Management 7 Planning Strategy And Competitive Advantage (1) 96443

Planning, Strategy and Competitive Advantage Planning, Strategy and Strategic Management • Determining the Organization’s Mission and Goals • Planning and Strategy Formulation (Porter) • Planning and Implementing Strategy •

Planning 

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Planning ◦ Identifying and selecting appropriate goals (goal making) and courses of action (strategy-making) for an organization. ◦ The organizational plan that results from the planning process details the goals and specifies how managers will attain those goals. Strategy ◦ The cluster of decisions and actions that managers take to help an organization reach its goals.

Strategy all actions taken in order to establish the main organizational goals,  the courses of action employed to achieve these goals,  the actions of allocating the necessary resources (financial, material, human and time resources),  the priorities and the means to adapt to the environmental changes,  with the declared purpose to achieve a competitive advantage and to fulfil the organization’s mission 

Strategic Management  

Set of managerial decisions and actions that determines the long-run performance of a company 4 Phases of Strategic Management 1. Basic financial planning 2. Forecast-based planning 3. Externally-oriented planning 4. Actual strategic management

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Benefits:

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Clearer sense of strategic vision Sharper focus on strategic importance Improved understanding of changing environment

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Qualities of Effective Plans (Fayol)

Unity Continuity

• Only one central plan is in effect at any given time

• Planning is an ongoing broad-framework process involving all managerial levels

Accuracy

• Managers have incorporated all available information into creating the current plan

Flexibility

• Managers alter the plan as the situation changes

Why Planning Is Important 

Planning ascertains where the organization is now and deciding where it will be in the future. ◦ Participation: all managers are involved in setting future goals. ◦ Sense of direction and purpose: planning sets goals and strategies for all managers. ◦ Coordination: plans provide all parts of the firm with understanding about how their systems fit with the whole. ◦ Control: Plans specify who is responsible for the accomplishment of a particular goal.

Types of Plans 

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Standing Plans ◦ Used in programmed decision situations. ◦ Policies are general guides to action. ◦ Rules are formal written specific guides to action. ◦ Standard operating procedures (SOP) specify an exact series of actions to follow. Single-Use Plans ◦ Developed for a one-time, nonprogrammed issue. ◦ Programs: integrated plans achieving specific goals. ◦ Project: specific action plans to complete programs.

Management Structures & The Planning Process

The Planning Process

Planning Process Stages 1.

Determining the Organization’s Mission and Goals ◦ Defining the organization’s overriding purpose and its goals. ◦ Mission - a broad declaration of an organization’s purpose that identifies the organization’s products and customers and distinguishes the organization from its competitors

2.

Formulating strategy ◦ Managers analyze current situation and develop the strategies needed to achieve the mission.

3.

Implementing strategy ◦ Managers must decide how to allocate resources between groups to ensure the strategy is achieved.

Levels and Types of Planning

Levels of Planning at General Electric

Levels of Planning 

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Corporate-Level Plan ◦ Top management’s decisions pertaining to the organization’s mission, overall strategy, and structure. ◦ Provides a framework for all other planning. Corporate-Level Strategy ◦ A plan that indicates in which industries and national markets an organization intends to compete.

Levels of Planning Business-Level Plan: ◦ Divisional managers’ decisions pertaining to division’s long-term goals, overall strategy, and structure. ◦ Identifies how the business will meet corporate goals.  Business-Level Strategy ◦ A plan that indicates how a division intends to compete against its rivals in an industry. ◦ Shows how the business will compete in market. 

Levels of Planning Functional-Level Plan ◦ Functional managers’ decisions pertaining to the goals that they propose to pursue to help the division attain its business-level goals.  Functional Strategy ◦ A plan that indicates how a functional department intends to achieve its goals. 

Who Plans? 

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Corporate-Level Plans ◦ Plans developed by top management who also are responsible for approving business- and functionallevel plans for consistency with the corporate plan. ◦ Top managers should seek input on corporate level issues from all management levels. Business-Level Plans ◦ Plans developed by divisional managers who also review functional plans. Both management levels should also seek information from other levels.

