Chapter 8 Strategic management is the set of decisions and actions

CHAPTER 8

STRATEGY FORMULATION AND EXECUTION

CHAPTER OUTLINE

What Is Your Strategy Strength?

I. Thinking Strategically

New Manager Self-Test: Systemic Thinking

II. What Is Strategic Management?

IV. Formulating Corporate-Level Strategy

A. Portfolio Strategy

B. The BCG Matrix

C. Diversification Strategy

V. Formulating Business-Level Strategy

VIII. Strategy Execution

ANNOTATED LEARNING OBJECTIVES

After studying this chapter, students should be able to:

1. Define the components of strategic management and discuss the levels of strategy.

Strategic management is the set of decisions and actions used to formulate and implement

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2. Describe the strategic management process and SWOT analysis for evaluating the

company’s strengths, weaknesses, opportunities, and threats.

The strategic management process begins when executives evaluate their current position with

respect to mission, goals, and strategies. Managers then scan the organization’s internal and

external environments and identify strategic issues that may require change. Internal or external

3. Define corporate-level strategies and explain the Boston Consulting Group (BCG) matrix,

portfolio and diversification approaches.

Corporate-level strategy pertains to the organization as a whole and the combination of business

units and product lines that make up the corporate entity. Strategic actions at this level usually

relate to the acquisition of new businesses, additions or divestments of business units, plants, or

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4. Describe Michael Porter’s competitive strategies.

Porter proposed that business-level strategies are the result of competitive forces in the

company’s environment. To find a competitive edge within the specific business environment,

5. Discuss organizational dimensions that managers use to execute strategy.

The final step in the strategic management process is execution, which is how strategy is put into

action. Strategy execution is the most difficult and important part of strategic management. One

LECTURE OUTLINE

WHAT IS YOUR STRATEGY STRENGTH?

Strategic management largely determines which organizations succeed and which ones struggle.

implementation.

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I. THINKING STRATEGICALLY

Strategic planning in for-profit organizations pertains to competitive actions in the marketplace.

In nonprofit organizations, strategic planning pertains to events in the external environment.

NEW MANAGER SELF-TEST: SYSTEMIC THINKING

Systemic thinking represents a strategic approach to problem solving that seeks the bigger

II. WHAT IS STRATEGIC MANAGEMENT?

Strategic management is the set of decisions and actions used to formulate and implement

strategies that provide a superior fit between the organization and its environment to achieve

A. Purpose of Strategy

1. Strategy is the plan of action that describes resource allocation and activities for

2. Competitive advantage refers to what sets the organization apart from others and

provides it with a distinctive edge in the marketplace. The essence of formulating

strategy is choosing how the organization will be different. To remain competitive,

companies develop strategies that focus on targeting specific customers, core

competencies, provide synergy, and create value for customers.

a. Target Customers. An effective strategy defines the customers and their needs

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b. Exploit Core Competence. A company’s core competence is something the

organization does especially well in comparison to its competitors. A core

competence represents a competitive advantage because the company acquires

Discussion Question #1: Based on your knowledge of the following companies, how effective

would you say any one of the following acquisitions were in terms of creating synergy:

a) The purchase of MySpace by News Corporation (owner of Fox Broadcasting)?

b) Google’s purchase of YouTube?

c) PepsiCo’s purchase of Frito-Lay?

d) Luby’s purchase of Fuddruckers?

e) InBev’s acquisition of Budweiser?

NOTES________________________________________________________________________

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B. Levels of Strategy Exhibit 8.1

1. What business are we in? Corporate-level strategy pertains to the organization as a

2. How do we compete? Business-level strategy pertains to each business unit or

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3. How do we support the business-level strategy? Functional-level strategy pertains

Discussion Question #9: Game maker Electronic Arts (EA) was criticized as “trying to buy

innovation” in its bid to acquire Take–Two Interactive, known primarily for the game “Grand

Theft Auto.” Does it make sense for EA to offer more than $2 billion to buy Take-Two when

creating a new video game costs only $20 million? Why would EA ignore internal innovation to

choose an acquisition strategy?

