In today’s highly competitive business environment, budget-oriented planning or forecast-based planning methods are insufficient for a large corporation to survive and prosper. The firm must engage in strategic planning that clearly defines objectives and assesses both the internal and external situation to formulate strategy, implement the strategy, evaluate the progress, and make adjustments as necessary to stay on track. A simplified view of the strategic planning process is shown by the following diagram:   The Strategic Planning Process Mission &       Objectives           Environmental   Scanning   Strategy     Formulation        Strategy  Implementation           Evaluation       & Control   Mission and Objectives The mission statement describes the company’s business vision, including the unchanging values and purpose of the firm and forward-looking visionary goals that guide the pursuit of future opportunities. Guided by the business vision, the firm’s leaders can define measurable financial and strategic objectives. Financial objectives involve measures such as sales targets and earnings growth. Strategic objectives are related to the firm’s business position, and may include measures such as market share and reputation.   Environmental Scan The environmental scan includes the following components: Internal analysis of the firm Analysis of the firm’s industry (task environment) External macroenvironment (PEST analysis) The internal analysis…

While a business must continually adapt to its competitive environment, there are certain core ideals that remain relatively steady and provide guidance in the process of strategic decision-making. These unchanging ideals form the business vision and are expressed in the company mission statement. In their 1996 article entitled Building Your Company’s Vision, James Collins and Jerry Porras provided a framework for understanding business vision and articulating it in a mission statement. The mission statement communicates the firm’s core ideology and visionary goals, generally consisting of the following three components: Core values to which the firm is committed Core purpose of the firm Visionary goals the firm will pursue to fulfill its mission The firm’s core values and purpose constitute its core ideology and remain relatively constant. They are independent of industry structure and the product life cycle. The core ideology is not created in a mission statement; rather, the mission statement is simply an expression of what already exists. The specific phrasing of the ideology may change with the times, but the underlying ideology remains constant. The three components of the business vision can be portrayed as follows: Core  Values        Core Purpose          …

Strategy can be formulated on three different levels: corporate level business unit level functional or departmental level. While strategy may be about competing and surviving as a firm, one can argue that products, not corporations compete, and products are developed by business units. The role of the corporation then is to manage its business units and products so that each is competitive and so that each contributes to corporate purposes. Consider Textron, Inc., a successful conglomerate corporation that pursues profits through a range of businesses in unrelated industries. Textron has four core business segments: Aircraft – 32% of revenues Automotive – 25% of revenues Industrial – 39% of revenues Finance – 4% of revenues. While the corporation must manage its portfolio of businesses to grow and survive, the success of a diversified firm depends upon its ability to manage each of its product lines. While there is no single competitor to Textron, we can talk about the competitors and strategy of each of its business units. In the finance business segment, for example, the chief rivals are major banks providing commercial financing. Many managers consider the business level to be the proper focus for strategic planning.   Corporate Level Strategy…

A scan of the external macro-environment in which the firm operates can be expressed in terms of the following factors: Political Economic Social Technological The acronym PEST (or sometimes rearranged as “STEP”) is used to describe a framework for the analysis of these macroenvironmental factors. A PEST analysis fits into an overall environmental scan as shown in the following diagram:       Environmental Scan           /   \ External Analysis     Internal Analysis     /                       \   Macroenvironment  Microenvironment      |   P.E.S.T.          Political Factors Political factors include government regulations and legal issues and define both formal and informal rules under which the firm must operate. Some examples include: tax policy employment laws environmental regulations trade restrictions and tariffs political stability   Economic Factors Economic factors affect the purchasing power of potential customers and the firm’s cost of capital. The following are examples of factors in the macroeconomy: economic growth interest rates exchange rates inflation rate   Social Factors Social factors include the demographic and cultural aspects of the external macroenvironment. These factors affect customer needs and the size of potential markets. Some social factors include: health consciousness population growth rate age distribution career attitudes emphasis on safety   Technological Factors Technological…

The model of pure competition implies that risk-adjusted rates of return should be constant across firms and industries. However, numerous economic studies have affirmed that different industries can sustain different levels of profitability; part of this difference is explained by industry structure. Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.   Diagram of Porter’s 5 Forces     SUPPLIER POWER Supplier concentration Importance of volume to supplier Differentiation of inputs Impact of inputs on cost or differentiation Switching costs of firms in the industry Presence of substitute inputs Threat of forward integration Cost relative to total purchases in industry   BARRIERS TO ENTRY Absolute cost advantages Proprietary learning curve Access to inputs Government policy Economies of scale Capital requirements Brand identity Switching costs Access to distribution Expected retaliation Proprietary products   THREAT OF SUBSTITUTES -Switching costs -Buyer inclination to  substitute -Price-performance  trade-off of substitutes   BUYER POWER Bargaining leverage Buyer volume Buyer information Brand identity Price sensitivity Threat of backward integration Product differentiation Buyer concentration vs….

