Strategic Management and

Business Policy 15e, Global Edition

Chapter 6
Strategy
Formulation:
Business Strategy

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Learning Objectives
6-1 Utilize the SFAS matrix and a SWOT
diagram to examine business strategy.
6-2 Develop a mission statement that
addresses the five elements of good
design
6-3 Explain the competitive and cooperative
strategies available to corporations
6-4 Identify the types of strategic alliances

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6-1. Utilize the SFAS matrix
and a SWOT diagram to
examine business strategy

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3
 A Framework for Examining Business Strategy (1 of 2)

• Strategy formulation
– Strategy formulation, often referred to as strategic planning
or long-range planning, is concerned with developing a
corporation’s mission, objectives, strategies, and policies
• Strategy formulation begins with a Situation analysis,
which is :
– The process of finding a strategic fit between external
opportunities and internal strengths while working around
external and internal weaknesses.
• As was discussed in Chapter 5, the VRIO framework is extraordinarily
effective in not only analysing potential competitive advantages to determine
which are true competitive advantages, but also in examining whether the
company is organized to take advantage of those strengths.

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A Framework for Examining Business Strategy (2 of 2)

• SWOT
– Is an acronym used to describe the particular strengths,
weaknesses, opportunities, and threats that are potential
strategic factors for a specific company.
• It can be said that the essence of strategy is opportunity divided by
capacity, i.e. Strategy = opportunity/capacity

• Opportunity by itself has no real value unless a company has

the capacity (i.e. resources) to take advantage of that
opportunity.
• SWOT, as a conceptual tool can be used to take a broader view of strategy
through the formula SA = O/(S–W), i.e. (Strategic Alternative equals
Opportunity divided by Strengths minus Weaknesses).

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 Criticisms of SWOT Analysis

• SWOT, by itself, is just a start to a strategic analysis.

• Some of the primary criticisms of SWOT are:
1. It is simply the opinions of those filling out the boxes.
2. Virtually everything that is a strength is also a weakness.
3. Virtually everything that is an opportunity is also a threat.
4. Adding layers of effort does not improve the validity of the
list.
5. It uses a “single point in time” approach.
6. There is no tie to the view from the customer.
7. There is no “validated evaluation” approach.

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 Generating a Strategic Factors Analysis Summary (SFAS) Matrix

• SFAS (Strategic Factors Analysis Summary) Matrix

– The EFAS and IFAS Tables plus the SFAS Matrix were
developed to deal with some of the criticisms of SWOT
analysis and have been very effective.
– The SFAS Matrix summarizes an organization’s strategic factors by combining
the External factors from the EFAS Table with the Internal factors from the IFAS
Table.
– The EFAS and IFAS examples given of Maytag Corporation (as it was in 1995)
in Table 4–5 and Table 5–2 list a total of 20 internal and external factors. These
are too many factors for most people to use in strategy formulation.
– The SFAS Matrix requires a strategic decision maker to condense these
strengths, weaknesses, opportunities, and threats into fewer than 10 strategic
factors.
– This is done with a management team review and then by revising the weight
given each factor.
– The revised weights reflect the priority of each factor as a determinant of the
company’s future success.
– The highest-weighted EFAS and IFAS factors should appear in the SFAS
Matrix.
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Figure 6-1: Strategic Factor Analysis Summary (SFAS) Matrix

The example given in Figure 6–1 is for Maytag Corporation in 1995, before the firm
sold its European and Australian operations and it was acquired by Whirlpool. The
SFAS Matrix includes only the most important factors gathered from environmental
scanning and thus provides information that is essential for strategy formulation.
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 Finding a Propitious Niche
• One desired outcome of analysing strategic factors is identifying
niches where an organization can use its core competencies to
take advantage of a particular market opportunity.
• A niche is a need in the marketplace that is currently unsatisfied.
• The goal is to find a Propitious niche, an extremely favorable niche that is:
– So well suited to the firm’s internal and external environment that other
corporations are not likely to challenge or dislodge it.

• A niche is propitious to the extent that it currently is just large enough for one firm to
satisfy its demand. After a firm has found and filled that niche, it is not worth a
potential competitor’s time or money to also go after the same niche.

