Strategic management theory and case study

Table of Figure Figure 1 Strategic Management Process...1 Figure 2 Strategic Formulation Process...3 Figure 3 the Components of External Environment ...7 Figure 4 Thailand Competitivenes

Strategic Management: Theory and Case Study

By Tunchalong Rungwitoo

May 2012

Table of Content

Table of Content ii

Table of Table iii

Table of Figure iv

Table of Example v

Introduction 1

Part I: Strategy Formulation 3

1 Organization Mission 4

2 Competitive Situations 7

2.1 External Environment Analysis 7

2.2 Internal Environment Analysis 16

2.3 SWOT Analysis 19

3 Developing Strategy 20

3.1 Corporate Level Strategy 21

3.2 Business Level Strategy 33

3.3 Functional Level Strategy 35

Part II: Strategy Implementation 38

4 Strategy Implementation 38

4.1 Organizational Alignment 38

4.2 Leadership and Motivation 41

Part III: Controlling and Evaluation 44

5 Controlling and Evaluation 44

5.1 The Controlling Process 44

5.2 Key Performance Indicators 45

Power Point Hand Out 48

References 83

Table of Table

Table 1 Starbucks Mission and Components 6 Table 2 Missha SWOT Analysis 20

Table of Figure

Figure 1 Strategic Management Process 1

Figure 2 Strategic Formulation Process 3

Figure 3 the Components of External Environment 7

Figure 4 Thailand Competitiveness 11

Figure 5 Thai Automotive Competitiveness 12

Figure 6 Porter’s Five Forces 13

Figure 7 Korean Cosmetic Attractiveness 14

Figure 8 The Value Chain 17

Figure 9 Air Asia Value Chain 17

Figure 10 SWOT Analysis Model 19

Figure 11 Hierarchy of Strategy, Goals and Plans 21

Figure 12 Corporate Level Strategy Chart 22

Figure 13 Three Concentration Growth Strategies 23

Figure 14 Integration Strategy 24

Figure 15 Adidas Corporate Strategies 26

Figure 16 BCG Growth - Share Matrix 29

Figure 17 Product Life Cycle Curve 30

Figure 18 a relationship between BCG Growth-Share Matrix and Product Life Cycle 31

Figure 19 Corporate Strategy suggested by GE 9 Cell 32

Figure 20 Industry Attractiveness Evaluation 32

Figure 21 Business Strength Evaluation 33

Figure 22 Example of GE 9 Cell Analysis 33

Figure 23 Porter's Generic Strategies 34

Figure 24 Functional Level Strategy 36

Figure 25 Three primary activities for effective strategic implementation 38

Figure 26 Organizatinal Alignment 40

Figure 27 Major Source of Leader Power and Likely Subordinate Reactions 41

Figure 28 Maslow Hierachy of Needs 42

Figure 29 Hersey and Blanchard's Situational Leadership 43

Figure 30 The Controlling Process 44

Figure 31 Balance Scorecard 45

Figure 32 The Linkage of Four Perspectives 47

Table of Example

Example 1 Mission Statement 5

Example 2Macro Environment Analysis 8

Example 3 Thailand National Competitiveness 11

Example 4 Industry Attractiveness Analysis 14

Example 5 Value Chain Analysis 17

Example 6 SWOT Analysis 20

Example 7 Adidas Corporate Strategy 25

Introduction

General Management which is the process of achieving organizational goals by engaging

in the four major functions of planning, organizing, leading and controlling1 nowadays may not sufficient and supportive for the organization succeed in the world of complex environments It concerns about the process to manage the company internally but does not concentrate more on creating competitiveness regarding environments affecting the organization Even companies adopt general management to sustain profitability by reducing the defects or costs, and improving operations process in order to increase productivity, they may not succeed in the competition because they perform only similar activities better than competitors but do not create the distinctive competitiveness Additionally, they perform only operational effectiveness but not strategy2 Operational effectiveness and strategy are both essential to superior performance but they work in very different ways Strategy is about competitive position that the company performs different activities from rivals’ or performing similar activities in different ways.3

To learn how the companies create strategies and put them into action, the executives or strategists should examine carefully an aspect of Strategic Management Strategic Management is a process regarding 3 primary activities; Strategy Formulation, Strategy Implementation, and Controlling and Evaluation4

Figure 1 Strategic Management Process

This paper will be divided into 3 parts regarding the strategic management process which

is shown on Figure 1 and given examples related to Asian stories The first part is strategy formulation consisting of 3 components; Organization Mission, Competitive Situations, and Strategy Development The second part will express how to implement the strategies

