CHAPTER 6

Strategy Formulation:
Situation Analysis and
Business Strategy
Strategy
Formulation
Often referred to as strategic
planning or long-range
planning, is concerned with
developing a corporation’s
mission, objectives, strategies,
and policies.
 The Strategy Formulation,
begins with Situation Analysis:

SWOT
SA = O/(S – W)
Criticism
of
SWOT
Analysis
 The SFAS
(Strategic Factors Analysis Summary) Matrix
A chart that summarizes an organization’s strategic factors by combining the external
factors from an EFAS table with the internal factors from an IFAS table.
Figure 6-1 Strategic Factor Analysis
Summary (SFAS) Matrix
Figure 6-1 Strategic Factor Analysis
Summary (SFAS) Matrix
 TABLE 4–5 External Factor Analysis
Summary (EFAS Table): Maytag as Example
 TABLE 5–2 Internal Factor Analysis
Summary (IFAS Table): Maytag as Example
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
Review of Mission A reexamination of an organization’s
current mission and objectives must be
and Objectives made before alternative strategies can
be generated and evaluated.

Common thread

is the idea and principle behind a

joint whole, and it is the common
thread that connects the
individual parts into a whole with
meaning.
Generating Alternative
Strategies by using a
TOWS Matrix
The TOWS Matrix illustrates
how the external
opportunities and threats
facing a particular
corporation can be matched
with that company’s internal
strengths and weaknesses to
result in four sets of possible
strategic alternatives.
Business Strategy
Business strategy focuses on improving the
competitive position of a company’s or business
unit’s products or services within the specific
industry or market segment that the company or
business unit serves.
Porter’s
Competitive
Strategy Lower Cost
Strategy Differentiation
Strategy
This strategy is based on is the ability of a
company or a is the ability of a
competitive strategy which business unit to company to provide
suggests that states and design, produce, and unique and superior
businesses should pursue market a value to the buyer in
comparable product terms of product
policies that create high-
more efficiently than quality, special
quality goods to sell at high its competitors features, or after-sale
prices in the market. service.
Competitive Scope

The breadth or narrowness of an

organisation's focus as measured
horizontally by the range of industries,
market segments, or geographical
regions it targets, or vertically by the
degree to which it is integrated.
 Differentiation
Cost Leadership Products are unique
in the industry
PORTER’S COMPETITIVE
Lower cost Aims at the broad
competitive strategy mass market
Aims at the broad May charge a
mass market premium for its
STRATEGIES

Charge a lower product

price but still make
a satisfactory profit

Differentiation
Cost Focus Focus

A low-cost
competitive strategy Concentrates on a
Focuses on a particular buyer
particular buyer group
group
Risk in Competitive Strategies

No one competitive strategy is guaranteed to achieve

success, and some companies that have
successfully implemented one of Porter’s competitive
strategies have found that they could not
sustain the strategy. As shown in Table 6–1, each of
the generic strategies has risks.
Quality, alone, has eight different dimensions—each with the potential of providing
a product with a competitive advantage (see Table 6–2).
 Industry Structure and Competitive Strategy

In a fragmented industry, for example, where many small- and medium-sized local
companies compete for relatively small shares of the total market, focus strategies will likely
predominate.
As an industry matures, fragmentation is overcome, and the industry tends to become a
consolidated industry dominated by a few large companies. Although many industries start
out being fragmented, battles for market share and creative attempts to overcome local or niche
market boundaries often increase the market share of a few companies.
The strategic rollup was developed in the mid-1990s as an efficient way to quickly consoli-
date a fragmented industry. With the aid of money from venture capitalists, an entrepreneur ac-
quires hundreds of owner-operated small businesses. The resulting large firm creates economies
of scale by building regional or national brands, applies best practices across all aspects of mar-
keting and operations, and hires more sophisticated managers than the small businesses could pre-
viously afford. Rollups differ from conventional mergers and acquisitions in three ways: (1) they
involve large numbers of firms, (2) the acquired firms are typically owner operated, and (3) the
objective is not to gain incremental advantage, but to reinvent an entire industry
Hypercompetition and Competitive Advantage Sustainability
Some firms are able to sustain their competitive advantage for many years,28 but most
find that competitive advantage erodes over time. In his book Hypercompetition, D’Aveni
proposes that it is becoming increasingly difficult to sustain a competitive advantage for
very long. “Market stability is threatened by short product life cycles, short product design
cycles, new technologies, frequent entry by unexpected outsiders, repositioning by
incumbents, and tactical redefinitions of market boundaries as diverse industries
merge.”29 Consequently, a company or business unit must constantly work to improve its
competitive advantage. It is not enough to be just the lowest-cost competitor. Through
continuous improvement programs, competitors are usually working to lower their costs
as well. Firms must find new ways not only to reduce costs further but also to add value to
the product or service being provided.
 Which Competitive Strategy Is Best?

Before selecting one of Porter’s generic

competitive strategies for a company or
business unit, management should assess its
feasibility in terms of company or business
unit resources and capabilities

Ilagan
 Competitive Tactics
A tactic 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. Some of the tactics
available to implement competitive
strategies are timing tactics and market
location tactics.
Timing Tactics: When to Compete

A timing tactic deals with when a company

implements a strategy. The first company to
manufacture and sell a new product or service is
called the first mover (or pioneer).
 Timing Tactics: When to Compete
Being a first mover does, however, have its disadvantages.
These disadvantages can be, conversely, advantages
enjoyed by late-mover firms. Late movers may be able to
imitate the technological advances of others (and thus
keep R&D costs low), keep risks down by waiting until a
new technological standard or market is established, and
take advantage of the first mover’s natural inclination to
ignore market segments
Market Location
Tactics: Where to
Compete Offensive tactic Defensive tactic