If the primary determinant of a firm’s profitability is the attractiveness of the industry in which it operates, an important secondary determinant is its position within that industry. Even though an industry may have below-average profitability, a firm that is optimally positioned can generate superior returns. A firm positions itself by leveraging its strengths. Michael Porter has argued that a firm’s strengths ultimately fall into one of two headings: cost advantage and differentiation. By applying these strengths in either a broad or narrow scope, three generic strategies result: cost leadership, differentiation, and focus. These strategies are applied at the business unit level. They are called generic strategies because they are not firm or industry dependent. The following table illustrates Porter’s generic strategies: Porter’s Generic Strategies Target Scope Advantage Low Cost Product Uniqueness Broad (Industry Wide) Cost Leadership Strategy Differentiation Strategy Narrow (Market Segment) Focus Strategy (low cost) Focus Strategy (differentiation)   Cost Leadership Strategy This generic strategy calls for being the low cost producer in an industry for a given level of quality. The firm sells its products either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain…

  To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities. Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chain and is depicted below:   Primary Value Chain Activities Inbound Logistics >  Operations >  Outbound Logistics >  Marketing & Sales >  Service   The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin. Inbound logistics include the receiving, warehousing, and inventory control of input materials. Operations are the value-creating activities that transform the inputs into the final product. Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc. Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. Service activities are those that maintain and enhance the product’s value including customer support, repair services, etc. Any or all of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are…

     The degree to which a firm owns its upstream suppliers and its downstream buyers is referred to as vertical integration. Because it can have a significant impact on a business unit’s position in its industry with respect to cost, differentiation, and other strategic issues, the vertical scope of the firm is an important consideration in corporate strategy. Expansion of activities downstream is referred to as forward integration, and expansion upstream is referred to as backward integration. The concept of vertical integration can be visualized using the value chain. Consider a firm whose products are made via an assembly process. Such a firm may consider backward integrating into intermediate manufacturing or forward integrating into distribution, as illustrated below:   Example of Backward and Forward Integration No Integration Raw Materials   Intermediate Manufacturing   Assembly   Distribution   End Customer Backward Integration Raw Materials   Intermediate Manufacturing   Assembly   Distribution   End Customer Forward Integration Raw Materials   Intermediate Manufacturing   Assembly   Distribution   End Customer Two issues that should be considered when deciding whether to vertically integrate is cost and control. The cost aspect depends on the cost of market transactions between firms versus the cost of…

  The acquisition of additional business activities at the same level of the value chain is referred to as horizontal integration. This form of expansion contrasts with vertical integration by which the firm expands into upstream or downstream activities. Horizontal growth can be achieved by internal expansion or by external expansion through mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses. Some examples of horizontal integration include: The Standard Oil Company’s acquisition of 40 refineries. An automobile manufacturer’s acquisition of a sport utility vehicle manufacturer. A media company’s ownership of radio, television, newspapers, books, and magazines.   Advantages of Horizontal Integration The following are some benefits sought by firms that horizontally integrate: Economies of scale – acheived by selling more of the same product, for example, by geographic expansion. Economies of scope – achieved by sharing resources common to different products. Commonly referred to as “synergies.” Increased market power (over suppliers and downstream channel members) Reduction in the cost of international trade by operating factories in foreign markets. Sometimes benefits can be gained through customer perceptions of linkages between products. For example, in some cases synergy can be achieved…

To portray alternative corporate growth strategies, Igor Ansoff presented a matrix that focused on the firm’s present and potential products and markets (customers). By considering ways to grow via existing products and new products, and in existing markets and new markets, there are four possible product-market combinations. Ansoff’s matrix is shown below:   Ansoff Matrix     Existing Products New Products Existing Markets Market Penetration       Product Development       New Markets     Market Development       Diversification   Ansoff’s matrix provides four different growth strategies: Market Penetration – the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Market Development – the firm seeks growth by targeting its existing products to new market segments. Product Development – the firms develops new products targeted to its existing market segments. Diversification – the firm grows by diversifying into new businesses by developing new products for new markets.   Selecting a Product-Market Growth Strategy The market penetration strategy is the least risky since it leverages many of the firm’s existing resources and capabilities. In a growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if…

