CHAPTER 6

Strategy Formulation:
Situation Analysis &
Business Strategy

STRATEGIC MANAGEMENT & BUSINESS POLICY

11TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

Prentice Hall, Inc. © 2006 6-1

 Situational Analysis

Strategy formulation --

–Strategic planning or long-range planning

(Develops mission, objectives, strategies, policies)

Or

–process of finding a strategic fit between external

opportunities and internal strengths while working
around external threats and internal weaknesses

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 Situational Analysis

SWOT Criticism
– Generates lengthy lists
– No weighted priorities
– Ambiguous wording
– Same factor can be in two categories
– No supporting data
– Single level analysis
– No link to strategy implementation

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 IFAS – Maytag as Example

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 EFAS – Maytag as Example

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 SFAS Matrix

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 Situational Analysis

Niche –
–Need in the marketplace that is currently
unsatisfied

Corporate Goal –
–Find propitious niche – market segment big
enough for only one company

–Strategic window – opportunity available for a

limited time

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 TOWS Matrix

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 Business Strategy

Business Strategy
Focuses on improving competitive position of
company’s products or services within the
specific industry or market segment

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 Porter’s Competitive Strategies

Competitive Strategy –
–Lower Cost strategy
•Greater efficiencies than competitors
–Differentiation strategy
•Unique/superior value, quality, features, service

Competitive Scope -
–Direct competition
–Focus on niche

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 Porter’s Competitive Strategies

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 Porter’s Competitive Strategies

Cost Leadership –
–Low-cost competitive strategy
–Broad mass market
–Efficient-scale facilities
–Cost reductions
–Cost minimization
Potential Outcome
–Barriers to entry
–Higher ROI

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 Porter’s Competitive Strategies

Differentiation –
–Broad mass market
–Unique product/service
–Premiums charged
–Less price sensitivity
Potential Outcome
–Increase Market Share
–Higher Profit
–Brand as barrier to entry

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 Porter’s Competitive Strategies

Cost-Focus –

–Low-cost competitive strategy

–Focus on market segment/Niche
–Geographic
–Buyer Group
–Cost advantage in market segment

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 Porter’s Competitive Strategies

Differentiation Focus –
–Specific group or geographic market focus
–Differentiation in target market
–Special needs of narrow target market

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 Porter’s Competitive Strategies

Stuck in the middle –

–No competitive advantage

–Below-average performance

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 Risks of Generic Strategies

Risks of Cost Leadership Risks of Differentiation Risks of Focus

Risks
Cost of CostisLeadership
leadership not Risks of Differentiation
Differentiation is not TheRisks
focusof Focusis
strategy
Cost leadership
sustained: is not Differentiation is not
sustained: The focus strategy is
imitated:
• sustained:
Competitors imitate. • sustained:
Competitors imitate. Theimitated:
target segment becomes
• Competitors
• Technology imitate.
changes. • •Bases
Competitors imitate.
for differentiation The target
structurally segment becomes
unattractive:
• •Other
Technology
bases forchanges.
cost •become
Bases less
for differentiation
important to structurally
• Structure unattractive:
erodes.
•leadership
Other baseserode. cost
for become less important to
buyers. • Structure
• Demand erodes.
disappears.
leadership
Proximity erode.
in differentiation is Costbuyers.
proximity is lost. • Demand
Broadly targeteddisappears.
competitors
Proximity
lost. in differentiation is Cost proximity
Differentiation is lost.
focusers Broadly targeted
overwhelm the segment:competitors
lost.focusers achieve even
Cost Differentiation
achieve focusers
even greater overwhelm
• The segment’s the segment:
Costcost
lower focusers achieve even
in segments. achieve eveningreater
differentiation segments. • The segment’s
differences from other
lower cost in segments. differentiation in segments. differences
segments narrow.from other
• Thesegments
advantages narrow.
of a
• Theline
broad advantages
increase.of a
broad line
New focusers increase.
subsegment
the New focusers sub-segment
industry.
the industry.

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 Risks of Generic Strategies

Broad versus Focused Strategies

“Although there is generally room for only one
company to successfully pursue the mass-
market cost leadership strategy (requires
dominant market share), there is room for an
almost unlimited number of differentiation and
focus strategies (depending on the range of
possible features and market niches).”

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 8 Dimensions of Quality

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 Competitive Strategy

Industry Structure –
–Fragmented Industry
– Focus
–Consolidated Industry
–Cost/Differentiation through service
–Move toward commoditization

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 Competitive Strategy

Strategic Rollup (industry consolidation)

– Involve larger numbers of firms
– Acquired firms are typically owner operated
– Objective is not to gain incremental advantage but to
reinvent an entire industry

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 Competitive Tactics

Tactics
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. (Narrower in
scope and shorter time horizons than strategies)

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 Competitive Tactics

Timing Tactics –
–First mover advantages
–Reputation for industry leadership
–Cost leadership as product matures
–Temporary high profits
–10 years for CPG
–12 years for Industrial
–Late movers advantages
–Imitate technology advances
–Lower R&D costs
–Lower risk
–Market segmentation opportunities

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 Competitive Tactics

Market Location Tactics -- Offensive

–Frontal Assault – match the competition

–Flanking Maneuver - segmentation
–Bypass Attack – change the rules
–Encirclement - variety
–Guerrilla Warfare – many small initiatives on
small market segments

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 Competitive Tactics

Market Location Tactics -- Defensive

–Raise structural barriers

–Increase expected retaliation
–Lower the inducement for attack

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 Cooperative Strategies

Collusion
active cooperation of firms within an industry to
reduce output and raise prices to get around the
economic laws of supply and demand

–Implicit or explicit
–Generally illegal

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 Cooperative Strategies

Strategic Alliances (Why?)

– To obtain technology and/or manufacturing
capability
– To obtain access to specific markets
– To reduce financial risks
– To reduce political risk
– To learn new capabilities

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 Cooperative Strategies

• Mutual service consortia

– Pooled services within an industry
• Joint ventures
– Creates an independent entity, allocates ownership,
financial risk and reward (temporary with high failure rates)
• Licensing arrangements
– Rights are granted to a firm in another country to produce
or sell products
• Value-chain partnerships
– Alliances among companies and their suppliers and/or
distributors

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 Cooperative Strategies

Continuum of Strategic Alliances

Mutual Service Joint Venture Value Chain

Consortium Licensing Arrangement Partnerships

Weak and Distant Strong and Close

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 CHAPTER 6
Strategy Formulation:
Situation Analysis &
Business Strategy

STRATEGIC MANAGEMENT & BUSINESS POLICY

11TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

Prentice Hall, Inc. © 2006 6-30