• Finding such a niche or sweet spot is not easy. A firm’s management must
continually look for a Strategic window, that is: A unique market opportunity
that is available for a particular time.
• The first firm through a strategic window can occupy the market and discourage
competition (if the firm has the required internal strengths).
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6-2. Develop a mission statement
that addresses the five elements
of good design

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10
 Mission and Objectives (1 of 2)

• One of the first steps in good strategy design should

be crafting the mission statement for the organization.
• The mission statement must enable a common
thread to highlight and focus the energy of everyone
in the organization in the direction that the top
management team believes is best for the business.

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 Mission and Objectives (2 of 2)
A well-crafted mission statement has five common elements
1. It must be short: so that every employee can remember the
statement.
2. The design must be simple: so that everyone in the
company can understand what the senior leadership team
desires.
3. It has to provide direction: to the activities of company
employees.
4. It should enable employees: knowing exactly what the
company does and what it does not do.
5. It should be measurable: so that the company can visibly
see progress.

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6-3. Explain the competitive
and cooperative strategies
available to corporations

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 Business Strategies
• Business strategy
– Focuses on improving the competitive position of a
company’s or business unit’s products or services within the
specific industry or market segment that the company or
business unit serves.
– Two types: Competitive, Cooperative:
– Business strategy can be:
Competitive (battling against all competitors for
advantage) and/or
Cooperative (working with one or more companies to
gain advantage against other competitors).

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 Porter’s Competitive Strategies (1 of 7)
Competitive strategy raises the following questions:
• Should we compete on the basis of lower cost (and
thus price), or should we differentiate our products or
services on some basis other than cost, such as
quality or service?
• Should we compete head-to-head with our major
competitors for the biggest but most sought-after
share of the market, or should we focus on a niche in
which we can satisfy a less sought-after but also the
profitable segment of the market?

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 Porter’s Competitive Strategies (2 of 7)
• Michael Porter proposed three “generic” competitive
strategies, (they are called generic because they can
be pursued by any type or size of business firm, even
by not-for-profit organizations), for outperforming other
corporations in a particular industry:
1. Overall Cost leadership
2. Differentiation
3. Focus.
• Cost leadership
– Is ability of a company or a business unit to design,
produce, and market a comparable product more
efficiently than its competitors.

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 Porter’s Competitive Strategies (3 of 7)

• Differentiation
– Ability of a company to provide unique and superior
value to the buyer in terms of product quality,
special features, or after-sale service.
• Focus
– Ability of a company to provide unique and superior
value to:
• a particular buyer group,
• segment of the market line, or
• geographic market.
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 Porter’s Competitive Strategies (4 of 7)
• Porter proposed that a firm’s competitive advantage in an
industry is determined by its competitive scope—that is, the
breadth of the company’s or business unit’s target market.
• Simply put, a company or business unit can choose a broad
target (aim at the middle of the mass market) or a narrow
target (aim at a market niche).
• Combining these two types of target markets with the three
competitive strategies results in four variations of generic
strategies:
– When the lower-cost and differentiation strategies have a
broad mass-market target, they are simply called
1. cost leadership and 2. differentiation.
– When they are focused on a market niche (narrow target),
however, they are called
3. cost focus and 4. differentiation focus.
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 Porter’s Competitive Strategies (5 of 7)
• 1. Cost leadership
– Is a lower-cost competitive strategy that aims at the broad mass market and
requires “aggressive construction of efficient-scale facilities, vigorous pursuit of
cost reductions from experience, tight cost and overhead control, avoidance of
marginal customer accounts, and cost minimization in areas like R&D, service,
sales force, advertising, and so on. Some companies successfully following this
strategy are Wal-Mart (discount retailing), Taco Bell (fast-food restaurants), HP
(computers).
– Characteristics of cost leadership business strategy:
1. Having a lower-cost position gives a company or business unit a defense
against rivals.
2. Its low prices serve as a barrier to entry because few new entrants will be able
to match the leader’s cost advantage.
3. Its lower costs allow it to continue to earn profits during times of heavy
competition.
4. Generates increased market share, that means it will have high bargaining
power relative to its suppliers (because it buys in large quantities).
– As a result, cost leaders are likely to earn above-average returns on
investment.
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 Porter’s Competitive Strategies (6 of 7)
• 2. Differentiation
– Is aimed at the broad mass market and involves the creation of a
product or service that is perceived throughout its industry as having
passed through the elements of VRIO.
– The company or business unit may then (if it chooses) charge a
premium.
– Differentiation is a viable strategy for earning above-average returns in
a specific business because the resulting increased value to the
customer lowers price sensitivity.
– Examples of companies use differentiation strategy: Walt Disney
Company (entertainment), BMW (automobiles), Apple (computers,
tablets, watches, and cell phones), and Five Guys (fast food).
– Characteristics of Differentiation strategy:
1. Lowers customers sensitivity to price
2. Increases buyer loyalty
3. Can generate higher profits than does a lower-cost strategy because
differentiation creates a better entry barrier
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 Porter’s Competitive Strategies (7 of 7)
• 3. Cost focus
– Is low-cost competitive strategy that focuses on a particular buyer
group or geographic market and attempts to serve only this niche to the
exclusion of others.
– In using cost focus, the company or business unit seeks a cost
advantage in its target segment.