Time Horizons of Plans 

Time Horizon - the intended duration of a plan. ◦ Long-term plans are usually 5 years or more. ◦ Intermediate-term plans are 1 to 5 years. ◦ Short-term plans are less than 1 year.

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Corporate and business-level goals and strategies require long- and intermediate-term plans. Functional plans focus on short-to intermediate-term plans. Most organizations have a rolling planning cycle to amend plans constantly.

Strategic Decision-Making Process

1. Determining the Organization’s Mission and Goals Defining the Business ◦ Who are our customers? ◦ What customer needs are being satisfied? ◦ How are we satisfying customer needs?  Establishing Major Goals ◦ Provides the organization with a sense of direction. ◦ Stretches the organization to higher levels of performance. ◦ Goals must be challenging but realistic with a definite period in which they are to be achieved. 

Sample Mission Statements

Good Mission Statements Limited number of goals - Concentration

Stress major policies & values - as stretch guidelines Define competitive scopes - by customers groups, customer needs, or technology

2. Planning and Strategy Formulation

What Influences The Strategy Formulation? External Factors

Internal Factors 

Owner

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The forces in the general environment

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Top managers

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Size and complexity of the business

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The forces in the task environment – especially the 5 forces of Porter’s Model of Competition:

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Technology

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Human resources

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Information and IT

◦ Threat of new entrants

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Financial resources

◦ Bargaining power of suppliers

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Organizational culture

◦ Bargaining power of buyers

◦ Rivalry among existing firms

◦ Threat of substitute products or services

Porter’s Five Forces Model Of Competition

Porter’s Five Forces 1.

Rivalry among existing firms

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Intense rivalry is often the result of the partial or total interaction of the following main factors : ◦

Numerous competitors and/or of a sensibly equal force

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A low rate of progress in the sector

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Higher fixed or storage costs

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The weak product differentiation or the lack of transfer costs

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Important strategic stakes

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High barriers to exit the market/industry

The rivalry analysis:

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Identifying the organization’s competitors

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Identifying the competitors’ objectives and strategies

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Estimating the competitors’ strengths and weaknesses

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Anticipating the competitors’ counter-reactions

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Selecting the competitors the organization can confront and the ones that must be avoided.

Porter’s Five Forces 2.

The threat of new entrants:

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The entry barrier on a certain market/industry - the supplementary costs that the new entrant on the market will have to pay in order to enter the respective market: ◦ the transfer costs;

◦ the experience effect; ◦ the access to the distribution network; ◦ the existence of some reserves of production capacity; ◦ the capital needs;

◦ the government policies and the existent regulations 

The reaction expected by the new entrant from the existing competitors

Porter’s Five Forces 3.

The threat of substitute products or services

products similar to the existing products, but with a better performance/price ratio  completely different products, but able to satisfy the same needs  must the organization engage to a “fight” against the substitution products? 

Porter’s Five Forces 4.

The bargaining power of suppliers – higher when:

5.

The bargaining power of buyers – higher when:

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The suppliers are more concentrated than the buyers

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There are no (or very few/only partially) substitute products

The seller depends on the sale for a large portion of its turnover

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The respective industry is not an important buyer for the supplier

The buy is a big part of the total value of the buyer’s purchases

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The products are either standardized or hardly differentiated

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The supplier’s product is very important for the buyer

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The products cannot be stored

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The products supplied are highly differentiated

The transfer costs when changing suppliers are low

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Buyers are backward integrated

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The transfer costs are high

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The demand exceeds the supply

The product purchased doesn’t influence the quality of the buyer’s products

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The supply exceeds the demand

Competitive Advantage 

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A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. It has to be sustainable: ◦ ◦ ◦ ◦ ◦

Unique Difficult to replicate Superior to the competition Relatively easy to maintain Applicable to multiple situations

