Strategy Formulation

Rex C. Mitchell, Ph.D.

INTRODUCTION
It is useful to consider strategy formulation as art of a strategic management rocess that com rises three hases! diagnosis, formulation, and im lementation. "trategic management is an ongoing rocess to de#elo and re#ise future$oriented strategies that allo% an organi&ation to achie#e its o'(ecti#es, considering its ca a'ilities, constraints, and the en#ironment in %hich it o erates. Diagnosis includes! )a* erforming a situation analysis )analysis of the internal en#ironment of the organi&ation*, including identification and e#aluation of current mission, strategic o'(ecti#es, strategies, and results, lus ma(or strengths and %ea+nesses, )'* analy&ing the organi&ation-s external en#ironment, including ma(or o ortunities and threats, and )c* identifying the ma(or critical issues, %hich are a small set, ty ically t%o to fi#e, of ma(or ro'lems, threats, %ea+nesses, and.or o ortunities that re/uire articularly high riority attention 'y management. Formulation, the second hase in the strategic management rocess, roduces a clear set of recommendations, %ith su orting (ustification, that re#ise as necessary the mission and o'(ecti#es of the organi&ation, and su ly the strategies for accom lishing them. In formulation, %e are trying to modify the current o'(ecti#es and strategies in %ays to ma+e the organi&ation more successful. This includes trying to create 0sustaina'le0 com etiti#e ad#antages $$ although most com etiti#e ad#antages are eroded steadily 'y the efforts of com etitors. 1 good recommendation should 'e! effecti#e in sol#ing the stated ro'lem)s*, ractical )can 'e im lemented in this situation, %ith the resources a#aila'le*, feasi'le %ithin a reasona'le time frame, cost$effecti#e, not o#erly disru ti#e, and acce ta'le to +ey 0sta+eholders0 in the organi&ation. It is im ortant to consider 0fits0 'et%een resources lus com etencies %ith o ortunities, and also fits 'et%een ris+s and ex ectations. There are four rimary ste s in this hase! 2 Re#ie%ing the current +ey o'(ecti#es and strategies of the organi&ation, %hich usually %ould ha#e 'een identified and e#aluated as art of the diagnosis 2 Identifying a rich range of strategic alternati#es to address the three le#els of strategy formulation outlined 'elo%, including 'ut not limited to dealing %ith the critical issues 2 Doing a 'alanced e#aluation of ad#antages and disad#antages of the alternati#es relati#e to their feasi'ility lus ex ected effects on the issues and contri'utions to the success of the organi&ation 2 Deciding on the alternati#es that should 'e im lemented or recommended. In organi&ations, and in the ractice of strategic management, strategies must 'e implemented to achie#e the intended results. The most %onderful strategy in the history of the %orld is useless if not im lemented successfully. This third and final stage in the strategic management rocess in#ol#es de#elo ing an im lementation lan and then doing %hate#er it ta+es to ma+e the ne% strategy o erational and effecti#e in achie#ing the organi&ation-s o'(ecti#es. The remainder of this cha ter focuses on strategy formulation, and is organi&ed into six sections! Three 1s ects of "trategy 3ormulation, Cor orate$4e#el "trategy, Com etiti#e "trategy, 3unctional "trategy, Choosing "trategies, and Trou'lesome "trategies.

T5R66 1"P6CT" O3 "TR1T678 3ORMU41TION

The follo%ing three as ects or le#els of strategy formulation, each %ith a different focus, need to 'e dealt %ith in the formulation hase of strategic management. The three sets of recommendations must 'e internally consistent and fit together in a mutually su orti#e manner that forms an integrated hierarchy of strategy, in the order gi#en. Corporate Level Strategy: In this as ect of strategy, %e are concerned %ith 'road decisions a'out the total organi&ation-s sco e and direction. 9asically, %e consider %hat changes should 'e made in our gro%th o'(ecti#e and strategy for achie#ing it, the lines of 'usiness %e are in, and ho% these lines of 'usiness fit together. It is useful to thin+ of three com onents of cor orate le#el strategy! )a* gro%th or directional strategy )%hat should 'e our gro%th o'(ecti#e, ranging from retrenchment through sta'ility to #arying degrees of gro%th $ and ho% do %e accom lish this*, )'* ortfolio strategy )%hat should 'e our ortfolio of lines of 'usiness, %hich im licitly re/uires reconsidering ho% much concentration or di#ersification %e should ha#e*, and )c* arenting strategy )ho% %e allocate resources and manage ca a'ilities and acti#ities across the ortfolio $$ %here do %e ut s ecial em hasis, and ho% much do %e integrate our #arious lines of 'usiness*. Competitive Strategy (often called Business Level Strategy): This in#ol#es deciding ho% the com any %ill com ete %ithin each line of 'usiness )4O9* or strategic 'usiness unit )"9U*. Functional Strategy: These more locali&ed and shorter$hori&on strategies deal %ith ho% each functional area and unit %ill carry out its functional acti#ities to 'e effecti#e and maximi&e resource roducti#ity.