It engages the organization alignment that should be considered for changing the organization to support the operations based on the formulated strategies Finally, Controlling and Evaluation is a key factor to monitor the organization strategic operations

by considering 4 perspectives: financial perspective, customer perspective, internal process perspective, and learning and growth perspective

Part I: Strategy Formulation

Strategy formulation is the first activity that company should perform to create unique

competitive advantage by setting the organization mission, analysing the competitive situations both external perspective and internal perspective, and then developing the strategies that fits in the environments

Figure 2 Strategic Formulation Process

Firstly, the organization has to establish its reasons to exist and the scope of operations by setting its mission statement Then it should consider the competitive situations that effect firm operations and competitions There are 2 perspectives for analyzing the situations First perspective is external situations A strategist should understand macro environment, national competitiveness, and industry attractiveness whether those factors support or depress the organization Second perspective is internal factors An executive should examine correlations among the organization activities and business functions, and also explore the core competencies of the organization

As a consequence, a company will create a competitive advantage from crafting a set of strategies that gain supportive environments and prevent obstructive factors A strategist should classify the environments into 4 groups which are strengths, weaknesses, opportunities and threats; SWOT Analysis This classification is very helpful for developing the strategies via bringing its strengths and opportunities up to create competitive advantage and explore the possible alternatives to improve its weaknesses and prevent or avoid the threats Additionally, this competitive situation arrangement suggests the organization’s competitive position in the industry and supports conducting the firm’s strategies

There are 3 levels of the strategies Grand strategy or corporate strategy is the highest level It is very essential for setting the organizational direction whether firm wants to grow, stable or exit Business strategy is the second that the company should describe the company’s characteristics making competitiveness among the competitors whether it wants to differentiate by offering the superior values for customers, offering the affordable price by gaining the low cost advantage, or creating distinctive values for its concentrated customer5 Consequently, the company will contribute its grand strategy and business strategy to each business functions in order to craft functional strategies Marketing department will conduct marketing plan related to corporate and business strategies, as well as production and operation plan, human resources plan, and financial plan

1 Organization Mission

The organization should set its mission as the organization’s purpose or fundamental reason for existence Its organization mission is called as mission statement It is a broad declaration of the basic, unique purpose and scope of operations that distinguish the organization from other of it type6 There are 9 components to formulate mission statement as following:

1) Customers Who are the organization’s customers?

2) Products or services What are the organization’s major products or services? 3) Location Where does the organization compete?

4) Technology What is the firm’s basic technology?

5) Concern for survival What is the organization’s commitment to economic objectives?

6) Philosophy What are the basic belief, values, aspirations, and philosophical priorities of the organization?

7) Self-concept What are the organization’s major strengths and competitive advantages?

8) Concern for public image What are the organization’s public responsibilities, and what image is desired?

9) Concern for employees What is the organization’s attitude toward its employees?

Example 1 Mission Statement

Starbucks set its mission as the premier purveyor of the finest coffee in the world while maintaining our uncompromising principles as we grow7 The following six guiding principles will help Starbucks measure the appropriateness decisions;

• Provide a great work environment and treat each other with respect and dignity

• Embrace diversity as an essential component in the way we do business

• Apply the highest standards of excellence to the purchasing, roasting and fresh delivery of our coffee

• Develop enthusiastically satisfied customers all of the time

• Contribute positively to our communities and our environment

• Recognize that profitability is essential to our future success

From the above mission statement, Starbucks’ missions contain all of nine components which are shown in table 1

Table 1 Starbucks Mission and Components

The premier purveyor of the

finest coffee in the world while

maintaining our

uncompromising principles as

we grow

X X X X X

Provide a great work

environment and treat each

other with respect and dignity

Apply the highest standards of

excellence to the purchasing,

roasting and fresh delivery of

Contribute positively to our

communities and our

environment

X

Recognize that profitability is

essential to our future success

X

2.1 External Environment Analysis

External environment is the uncontrollable factors that effect the organization Firms should consider 3 models to amylase its external environment These are Macro Environment, National Competitiveness, and Industry Attractiveness

Figure 3 the Components of External Environment

Factor

Conditions

Related and Supporting Industries

1) Macro Environment

The first perspective is Macro Environment that affects overall of the business situation

The company should consider 5 factors which are Legislation and Regulations, General

Economic Conditions, Societal Values and Lifestyles, Population Demographics, and Technology8 The corporate who expand the business to a global market should consider all of these factors to be as the information for developing the strategy according to the host country

Example 2 Macro Environment Analysis

CP All, a convenience store company in Thailand which granted a license to use the trademark “7-Eleven”, are expanding the business in Vietnam9 have to consider all of 5 factors affecting the market penetration