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III. THE STRATEGIC MANAGEMENT PROCESS Exhibit 8.2

The strategic management process begins when executives evaluate their current position with

respect to mission, goals, and strategies. Then they scan the organization’s internal and external

A. Strategy Formulation versus Execution

1. Strategy formulation includes the planning and decision making that lead to the

2. Strategy execution is the use of managerial and organizational tools to direct

Discussion Question #3: You are a middle manager helping to implement a new corporate cost-

cutting strategy, and you’re meeting skepticism, resistance, and in some cases, outright hostility

from your subordinates. In what ways might you or the company have been able to avoid this

situation? Where do you go from here?

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1. SWOT analysis includes strengths, weaknesses, opportunities, and threats—that

affect organizational performance. External information about opportunities is

obtained from customers, government reports, professional journals, suppliers,

bankers, friends, and consultants. Internal information comes from reports, budgets,

financial ratios, surveys of employee attitudes, and satisfaction.

a. Internal Strengths and Weaknesses

• Strengths are positive internal characteristics organizations can exploit to

b. External Opportunities and Threats

Discussion Question #4: Perform a SWOT analysis for the school or university you attend. Do

you think university administrators consider the same factors when devising their strategy?

NOTES________________________________________________________________________

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Exhibit 8.4

IV. FORMULATING CORPORATE-LEVEL STRATEGY

A. Portfolio Strategy

1. Portfolio strategy pertains to the mix of business units and product lines that fit

2. An SBU has a unique business mission, product line, competitors, and markets

B. The BCG Matrix

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1. The BCG (Boston Consulting Group) matrix organizes businesses along two

dimensions—business growth rate and market share. Business growth rate pertains to

how rapidly the entire industry is growing. Market share defines whether a business

unit has a larger or smaller market share than competitors. The combination of

market share and business growth rate provides four categories to judge SBUs within

a corporate portfolio.

a. Star. The star has a large market share in a rapidly growing industry. The star is

important because it has additional growth potential and profits should be

Discussion Question #7: Walt Disney Company has four major strategic business units: movies

(including Miramax and Touchstone), theme parks, consumer products, and television (the ABC

TV network and the Disney Channel cable network). Place each of these SBUs on the BCG

matrix based on your knowledge of them.

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C. Diversification Strategy

1. The strategy of moving into new lines of business is called diversification. The

purpose of diversification is to expand the firm’s business operations to produce new

2. Managers may also pursue diversification opportunities to create value through a

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Discussion Question #2: How might a corporate management team go about determining

whether the company should diversify? What factors should they consider? What kinds of

information should they collect?

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V. FORMULATING BUSINESS-LEVEL STRATEGY Exhibit 8.5

The focus of business-level strategy is how to compete. A popular and effective model for

formulating strategy is Porter’s competitive strategies.

A. The Competitive Environment

The competitive environment is different for different kinds of businesses. Most large

B. Porter’s Competitive Strategies

Porter proposed that business-level strategies are the result of competitive forces in the

company’s environment. To find a competitive edge within the specific business

environment, Porter suggests that a company can adopt one of three strategies.

Exhibit 8.6

1. Differentiation. The differentiation strategy is an attempt to distinguish the firm’s

products or services from others in the same industry. The organization may use

2. Cost Leadership. With a cost leadership strategy, the organization seeks efficient

facilities, pursues cost reductions, and uses tight cost controls to produce products

3. Focus. With a focus strategy, the organization concentrates on a specific regional

Discussion Question #6: Using Porter’s competitive strategies, how would you describe the

strategies of Walmart, Macy’s, and Target?

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NOTES________________________________________________________________________

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VI. FORMULATING FUNCTIONAL-LEVEL STRATEGY

Functional-level strategies are the action plans used by major departments to support the

execution of business-level strategy. Major organizational functions include marketing,

Discussion Question #5: Fortune magazine and the Hay Group found that a clear, stable

strategy is one of the defining characteristics of companies on the list of “The World’s Most

Admired Companies.” Why might this be the case?