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This com rises the o#erall strategy elements for the cor oration as a %hole, the grand strategy, if you lease. Cor orate strategy in#ol#es four +inds of initiati#es! 2 Ma+ing the necessary mo#es to esta'lish ositions in different 'usinesses and achie#e an a ro riate amount and +ind of di#ersification. 1 +ey art of cor orate strategy is ma+ing decisions on ho% many, %hat ty es, and %hich s ecific lines of 'usiness the com any should 'e in. This may in#ol#e deciding to increase or decrease the amount and 'readth of di#ersification. It may in#ol#e closing out some 4O9-s )lines of 'usiness*, adding others, and.or changing em hasis among 4O9-s. 2 Initiating actions to 'oost the com'ined erformance of the 'usinesses the com any has di#ersified into! This may in#ol#e #igorously ursuing ra id$gro%th strategies in the most romising 4O9-s, +ee ing the other core 'usinesses healthy, initiating turnaround efforts in %ea+$ erforming 4O9-s %ith romise, and dro ing 4O9-s that are no longer attracti#e or don-t fit into the cor oration-s o#erall lans. It also may in#ol#e su lying financial, managerial, and other resources, or ac/uiring and.or merging other com anies %ith an existing 4O9. 2 Pursuing %ays to ca ture #alua'le cross$'usiness strategic fits and turn them into com etiti#e ad#antages $$ es ecially transferring and sharing related technology, rocurement le#erage, o erating facilities, distri'ution channels, and.or customers. ;

2 6sta'lishing in#estment riorities and mo#ing more cor orate resources into the most attracti#e 4O9-s. It is useful to organi&e the cor orate le#el strategy considerations and initiati#es into a frame%or+ %ith the follo%ing three main strategy com onents! gro%th, ortfolio, and arenting. These are discussed in the next three sections.

What Should be Our Growth Objective and Strategies?

7ro%th o'(ecti#es can range from drastic retrenchment through aggressi#e gro%th. Organi&ational leaders need to re#isit and ma+e decisions a'out the gro%th o'(ecti#es and the fundamental strategies the organi&ation %ill use to achie#e them. There are forces that tend to ush to decision$ma+ers to%ard a gro%th stance e#en %hen a com any is in trou'le and should not 'e trying to gro%, for exam le 'onuses, stoc+ o tions, fame, ego. 4eaders need to resist such tem tations and select a gro%th strategy stance that is a ro riate for the organi&ation and its situation. "ta'ility and retrenchment strategies are underutili&ed. "ome of the ma(or strategic alternati#es for each of the rimary gro%th stances )retrenchment, sta'ility, and gro%th* are summari&ed in the follo%ing three su'$sections.

Growth Strategies
1ll gro%th strategies can 'e classified into one of t%o fundamental categories! concentration %ithin existing industries or diversification into other lines of 'usiness or industries. <hen a com any-s current industries are attracti#e, ha#e good gro%th otential, and do not face serious threats, concentrating resources in the existing industries ma+es good sense. Di#ersification tends to ha#e greater ris+s, 'ut is an a ro riate o tion %hen a com any-s current industries ha#e little gro%th otential or are unattracti#e in other %ays. <hen an industry consolidates and 'ecomes mature, unless there are other mar+ets to see+ )for exam le other international mar+ets*, a com any may ha#e no choice for gro%th 'ut di#ersification. There are t%o 'asic concentration strategies, vertical integration and horizontal growth. Di#ersification strategies can 'e di#ided into related )or concentric* and unrelated )conglomerate* di#ersification. 6ach of the resulting four core categories of strategy alternati#es can 'e achie#ed internally through in#estment and de#elo ment, or externally through mergers, ac/uisitions, and.or strategic alliances $$ thus roducing eight ma(or gro%th strategy categories. Comments a'out each of the four core categories are outlined 'elo%, follo%ed 'y some +ey oints a'out mergers, ac/uisitions, and strategic alliances. 1. Vertical Integration: This ty e of strategy can 'e a good one if the com any has a strong com etiti#e osition in a gro%ing, attracti#e industry. 1 com any can gro% 'y ta+ing o#er functions earlier in the #alue chain that %ere re#iously ro#ided 'y su liers or other organi&ations )0'ac+%ard integration0*. This strategy can ha#e ad#antages, e.g., in cost, sta'ility and /uality of com onents, and ma+ing o erations more difficult for com etitors. 5o%e#er, it also reduces flexi'ility, raises exit 'arriers for the com any to lea#e that industry, and re#ents the com any from see+ing the 'est and latest com onents from su liers com eting for their 'usiness. 1 com any also can gro% 'y ta+ing o#er functions for%ard in the #alue chain re#iously ro#ided 'y final manufacturers, distri'utors, or retailers )0for%ard integration0*. This strategy ro#ides more control o#er such things as final roducts.ser#ices and distri'ution, 'ut may in#ol#e =

