Strategy formulation often referred to as strategic planning or long-range planning, is concerned with developing a corporations mission, objectives, strategies,

, and policies. Begins with situation analysisthe process of finding a strategic fit between EO-IS while working around ET-IW. SWOT analysis strategic factors for a specific company. Strategy = Opportunity/Capacityan opportunity by itself has no real value unless a company has the capacity (Resources) to take advantage of the opportunity. Strategic Alternative = O/(S-W) o CRITICISM OF SWOT ANALYSIS It generates lengthy lists. It uses no weights to reflect priorities. It uses ambiguous words and phrases. The same factor can be placed in two categories (e.g., a strength may also be a weakness). There is no obligation to verify opinions with data or analysis. It requires only a single level of analysis. There is no logical link to strategy implementation. Strategic Factors Analysis Summary (SFAS) Matrix Summarizes an organizations strategic factors by combining external factors from the EFAS and internal factors from the IFAS. Propitious Niche extremely favorable NICHEneed in the marketplace that is currently unsatisfied-that is so well suited to the firms internal and external environment that other corporations are not likely to challenge or dislodge it. A niche is propitious (favorable) to the extent that it currently is just large enough for one firm to satisfy its demand. It can also be called as STRATEGIC SWEET SPOT where a company is able to satisfy customers needs in a way that rivals cannot, given the context in which it operates. Strategic Window a unique market opportunity that is available only for a particular time. o The key is to identify a market opportunity in which the first firm to reach that market segment can obtain and keep dominant market share. Niches can also changesometimes faster than a firm can adapt to that change. A companys management may discover in their situation analysis that they need to invest heavily in the firms capabilities to keep them competitively strong in a changing niche. Mission and objectives Niches can also changesometimes faster than a firm can adapt to that change. A companys management may discover in their situation analysis that they need to invest heavily in the firms capabilities to keep them competitively strong in a changing niche. Decision makers tend to concentrate on the alternativesthe action possibilitiesrather than on a mission to be fulfilled and objectives to be achieved. It is much easier to deal with alternative courses of action that exist right here and now than to really think about what you want to accomplish in the future. --we often choose strategies that set our objectives for us rather than having our choices incorporate clear objectives and a mission statement.

If a company does not provide a Common Thread a unifying thememanagers may be unclear of where the company is heading.

TOWS Matrix illustrates how the external opportunities and threats facing a particular corporation can be matched with that companys internal strengths and weaknesses to result in four sets of possible strategic alternatives. It is very useful for generating a series of alternatives that the decision makers of a company or business unit might not otherwise have considered. SO Strategies are generated by thinking of ways in which a company or business unit could use its strengths to take advantage of opportunities. ST Strategies consider a companys or units strengths as a way to avoid threats. WO Strategies attempt to take advantage of opportunities by overcoming weaknesses. WT Strategies are basically defensive and primarily act to minimize weaknesses and avoid threats. Business strategyfocuses on improving the competitive position of a companys or business units products or services within the specific industry or market segment that the company or business unit serves. It is extremely important because research shows that business unit effects have double the impact on overall company performance than do either corporate or industry effects. How the company should compete or cooperate in each industry. It can be COMPETITIVE (battling against all competitors for advantage) and/or COOPERATIVE (working with one or more companies to gain advantage against other competitors). Competitive Strategy It raises the following questions: Should we compete on the basis of lower cost (and thus price), or should we differentiate our products or services on some basis other than cost, such as quality or service? Should we compete head to head with our major competitors for the biggest but most sought-after share of the market, or should we focus on a niche in which we can satisfy a less sought-after but also profitable segment of the market? Michael Porter two genericthey can be pursued by any type or size of business firm, even by not for profit organizations, competitive strategies o Lower cost strategy is the ability of a company or business units to design, produce, and market a comparable product more efficiently than its competitors. o Differentiation strategy is the ability of a company to provide unique and superior value to the buyer in terms of product quality, special features, or after-sale service. Firms competitive advantage is determined by its competitive scope--the breadth of the companys target market. Broad targetmiddle of the mass market; COST LEADERSHIP and DIFFERENTIATION. Narrow targetaim at the market niche; COST FOCUS and DIFFERENTIATION FOCUS. Cost leadership is a lower-cost competitive strategy that aims at the broad mass market and requires aggressive construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like R&D, service, sales force, advertising, and so on.