NOTES________________________________________________________________________

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VII. GLOBAL STRATEGY Exhibit 8.7

In global strategy, management tries to formulate coherent strategies to provide synergy among

worldwide operations for the purpose of fulfilling common goals. Firms that pursue further

1. In a strategy of globalization, product design and advertising strategies are

standardized throughout the world. This is based on the theory that people

1. In a multidomestic strategy, product design, marketing, and advertising are

C. Transnational Strategy

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1. A transnational strategy seeks to achieve both global standardization and national

responsiveness. This is difficult to achieve, as one goal requires close global

Discussion Question #10: If you are the CEO of a global company, how might you determine

whether a globalization, multidomestic, or transnational strategy would work best for your

enterprise? What factors would influence your decision?

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VIII. STRATEGY EXECUTION Exhibit 8.8

The final step in the strategic management process is strategy execution. Execution may be the

most difficult and important part of strategic management. One key to effective strategy

Visible leadership. The primary key to successful strategy implementation is good leadership.

Leadership is the ability to influence people to adopt the behaviors needed for strategy execution.

Leadership means using persuasion, motivating employees, shaping culture and values to support

the new strategy.

Clear roles and accountability. People need to understand how their individual actions can

contribute to achieving the strategy. To execute strategy effectively, top executives clearly

Discussion Question #8: As an administrator for a medium-sized hospital, you and the board of

directors have decided to change to a drug dependency hospital from a short-term, acute-care

facility. How would you go about executing this strategy?

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NOTES________________________________________________________________________

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Answers to End-of-Chapter Discussion Questions

1. Based on your knowledge of the following companies, how effective would you say any one of

the following acquisitions were in terms of creating synergy:

a) the purchase of MySpace by News Corporation (owner of Fox Broadcasting)?

b) Google’s purchase of YouTube?

c) Pepsi-Co’s purchase of Frito-Lay?

d) Luby’s purchase of Fuddruckers?

e) InBev’s acquisition of Budweiser?

Synergy occurs when organizational parts interact to produce a joint effect that is greater than the

2. How might a corporate management team go about determining whether the company should

diversify? What factors should they consider? What kinds of information should they

collect?

The purpose of diversification is to expand the firm’s business operations to produce new kinds

of valuable products and services. When the new business is related to the company’s existing

business activities, the organization is implementing a strategy of related diversification.

3. You are a middle manager helping to implement a new corporate cost-cutting strategy, and

you’re meeting skepticism, resistance, and in some cases, outright hostility from your

subordinates. In what ways might you or the company have been able to avoid this

situation? Where do you go from here?

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Implementing a new strategy represents change, and change always involves the potential for

loss of some kind, whether it’s loss of power, loss of relationships, loss of status, loss of security,

4. Perform a SWOT analysis for the school or university you attend. Do you think university

administrators consider the same factors when devising their strategy?

The following is a brief example of how SWOT analysis might apply to a specific university.

The university’s strengths are the loyalty of former students who contribute millions of dollars

management skills, and inability to transfer funds from declining to growing departments.

Opportunities include the ability to attract a huge number of merit scholars to give the university

scholarly visibility, the desire of many graduating high school students to attend the university,

the opportunity to increase the student quality by enforcing high enrollment standards, large

business and engineering colleges that are suited to the shifting preferences of high school

students for professional schools over liberal arts, and the opportunity to increase faculty size

and quality through controlled growth.

5. Fortune magazine and the Hay Group found that a clear, stable strategy is one of the

defining characteristics of companies on the list of “The World’s Most Admired

Companies.” Why might this be the case?

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A clear strategic direction is a key factor distinguishing winners from losers. Grand goals have to

6. Using Porter’s competitive strategies, how would you describe the strategies of Walmart,

Macy’s, and Target?

This answer will depend on how students perceive these companies. A reasonable answer is that

Walmart’s overall strategy can be characterized within the Porter’s model as a cost leadership

strategy. Walmart has a well-controlled and tightly managed internal system, but it is innovative

7. Walt Disney Company has four major strategic business units: movies (including Miramax

and Touchstone), theme parks, consumer products, and television (the ABC TV network and

the Disney Channel cable network). Place each of these SBUs on the BCG matrix based on

your knowledge of them.