ne% critical success factors that the arent com any may not 'e a'le to master and deli#er. 3or exam le, 'eing a %orld$class manufacturer does not ma+e a com any an effecti#e retailer. "ome %riters claim that 'ac+%ard integration is usually more rofita'le than for%ard integration, although this does not ha#e general su ort. In any case, many com anies ha#e mo#ed to%ard less #ertical integration )es ecially 'ac+%ard, 'ut also for%ard* during the last decade or so, re lacing significant amounts of re#ious #ertical integration %ith outsourcing and #arious forms of strategic alliances. 2. Horizontal Growth: This strategy alternati#e category in#ol#es ex anding the com any-s existing roducts into other locations and.or mar+et segments, or increasing the range of roducts.ser#ices offered to current mar+ets, or a com'ination of 'oth. It amounts to ex anding side%ays at the oint)s* in the #alue chain that the com any is currently engaged in. One of the rimary ad#antages of this alternati#e is 'eing a'le to choose from a fairly continuous range of choices, from modest extensions of resent roducts.mar+ets to ma(or ex ansions $$ each %ith corres onding amounts of cost and ris+. 3. Related i!ersi"ication #a$a %oncentric i!ersi"ication&: In this alternati#e, a com any ex ands into a related industry, one ha#ing synergy %ith the com any-s existing lines of 'usiness, creating a situation in %hich the existing and ne% lines of 'usiness share and gain s ecial ad#antages from commonalities such as technology, customers, distri'ution, location, roduct or manufacturing similarities, and go#ernment access. This is often an a ro riate cor orate strategy %hen a com any has a strong com etiti#e osition and distincti#e com etencies, 'ut its existing industry is not #ery attracti#e. '. (nrelated i!ersi"ication #a$a %onglomerate i!ersi"ication&: This fourth ma(or category of cor orate strategy alternati#es for gro%th in#ol#es di#ersifying into a line of 'usiness unrelated to the current ones. The reasons to consider this alternati#e are rimarily see+ing more attracti#e o ortunities for gro%th in %hich to in#est a#aila'le funds )in contrast to rather unattracti#e o ortunities in existing industries*, ris+ reduction, and.or re aring to exit an existing line of 'usiness )for exam le, one in the decline stage of the roduct life cycle*. 3urther, this may 'e an a ro riate strategy %hen, not only the resent industry is unattracti#e, 'ut the com any lac+s outstanding com etencies that it could transfer to related roducts or industries. 5o%e#er, 'ecause it is difficult to manage and excel in unrelated 'usiness units, it can 'e difficult to reali&e the ho ed$ for #alue added. )ergers* +c,uisitions* and Strategic +lliances: 6ach of the four gro%th strategy categories (ust discussed can 'e carried out internally or externally, through mergers, ac/uisitions, and.or strategic alliances. Of course, there also can 'e a mixture of internal and external actions. :arious forms of strategic alliances, mergers, and ac/uisitions ha#e emerged and are used extensi#ely in many industries today. They are used articularly to 'ridge resource and technology ga s, and to o'tain ex ertise and mar+et ositions more /uic+ly than could 'e done through internal de#elo ment. They are articularly necessary and otentially useful %hen a com any %ishes to enter a ne% industry, ne% mar+ets, and.or ne% arts of the %orld. Des ite their extensi#e use, a large share of alliances, mergers, and ac/uisitions fall far short of ex ected 'enefits or are outright failures. 3or exam le, one study u'lished in Business Wee in >??? found that @> ercent of alliances %ere either outright failures or 0lim ing along.0 Research on mergers and ac/uisitions includes a Mercer Management Consulting study of all mergers from A

>??B to >??@ %hich found that nearly half 0destroyed0 shareholder #alue, an 1. T. Cearney study of >>D multi'illion$dollar, glo'al mergers 'et%een >??= and >??@ %here DE ercent failed to create 0su'stantial returns for shareholders0 in the form of di#idends and stoc+ rice a reciation, and a Price$<aterhouse$Coo ers study of ?F ac/uisitions o#er GDBB million from >??A to >??F in %hich t%o$thirds of the 'uyer-s stoc+s dro ed on announcement of the transaction and a third of these %ere still lagging a year later. Many reasons for the ro'lematic record ha#e 'een cited, including aying too much, unrealistic ex ectations, inade/uate due diligence, and conflicting cor orate cultures, ho%e#er, the most o%erful contri'utor to success or failure is inade/uate attention to the merger integration rocess. 1lthough the la%yers and in#estment 'an+ers may consider a deal done %hen the a ers are signed and they recei#e their fees, this should 'e merely an incident in a multi$year rocess of integration that 'egan 'efore the signing and continues far 'eyond.

Sta-ility Strategies
There are a num'er of circumstances in %hich the most a ro riate gro%th stance for a com any is sta'ility, rather than gro%th. Often, this may 'e used for a relati#ely short eriod, after %hich further gro%th is lanned. "uch circumstances usually in#ol#e a reasona'le successful com any, com'ined %ith circumstances that either ermit a eriod of comforta'le coasting or suggest a ause or caution. Three alternati#es are outlined 'elo%, in %hich the actual strategy actions are similar, 'ut differing rimarily in the circumstances moti#ating the choice of a sta'ility strategy and in the intentions for future strategic actions. 1. .ause and /hen .roceed: This sta'ility strategy alternati#e )essentially a timeout* may 'e a ro riate in either of t%o situations! )a* the need for an o ortunity to rest, digest, and consolidate after gro%th or some tur'ulent e#ents $ 'efore continuing a gro%th strategy, or )'* an uncertain or hostile en#ironment in %hich it is rudent to stay in a 0holding attern0 until there is change in or more clarity a'out the future in the en#ironment. 2. 0o %hange: This alternati#e could 'e a co $out, re resenting indecision or timidity in ma+ing a choice for change. 1lternati#ely, it may 'e a comforta'le, e#en long$term strategy in a mature, rather sta'le en#ironment, e.g., a small 'usiness in a small to%n %ith fe% com etitors. 3. Gra- .ro"its 1hile 2ou %an: This is a non$recommended strategy to try to mas+ a deteriorating situation 'y artificially su orting rofits or their a earance, or other%ise trying to act as though the ro'lems %ill go a%ay. It is an unsta'le, tem orary strategy in a %orsening situation, usually chosen either to try to delay letting sta+eholders +no% ho% 'ad things are or to extract ersonal gain 'efore things colla se. Recent terri'le exam les in the U"1 are 6nron and <orldCom.

