IT 107 Organization and Management

HandOut #010

STRATEGIC PLANNING AND ORGANIZATIONS

The nature of strategic planning varies from organization to organization, depending on the organization's complexity, or stage of diversification, and on the level within the organization at which the planning is done. Diversification Diversification refers to the number of different goods and/or services a company produces and the number of different markets it serves. The degree of diversification classes firms in five basic stages: a single business, a dominant business, related businesses, and unrelated business. The different form or stage, of diversification of a firm affects the scope of the firm's planning process. A firm that produces different types of goods or services for unrelated markets often must have broad-based planning system. A firm involved in a single product or service line needs a less elaborate planning system. In other words, the complexity and scope of a firm's strategic planning depend partly on its stage of diversification. Five Basic Stages of Organizations as to Diversification A single-business firm provides a limited number of goods or services to one segment of a particular market. A dominant-business firm serves various segments of a particular market. A related-business firm provides a variety of similar goods and/or services. Its divisions generally compete in the same markets, use similar technologies, and share common distribution channels. A unrelated-business firm provides diverse goods and services to many different markets. Often referred to as a conglomerate, such a firm usually consists of a number of distinct strategic business units. A strategic business unit (SBU) is a division or subsidiary of a firm that serves a distinct product-market segment. It has a well-defined set of customers and/or covers a specific geographic area. An SBU is usually evaluated on the basis of its own income statement and balance sheet. Strategic business units are also used by large dominant-business firms or related-business firms. The top managers and teams within each SBU are responsible for developing the strategic plan for their unit. This strategic plan is normally submitted to corporate headquarters for review. Top management at headquarters is heavily involved in determining which firms the organization might acquire or divest itself of. It also decides where to reduce, maintain or increase the firm's capital investment commitments. Levels of Strategic Plans in Diversified Organizations Large-scale, diversified organizations often develop strategic plans at three levels: 1) the Corporate level, 2) the Business level, and 3) the Functional level. Corporate-Level Strategy Corporate-level strategy guides the activities of organizations that have more than one line of business. Diversification is a key issue in corporate-level strategy and planning. Top management devises a corporate strategy to determine the role of each separate business within the over- all organization. Strategies focus on the kinds of businesses the firm wants to engage in, ways to acquire or get rid of businesses, allocation of resources among the businesses, and ways to manage the business. At Ford, the office of the chief executive (which includes four executives), the board of directors, and the heads of the company's five sectors are closely involved with corporate-level strategy. To provide a better understanding of corporate-level strategy, we'll look at five specific corporate-level growth strategies: forward integration, backward integration, horizontal integration, concentric diversification, and conglomerate diversification. Five Corporate - Level Growth Strategies

Forward integration occurs when a company enters the businesses of its customers. This strategy moves the company closer to the ultimate consumer. Backward integration occurs when a company enters the businesses of its suppliers. This strategy is implemented by acquiring suppliers or by creating new businesses that provide the same goods or services as suppliers. Joint ventures can be used as an alternative means to traditional forms of backward, forward, and horizontal integration.

Horizontal integration occurs when a company acquires a competitor. Concentric diversification, sometimes called related diversification, occurs when a firm acquires or starts a business related to it in terms of technology, markets, or products (goods or services). Generally, a related-business firm acquires another company or starts new ventures. There must be some common thread linking the two firms, such as a common set of customers, similar technology, overlapping distribution channels, compatible managerial skills, or similar goods or services. Conglomerate diversification is a corporate level growth strategy that adds unrelated goods or services to a firm's product line. Generally one company acquires another company, or starts a venture in a totally new field, firms operating in the unrelated-businesses stage of diversification.

Business-Level Strategy Business-level strategy guides the operations of a single business and answer the question "How do we compete?" A single-business firm or an SBU provides a particular line of goods or services to a specific industry or market segment. Its top managers are involved with planning for: 1. how the firms can maintain a competitive edge, 2. how each key functional department (production, human resources, marketing, finance) can contribute to the firm's overall effectiveness, and 3. how resources should be allocated among the functions. Functional-Level Strategy Functional-level strategy consists of guidelines for managing a firm's functional areas, such as manufacturing, marketing, human resources, finance, engineering, and research and development. Each functional strategy and plan should be designed to contribute to the business-level strategies and plans. Functional-level strategies often involve a combination of tactical and strategic planning. The Strategic Planning Process The organizational mission, goals and objectives are developed by answering the following questions: Who are we? What do we want to become? What are our guiding objectives?

These general goals and objectives provide broad direction for decision-making and may not change from year to year. It is also important to note that they are not developed in isolation. Three Growth Strategies Most Common to Business-Level Strategy and Planning

Market penetration strategy - a business-level strategy that seeks growth in current markets with current goods or services. Market development strategy - a business-level growth strategy that seeks new markets for current products. Product development strategy - a business-level growth strategy that seeks to develop new or improved goods or services for current markets.