A market location tactic usually takes place in

deals with where a usually takes place in the firm’s own
company implements a an established current market
competitor’s market position as a defense
strategy. A company or
location. against possible
business unit can attack by a rival
implement a competitive
strategy either offensively or
defensively.
Offensive Tactics. Some of the methods used to attack
a competitor’s position are:

Frontal assault: The attacking firm goes head to head with

its competitor. It matches the competitor in every category
from price to promotion to distribution channel. To be
successful, the attacker must have not only superior
resources, but also the willingness to persevere.
Offensive Tactics. Some of the methods used to attack
a competitor’s position are:

Flanking maneuver: Rather than going straight for a

competitor’s position of strength with a frontal assault, a
firm may attack a part of the market where the competitor
is weak
Offensive Tactics. Some of the methods used to attack
a competitor’s position are:

Bypass attack: Rather than directly attacking the

established competitor frontally or on its flanks, a company
or business unit may choose to change the rules of the
game. This tactic attempts to cut the market out from
under the established defender by offering a new type of
product that makes the competitor’s product unnecessary.
Offensive Tactics. Some of the methods used to attack
a competitor’s position are:

Encirclement: Usually evolving out of a frontal assault or

flanking maneuver, encirclement occurs as an attacking
company or unit encircles the competitor’s position in
terms of products or markets or both. The encircler has
greater product variety (e.g., a complete product line,
ranging from low to high price) and/or serves more markets
(e.g., it dominates every secondary market)
Offensive Tactics. Some of the methods used to attack
a competitor’s position are:

Guerrilla warfare: Instead of a continual and extensive

resource-expensive attack on a competitor, a firm or
business unit may choose to “hit and run.” Guerrilla warfare
is characterized by the use of small, intermittent assaults on
different market segments held by the competitor. In this
way, a new entrant or small firm can make some gains
without seriously threatening a large, established
competitor and evoking some form of retaliation.
 Defensive Tactics. According to Porter, defensive tactics
aim to lower the probability of attack, divert attacks to less
threatening avenues, or lessen the intensity of an attack.
Instead of increasing competitive advantage per se, they
make a company’s or business unit’s competitive
advantage more sustainable by causing a challenger to
conclude that an attack is unattractive
 Raise structural barriers. Entry barriers act to block a
challenger’s logical avenues of attack. Some of the most
important, according to Porter, are to:
1. Offer a full line of products in every profitable market
segment to close off any entry points (for example, Coca
Cola offers unprofitable noncarbonated beverages to keep
competitors off store shelves);
2. Block channel access by signing exclusive agreements
with distributors;
3. Raise buyer switching costs by offering low-cost training
to users;
 4. Raise the cost of gaining trial users by keeping prices low on
items new users are most likely to purchase;
5. Increase scale economies to reduce unit costs;
6. Foreclose alternative technologies through patenting or
licensing;
7. Limit outside access to facilities and personnel;
8. Tie up suppliers by obtaining exclusive contracts or purchasing
key locations;
9. Avoid suppliers that also serve competitors; and
10. Encourage the government to raise barriers, such as safety and
pollution standards or favorable trade policies.
 Increase expected retaliation: This tactic is any action that
increases the perceived threat of retaliation for an attack.

Lower the inducement for attack: A third type of defensive

tactic is to reduce a challenger’s expectations of future profits
in the industry. Like Southwest Airlines, a company can
deliberately keep prices low and constantly invest in cost-
reducing measures.
Cooperative Strategies
Cooperative Strategies

Collusion

Strategic Alliances
Collusion
Collusion is the active cooperation of firms within an industry to reduce
output and raise prices to get around the normal economic law of supply
and demand.

Collusion may be explicit, in which case firms cooperate through direct

communication and negotiation, or tacit, in which case firms cooperate
indirectly through an informal system of signals.

Collusion can also be tacit, in which case there is no direct communication

among competing firms.
Collusion
According to Barney, tacit collusion in an industry is most likely to be
successful if:
(1) there are a small number of identifiable competitors,
(2) costs are similar among firms,
(3) one firm tends to act as the price leader,
(4) there is a common industry culture that accepts cooperation,
(5) sales are characterized by a high frequency of small orders,
(6) large inventories and order backlogs are normal ways of dealing with
fluctuations in demand, and
(7) there are high entry barriers to keep out new competitors.
Strategic Alliances

A strategic alliance is a long-term cooperative arrangement

between two or more independent firms or business units that
engage in business activities for mutual economic gain. Alliances
between companies or business units have become a fact of life in
modern business.
Strategic Alliances
Companies or business units may form a strategic alliance for a number of reasons,
including:

1.To obtain or learn new capabilities: A study found that firms with strategic alliances
had more modern manufacturing technologies than did firms without alliances.
2.To obtain access to specific markets: This is often achieved by forming value-chain
alliances with foreign companies either as parts suppliers or as sub-contractors.
3.To reduce financial risk: Alliances take less financial resources than do acquisitions or
going it alone and are easier to exit if necessary.
4.To reduce political risk: Forming alliances with local partners is a good way to
overcome deficiencies in resources and capabilities when expanding into international
markets.
Mutual Service
Consortia

A mutual service consortium is a

partnership of similar companies
in similar industries that pool their
resources to gain a benefit that is
too expensive to develop alone,
such as access to advanced
technology.
Joint Venture

A 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
Continuum of Strategic Alliances
Licensing Arrangements

A licensing arrangement is an
agreement in which the licensing
firm grants rights to another firm
in another country or market to
produce and/or sell a product. The
licensee pays compensation to the
licensing firm in return for
technical expertise.
Value-Chain Partnerships

A value-chain partnership 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
advantage.
Thank You