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Edinburgh Business School MBA AUC Academic Partner Strategic Planning Module 7 Making Choices among Strategies Instructor: Moataz Darwish, MBA
Contents 1. A Structure for Rational Choice 2. Strengths, Weaknesses, Opportunities and Threats 3. Generic Strategies 4. Identifying Strategic Variations 5. Strategy Choice SP Mod 7 – Moataz Darwish 3
A Structure for Rational Choice • Analyses of choice: investigate the structures within which choices are made among competing options. • Analysis: • identify many relevant factors • estimate their relative importance, • thus providing the basis on which an informed choice can be made. • BUT, NO course of action is generated yet. SP Mod 7 – Moataz Darwish 5
Contents 1. A Structure for Rational Choice 2. Strengths, Weaknesses, Opportunities and Threats 3. Generic Strategies 4. Identifying Strategic Variations 5. Strategy Choice SP Mod 7 – Moataz Darwish 6
Strengths, Weaknesses, Opportunities and Threats • ETOP & SAP can be combined together to identify where matches occur between the two SWOT • SWOT analysis is an essential first step in: • Assessing what the company needs to do to protect its current market position, • And in identifying potential strategic thrusts which can capitalise on company strengths and market opportunities. • It is not always a simple matter to categorise factors and recognise opportunities and threats for what they are; • That is why it is so important to understand the core disciplines and be able to think through the implications of market information. SP Mod 7 – Moataz Darwish 7
Strengths, Weaknesses, Opportunities and Threats • Government decision to reduce investment in railways and increase investment in the road network; one of the main markets for the new engine control is in very large trucks. A threat is the relaxation of trade barriers. • Strengths lie in what it might be able to do, and as a result these strengths do not match very well with the opportunity of expanding into the truck market. • Weaknesses relate to the company’s ability to bring the new product to the market, capture the new segment, and match aggressive foreign competition. SP Mod 7 – Moataz Darwish 8
Contents 1. A Structure for Rational Choice 2. Strengths, Weaknesses, Opportunities and Threats 3. Generic Strategies 1. Corporate Level Generic Options 2. Business Level Generic Options 3. Decision Maker Generic Strategies 4. Generic Strategies and Company Performance 4. Identifying Strategic Variations 5. Strategy Choice SP Mod 7 – Moataz Darwish 9
Generic Strategies 1. Corporate Level Generic Options • Scope of the company and the directions it will pursue, for example the development of new products or the acquisition of companies to increase the product portfolio. • Mangers have to have: comprehensive analyses, explicit about which generic alternative they are pursuing and why. • It is important to be clear about what the strategy options are NOT (ex. Expansion can not be defined as increase profitability) . • The generic strategy is one of the means by which the end of profitability may be achieved. 2. Business Level Generic Options • focus on effective exploitation of individual product markets, as opposed to the overall resource allocation problem facing corporate level strategists. • Individual product OR strategy approach to group of products Generic strategies are the basis on which the company attempts to build its competitive advantage; without a clear idea of the generic strategy which it is pursuing, a company is likely to end up with no identifiable strategy with the result that it will lack direction and strategic intent. SP Mod 7 – Moataz Darwish 10
Generic Strategies Decision Maker Generic Strategies ProspectorProspector AnalyzerAnalyzer DefenderDefender ReactorReactor Corporate Generic Strategies StabilityStability ExpansionExpansion RetrenchmentRetrenchment CombinationsCombinations Business Level Generic Strategies Cost LeadershipCost Leadership DifferentiationDifferentiation FocusFocus Stuck in the MiddleStuck in the Middle SP Mod 7 – Moataz Darwish 11
Generic Strategies • The approach to strategy is partly dependent on the overall or dominant characteristic of the decision maker or decision making group • Prospector: identification of new market opportunities • Analyser: sophisticated internal information systems and detailed investigation of options, but this is unlikely to be followed up by the type of action undertaken by the Prospector • Defender: maintaining the current market position without exhibiting a great deal of initiative in developing new market opportunities • Reactor: deals with circumstances as they arise • These dominant characteristics may be relevant only to a specific period, and will obviously change as managers are replaced. • Help towards understanding how the company has reached the position it is in, and the type of strategy which might win general support. SP Mod 7 – Moataz Darwish 12