Retrenchment Strategies
/urnaround: This strategy, dealing %ith a com any in serious trou'le, attem ts to resuscitate or re#i#e the com any through a com'ination of contraction )general, ma(or cut'ac+s in si&e and costs* and consolidation )creating and sta'ili&ing a smaller, leaner com any*. 1lthough difficult, %hen done #ery effecti#ely it can succeed in 'oth retaining enough +ey em loyees and re#itali&ing the com any. D

%a3ti!e %om3any Strategy: This strategy in#ol#es gi#ing u inde endence in exchange for some security 'y 'ecoming another com any-s sole su lier, distri'utor, or a de endent su'sidiary. Sell 4ut: If a com any in a %ea+ osition is una'le or unli+ely to succeed %ith a turnaround or ca ti#e com any strategy, it has fe% choices other than to try to find a 'uyer and sell itself )or di#est, if art of a di#ersified cor oration*. 5i,uidation: <hen a com any has 'een unsuccessful in or has none of the re#ious three strategic alternati#es a#aila'le, the only remaining alternati#e is li/uidation, often in#ol#ing a 'an+ru tcy. There is a modest ad#antage of a #oluntary li/uidation o#er 'an+ru tcy in that the 'oard and to management ma+e the decisions rather than turning them o#er to a court, %hich often ignores stoc+holders- interests.

What Should Be Our !ortfolio Strateg"?

This second com onent of cor orate le#el strategy is concerned %ith ma+ing decisions a'out the ortfolio of lines of 'usiness )4O9-s* or strategic 'usiness units )"9U-s*, not the com any-s ortfolio of indi#idual roducts. Portfolio matrix models can 'e useful in reexamining a com any-s resent ortfolio. The ur ose of all ortfolio matrix models is to hel a com any understand and consider changes in its ortfolio of 'usinesses, and also to thin+ a'out allocation of resources among the different 'usiness elements. The t%o rimary models are the 9C7 7ro%th$"hare Matrix and the 76 9usiness "creen )Porter, >?EB, has a good summary of these*. These models consider and dis lay on a t%o$ dimensional gra h each ma(or "9U in terms of some measure of its industry attracti#eness and its relati#e com etiti#e strength The B#G Growth$Share %atri& model considers t%o relati#ely sim le #aria'les! gro%th rate of the industry as an indication of industry attracti#eness, and relati#e mar+et share as an indication of its relati#e com etiti#e strength. The G' Business Screen, also associated %ith McCinsey, considers t%o com osite #aria'les, %hich can 'e customi&ed 'y the user, for )a* industry attracti#eness )e.g, one could include industry si&e and gro%th rate, rofita'ility, ricing ractices, fa#ored treatment in go#ernment dealings, etc.* and )'* com etiti#e strength )e.g., mar+et share, technological osition, rofita'ility, si&e, etc.* The 'est test of the 'usiness ortfolio-s o#erall attracti#eness is %hether the com'ined gro%th and rofita'ility of the 'usinesses in the ortfolio %ill allo% the com any to attain its erformance o'(ecti#es. Related to this o#erall criterion are such /uestions as! 2 Does the ortfolio contain enough 'usinesses in attracti#e industriesH 2 Does it contain too many marginal 'usinesses or /uestion mar+sH 2 Is the ro ortion of mature.declining 'usinesses so great that gro%th %ill 'e sluggishH 2 1re there some 'usinesses that are not really needed or should 'e di#estedH 2 Does the com any ha#e its share of industry leaders, or is it 'urdened %ith too many 'usinesses in modest com etiti#e ositionsH 2 Is the ortfolio of "9U-s and its relati#e ris+.gro%th otential consistent %ith the strategic goalsH 2 Do the core 'usinesses generate de enda'le rofits and.or cash flo%H 2 1re there enough cash$ roducing 'usinesses to finance those needing cash 2 Is the ortfolio o#erly #ulnera'le to seasonal or recessionary influencesH @

2 Does the ortfolio ut the cor oration in good osition for the futureH It is im ortant to consider di#ersification #s. concentration %hile %or+ing on ortfolio strategy, i.e., ho% 'road or narro% should 'e the sco e of the com any. It is not al%ays desira'le to ha#e a 'road sco e. "ingle$'usiness strategies can 'e #ery successful )e.g., early strategies of McDonald-s, Coca$Cola, and 9IC Pen*. "ome of the ad#antages of a narro% sco e of 'usiness are! )a* less am'iguity a'out %ho %e are and %hat %e do, )'* concentrates the efforts of the total organi&ation, rather than stretching them across many lines of 'usiness, )c* through extensi#e hands$on ex erience, the com any is more li+ely to de#elo distincti#e com etence, and )d* focuses on long$term rofits. 5o%e#er, ha#ing a single 'usiness uts 0all the eggs in one 'as+et,0 %hich is dangerous %hen the industry and.or technology may change. Di#ersification 'ecomes more im ortant %hen mar+et gro%th rate slo%s. 9uilding sta'le shareholder #alue is the ultimate (ustification for di#ersifying $$ or any strategy.

What Should Be Our !arenting Strateg"?

This third com onent of cor orate le#el strategy, rele#ant for a multi$'usiness com any )it is moot for a single$'usiness com any*, is concerned %ith ho% to allocate resources and manage ca a'ilities and acti#ities across the ortfolio of 'usinesses. It includes e#aluating and ma+ing decisions on the follo%ing! 2 Priorities in allocating resources )%hich 'usiness units %ill 'e stressed* 2 <hat are critical success factors in each 'usiness unit, and ho% can the com any do %ell on them 2 Coordination of acti#ities )e.g., hori&ontal strategies* and transfer of ca a'ilities among 'usiness units 2 5o% much integration of 'usiness units is desira'le.