The cost leader is able to charge a lower price for its product than its competitors and still make a satisfactory profit. It also gives a company a defense against rivals. Its lower costs allow it to continue to earn profits during times of heavy competition. Its high market share means that it will have high bargaining power relative to its suppliers (because it buys in large quantities). Its low price will also serve as a barrier to entry because few new entrants will be able to match the leaders cost advantage. As a result, cost leaders are likely to earn aboveaverage returns on investment.

Differentiation is aimed at the broad mass market and involves the creation of a product or service that is perceived throughout its industry as unique. The company may then charge a premium for its product. This specialty can be associated with design or brand image, technology, features, a dealer network, or customer service. It is a viable business strategy for earning above-average returns in a specific business because the resulting brand loyalty lowers customers sensitivity to price. Increased costs can usually be passed on to the buyers. Buyer loyalty also serves as an entry barrier; new firms must develop their own distinctive competence to differentiate their products in some way in order to compete successfully. Research does suggest that a differentiation strategy is more likely to generate higher profits than does a low-cost strategy because differentiation creates a better entry barrier. A low-cost strategy is more likely, however, to generate increases in market share. Cost focus is a low-cost competitive strategy that focuses on a particular buyer group or geographic market and attempts to serve only this niche, to the exclusion of others. In using cost focus, the company or business unit seeks a cost advantage in its target segment. Differentiation focus, like cost focus, concentrates on a particular buyer group, product line segment, or geographic market. A company seeks differentiation in a targeted market segment. This strategy is valued by those who believe that a company or a unit that focuses its efforts is better able to serve the special needs of a narrow strategic target more effectively than can its competition. Cost proximitythe higher prices it charges for its higher quality should not be too far above the price of the competition; otherwise customers will not see the extra quality as worth the extra cost. Fragmented Industry Consolidated Industry Hypercompetition Dynamic Capabilities Competitive Tactics Tactics is a specific operating plan that details how a strategy is to be implemented in terms of when and where it is to be put into action. By their nature, tactics are narrower in scope and shorter in time horizon than are strategies. It can be viewed as a link between the formulation and implementation of strategy. TWO CATEGORIES OF COMPETITIVE TACTIC: A. Timing tactic Determines when a company will implement a strategy.

 When to make a strategy move is often as important as to what move to make. FIRST MOVER they are the first to manufacture and sell a new product or service. - ADVANTAGES: - The company is able to establish a reputation as an industry leader. LATE MOVER enjoys the disadvantages of the first-mover. - They are able to imitate the technological advances of others, keep risks down by waiting until a new technological standard or market is established. o EXAMPLE: (FIRST and LATE mover) - Microsoft and Netscape - Netscape acquired over an 80% share of the Internet Browser market by being the first to commercialize the product successfully. - Once Netscape had established itself as the standard for Internet Browsers in the 1990s, Microsoft directly attacked Netscapes position with its Internet Explorer. - By 2004, Microsofts Internet Explorer dominated web browsers. B. Market Location Tactic Determines where a company implements a strategy. It can implement a competitive strategy either offensively or defensively. OFFENSIVE TACTICS are designed to take market share from the competitor. Thus, it usually takes place in an established competitors market location. - Frontal assault the attacking firm goes head to head with its competitor. - It matches the competitor in every category. - To be successful the attacker must have not only superior resources, but the willingness to preserve. o Flanking maneuver attacking a part of the market where the competitor is weak. EXAMPLE: Texas Instrument avoided competing directly with Intel by developing microprocessors for consumer electronics, cell phones, and medical devices instead of computers. o Bypass attack- attempts to cut the market out from under the established defender by offering a new type of product that makes the competitors product unnecessary. EXAMPLE: instead of competing directly against Microsofts Pocket PC and Palm Pilot for the handheld computer market, Apple introduced the iPOd as a personal digital music player. It was the most radical change to the way people listen to music since the Sony Walkman. o Encirclement- it involves encircling and pushing over the competitors position in terms of greater product variety and/or serving more markets. o Guerilla warfare- using a "hit and run" attack on a competitor, with small, intermittent assaults on different market segments. This offers the possibility for even a small firm to make some gains without seriously threatening a large, established competitor and evoking some form of retaliation.