(1) Legislation and Regulations

Vietnam Government’s policy implies to the intention of developing economic growth by using foreign direct investment such as the reduction the conditional fields of foreign investment by opening the door to such “sensitive” service fields as banking, finance,

transportation, telecommunications, wholesale and retail, and culture. 10 In addition, Vietnam is considered to be the country which has a stable socio-political environment than the other regional countries.11 This is also the one support factor to encourage the investment However, Vietnamese strategy declaration focuses on 6 target other countries for foreign investment.12 This will be the threat for Thai investor that will less prioritize and faces with the increasing of competitors

For retail services, C.P.All is influenced from the law to entry in the retail and franchise service by joint venture and should invest its own stores before it is able to expand its branch after 3 years.13

(2) General Economic Conditions

The economic indicators show the strong GDP growth rate and increases GDP per capita, investment rate and total retail sector value that expresses the rising of consumer consumption However, the inflation rate effect the buying power that may be reduced from the higher price of goods and services and also the increasing of interest rate may change the expense to saving and also decrease the investment from bank funding For one thing, Vietnam has efficiency employment There are a few employment rates around

5 % which are male 2% and female 3% In addition the part-time job increased focusing

on service and retail sectors

(3) Societal Values and Lifestyles

The economic reform changes Vietnamese values and lifestyles They require more standards of living such as hygiene and convenience People in urban areas normally go

to shopping fresh food and other consuming goods in Supermarkets which is the most

convenient In addition, Convenience foods are becoming more popular with families to

save their time in preparing and cooking Moreover, people prefer relaxing in their own

houses with families at night or on days off As a result, they can spend more money on home entertainment products such as CD VCD and DVD. 14

Vietnamese are not familiar with buses, and usually have no habit of using a bus in daily life but the main means of transportation in Vietnamese daily life is motorbikes and bicycles Therefore, 7-Eleven ought to locate in gas station

(4) Population Demographics

Vietnamese population was 83 million in 2005 This total population is predicted to increase to more than 94 million in 2015 If the Vietnamese population was represented

by a pyramid, it would have a narrow top and wide base Vietnamese population density

is high in comparison to other countries As Vietnam is an agricultural country, the population is mainly concentrated in rural areas which around 80% of the total population

of the country, while only 20% of population lives in urban areas.15

Furthermore, the population density is very high and the household preferences that people live in the rented house This may imply that there should be a large number of houses locating nearly with high density In consequence, 7-eleven should locate in the house community to offer them the convenience

(5) Technology

Vietnam is putting considerable effort into modernization and expansion of its telecommunication system and Information Technology, but the performance has to be improved and require more investment Vietnam technology good in the economic main cities; Hanoi, Da Nang, and Ho Chi Minh City, there are fibre-optic cable or microwave radio relay network to exchange the information; main lines have been substantially increased, and the use of mobile telephones is growing rapid16

2) National Competitiveness

For International Business environment, the national competitiveness is an important factor that a company should see the potential of industry regarding competitive advantage in the state level In a world of increasingly international competition, nations have become more important Competitive advantage is created and sustained through a highly localized process Differences in national values, culture, economic structures, institutions, and histories all contribute to competitive success Therefore, the company should analyze the competiveness in the state level in order to find the opportunities and threat influenced on the industry that firm challenges To investigate national competitiveness, firm should examine The Diamond of National Advantage which compound of 4 attributes; Factor Conditions, Demand Conditions, Related and Supporting Industries, and Firm strategy, Structure, and Rivalry.17

(1) Factor Conditions The nation’s position in factors of production, such as

skilled labour or infrastructure, necessary to compete in a given industry

(2) Demand Conditions The nature of home-market demand for the industry’s

product or service

(3) Related and Supporting Industries The presence or absence in the nation of

supplier industries and other related industries that are internationally competitive

(4) Firm Strategy, Structure and Rivalry The conditions in the nation

governing how companies are created, organized, and managed, as well as the nature of domestic rivalry

Example 3 Thailand National Competitiveness

Figure 4 Thailand Competitiveness

Figure 4 shows the competitiveness of Thailand regarding Diamond Model18 suggesting opportunities for a company to create its own competitiveness Automotive and tourism sector have high potential for Thailand competitive advantage Automotive sector gain the opportunity from demand condition especially in pick-up truck which is one of the most developed markets in the world While the beautiful location and natural resources are an opportunity for tourism sector