Generic Strategies Corporate Generic StrategiesCorporate Generic Strategies StabilityStability ExpansionExpansion RetrenchmentRetrenchment CombinationsCombinations Stay the same NOT steady Expand Get smaller Change mix of activities •Relatively small •Diversifying risk •Re-structuring/ Down- Either: performance gap •Searching for sizing/ De-layering 1-Diff strategies in •Markets are mature, long competencies or •End of Product life diff SBUs lifecycles opportunities fit with it cycles (redeployment) OR •Internal weaknesses - •Exploit Economies of •Dogs (divest) 2-Sequentially aim to increase efficiency scale / Experience •Overextended markets •Opportunity cost •Unstable financial history effects (losing money on some •Product portfolio •Poor economic •Building advance markets) prospects, business cycle capacity (in recession) •Drive for efficiency downturn •Managerial motivation •Competitive threat (remuneration/reward) •Perceived costs of change – change averse • •Managers averse to risk Different generic strategies are appropriate in different •Not trivial option – needs circumstances. substantial internal •What criteria to decide on? Depends on Co Objectives and adding changes most value to Shareholder wealth. •The distinction between means and ends must be maintained. SP Mod 7 – Moataz Darwish 14
Parenting Advantage (from Mod 1) 1. Stand-alone influence: • the parenting activities include agreeing and monitoring performance targets, approving major capital expenditures and selecting business unit managing directors; • the parenting influence may extend to product-market strategies, pricing and human resource management. But it can be argued that the more the parent extends its influence into the affairs of the individual businesses, the more likely it is that it will destroy value; this is the 10 per cent versus 100 per cent paradox: why should a parent manager working part time do better than a business manager working full time? 2. Linkage influence: • the parent can encourage relationships to capitalise on synergy. But in the absence of a parent, business managers are free to establish linkages without parental involvement; so why should the parent do any better? This is the ‘enlightened self-interest’ paradox. 3. Functional and services influence: • the parent can provide functional leadership and cost effective services. But this creates a supplier insulated from outside competition, and it is difficult to guarantee that internal suppliers will be as efficient as the market. This is the ‘beating the specialists’ paradox. 4. Corporate development activities: • the main role of the parent is usually seen as buying and selling businesses, creating new businesses, and redefining businesses. This amounts to changing the businesses in the corporate portfolio. But since the weight of research indicates that the majority of corporately sponsored acquisitions, new ventures and business redefinitions fail to create value, the odds against success are long; this is the ‘beating the odds’ paradox. SP Mod 7 – Moataz Darwish 15
SBU Generic Strategies • Competitive Scope and Competitive Advantage: • Company still has to make a decision between cost and differentiation even if it has identified a narrow target or niche. • It follows that the skills required to pursue the different generic strategies are different. • Switching from one generic to another has implications for the total design of the value Figure 7.2 Competitive scope and competitive advantage chain. SP Mod 7 – Moataz Darwish 16
Generic Strategies • Cost Leadership – 2 preoccupations: 1. Must achieve market share (high initial investment) Table 7.3 Cost leadership, differentiation and focus: related activities 2. Maintain efficient resource allocation, forefront of technology development to reduce cost, maintaining position. • Differentiation: 1. Segmenting market with price premium to compensating for additional differentiation cost 2. Irrational to ignore cost altogether 3. Continually redefining the market 4. Non-homogenous products with product position • Focus: 1. Identify Market niches, avoid competition (product, process or consumer) 2. Market share - irrelevant • Stuck in the middle: 1. Undefined strategy, continually adjusting, confused SP Mod 7 – Moataz Darwish 17
Contents 1. A Structure for Rational Choice 2. Strengths, Weaknesses, Opportunities and Threats 3. Generic Strategies 4. Identifying Strategic Variations 5. Strategy Choice SP Mod 7 – Moataz Darwish 18
Identifying Strategic Variations • The next step is to identify which courses of action are available in order to achieve the identified objectives. • Within the context of a given generic strategy some broad classifications can serve to reduce the options which have to be evaluated. SP Mod 7 – Moataz Darwish 19
Identifying Strategic Variations 1. Related and Unrelated Diversification Options – relatedness • Main incentives: minimise risk (mgt risk), capture economies of scope (could lead to diseconomies as well + dominant mgt logic), add value through the parenting, function and benefit from synergy. • To illustrate the benefits of not taking relatedness at its face value consider the case of a company that produces industrial office cleaning equipment. •Two options considered: to establish an SBU that undertakes office cleaning mainly using the company’s equipment or to invest in a production line producing domestic vacuum cleaners. •there is likely to be very little benefit from expansion in either case (little commonality between either routines or resources). SP Mod 7 – Moataz Darwish 20
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