Strategy Formulation: 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. It
begins with situation analysis: the process of finding a strategic fit between external
opportunities and internal strengths while working around external threats and internal
weaknesses.
The goal of strategy is to find an extremely favorable niche so well suited to the firm's internal and
external environment that other corporations are not likely to challenge or dislodge it.

A niche is a need in the marketplace that is currently unsatisfied

Propitious niche: that is so well suited to the firm's competitive advantages that other organizations are
not likely to challenge or dislodge it

Strategic windows: unique market opportunities that are available for only a particular time

SFAS Matrix.: The matrix that summarizes an organization's strategic factors by combining the external
factors from the EFAS Table with the internal factors from the IFAS Table

Competitive strategy raises the questions of whether to compete on the basis of lower cost or
differentiation and whether to compete for the biggest market or a niche market. And focus on
improving the competitive position of a corporation's products or services within the industry or market
segment served

Cost leadership is the ability of a company or business unit to design, produce, and market a
comparable product more efficiently than its competitors

Differentiation: the ability to provide unique and superior value to the buyer in terms of product quality,
special features, or after-sale service

competitive scope: the term that applies to the breadth of a company's or business unit's target market

Stuck in the middle.: a business unit in a competitive marketplace with no generic competitive strategy

strategic rollup.: A method developed in the mid-1990s as an efficient means to quickly consolidate a
fragmented industry

Cost proximity: When a company following a differentiation strategy ensures that the higher price it
charges for its higher quality is not priced too far above the price of the competition

Collusion: The active cooperation of firms within an industry to reduce output and raise prices to get
around the normal law of supply and demand

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
It can be said that the essence of strategy is opportunity divided by capacity. 1 An
opportunity by itself has no real value unless a company has the capacity (i.e., resources) to
take advantage of that opportunity. By itself, a distinctive competency in a key resource or
capability is no guarantee of competitive advantage. Weaknesses in other resource areas
can prevent a strategy from being successful. SWOT, as a conceptual tool can be used to
take a broader view of strategy through the formula SA = O/(S–W)—that is, (Strategic
Alternative equals Opportunity divided by Strengths minus Weaknesses).
This reflects an important issue strategic managers face: Should we invest more in our
strengths to make them even stronger (a distinctive competence) or should we invest in our
weaknesses to at least make them competitive?
Populating a SWOT chart, by itself, is just the start of a strategic analysis. Some of the
primary criticisms of SWOT are:
■■ It is simply the opinions of those filling out the boxes
■■ Virtually everything that is a strength is also a weakness
■■ Virtually everything that is an opportunity is also a threat
■■ Adding layers of effort does not improve the validity of the list
■■ It uses a single point in time approach
■■ There is no tie to the view from the customer
■■ There is no validated evaluation approach.

What are the common elements of a well-crafted mission statement?

Answer: A well-crafted mission statement has five common elements.

1. It must be short so that every employee can remember the statement.

2. The design must be simple so that everyone in the company can understand what the senior
leadership team desires.
3. It has to provide direction to the activities of company employees.
4. The statement should enable employees to knowing what the company does and what it does
not do in an exact way.
5. Finally, the statement should be measurable so that the company can visibly see progress.

BUSINESS STRATEGIES: Competitive & Cooperative

What are Porter's three generic competitive strategies?

1. Cost leadership is the ability of a company or a business unit to design, produce, and market a
comparable product or service more efficiently than its competitors. Cost leadership is a lower-
cost competitive strategy that aims at the broad mass market and requires “aggressive
construction of efficient-scale facilities, vigorous pursuit of cost reductions from experience,
tight cost and overhead control, avoidance of marginal customer accounts, and cost
minimization in areas like R&D, service, sales force, advertising, and so on.”8 Because of its
lower costs, the cost leader is able to charge a lower price for its products than its competitors
and still make a satisfactory profit. Although it may not necessarily have the lowest costs in the
industry, it has lower costs than its competitors. Some companies successfully following this
strategy are Wal-Mart (discount retailing), Having a lower-cost position also gives a company or
business unit a defense against rivals. Its lower costs allow it to continue to earn profits during
times of heavy competition. Its high market share means that it will have high bargaining power
relative to its suppliers (because it buys in large quantities). Its low price will also serve as a
barrier to entry because few new entrants will be able to match the leader’s cost advantage. As
a result, cost leaders are likely to earn above-average returns on investment.
2. Differentiation is the ability of a company to provide unique and superior value to the buyer.
Differentiation may include areas such as product quality, special features, or after-sale service.
 is aimed at the broad mass market and involves the creation of a product or service that is
perceived throughout its industry as having passed through the elements of VRIO. The company
or business unit may then (if they choose to) charge a premium. Differentiation is a viable
strategy for earning above-average returns in a specific business because the resulting increased
value to the customer lowers price sensitivity. Increased costs can usually be passed on to the
buyers. Buyer loyalty also serves as an entry barrier; new firms must develop their own
distinctive competence to differentiate their products or services in some way in order to
compete successfully. Examples of companies that successfully use a differentiation strategy are
Walt Disney Company (entertainment), Apple (computers, tablets, watches, and cell phones),
Research does suggest that a differentiation strategy is more likely to generate higher profits
than does a lower-cost strategy because differentiation creates a better entry barrier.
3. Focus is the ability of a company to provide unique and superior value to a particular buyer
group, segment of the market line, or geographic market.