Figure 5 Thai Automotive Competitiveness

Figure 5 is the business environment assessment of Thai automotive cluster.19 There are many factors supporting automotive corporation in Thailand This cluster has strong and growing position in the world export market for pick-up trucks There is a large investment from international automakers and cost competitiveness based on low factor input costs In addition, automotive makers can access to the skills of foreign assemblers and gain a strong physical infrastructure as well as a strong presence of locally –based suppliers However, there are 2 weak points that automotive firm should consider to solve them They are the mismatch between workforce skills and company needs, and lacking

of innovative capacity

3) Industry Attractiveness

Industry Attractiveness is a competition environment affecting the industry or the market that the company competes 5 forces model20 is an important tool to analyze competition environment and to help the company examine the industry attractiveness This model is useful for the company to making a decision for investing or entering to the interesting industry

Figure 6 Porter’s Five Forces

The 5 forces model is divided in to 2 perspectives The first perspective, vertical line, is about the competition in the certain industry regarding 3 factors; Industry Competitors, New Entrants, and Substitutes This perspective considers the market challenger in the current competition by examining the strength of the competitors and the competition intensive If the competitors have much more power and the market is high competitive environment, the industry may not attractive for the new comers In addition, it considers the increasing of the new competitors If there is no barrier for the new entrants, the competition will be higher and may not attractive in the future Furthermore, substitute products are one of the indirect competitors that can gain the customer share from the market For another perspective, horizontal line is about the industry operation showing the correlation among suppliers, producers, merchandises, and buyers It regard as the bargaining power of supplier and buyers If the related units have more power to persist the product quality, price or other subject that the company are not able to negotiate, the industry may not attractive to enter

Example 4 Industry Attractiveness Analysis

A Korean cosmetic industry nowadays is not much attractive for the home corporation Rivalry among competitors and bargaining power of buyers forces the Korean cosmetic firms to find new market by expanding business to other country

Figure 7 Korean Cosmetic Attractiveness (1) Rivalry among competitors: High

- Large number of brands in the market: There are currently a lot of major

brands already existing in the market with strong foothold, therefore, each brand try to compete against one another to gain market share especially those major brands

- Industry growth: With 3.4% increase over 2006, Cosmetic industry has seen as

much consolidated in recent years Therefore, all brands want to grab this growth to have its sales volume grow

- Low product differences: Every brand will follow the market trends to be more

competitive to other brands Therefore every brand will have nearly the same SKU in their product category

(2) Barriers to entry: High

- Brand Identity: Korean people tends to favour European cosmetics over US or

Korean product as European products have traditionally had a more Luxurious brand images, therefore, the new comer will have the difficulty to enter the market

- Government restriction: There are many documents needed to be submitted to

The Korea Pharmaceutical Traders Association (KPTA) in order to importing product into Korea

- Large number of brands in the market: There are currently a lot of majors

brands imported into Korea, also many of Korea local brands increasing their reputation

to Korean market Therefore there is high barrier of the new comer to enter to the market

(3) Threat of substitutes: Low

- Substituted product: There are no evident threats as to the possibility of new

products that could replace the cosmetic industry

(4) Bargaining power of supplier: Moderate

- Differentiation of input: There is low differentiation of input in cosmetic

industry as every supplier need to follow market trend in order to keep the customer loyalty to the brand

- Impact of inputs on cost: As the world economy is now very fluctuating

especially the oil price, the price of raw materials are increasing which make the difficulty of the supplier to maintain the price

- Threat of forward integration: To integrate with the supplier would need high

cost of investment

(5) Bargaining power of buyer: high

- Buyer’s needs: Korean people tend to be more health-conscious They prefer

more natural and green cosmetic products Therefore they have high bargaining power which makes every brand to follow the customer’s needs in order to keep the customer loyalty

- Market sizes: The entire cosmetics market in Korea is estimated to be worth

about USD 6.1 billion So customer has many cosmetic brands to choose for themselves

If product doesn’t meet their preference, they will switch to another brand instead

- Brand Identity: In the cosmetic market, there are some brands especially

European brands which are in the consumer’s awareness like Chanel, Lancôme, Sisley,

LVMH Group, and etc which can be considered as a brand identity for cosmetic market

As a result, consumer always considers purchasing those brands as first priority

- Product differentiation: There is low product differentiation of cosmetic business

as all brands will have nearly the same features and benefits provided to customer So customer can change the brands easily

2.2 Internal Environment Analysis

Besides watching External Environment, The companies should examine the competitiveness and performance of the firm operations Corporation can analyze internal operations by using Value Chain Analysis, Business Function Analysis, and Core Competencies Analysis

