unrelated (conglomerate)

Mergers, acquisitions, strategic alliances

Other Directional Strategies

Stability
Retrenchment

often more appropriate than growth strategies, which tend to be overused

Competitive Strategy
(Sometimes called business level strategy)
How we will compete within each line of business (LOB) or strategic business unit (SBU) Porters four generic competitive strategies Variations plus tactics

Generic Competitive Strategies

Competitive Advantage Lower cost Differentiation Competitive Broad Scope Narrow Price leadership Differentiation

Price focus Differentiation Focus

Competitive Advantage
A firms ability to create value in a way that its rivals cannot When a firm has the potential to earn a persistently higher rate of profit than its rivals

Competitive advantage means a lack of equilibrium with rival firms

Being distinctively better than rivals on 1-2 key success factors usually translates into competitive advantage

The Emergence of Competitive Advantage

How does competitive advantage emerge?

External sources of change e.g.: Changing customer demand Changing prices Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective in exploiting change

Some firms have greater creative and innovative capability

Competitive Advantage from Responsiveness to External Change

Any external change creates opportunities

Frequently, speed of response is critical Responsiveness requires:
One key resource: information One key capability: flexibility

For example, Wal-Marts purchasing and distribution driven by point-of-sale data

Competitive Advantage from InternallyGenerated Change: Strategic Innovation

Characteristics of innovative strategies:

Associated with new entrants to an industry (e.g. IKEA in furniture, Home Depot, Dell in
PCs)

Reconcile conflicting performance goals

(e.g. Toyotas lean production system combines low cost, high quality, and flexibility)

Reconfiguring the value chain (e.g. Southwest

Airlines simplification of the normal airline value chain)

Sustaining Competitive Advantage

Competitive advantage is subject to erosion by competitors
by imitation or innovation

Competitive imitation requires:

Identification of a competitive advantage Incentive to imitate

Diagnosis of key features

Resource acquisition

Sustaining Competitive Advantage Against Imitation

REQUIREMENT FOR IMITATION Identification

ISOLATING MECHANISM - Obscure superior performance - Deterrence--signal aggressive intentions to imitators - Pre-emption--exploit all available investment opportunities - Rely upon multiple sources of competitive advantage to create causal ambiguity

Incentives for imitation

Diagnosis

Resource acquisition

- Base competitive advantage upon resources and capabilities that are immobile and difficult to replicate

Competitive Advantage in Different Industry Settings: Trading Markets and Production Markets
SOURCE OF IMPERFECTION OF COMPETITION None (efficient markets) Imperfect information Transaction costs Systematic behavioral trends Overshooting OPPORTUNITY FOR COMPETITIVE ADVANTAGE None Insider trading Cost minimization Superior diagnosis (e.g. chart analysis) Contrarianism Identify potential barriers to imitation (e.g. deterrence, preemption, causal ambiguity, resource immobility, etc.) & base strategy upon them. Difficult to influence or exploit.

MARKET TYPE

TRADING MARKETS

Barriers to imitation PRODUCTION MARKETS Barriers to innovation

Functional Level Strategy

More localized and shorter-horizon strategies
Deal with how each functional area will carry out its activities to be effective and maximize resource productivity

Need to ensure that the set of recommended strategies address all the critical issues well

International Strategies
Licensing Management contracts Exporting Joint ventures, production sharing, subcontract arrangements Turnkey construction contracts BOT (build, operate, transfer) contracts Acquisitions Green-field development

Implementation

Implementation
Third stage in strategic management process
Vital, often neglected

Reread notes on implementation

Need a good implementation plan Then any path will do (Cheshire Cat) If you dont know where youre going, you might wind up somewhere else! (Yogi Berra) BUT you have to work with the situation as your implementation proceeds Plans get you into things, but you got to work your way out. (Will Rogers, Jr.)

Any implementation plan needs to answer:

What?

How?
Who? When? Where? Why (are we doing it this way)?

An implementation plan is a sequence of action steps

Action steps in an implementation plan may result from considering:
Basic steps necessary Resources Timing Support Reward systems Organization structure Culture Tracking & control systems

Some problems in rewarding & measuring performance

Lack of valid, measurable objectives Cant get timely, valid information Side effects:
Short-term orientation Goal displacement

Behavior substitution
Suboptimization

Behavior Substitution