• 4. Differentiation focus
– Like cost focus, concentrates on a particular buyer group, product line
segment, or geographic market to serve the needs of a narrow
strategic market more effectively than its competitors.
– In using differentiation focus, a company or business unit seeks
differentiation in a targeted market segment.
– This strategy is valued by those who believe that a company or a unit
that focuses its efforts is better able to serve the special needs of a
narrow strategic target more effectively than can its competition.

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 Risks in Competitive Strategies
• No one competitive strategy is guaranteed to achieve
success, and some companies that have successfully
implemented one of Porter’s competitive strategies have
found that they could not sustain the strategy.
• Each of the generic strategies has risks.
• For example, a company following a differentiation strategy
must ensure that the higher price it charges for its higher
quality is not too far above the price of the competition,
otherwise customers will not see the extra quality as worth the
extra cost.

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 Issues in Competitive Strategies (1 of 2)
• Stuck in the middle
– Porter argues that to be successful, a company or business
unit must achieve one of the previously mentioned generic
competitive strategies.
– Otherwise, the company or business unit is stuck in the
middle of the competitive marketplace with no competitive
advantage and is doomed to below-average performance.
– A classic example of a company that found itself stuck in
the middle was K-Mart.
▪ The company spent a lot of money trying to imitate both
Wal-Mart’s low-cost strategy and Target’s quality
differentiation strategy.
▪ The result was a bankruptcy filing and its continuation
today as a floundering company with poor performance
and no clear strategy.
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 Issues in Competitive Strategies (2 of 2)

• Most Successful entrepreneurial ventures follow focus

strategies.
• The successful ones differentiate their product or
service from those of others by focusing on customer
wants in a segment of the market, thereby achieving a
dominant share of that part of the market.
• Adopting guerrilla warfare tactics, these companies
often go after opportunities in market niches too small
to justify retaliation from the market leaders.

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 Industry Structure and Competitive Strategy (1 of 3)
• Although each of Porter’s generic competitive strategies may
be used in any industry, certain strategies are more likely to
succeed depending upon the type of industry.
• Fragmented industry
– Many small and medium-sized companies compete for
relatively small shares of the total market, focus strategies
will likely predominate.
• Products in this industry are typically in early stages of product life cycle. Focus
strategies are used.

• If few economies are to be gained through size, no large firms will emerge and entry
barriers will be low—allowing a stream of new entrants into the industry.

• Sandwich shops, veterinary care, used-car lots, dry cleaners,

and nail salons are examples.
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 Industry Structure and Competitive Strategy (2 of 3)
• Consolidated industry
• As an industry matures, fragmentation is overcome, and the industry tends
to become a consolidated industry dominated by a few large companies.
– Although many industries start out being fragmented, battles for market
share and creative attempts to overcome local or niche market
boundaries often increase the market share of a few companies.
– After product standards become established for minimum quality and
features, competition shifts to a greater emphasis on cost and service.
• Slower growth, overcapacity, and knowledgeable buyers combine to put a premium
on a firm’s ability to achieve cost leadership or differentiation along the dimensions
most desired by the market.

• R&D shifts from product to process improvements. Overall product quality improves,
and costs are reduced significantly.