1) Value Chain Analysis21 is a systematic tool to analyze the interaction among all the

activities a firm performs This concept divides a company’s activities, value activities, into the technology and economically distinct activities it performs to do business A company’s value activities fall into nine generic categories They are regarded as the process to create value considering 2 main activities which are 5 primary activities and 4 support activities Primary activities compound of the operational factors initiating from the input of raw materials to operations and output as the finished products delivered to target customers For the support activities, there are 4 main factors that firm should encourage the increasing of competitiveness regarding primary activities These are Firm Infrastructure, Human Resource Management, Technological Development, and Procurement

A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors One of the reasons the value chain framework

is helpful is because it emphasizes that competitive advantage can come not just from great products or services, but from anywhere along the value chain It's also important to understand how a firm fits into the overall value system, which includes the value chains

of its suppliers, channels, and buyers

Figure 8 The Value Chain Example 5 Value Chain Analysis

Air Asia which is the low cost Malaysian national airline gain the competitive advantage from performing its operation regarding value chain activities showed on Figure 9

Figure 9 Air Asia Value Chain

Outbound Logistics

Marketing and Sales Services

2) Business Functions Analysis is the basis tools to investigate the organization

performance divided by functions which are marketing, productions, operations, human resource, and finance etc For example, executive should explore firm’s market share and customer satisfaction for marketing analysis Production analysis is to determine productivity of the production process and also product quality Human resource management is to explore the organizational structure and also the staff competencies Lastly, strategist should analyze financial statement considering profitability and liquidity

3) Core Competencies Analysis22 is to examine the resources, capabilities and competencies which considered as the essential factors in the organization It will lead to the company core competencies and also the organizational competitive advantage A successful company which is flexible for adapting its operation related to the complex environment has a set of core competencies or capabilities that are difficult for competitors to imitate and distinguish the company from competition

An organization’s resources and capabilities23encompass the financial, physical, human, and organizational assets used in its operations Financial resources include debt, equity, retained earnings, and other money related matters Physical resources include buildings, machinery, vehicles, and other material items used to operate Human resources are the skills, abilities, experience, and other work-related characteristics of the individuals associated with the organization

Core competencies24 is the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technology Company should identify the organization regarding 3 factors; a potential access to wide variety of markets, a significant contribution to end user value, and difficulty for competitors to imitate There are many competitive brands gain competitive advantage from their core competencies such as Sony in miniaturization, allowing it to make everything from Walkmans to video cameras to notebook computers Canon's core competence in optics, imaging, and microprocessor controls have enabled it to enter markets as seemingly diverse as copiers, laser printers, cameras, and image scanners

2.3 SWOT Analysis

SWOT analysis is a tool to classify the environment effecting the organization It

identifies internal and external factors whether they are favourable and unfavourable to

the organization and classifies them into 4 groups which are Strength, Weakness,

Opportunities, and Threats

Strengths determine internal environments which are the organization’s strong points

They arise from the resources and competencies available in the firm Additionally, the

resources advantage relative to competitors and the needs of the markets a firm serves or

expects to serve Weaknesses are organization’s weak points which are limitation or

deficiency relative to competitors that impedes a firm’s effective performance

Opportunities determine uncontrollable factors from the external environment that

support the organization activities Threats are unfavourable situation in the firm’s

external environment and the key impediments to the firm’s current or desired position

SWOT Analysis involves 2 important parts which are drawing conclusions about the

competitive situations and translating these conclusions into strategic actions to better

match the strategy on its resource strengths and market opportunities, to correct the

important weaknesses, and to defend against external threats

Figure 10 SWOT Analysis Model

Example 6 SWOT Analysis

Missha, a Korean cosmetic brand, analyze the environment affecting the business expansion in Thailand on the table 2

Table 2 Missha SWOT Analysis

• Product quality and variety

• Reasonable Price

• Low cost of distribution expense

• Consumer’s active participation

• Korean Trend spread worldwide

• Increasing in health and nature

conscious

• Increasing of Female world population

• Global Rising in men’s grooming

market

• Strong brand in local market

• Different consumer behaviour from the home market

• Decreasing of global economy

• Increasing of production cost

Table 2 shows Missha SWOT Analysis for establishing business in Thailand This grid helps Missha to set its marketing strategies regarding strengths and opportunities and find the solutions to solve its weaknesses and threats Missha uses its strength in marketing proposition to communicate to Thai target customer who adopts Korean Trend and is aware of wellbeing However, to solves its depress it use joint ventures which are the mode of entry giving local company who understand Thai culture prepare marketing plan that suits to Thai behaviour

direction to each business unit differently A Strategic Business Unit (SBU) is a distinct

business that can be managed relatively independently of other businesses within the

organization Business Level Strategy focuses on the way to compete within particular

business while also supporting the corporate level strategy Strategies at this level are aimed at deciding the type of competitive advantage to build, determining responses to changing environmental and competitive conditions, allocating resources within the

business unit, and coordinating functional level strategy Functional Level Strategy

concentrates on the action plan for particular functional area such as marketing strategy, productions and operations strategy, human resource strategy, and financial strategy