COMP6TITI:6 )9U"IN6"" 46:64* "TR1T678

In this second as ect of a com any-s strategy, the focus is on ho% to com ete successfully in each of the lines of 'usiness the com any has chosen to engage in. The central thrust is ho% to 'uild and im ro#e the com any-s com etiti#e osition for each of its lines of 'usiness. 1 com any has com etiti#e ad#antage %hene#er it can attract customers and defend against com etiti#e forces 'etter than its ri#als. Com anies %ant to de#elo com etiti#e ad#antages that ha#e some sustaina'ility )although the ty ical term 0sustaina'le com etiti#e ad#antage0 is usually only true dynamically, as a firm %or+s to continue it*. "uccessful com etiti#e strategies usually in#ol#e 'uilding uni/uely strong or distincti#e com etencies in one or se#eral areas crucial to success and using them to maintain a com etiti#e edge o#er ri#als. "ome exam les of distincti#e com etencies are su erior technology and.or roduct features, 'etter manufacturing technology and s+ills, su erior sales and distri'ution ca a'ilities, and 'etter customer ser#ice and con#enience. %om3etiti!e strategy is a-out -eing di""erent. It means deli-erately choosing to 3er"orm acti!ities di""erently or to 3er"orm di""erent acti!ities than ri!als to deli!er a uni,ue mi6 o" !alue. )Michael 6. Porter* F

/he essence o" strategy lies in creating tomorrow7s com3etiti!e ad!antages "aster than com3etitors mimic the ones you 3ossess today. )7ary 5amel I C. C. Prahalad* <e %ill consider com etiti#e strategy 'y using Porter-s four generic strategies )Porter >?EB, >?ED* as the fundamental choices, and then adding #arious com etiti#e tactics.

!orter(s Four Generic #ompetitive Strategies

5e argues that a 'usiness needs to ma+e t%o fundamental decisions in esta'lishing its com etiti#e ad#antage! )a* %hether to com ete rimarily on rice )he says 0cost,0 %hich is necessary to sustain com etiti#e rices, 'ut rice is %hat the customer res onds to* or to com ete through ro#iding some distincti#e oints of differentiation that (ustify higher rices, and )'* ho% 'road a mar+et target it %ill aim at )its com etiti#e sco e*. These t%o choices define the follo%ing four generic com etiti#e strategies. %hich he argues co#er the fundamental range of choices. 1 fifth strategy alternati#e )'est$cost ro#ider* is added 'y some sources, although not 'y Porter, and is included 'elo%! 1. 4!erall .rice #%ost& 5eadershi3: a ealing to a 'road cross$section of the mar+et 'y ro#iding roducts or ser#ices at the lo%est rice. This re/uires 'eing the o#erall lo%$cost ro#ider of the roducts or ser#ices )e.g., Costco, among retail stores, and 5yundai, among automo'ile manufacturers*. Im lementing this strategy successfully re/uires continual, exce tional efforts to reduce costs $$ %ithout excluding roduct features and ser#ices that 'uyers consider essential. It also re/uires achie#ing cost ad#antages in %ays that are hard for com etitors to co y or match. "ome conditions that tend to ma+e this strategy an attracti#e choice are! 2 The industry-s roduct is much the same from seller to seller 2 The mar+et lace is dominated 'y rice com etition, %ith highly rice$sensiti#e 'uyers 2 There are fe% %ays to achie#e roduct differentiation that ha#e much #alue to 'uyers 2 Most 'uyers use roduct in same %ays $$ common user re/uirements 2 "%itching costs for 'uyers are lo% 2 9uyers are large and ha#e significant 'argaining o%er 2. i""erentiation: a ealing to a 'road cross$section of the mar+et through offering differentiating features that ma+e customers %illing to ay remium rices, e.g., su erior technology, /uality, restige, s ecial features, ser#ice, con#enience )exam les are Nordstrom and 4exus*. "uccess %ith this ty e of strategy re/uires differentiation features that are hard or ex ensi#e for com etitors to du licate. "ustaina'le differentiation usually comes from ad#antages in core com etencies, uni/ue com any resources or ca a'ilities, and su erior management of #alue chain acti#ities. "ome conditions that tend to fa#or differentiation strategies are! 2 There are multi le %ays to differentiate the roduct.ser#ice that 'uyers thin+ ha#e su'stantial #alue 2 9uyers ha#e different needs or uses of the roduct.ser#ice 2 Product inno#ations and technological change are ra id and com etition em hasi&es the latest roduct features 2 Not many ri#als are follo%ing a similar differentiation strategy 3. .rice #%ost& Focus: a mar+et niche strategy, concentrating on a narro% customer segment and com eting %ith lo%est rices, %hich, again, re/uires ha#ing lo%er cost structure than com etitors )e.g., a single, small sho on a side$street in a to%n, in %hich they %ill order electronic e/ui ment E

