Strategic management Strategy formulation: Nature of the formulation process: Formal and Informal. Simple and Complex.

Analytical and Qualitative. Involve many people or just a few. Three interlocking aspects of the strategy formulation process: Strategic Intent o Driver of the strategy formulation o Provides direction for strategy o Answer question, Where do we want to go? Strategic Choice o Provides relevant knowledge of strategic context o Anchors future strategies in reality o Answers question Where are we now? Strategic Assessment o If no choice- no strategy needed o The link to action o Answer questions How to get from where we are to where we want to be. Effective strategy formulation processes Customer awareness Supplier relationships Stakeholder influences Understanding of competence Awareness of technological change and innovation Mix of people involved in process Encouragement and understanding of top management Communication of results and reaction to feedback Sound logic and balance to the process Process design but not over-design Considered role of external support

Results from the strategy formulation process Goals that are simple, consistent and long term. Profound understanding of the competitive environment Objective appraisal of resources Effective implementation Business Level strategies for growth: Market penetration strategies Product development strategies Market development strategies Diversification strategies Product/Market Expansion: Scale Strategies Market Penetration Goal: increase market share Low risk/marginal returns Every business does this Market Development Goal: find new markets Marketing expertise Mature products/services Product Development Goal: develop & introduce new products/services Technical expertise Growth of products/services (Could Entail Related Diversification) Diversification Goal: develop & introduce products/services to new or emerging markets (Most likely Unrelated Diversification) When Does Diversification Make Sense? Single business strategies have a number of advantages but also a number of risks -- all ones eggs in one basket The logic: to spread corporate risk across multiple industries to enhance shareholder value: SYNERGY (i.e., 2 + 2 = 5)

Diversification Motives The risks of single business strategies are more severe for management than for shareholders of publicly traded firms. Diversification may be motivated by managements desire to reduce risk. Diversification only makes sense when it enhances shareholder value! Tests for Judging Diversification Attractiveness o Is the target industry attractive? (Use 5-forces model to assess industry attractiveness) o Does the diversification move fit with the grand strategy of the firm? Better-off o Does the diversification move produce opportunities for synergies? Will the company be better off after the diversification than it was before? How and why? Cost of entry o Is the cost of the diversification worth it? o Will the diversified firm create enough additional value to justify the cost? Methods for Diversification Acquisition of an existing business. Creation of a new business from within, e.g. a start-up. Joint venture with another firm or firms. Acquisition Most popular approach to diversification Quick market entry Avoids entry barriers: o Technology o Access to suppliers o Efficiency / economies of scale o Promotion o Distribution channels

Strategic Planning:

Strategic planning has taken on new importance in todays world of globalization, deregulation, advancing technology, and changing demographics, and lifestyles Grand Strategy General plan of major action to achieve long-term goals Falls into three general categories 1. Growth 2. Stability 3. Retrenchment Grand Strategy: Growth Growth can be promoted internally by investing in expansion or externally by acquiring additional business divisions Internal growth = can include development of new or changed products External growth = typically involves diversification businesses related to current product lines or into new areas

Grand Strategy: Stability Stability, sometimes called a pause strategy, means that the organization wants To remain the same size or to grow slowly and in a controlled fashion.

Grand Strategy: Retrenchment Retrenchment = the organization goes through a period of forced decline by either shrinking current business units or selling off or liquidating entire businesses Liquidation = selling off a business unit for the cash value of the assets, thus terminating its existence Divestiture = involves selling off of businesses that no longer seem central to the corporation.