Figure 11 Hierarchy of Strategy, Goals and Plans

In addition, the three levels of strategies have parallel levels of goals, plans, and management levels26 as shown in Figure 11 Strategic goals are broadly defined targets result and contribute to strategic plans setting by top management Tactical goals are future end result for specific department or business units setting by middle management Finally, Operational Goals are target result that address specific measurable outcome related to functional strategy

3.1 Corporate Level Strategy

Corporate Level Strategy, grand strategy or master strategy, provides the basic strategic direction at the corporate level There are 3 main direction that top management has to decide for its business unit; growth, stability and retrenchment

Top Management

Middle Management

First-Line Management

1) Growth Strategy involves organizational expansion in sales, earnings, and other

criteria such as business units, product variety, customers, geographic locations, and economy of scales, etc There are 3 major growth strategies; Concentration,

Diversification, and Integration

Figure 12 Corporate Level Strategy Chart

Vertical Integration Horizontal Integration

Conglomerate Diversification Concentric Diversification

(1) Concentration Strategy, or intensive strategy, focuses on effecting the

growth of a single product or service or a small number of closely related products or services It considers 2 dimensions which are product and market

Figure 13 Three Concentration Growth Strategies27

The company first considers whether it could gain more market share with its current products in their current markets (market penetration strategy) Next it considers whether

it can find or develop new markets for its current products (market development strategy) Then it considers whether it can develop new products of potential interest to its current markets (product development strategy) Later it will also review opportunities to develop new products for new markets (diversification strategy).28

(2) Diversification Strategy entails effecting growth through the development of

new areas that are clearly distinct from current business In addition to diversifying for growth reasons, organizations often diversify to reduce the risk that can be associated with single-product or single-industry operations.29 There are two types of diversification: concentric and conglomerate First, the company develops concentric strategy to seek new products that have technological or market synergies with existing product line, even though the new products themselves may appeal to a different group of customers It occurs when an organization diversifies into a related, but distinct, business Second, the company can set conglomerate strategy to seek new businesses that have no relationship

to its current technology, products, or markets. 30

(3) Integration Strategy31 involves expanding its operations line to related activities or the similar activities but to acquire more markets or products A company can expand its activities from producing its finish products to produce raw materials or other

input When a company grows by becoming its own suppliers, the process is backward

vertical integration Additionally, it may develop forward vertical integration which

replaces distributors by establishing its own stores to meet end customers itself Furthermore, a company can reduce competitions or gain more market share by merging

or acquiring companies in the certain industry The process to add more similar business

is called as horizontal integration

Figure 14 Integration Strategy

2) Stability Strategy32 engages maintaining the statue in a competition because of several reasons If a company is doing reasonably well, managers may not want to take risk from aggressive growth In addition, a company may gain high market share and has enjoyed the market already Another reason for choosing stability is to recover the resource An organization that stretched its resources during a period of accelerated growth may need to attain stability before it attempt further accelerated growth On the other hand, if the market growth is low, a company may choose stability strategy to hold

on the current market share

3) Retrenchment Strategy33 or defensive strategy focus on the desire or need to reduce organizational operations, usually through cost reduction or asset reductions Retrenchment strategy includes many types of retrenchment such as harvest, turnaround, divestiture, bankruptcy, and liquidation

(1) Harvest entails minimizing investments while attempting to maximize

short-run profits and cash flow, with the long-short-run intention of exit the market.34 It is often used when future growth in the market is doubtful or will require investment that does not appear to be cost effective

(2) Turnaround is designed to reverse a negative trend and restore the

organization to appropriate levels of profitability It is used for shifting from a negative direction or a positive one A company will push an effort to reserve it resources in order

to make a big turnaround

(3) Divestiture involves an organization’s selling or divesting of a business or

part of a business There are 2 different effects on this strategy A company may have a positive effect on the price of the firm’s stock but conversely it may have a negative

effect if divestitures are conducted in the absence of clear strategic goals

(4) Bankruptcy is a means whereby an organization that is unable to pay its debts

can seek court to protection from creditors and from certain contract obligations while it attempts to regain financial stability