  The Boston Consulting Group, Perspectives on Strategy Perspectives on Strategy contains Bruce Henderson’s original writings on the BCG growth-share matrix. Specific articles include: The Product Portfolio – introduces the growth-share matrix and its dynamics, including the success sequence and the disaster sequence. Cash Traps – explains why the majority of products are cash traps. The Star of the Portfolio – and why market share is so important. Anatomy of the Cash Cow – including the buying and selling of market share for cash cows. The Corporate Portfolio – discussing the advantages of diversified companies. Renaissance of the Portfolio – after the portfolio concept’s falling out of favor, this article makes the case for its return. The 75 articles in Perspectives on Strategy also include the pricing paradox, segment-of-one marketing®, time-based competition, and other articles summarizing the insights of Bruce Henderson and other BCG members.   Companies that are large enough to be organized into strategic business units face the challenge of allocating resources among those units. In the early 1970’s the Boston Consulting Group developed a model for managing a portfolio of different business units (or major product lines). The BCG growth-share matrix displays the various business units on…

In consulting engagements with General Electric in the 1970’s, McKinsey & Company developed a nine-cell portfolio matrix as a tool for screening GE’s large portfolio of strategic business units (SBU). This business screen became known as the GE/McKinsey Matrix and is shown below:   GE / McKinsey Matrix     Business Unit Strength     High      Medium      Low       High         Medium         Low         The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU’s position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways: The GE matrix generalizes the axes as “Industry Attractiveness” and “Business Unit Strength” whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit. The GE matrix has nine cells vs. four cells in the BCG matrix. Industry attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and multiplying…

In their 1990 article entitled, The Core Competence of the Corporation, C.K. Prahalad and Gary Hamel coined the term core competencies, or the collective learning and coordination skills behind the firm’s product lines. They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services. According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. For example, motors are a core product that can be used in wide array of end products. The business units of the corporation each tap into the relatively few core products to develop a larger number of end user products based on the core product technology. This flow from core competencies to end products is shown in the following diagram:   Core Competencies to End Products End Products  1   2   3   4   5   6   7   8   9  10 11 12 Business 1 Business 2 Business 3 Business 4               Core Product  1                     Core Product  2             Competence 1 Competence 2 Competence…

During the last half of the twentieth century, many barriers to international trade fell and a wave of firms began pursuing global strategies to gain a competitive advantage. However, some industries benefit more from globalization than do others, and some nations have a comparative advantage over other nations in certain industries. To create a successful global strategy, managers first must understand the nature of global industries and the dynamics of global competition.   Sources of Competitive Advantage from a Global Strategy A well-designed global strategy can help a firm to gain a competitive advantage. This advantage can arise from the following sources:   Efficiency Economies of scale from access to more customers and markets Exploit another country’s resources – labor, raw materials Extend the product life cycle – older products can be sold in lesser developed countries Operational flexibility – shift production as costs, exchange rates, etc. change over time Strategic First mover advantage and only provider of a product to a market Cross subsidization between countries Transfer price Risk Diversify macroeconomic risks (business cycles not perfectly correlated among countries) Diversify operational risks (labor problems, earthquakes, wars) Learning Broaden learning opportunities due to diversity of operating environments Reputation Crossover customers…

Classical theories of international trade propose that comparative advantage resides in the factor endowments that a country may be fortunate enough to inherit. Factor endowments include land, natural resources, labor, and the size of the local population. Michael E. Porter argued that a nation can create new advanced factor endowments such as skilled labor, a strong technology and knowledge base, government support, and culture. Porter used a diamond shaped diagram as the basis of a framework to illustrate the determinants of national advantage. This diamond represents the national playing field that countries establish for their industries.   Porter’s Diamond of National Advantage   Firm Strategy, Structure, and Rivalry   Factor Conditions     Demand Conditions     Related and Supporting Industries           The individual points on the diamond and the diamond as a whole affect four ingredients that lead to a national comparative advantage. These ingredients are: the availability of resources and skills, information that firms use to decide which opportunities to pursue with those resources and skills, the goals of individuals in companies, the pressure on companies to innovate and invest. The points of the diamond are described as follows. I.  Factor Conditions A country creates…

The decision of how to enter a foreign market can have a significant impact on the results. Expansion into foreign markets can be achieved via the following four mechanisms: Exporting Licensing Joint Venture Direct Investment   Exporting Exporting is the marketing and direct sale of domestically-produced goods in another country. Exporting is a traditional and well-established method of reaching foreign markets. Since exporting does not require that the goods be produced in the target country, no investment in foreign production facilities is required. Most of the costs associated with exporting take the form of marketing expenses. Exporting commonly requires coordination among four players: Exporter Importer Transport provider Government   Licensing Licensing essentially permits a company in the target country to use the property of the licensor. Such property usually is intangible, such as trademarks, patents, and production techniques. The licensee pays a fee in exchange for the rights to use the intangible property and possibly for technical assistance. Because little investment on the part of the licensor is required, licensing has the potential to provide a very large ROI. However, because the licensee produces and markets the product, potential returns from manufacturing and marketing activities may be lost.   Joint…