at lo% rices, or the chea est automo'ile made in the former 9ulgaria*. "ome conditions that tend to fa#or focus )either rice or differentiation focus* are! 2 The 'usiness is ne% and.or has modest resources 2 The com any lac+s the ca a'ility to go after a %ider art of the total mar+et 2 9uyers- needs or uses of the item are di#erse, there are many different niches and segments in the industry 2 9uyer segments differ %idely in si&e, gro%th rate, rofita'ility, and intensity in the fi#e com etiti#e forces, ma+ing some segments more attracti#e than others 2 Industry leaders don-t see the niche as crucial to their o%n success 2 3e% or no other ri#als are attem ting to s eciali&e in the same target segment '. i""erentiation Focus: a second mar+et niche strategy, concentrating on a narro% customer segment and com eting through differentiating features )e.g., a high$fashion %omen-s clothing 'outi/ue in Paris, or 3errari*. 8est9%ost .ro!ider Strategy: )although not one of Porter-s 'asic four strategies, this strategy is mentioned 'y a num'er of other %riters.* This is a strategy of trying to gi#e customers the 'est cost.#alue com'ination, 'y incor orating +ey good$or$'etter roduct characteristics at a lo%er cost than com etitors. This strategy is a mixture or hy'rid of lo%$ rice and differentiation, and targets a segment of #alue$conscious 'uyers that is usually larger than a mar+et niche, 'ut smaller than a 'road mar+et. "uccessful im lementation of this strategy re/uires the com any to ha#e the resources, s+ills, ca a'ilities )and ossi'ly luc+* to incor orate u $scale features at lo%er cost than com etitors. This strategy could 'e attracti#e in mar+ets that ha#e 'oth #ariety in 'uyer needs that ma+e differentiation common and %here large num'ers of 'uyers are sensiti#e to 'oth rice and #alue. Porter might argue that this strategy is often tem orary, and that a 'usiness should choose and achie#e one of the four generic com etiti#e strategies a'o#e. Other%ise, the 'usiness is stuc+ in the middle of the com etiti#e mar+et lace and %ill 'e out$ erformed 'y com etitors %ho choose and excel in one of the fundamental strategies. 5is argument is analogous to the threats to a tennis layer %ho is standing at the ser#ice line, rather than near the 'aseline or getting to the net. 5o%e#er, others resent exam les of com anies )e.g., 5onda and Toyota* %ho seem to 'e a'le to ursue successfully a 'est$cost ro#ider strategy, %ith sta'ility.

#ompetitive )actics
1lthough a choice of one of the generic com etiti#e strategies discussed in the re#ious section ro#ides the foundation for a 'usiness strategy, there are many #ariations and ela'orations. 1mong these are #arious tactics that may 'e useful )in general, tactics are shorter in time hori&on and narro%er in sco e than strategies*. This section deals %ith com etiti#e tactics, %hile the follo%ing section discusses coo erati#e tactics. T%o categories of com etiti#e tactics are those dealing %ith timing )%hen to enter a mar+et* and mar+et location )%here and ho% to enter and.or defend*. /iming /actics: <hen to ma+e a strategic mo#e is often as im ortant as %hat mo#e to ma+e. <e often s ea+ of first$movers )i.e., the first to ro#ide a roduct or ser#ice*, second$movers or ra id follo%ers, and late movers )%ait$and$see*. 6ach tactic can ha#e ad#antages and disad#antages. ?

9eing a first$mo#er can ha#e ma(or strategic ad#antages %hen! )a* doing so 'uilds an im ortant image and re utation %ith 'uyers, )'* early ado tion of ne% technologies, different com onents, exclusi#e distri'ution channels, etc. can roduce cost and.or other ad#antages o#er ri#als, )c* first$time customers remain strongly loyal in ma+ing re eat urchases, and )d* mo#ing first ma+es entry and imitation 'y com etitors hard or unli+ely. 5o%e#er, 'eing a second$ or late$mo#er isn-t necessarily a disad#antage. There are cases in %hich the first$mo#er-s s+ills, technology, and strategies are easily co ied or e#en sur assed 'y later$mo#ers, allo%ing them to catch or ass the first$mo#er in a relati#ely short eriod, %hile ha#ing the ad#antage of minimi&ing ris+s 'y %aiting until a ne% mar+et is esta'lished. "ometimes, there are ad#antages to 'eing a s+illful follo%er rather than a first$mo#er, e.g., %hen! )a* 'eing a first$mo#er is more costly than imitating and only modest ex erience cur#e 'enefits accrue to the leader )follo%ers can end u %ith lo%er costs than the first$mo#er under some conditions*, )'* the roducts of an inno#ator are some%hat rimiti#e and do not li#e u to 'uyer ex ectations, thus allo%ing a cle#er follo%er to %in 'uyers a%ay from the leader %ith 'etter erforming roducts, )c* technology is ad#ancing ra idly, gi#ing fast follo%ers the o ening to lea frog a first$mo#er-s roducts %ith more attracti#e and full$featured second$ and third$generation roducts, and )d* the first$mo#er ignores mar+et segments that can 'e ic+ed u easily. )ar$et 5ocation /actics: These fall con#eniently into offensi#e and defensi#e tactics. Offensi#e tactics are designed to ta+e mar+et share from a com etitor, %hile defensi#e tactics attem t to +ee a com etitor from ta+ing a%ay some of our resent mar+et share, under the onslaught of offensi#e tactics 'y the com etitor. "ome offensi#e tactics are! 2 Frontal *ssault+ going head$to$head %ith the com etitor, matching each other in e#ery %ay. To 'e successful, the attac+er must ha#e su erior resources and 'e %illing to continue longer than the com any attac+ed. 2 Flan ing %aneuver+ attac+ing a art of the mar+et %here the com etitor is %ea+. To 'e successful, the attac+er must 'e atient and %illing to carefully ex and out of the relati#ely undefended mar+et niche or else face retaliation 'y an esta'lished com etitor. 2 'ncirclement+ usually e#ol#ing from the re#ious t%o, encirclement in#ol#es encircling and ushing o#er the com etitor-s osition in terms of greater roduct #ariety and.or ser#ing more mar+ets. This re/uires a %ide #ariety of a'ilities and resources necessary to attac+ multi le mar+et segments. 2 B"pass *ttac + attem ting to cut the mar+et out from under the esta'lished defender 'y offering a ne%, su erior ty e of roduce that ma+es the com etitor-s roduct unnecessary or undesira'le. 2 Guerrilla Warfare+ using a 0hit and run0 attac+ on a com etitor, %ith small, intermittent assaults on different mar+et segments. This offers the ossi'ility for e#en a small firm to ma+e some gains %ithout seriously threatening a large, esta'lished com etitor and e#o+ing some form of retaliation. "ome Defensi#e Tactics are! 2 ,aise Structural Barriers+ 'loc+ a#enues challengers can ta+e in mounting an offensi#e 2 -ncrease '&pected ,etaliation+ signal challengers that there is threat of strong retaliation if they attac+ 2 ,educe -nducement for *ttac s+ e.g., lo%er rofits to ma+e things less attracti#e )including use of accounting techni/ues to o'scure true rofita'ility*. Cee ing rices #ery lo% gi#es a ne% entrant little rofit incenti#e to enter. >B