(5) Liquidation entails dissolving an organization by disposing of all its assets

and settling its remaining debts It usually occurs when serious difficulties, such as

bankruptcy can not be resolved

Example 7 Adidas Corporate Strategy 35

Adidas, a German company that manufactures footwear and sport apparel found in 1920s, set its vision to achieve “the best portfolio of sports brands in the world.” Adidas corporate strategy can be divided into 4 revolutions There are 3 top executives formulated strategies which are shown on Figure 15

Revolution I

The First revolution was conducted by the founder, Adolph Dassler, to create innovative athletic footwear focusing on track-and-field shoes Rudolph Dassler, his brother, joined Adidas as strategic partner but their conflict make Rudolph split him to found Puma which was Adidas competitor

This first revolution was successful from the reputation that many sport activities sign contract to Adidas and athletes use Adidas as their sport shoes However, when founder passed away and his son was not able to operate it with a clear direction, the first revolution has come to the end and turned to the next revolution

Figure 15 Adidas Corporate Strategies Revolution II

After the founder and his son passed away, Robert Louise – Dreyfus, a French advertising executive who is a head of group investor acquired Adidas, came to be a chief executive director and launched a dramatic turnaround of the company by following action cutting

costs, improving styling, and launching new model Turnaround strategy makes Adidas become the 3rd largest athletic footwear seller in the U.S

In addition, when Nike, Adidas competitor, had begun to diversify outside of athletic footwear and apparel, Adidas promoted new strategy to diversification to ski equipment, golf clubs, bicycle component, and winter sports apparel by acquiring Salomon which is a French sports equipment manufacture The objective of concentric diversification strategy from the French CEO may be just to do the same as the key competitor, but his decision led Adidas to the failure of this revolution Therefore, he step down and rejoined his family business This is because his decision may not think prudentially of Adidas capability both competencies and financial status

• Signed additional athletes to endorsement contracts

• Supplied apparel, equipment, and footwear to Olympic Games

For the problem from the acquisition of Salomon, Hainer restructured the strategic business and changed the direction of Adidas from to operate the sport equipment business in Salomon that Adidas has no competencies and capabilities to offer the apparel and footwear as the supplement product to Salomon customers

Furthermore, Adidas in the third revolution also used 2 groups of growth strategy; intensive strategy and integration strategy The company expanded sales by establishing its own retail store to the international market This can be defined as the using of backward vertical integration and market development

Revolution IV

Adidas sustains its growth by using divestiture strategy by selling Salomon which require much more competencies that waste Adidas resources and planning for horizontal integration strategy to acquire Reebok which are in the same footwear and apparel business This decision is to reduce cost from less strategic fit unit and by the mean time

to increase the unit that have more strategic fit which creates more value and lead to synergy as well

Tools for crafting corporate strategy

While strategists consider environments effecting the strategy formulations, many companies are not able to find a relationship between environment and strategy In addition, they create strategy base on opinion based rather than information based Therefore, a company can’t succeed to creating competitive advantage To help strategists create corporate strategy according to the environments, they should select 2 tools for crafting strategy; BCG Growth-Share Matrix or GE 9 Cell

Even though a strategist can use SWOT Analysis as a basic tool to see the supporting factors from internal and external environments, it can’t suggest a process or methodology to develop strategy especially a strategic direction BCG Growth – Share Matrix and GE 9 Cell are tools helping strategist to formulate strategy according to internal and external factors

1) BCG Growth – Share Matrix

BCG Growth – Share Matrix is developed by Boston Consulting Group, a prominent management consulting firm It is used for suggest a resources contribution to the organization business unit by considering marketing perspective internally and externally For internal market factors, Market shared is considered as the company ability to compete in the market While market growth is represented as the external factor whether

it is interesting for invest A Company will rate these 2 factors in to 2 levels; High and Low As a result, BCG Growth-Share Matrix conducts the four-cell matrix which divides business unit in to 4 categories36 as shown on Figure 16

Figure 16 BCG Growth - Share Matrix (1) Question Mark is a category which a business unit gains low market shares in

a high growth rate business This category always involves a start-up organization investing in a potential market Its products generate less cash than is invested in them They are risky and require considerable funding, making them minimally profitable in the initial stages The business which falls in this category can set it corporate strategy to be growth or retrenchment The Question Mark products/business units could become Stars

by increasing market share or divest to exit the uncompetitive industry

(2) Star is a category for business unit which has high market share in a high

business growth The organization performance in this category yields more cash than the cash investment in them However, Stars need investment to maintain their position because the rivalry may be tense from market challengers who compete to gain more market share or new competitors who enter to a high growth market