Competitive Advantage

Formulating Strategies CorporateLevel

BusinessLevel

FunctionalLevel

Concentration

Low-Cost

Diversification

Differentiation

Lowering the costs of providing the value in products

International Expansion

Focused LowCost

Vertical Integration

Focused Differentiation

Adding new value to the product by differentiating

Formulating Corporate-Level Strategies 1. Concentration in Single Business 

Can become a strong competitor, but can be risky. ◦ Knowledge of current market can be a competitive advantage. (core competence) ◦ Concentration creates a large degree of business risk if the single market in which the firm competes declines.

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Concentration is a logical strategy if downsizing organization to increase performance by exiting underperforming businesses.

Formulating Corporate-Level Strategies 2. Diversification 

Related diversification into similar market areas to build upon existing competencies. ◦ Synergy: two divisions working together perform better than the sum of their individual performances (2+2=5).

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Unrelated diversification is entry into industries unrelated to current business. ◦ Attempts to build a portfolio of unrelated firms to reduce risk of single industry failure. ◦ Unrelated firms can be more difficult to manage.

Formulating Corporate-Level Strategies 3. International Expansion Basic Question: to what extent do we customize products and marketing for different national conditions?  Global strategy - selling the same standardized product and using the same basic marketing approach in all countries. 

◦ Standardization provides for lower production cost. ◦ Ignores national differences that local competitors can address to their advantage. 

Multidomestic Strategy - Customizing products and marketing strategies to specific national conditions. ◦ Helps gain market entry and build local market share. ◦ Raises production costs.

Formulating Corporate-Level Strategies 4.Vertical Integration A strategy that allows an organization to create value by producing its own inputs or distributing its own products. ◦ Backward vertical integration occurs when a firm seeks to reduce its input costs by producing its own inputs. ◦ Forward vertical integration occurs when a firm distributes its outputs or products to lower distribution costs and ensure the quality service to customers.  A fully integrated firm faces the risk of bearing the full costs of an industry-wide slowdown.  There is also the possibility of horizontal integration – purchasing/merging with one or several competitive companies 

Stages in a Vertical Value Chain

Formulating Business-Level Strategies Porter’s Business-Level Strategies: Number of Market Segments Served Strategy

Many

Low-cost

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Focused low-cost Differentiation Focused differentiation

Few

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Formulating Business-Level Strategies 1. 

Low-Cost Strategy Driving the organization’s total costs down below the total costs of rivals. ◦ Manufacturing at lower costs, reducing waste. ◦ Lower costs than competition means that the low cost producer can sell for less and still be profitable.

2.

Differentiation

Offering products different from those of competitors.  Differentiation must be valued by the customer in order for a producer to charge more for a product. 

Formulating Business-Level Strategies 3. 

4. 

Focused Low-Cost Serving only one market segment and being the lowest-cost organization serving that segment.

Focused Differentiation Serving only one market segment as the most differentiated organization serving that segment.

Functional-Level Strategies A plan that indicates how an organizational function intends to achieve its goals.  Seeks to have each department add value to a good or service.  Marketing, service, and production functions can all add value to a good or service through: 

◦ Lowering the costs of providing the value in products. ◦ Adding new value to the product by differentiating. 

Functional strategies must fit with business level strategies.

Goals for Successful Functional Strategies 1.

2. 3. 4.

Attain superior efficiency as a measure of outputs for a given unit of input. Attain superior quality by producing reliable products that do their intended job. Attain superior innovation developing new and novel features that can be added to the product or process. Attain superior responsiveness to customers by acknowledging their needs and fulfilling them.

3. Planning and Implementing Strategy 1. 2.

3. 4. 5.

Allocate implementation responsibility to the appropriate individuals or groups. (delegation) Draft detailed action plans for implementation. Establish a timetable for implementation. Allocate appropriate resources. Hold specific groups or individuals responsible for the attainment of corporate, divisional, and functional goals. (ability)