The general ex erience is that any com etiti#e ad#antage currently held %ill e#entually 'e eroded 'y the actions of com etent, resourceful com etitors. Therefore, to sustain its initial ad#antage, a firm must use 'oth defensi#e and offensi#e strategies, in ela'orating on its 'asic com etiti#e strategy.

#ooperative Strategies
1nother grou of 0com etiti#e0 tactics in#ol#e coo eration among com anies. These could 'e grou ed under the heading of #arious ty es of strategic alliances, %hich ha#e 'een discussed to some extent under Cor orate 4e#el gro%th strategies. These in#ol#e an agreement or alliance 'et%een t%o or more 'usinesses formed to achie#e strategically significant o'(ecti#es that are mutually 'eneficial. "ome are #ery short$term, others are longer$term and may 'e the first stage of an e#entual merger 'et%een the com anies. "ome of the reasons for strategic alliances are to! o'tain.share technology, share manufacturing ca a'ilities and facilities, share access to s ecific mar+ets, reduce financial. olitical.mar+et ris+s, and achie#e other com etiti#e ad#antages not other%ise a#aila'le. There could 'e considered a continuum of ty es of strategic alliances, ranging from! )a* mutual ser#ice consortiums )e.g., similar com anies in similar industries ool their resources to de#elo something that is too ex ensi#e alone*, )'* licensing arrangements, )c* (oint #entures )an inde endent 'usiness entity formed 'y t%o or more com anies to accom lish certain things, %ith allocated o%nershi , o erational res onsi'ilities, and financial ris+s and re%ards*, )d* #alue$chain artnershi s )e.g., (ust$in$time su lier relationshi s, and out$sourcing of ma(or #alue$chain functions*.

3UNCTION14 "TR1T67I6"
3unctional strategies are relati#ely short$term acti#ities that each functional area %ithin a com any %ill carry out to im lement the 'roader, longer$term cor orate le#el and 'usiness le#el strategies. 6ach functional area has a num'er of strategy choices, that interact %ith and must 'e consistent %ith the o#erall com any strategies. Three 'asic characteristics distinguish functional strategies from cor orate le#el and 'usiness le#el strategies! shorter time hori&on, greater s ecificity, and rimary in#ol#ement of o erating managers. 1 fe% exam les follo% of functional strategy to ics for the ma(or functional areas of mar+eting, finance, roduction.o erations, research and de#elo ment, and human resources management. 6ach area needs to deal %ith sourcing strategy, i.e., %hat should 'e done in$house and %hat should 'e outsourcedH Mar+eting strategy deals %ith roduct.ser#ice choices and features, ricing strategy, mar+ets to 'e targeted, distri'ution, and romotion considerations. 3inancial strategies include decisions a'out ca ital ac/uisition, ca ital allocation, di#idend olicy, and in#estment and %or+ing ca ital management. The roduction or o erations functional strategies address choices a'out ho% and %here the roducts or ser#ices %ill 'e manufactured or deli#ered, technology to 'e used, management of resources, lus urchasing and relationshi s %ith su liers. 3or firms in high$tech industries, RID strategy may 'e so central that many of the decisions %ill 'e made at the 'usiness or e#en cor orate le#el, for exam le the role of technology in the com any-s com etiti#e strategy, including choices 'et%een 'eing a technology leader or follo%er. 5o%e#er, there %ill remain more >>

s ecific decisions that are art of RID functional strategy, such as the relati#e em hasis 'et%een roduct and rocess RID, ho% ne% technology %ill 'e o'tained )internal de#elo ment #s. external through urchasing, ac/uisition, licensing, alliances, etc.*, and degree of centrali&ation for RID acti#ities. 5uman resources functional strategy includes many to ics, ty ically recommended 'y the human resources de artment, 'ut many re/uiring to management a ro#al. 6xam les are (o' categories and descri tions, ay and 'enefits, recruiting, selection, and orientation, career de#elo ment and training, e#aluation and incenti#e systems, olicies and disci line, and management.executi#e selection rocesses.