(3) Cash Cow involves business units with high market growth, generating more

cash than the cash investments required for sustaining them Cash Cows are mature products/business units in well-established markets, generating funds to support other parts of the business They typically form the core of a business

(4) Dog is a category in the declining stage which business units gain small

market share and operate in slow growing market As a rule, these products do not

generate much cash, but they do absorb cash Their profitability is declining and they must be divested if possible, or otherwise rapidly harvested

In addition, this method is based on the product life cycle theory that can be used to determine what priorities should be given in the product portfolio of a business unit To ensure long-term value creation, a company should have a portfolio of products that contains both high-growth products in need of cash inputs and low-growth products that generate a lot of cash

Product Life cycle theory, there are 5 stages categorised by the revenue generates Generally product life cycle can be drawn as S-curve which is shown in Figure 17

Figure 17 Product Life Cycle Curve

In Introduction stage, the market growth is low but can develop for growth stage This stage fall in question mark that companies try to find its competitiveness to gain market share Next, the market shoots up in the growth stage, a company who gains high market share will be in a star category but low market share is a dog group The third stage is maturity which market growth decreased Market leader gains profitability and earn more money as a cash cow group while a small market share turn to be question mark For this stage a company should find more opportunities to exit in the next stage, decline stage The cash cow company can use its money generated to invest in other potential product or

industry in order to be a question mark unit for other industry which is shown in Figure

GE 9 Cell, or General Electric/ McKinsey Matrix, is a nine cell matrix from 2 dimensions; industry attractiveness and business strength Strategist can break down these dimensions in to several factors and rate then as 1 – 9 scores or 3 level as high medium or low Then strategist weight the factors impact with the score rated in each dimensions As

a result a company can see the status of the business unit and suggest the strategy the business fell in the categories

Figure 19 Corporate Strategy suggested by GE 9 Cell Industry attractiveness can separate to various factors; 5 forces model and other

external environments can be considered for this perspective In addition, Business

strength can be divided to other internal factors related to value chain and functional

activities Calculations for these perspectives is shown in Figure 19 and Figure 20

Figure 20 Industry Attractiveness Evaluation

Growth Strategy

Stability Strategy

Retrenchment Strategy

Figure 21 Business Strength Evaluation

From the above rating, the business unit has 4.40 strength score with 7.75 industry attractive score

As a consequence, it falls in Medium business strength – High market attractiveness This matrix suggests a growth strategy by increasing its strengths

Figure 22 Example of GE 9 Cell Analysis 3.2 Business Level Strategy

Business Level Strategy involves a distinctive positioning that firm established to competes successfully in a particular market A company can develop it position by leveraging its strengths whether it will be differentiation or cost advantage In addition, it wants to focus in a particular segment or offers its values to mass market Therefore, generic strategies result differentiation, cost leadership, and focus.37

Figure 23 Porter's Generic Strategies (1) Differentiation Strategy38

A differentiation strategy calls for the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition The value added by the uniqueness

of the product may allow the firm to charge a premium price for it The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product Because of the product's unique attributes, if suppliers increase their prices the firm may be able to pass along the costs to its customers who cannot find substitute products easily Firms that succeed in a differentiation strategy often have the following internal strengths:

• Access to leading scientific research to create innovative products

• Highly skilled and creative product development team

• Strong sales team with the ability to successfully communicate the perceived

• Corporate reputation for quality and innovation

(2) Cost Leadership Strategy39

The firm offers its products at average industry prices to earn a profit higher than the rivals, or below the average industry prices to gain market share In the price war, cost leadership is advantage to gain higher profitability than competitors Even without price war, a company will remain profitable in the mature industry which price decline

Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether

If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership Firms that succeed in cost leadership often have the following internal strengths:

• Access to the capital required making a significant investment in production

assets; this investment represents a barrier to entry that many firms may not

overcome

• Skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process

• High level of expertise in manufacturing process engineering

• Efficient distribution channels

(3) Focus Strategy40

The focus strategy concentrates on a narrow segment and within that segment attempts to achieve either a cost advantage or differentiation The premise is that the needs of the group can be better serviced by focusing entirely on it A firm using a focus strategy often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages other firms from competing directly In addition, it is able to tailor a broad range of product development strengths to a relatively narrow market segment that they know very well

Because of their narrow market focus, firms pursuing a focus strategy have lower volumes and therefore less bargaining power with their suppliers However, firms pursuing a differentiation-focused strategy may be able to pass higher costs on to customers since close substitute products do not exist

3.3 Functional Level Strategy

Functional Level Strategy involves business function operations to support corporate and business strategy Functional level strategy is about marketing strategy, productions and operations strategy, human resource management strategy, and financial strategy