 DEFENSIVE TACTIC usually takes place in the firms own current market position as defense against possible attack by a rival. - It aims to lower the probability of attack. o Raise structural barriers entry barriers act to block a challengers logical avenues of attack. o Increase expected retaliation is any action that increases the perceived threat of retaliation for an attack. For example, management may strongly defend any erosion of market share by drastically cutting prices or matching a challengers promotion through a policy of accepting any price-reduction coupons for a competitors product. o Lower the inducement for attack reduces a challengers expectations of future profits in the industry. COOPERATIVE STRATEGY - Is used to gain competitive advantage within an industry by working with other firms. TWO GENERAL TYPES: A. Collusion is the active cooperation of firms within an industry to reduce output and raise prices in order to get around the normal economic law of supply and demand. o Explicit Collusion occurs when two or more firms in the same industry formally agree to control the market. o Tacit collusion wherein there is no direct communication among competing firms. - However, it can be illegal. For example, when General Electric wanted to ease price competition in the steam turbine industry, it widely advertises its prices and publicly committed not to sell below those prices. B. Strategic Alliance is a long-term cooperative arrangement between two or more independent firms of business units that engage in business activities for mutual economic gain. TYPES OF COOPERATIVE AGREEMENTS 1. Mutual Service Consortia is a partnership of similar companies in similar industries that pool their resources to gain benefit that is too expensive to develop alone. 2. Joint Venture is a cooperative business activity, formed by two or more separate organizations for strategic purposes, that creates an independent business entity and allocates ownership, operational responsibilities, and financial risks and rewards to each member, while preserving their separate identity. EXAMPLE: P&G formed a joint venture with Clorox to produce food-storage wraps. 3. Licensing Arrangements an agreement in which the licensing firms grants rights to another firm in another market to produce and/or sell a product. 4. Value Chain Partnerships is a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantages.

CHAPTER 7 Corporate strategy deals with three key issues facing the corporation as a whole: 1. The firms overall orientation toward growth, stability, or retrenchment (directional strategy) 2. The industries or markets in which the firm competes through its products and business units (portfolio analysis) 3. The manner in which management coordinates activities and transfers resources and cultivates capabilities among product lines and business units (parenting strategy) Corporate strategy is primarily about the choice of direction for a firm as a whole and the management of its business or product portfolio. It includes decisions regarding the flow of financial and other resources to and from a companys product lines and business units. Directional Strategy three general orientations (sometimes called grand strategies): o Growth strategies expand the companys activities. Continuing growth means increasing sales and a chance to take advantage of the experience curve to reduce the per-unit cost of products sold, thereby increasing profits. This cost reduction becomes extremely important if a corporations industry is growing quickly or consolidating and if competitors are engaging in price wars in attempts to increase their shares of the market. Firms that have not reached critical mass (that is, gained the necessary economy of large-scale production) face large losses unless they can find and fill a small, but profitable, niche where higher prices can be offset by special product or service features. A corporation can grow internally by expanding its operations both globally and domestically, or it can grow externally through mergers, acquisitions, and strategic alliances. A merger is a transaction involving two or more corporations in which stock is exchanged but in which only one corporation survives. Mergers usually occur between firms of somewhat similar size and are usually friendly. The resulting firm is likely to have a name derived from its composite firms. An acquisition is the purchase of a company that is completely absorbed as an operating subsidiary or division of the acquiring corporation. Acquisitions usually occur between firms of different sizes and can be either friendly or hostile. Hostile acquisitions are often called takeovers. TWO KEY REASONS:
Growth based on increasing market demand may mask flaws in a companyflaws that would be immediately evident in a stable or declining market. A growing flow of revenue into a highly leveraged corporation can create a large amount of organization slack (unused resources) that can be used to quickly resolve problems and conflicts between departments and divisions. Growth also provides a big cushion for turnaround in case a

strategic error is made. Larger firms also have more bargaining power than do small firms and are more likely to obtain support from key stakeholders in case of difficulty. A growing firm offers more opportunities for advancement, promotion, and interesting jobs. Growth itself is exciting and egoenhancing for CEOs. The marketplace and potential investors tend to view a growing corporation as a winner or on the move. Executive compensation tends to get bigger as an organization increases in size. Large firms are also more difficult to acquire than are smaller ones; thus an executives job in a large firm is more secure. Two basic growth strategies: Concentration o If a companys current product lines have real growth potential, concentration of resources on those product lines makes sense as a strategy for growth. o Two basic strategies: Vertical growth can be achieved by taking over a function previously provided by a supplier or by a distributor. And, Diversification

o o

Stability strategies make no change to the companys current activities. Retrenchment strategies reduce the companys level of activities.