C5OO"IN7 T56 96"T "TR1T678 14T6RN1TI:6"

Decision ma+ing is a com lex su'(ect, %orthy of a cha ter or 'oo+ of its o%n. This section can only offer a fe% suggestions. 1mong the many sources for additional information, I recommend 5arrison )>???*, McCall I Ca lan )>??B*, and <illiams );BB;*. 5ere are some factors to consider %hen choosing among alternati#e strategies! 2 It is im ortant to get as clear as ossi'le a'out o'(ecti#es and decision criteria )%hat ma+es a decision a 0good0 oneH* 2 The rimary ans%er to the re#ious /uestion, and therefore a #ital criterion, is that the chosen strategies must 'e effecti#e in addressing the 0critical issues0 the com any faces at this time 2 They must 'e consistent %ith the mission and other strategies of the organi&ation 2 They need to 'e consistent %ith external en#ironment factors, including realistic assessments of the com etiti#e en#ironment and trends 2 They fit the com any-s roduct life cycle osition and mar+et attracti#eness.com etiti#e strength situation 2 They must 'e ca a'le of 'eing im lemented effecti#ely and efficiently, including 'eing realistic %ith res ect to the com any-s resources 2 The ris+s must 'e acce ta'le and in line %ith the otential re%ards 2 It is im ortant to match strategy to the other as ects of the situation, including! )a* si&e, stage, and gro%th rate of industry, )'* industry characteristics, including fragmentation, im ortance of technology, commodity roduct orientation, international features, and )c* com any osition )dominant leader, leader, aggressi#e challenger, follo%er, %ea+, 0stuc+ in the middle0* 2 Consider sta+eholder analysis and other eo le$related factors )e.g., internal and external ressures, ris+ ro ensity, and needs and desires of im ortant decision$ma+ers* 2 "ometimes it is hel ful to do scenario construction, e.g., cases %ith o timistic, most li+ely, and essimistic assum tions.

"OM6 TROU946"OM6 "TR1T67I6" TO 1:OID OR U"6 <IT5 C1UTION

Follow the 5eader: %hen the mar+et has no more room for co ycat roducts and loo+$ali+e com etitors. "ometimes such a strategy can %or+ fine, 'ut not %ithout careful consideration of the com any-s articular strengths and %ea+nesses. )e.g., 3u(itsu 4td. %as dri#en since the >?@Bs to catch u to I9M in mainframes and continued this /uest e#en into the >??Bs after mainframes %ere >;

in stee decline, or the decision 'y "tandard Oil of Ohio to follo% 6xxon and Mo'il Oil into conglomerate di#ersification* %ount 4n Hitting +nother Home Run: e.g., Polaroid tried to follo% its early success %ith instant hotogra hy 'y de#elo ing 0Pola#ision0 during the mid$>?FBs. Unfortunately, this #ery ex ensi#e, instant de#elo ing, Emm, 'lac+ and %hite, silent motion icture camera and film %as dis layed at a stoc+holders- meeting a'out the time that the first 'eta$format #ideo recorder %as released 'y "ony. Polaroid re ortedly %rote off at least GDBB million on this #enture %ithout selling a single camera. /ry to o :!erything: esta'lishing many %ea+ mar+et ositions instead of a fe% strong ones +rms Race: 1ttac+ing the mar+et leaders head$on %ithout ha#ing either a good com etiti#e ad#antage or ade/uate financial strength, ma+ing such aggressi#e attem ts to ta+e mar+et share that ri#als are ro#o+ed into strong retaliation and a costly 0arms race.0 "uch 'attles seldom roduce a su'stantial change in mar+et shares, usual outcome is higher costs and rofitless sales gro%th .ut )ore )oney 4n a 5osing Hand: one #ersion of this is allocating RID efforts to %ea+ roducts instead of strong roducts )e.g., Pola#ision again, Pan 1m-s attem t to continue glo'al routes in >?EF* 4!er9o3timistic :63ansion: Using high de't to finance in#estments in ne% facilities and e/ui ment, then getting tra ed %ith high fixed costs %hen demand turns do%n, excess ca acity a ears, and cash flo%s are tight (nrealistic Status9%lim-ing: 7oing after the high end of the mar+et %ithout ha#ing the re utation to attract 'uyers loo+ing for name$'rand, restige goods )e.g., "ears- attem ts to introduce designer %omen-s clothing* Selling the Sizzle 1ithout the Stea$: " ending more money on mar+eting and sales romotions to try to get around ro'lems %ith roduct /uality and erformance. De ending on cosmetic roduct im ro#ements to ser#e as a su'stitute for real inno#ation and extra customer #alue.

Selected ,eferences
5arrison, 6. 3ran+ )>???*. )he %anagerial Decision$%a ing !rocess )Dth ed.*. 9oston! 5oughton Mifflin. McCall, Morgan <., Jr., I Ca lan, Ro'ert C. )>??B*. Whatever it ta es+ )he realities of managerial decision ma ing );nd ed.*. 6ngle%ood Cliffs, NJ! Prentice$5all. Porter, Michael 6. )>?EB*. #ompetitive Strateg"+ )echni.ues for anal"zing industries and competitors/ Ne% 8or+! 3ree Press. Porter, Michael 6. )>?ED*. #ompetitive advantage+ #reating and sustaining superior performance/ Ne% 8or+! 3ree Press. >=

<illiams, "te#e <. );BB;*. %a ing better business decisions+ 0nderstanding and improving critical thin ing and problem solving s ills. Thousand Oa+s, C1! "age Pu'lications.

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