Hypercompetition and Competitive Advantage Sustainability

1. D’Aveni proposes that it is becoming increasingly difficult to sustain a competitive advantage for
very long.
2. Firms must find new ways not only to reduce costs further but also to add value to the product
or service being provided.
3. The importance of building dynamic capabilities to better cope with uncertain environments
4. They tend to go through escalating stages of competition. Firms initially compete on cost and
quality, until an abundance of high-quality, low-priced goods result.
5. Firms then raise entry barriers to limit competitors. Economies of scale, distribution
agreements, and strategic alliances
6. After the established players have entered and consolidated all new markets, the next stage is
for the remaining firms to attack and destroy the strongholds of other firms.
7. according to D’Aveni, the remaining large global competitors can work their way to a situation
of perfect competition in which no one has any advantage and profits are minimal.
8. According to D’Aveni, as industries become hypercompetitive, there is no such thing as a
sustainable competitive advantage. Successful strategic initiatives in this type of industry
typically last only months to a few years.
9. According to D’Aveni, the only way a firm in this kind of dynamic industry can sustain any
competitive advantage is through replacing a firm’s current successful products with the next
generation of products before the competitors can do so.
10. One danger of D’Aveni’s concept of hypercompetition, however, is that it may lead to an
overemphasis on short-term tactics over long-term strategy.

What are cooperative strategies?

Cooperative strategies are used to gain competitive advantage within an industry by working with other
firms. The two general types of cooperative strategies are collusion and strategic alliances.

1. Collusion is the active cooperation of firms within an industry to reduce output and raise prices
in order 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.
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.
2. A strategic alliance is a partnership of two or more corporations or business units to achieve
strategically significant objectives that are mutually beneficial.

Discuss the reasons a firm may form a strategic alliance.

Answer: 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. A firm may form a
strategic alliance to obtain or learn new capabilities, to obtain access to specific markets, to reduce
financial risk, or to reduce political risk.

Discuss the types of alliances that businesses can engage in?

1. 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.
2. 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
ownership, operational responsibilities, and financial risks and rewards to each member, while
preserving their separate identity/autonomy."
3. 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.
4. 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.
Discuss competitive strategy differences between a fragmented and a consolidated industry.

Answer: In a fragmented industry, there are many small- and medium-sized local companies competing
for relatively small shares of the total market. Focus strategies will likely predominate in a fragmented
industry. Fragmented industries are typical for products in the early stages of their life cycle. If few
economies are to be gained through size, no large firms will emerge and entry barriers will be low—
allowing a stream of new entrants into the industry.

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 begin fragmented, battles for
market share and creative attempts to overcome local or niche market boundaries often increase the
market share of a few companies. After product standards become established for minimum quality and
features, competition shifts to a greater emphasis on cost and service. Slower growth, overcapacity, and
knowledgeable buyers combine to put a premium on a firm's ability to achieve cost leadership or
differentiation along the dimensions most desired by the market. Research and development shifts from
product to process improvements. Overall product quality improves, and costs are reduced significantly

What is the impact of hypercompetition on competitive advantage?

Answer: Hypercompetition reflects the increasing difficulty of sustaining a competitive advantage over
time. As a result of this erosion of competitive advantage, companies must constantly work to improve
their advantage. Firms must constantly seek new ways to lower costs and add value to their products
and services.