Students may not be familiar with each of these divisions, but can attempt to place them on the

model based on their experience as consumers. Movies would be considered a star on the BCG

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8. As an administrator for a medium-sized hospital, you and the board of directors have

decided to change to a drug dependency hospital from a short-term, acute-care facility. How

would you go about executing this strategy?

This is a major change in strategy. Rather than provide facilities for recovery from operations

and diseases, the hospital will receive patients who have problems with alcoholism and drug

9. Game maker Electronic Arts (EA) was criticized as “trying to buy innovation” in its bid to

acquire Take-Two Interactive, known primarily for the game “Grand Theft Auto.” Does it

make sense for EA to offer more than $2 billion to buy Take Two when creating a new video

game costs only $20 million? Why would EA ignore internal innovation to choose an

acquisition strategy?

It would make sense for EA to acquire Take-Two if there is a strong expectation that Take Two

10. If you are the CEO of a global company, how might you determine whether a globalization,

multidomestic, or transnational strategy would work best for your enterprise? What factors

would influence your decision?

If the company’s products can be successfully standardized throughout the world, meaning

people truly do want the same products/services everywhere, then a globalization strategy will

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Apply Your Skills: Experiential Exercise

Strategic Thinking Blueprints

Strategic thinking involves a mental blueprint that includes a desired future, ways to achieve that

Apply Your Skills: Small Group Breakout

SWOT Analysis

This exercise asks each student to select a local eating establishment and write a statement of

what the student believes is the business’s current strategy, key strengths and weaknesses, and

Apply Your Skills: Ethical Dilemma

The Spitzer Group

1. Don’t require Spitzer “connectors” to reveal their affiliation with the corporate word-of-

mouth marketing campaign. They don’t have to recommend a product they don’t believe in.

The situation is a little unclear in the case description, but it appears that Spitzer Group is

2. Require that Spitzer participants reveal their ties to the corporate marketing program right

up front before they make a recommendation.

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Although there is no information about this in the case, assuming the participants are not being

paid or receiving other forms of remuneration from Spitzer’s client except for an occasional new

3. Instruct Spitzer participants to reveal their participation in the corporate marketing program

only if directly asked by the person they are talking to about the client’s products.

This is probably the best option. It does not prevent participants from revealing their affiliation

Apply Your Skills: Case for Critical Analysis

Costco: A Different Path

1. Have you shopped at a Costco store? How do you think a Costco store compares to Sam’s

Club, Target, or Walmart store? What do you value most when selecting a low-priced store

at which to shop?

2. With respect to competitive strategy, identify and evaluate Costco’s target customers, its

core competencies, and how it builds synergy and delivers value.

Costco’s target customers are those who identify themselves as cost-conscious consumers but

3. Would you rate Costco’s competitive strategy as pursuing differentiation, cost-leadership,

focus, or some combination? Why?

An analysis of Costco in relation to Porter’s Competitive Strategies may lead a student to

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On the Job Video Case Answers

Theo Chocolate

1. Evaluate Theo’s new strategy in light of the company’s strengths, weaknesses, opportunities,

and threats.

A SWOT analysis for Theo Chocolate begins by recognizing that Theo has a mission to be the

most loved and most ethical chocolate company in the world. Internal strengths that help the

2. Using the BCG Matrix, explain Theo’s decision to offer a classic line of chocolate bars after

having limited success with Fantasy Flavor chocolates.

Theo began as an organic chocolate maker with an exotic product line that appealed to Fair

Trade consumers and sophisticated chocolate lovers. As creative as Theo’s products were, they

3. Which of the three competitive strategies—differentiation, cost leadership, or focus—do you

think is right for Theo Chocolate? Explain.

Answers will vary, but students should recognize that Theo is banking on its organic and Fair

Trade expertise to differentiate itself from other chocolate makers and brands (differentiation

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