Two Models of Business-Level Strategy Product-life Cycle Model Generic Strategies Model

Each of these provides a different means for generating and evaluating alternatives strategies. In combination, these models can be powerful aids to managers and other employees in the business4evel planning and management process. PRODUCT-LIFE CYCLE MODEL Product-Life Cycle Model - a model of business-level strategy that emphasizes planning according to the life-cycle phase of the firm's goods or services. The product-life cycle model specifies the market phases that many goods and services go through during their lifetime and stresses strategic plans based on these phases. Figure shows one popular version of a product-life cycle, with five phases: introduction, growth, maturity, decline, and termination. The vertical axis shows whether market demands (sales volume) for the product (or service) is increasing, stable, or decreasing. The horizontal axis shows time. For fad product, such as Teenage Mutant Ninja Turtles, the time span for all five phases might be a couple of years or less, In contrast, automobiles have been on the market for more than seventy-five years, This industry now appears to be in the maturity phase. Although strategic planning for each good/service is influenced by its life cycle phase, management can sometimes intervene in the cycle, shifting a mature or declining product or service into a new growth stage. For example, several years ago, Japanese manufacturers, unlike U.S. manufacturers who accepted that motorcycles and radios were in the maturity stage, developed new markets (re-entered a growth stage) for motor scooters, all-terrain vehicles (ATVs), and Walkman radios. Strategies During Introduction & Growth According to this model, emphasis on strategic and functional areas (such as marketing, production, R&D, and finance) needs to change for different phases of the product life cycle. During the introduction and growth phases, dominant strategic concerns are with product development (R&D), finding new customers (marketing), and financing start-up, expansion, and marketing cost. Risk and the possibility of failure are great in these two initial phases. Strategies at Maturity Stage During, the maturity phase of a product, a dominant strategic concern is the need to reduce per unit production cost. Cost-cutting measures such as shutting down obsolete plants, laying off employees, and automating may be utilized.

Another dominant strategic concern during the maturity phase is to maintain, or even increase, market share at the expense of competitors. Because of the relatively slow growth rate in a mature market, significant growth must come at the expense of competitors sales or through buying out of competitors. Strategies at Decline Stage During the decline phase of a product's or service's life cycle, there continues to be a strong strategic emphasis of efficiency (reduce costs per units). This effort is often associated with reducing capital investment rather than holding it steady as in the maturity phase. Product or service options and variations are often standardized and their number reduced. Efforts are also made to improve marketing efficiency. Mergers or acquisitions among competing firms accelerate during the decline phase. Strategies at Termination Stage In the termination phase are the sharp reductions in availability and possibly the total elimination of a good or service. Most drive-in theaters through out North America have closed down during the past decade. The primary reason for the closing of many of these theaters is home VCR Technology along with its channel of distribution: the video store. GENERIC STRATEGIES MODEL This model is a framework of three basic business-level strategies that can be applied to a variety of organization in diverse industries. The various combinations of these two (2) variables - strategic target and strategic advantage - suggest three different generic strategies: differentiation strategy, cost leadership strategy, and focus strategy. Differentiation Strategy The business-level strategy that emphasizes competing with all other firms in an industry but offering product that customers perceived to be unique. This strategy is dominant in the auto industry. Organizations attempt to create unique value (benefits) by influencing customer perceptions and /or providing real differences. A variety of offerings are associated with the differentiation strategy, including innovative product design (BMW), high quality (Fords theme " Quality is Job 1"), unique brand image (Mercedez - Benz), technological leadership (Honda's four-wheel steering), customer service leadership (GM's Mr. Goodwrench), and extensive dealer network, and product warranty (Mazda's bumper-to-bumper warranty). One of the shortcomings of the differentiation strategy depends on the relative ease with which offerings can be copied or imitated. As soon as most or all competitors imitate the offering ( such as a bumper-to-bumper car warranty), it is no longer effective as means of differentiation. Cost Leadership Strategy The business level strategy that emphasizes competing with all other firms in an industry by providing a good or service at a price as low as or lower than theirs. This strategy attempts to maximize efficiency and minimize costs. Autos produced and marketed primarily under at the cost leadership strategy include the Hyundai, Ford Escort, Subaru Justy, Nissan Sentra, Mazda 323, Suzuk-is Alto G-Type, Toyota Tercel EZ, Daihatsu Mira, Chevrolet Sprint, and Honda Civic. A variety of strategic actions are associated with a cost leadership strategy, such as constructing plants that yield high economies of scale, constantly striving to control overhead and production costs to reduce per-unit cost, minimizing R&D, service, sales force, advertising, and similar costs, or avoiding customers whose demands would result in high selling or service costs. High volume and/or rapid growth are often needed for profitability. For example, the new Ford Escort, designed for global sales is assembled in twelve locations worldwide with an annual capacity of 900,000 units. Focus Strategy Focus strategy is the business level strategy that emphasizes competing in a specific industry niche by offering either unique product or a low-cost product. A niche is a narrowly defined market segment that many competitors may overlook, ignore, or have difficulty serving. Organizations attempt to create a unique product image by catering to the specific demands of the selected niche, ignoring other potential customers. The strategic actions associated with the focus strategy are adaptations of the actions associated with the differentiation and cost leadership strategies, but they're applied to a specific market niche. Autos produced and marketed using primarily the focus strategy with a differentiation emphasis include Acura Legend LS, Porsche, Lexus LS500, Rolls-Royce Infiniti 45, BMW, Ferrari, and Maserati. Only a small percent of American car buyers can afford these cars since their sticker prices range from about $40,000 on up. Oshkosh Truch, in contrast, follows a cost leadership strategy to a specific market niche in the production of heavy-duty military vehicles.
By JinAd