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 Industry Structure and Competitive Strategy (3 of 3)
• Strategic rollup
– It was developed in the mid-1990s as an efficient way to quickly
consolidate a fragmented industry.
– With the aid of money from venture capitalists and private equity
firms, a single company acquires hundreds of owner-operated
small businesses.
– The resulting large firm creates economies of scale by:
▪ Building regional or national brands
▪ Applies best practices across all aspects of marketing and
operations
▪ Hires more sophisticated managers than the small businesses
could previously afford. (Examples of Rollups in the book).
• Rollups differ from mergers/acquisitions in three ways:
1. They involve large numbers of firms.
2. The acquired firms are typically owner operated.
3. The objective is not to gain incremental advantage, but to
reinvent an entire industry.
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 Hyper-competition and Competitive Advantage
Sustainability (1 of 2)
• According to D’Aveni:
– “In a hypercompetitive environment, market stability is threatened by:
1. short product life cycles,
2. short product design cycles,
3. new technologies,
4. frequent entry by unexpected outsiders,
5. repositioning by incumbents, and
6. tactical redefinitions of market boundaries as diverse industries
merge.”
• A company or business unit must constantly work to improve its competitive
advantage.
• It is not enough to be just the lowest-cost competitor. Through continuous
improvement programs, competitors are usually working to lower their costs
as well. Firms must find new ways not only to reduce costs further but also
to add value to the product or service being provided.
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Hypercompetition and Competitive Advantage Sustainability
(2 of 2)

• According to D’Aveni, as industries become hypercompetitive,

there is no such thing as a sustainable competitive advantage.
• Sustained competitive advantage is increasingly a matter not
of a single advantage maintained over time, but more a matter
of sequencing advantages over time.

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 Cooperative Strategies (1 of 3)
• Cooperative Strategies
– A company uses competitive strategies to gain
competitive advantage within an industry by battling
against other firms.
– These are not, however, the only business strategy options
available to a company or business unit for competing
successfully within an industry.
– A company can also use cooperative strategies to gain a
competitive advantage within an industry by working with
other firms.
– The two general types of cooperative strategies are
collusion and strategic alliances.

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 Cooperative Strategies (2 of 3)
• Collusion
– Is the active cooperation of firms within an industry to
reduce output and raise prices to avoid economic law of
supply and demand.
– Collusion may be:
▪ Explicit, in which case firms cooperate through direct
communication and negotiation, or
▪ Tacit, in which case firms cooperate indirectly through an informal
system of signals (indirect communication).
– Explicit collusion is illegal in most countries and in a
number of regional trade associations, such as the
European Union.
– Even tacit collusion can, however, be illegal.
– Example: General Electric and the Westing-House
“Conscious Parallelism”
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6-4. Identify the types of
strategic alliances

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32
 Cooperative Strategies (3 of 3)
• Strategic Alliances
– Is a long-term cooperative arrangement between two or more
independent firms or business units that engage in business activities for
mutual economic gain.
– Cooperative arrangements between companies and business units fall
along a continuum from weak and distant to strong and close. (See
Figure 6–2.)
– The Types of alliances range from 1) mutual service consortia to 2) joint
ventures and licensing arrangements to 3) value-chain partnership

Figure 6-2: Continuum of Strategic Alliances

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 Reasons to Form an Alliance
Companies or business units may form a strategic alliance for a
number of reasons, including:
• Obtain or learn new capabilities: Alliances are especially useful if
the desired knowledge or capability is based on tacit knowledge or on new
poorly understood technology.

• Obtain access to specific markets: In a survey by the Economist

Intelligence Unit, 59% of executives stated that their primary reason for
engaging in alliances was the need for fast and low-cost expansion into
new markets.

• Reduce financial risk: Alliances take less financial resources than do

acquisitions or going it alone and are easier to exit if necessary.

• Reduce political risk: Forming alliances with local partners is a good

way to overcome deficiencies in resources and capabilities when
expanding into international markets. (Ex: Joint Ventures with Chinese Co.)
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 Types of Alliances (1 of 4)
1. Mutual service consortium
– Is a partnership of similar companies in similar industries
that pool their resources to gain a benefit that is too
expensive to develop alone, such as access to advanced
technology.
– IBM established a research alliance with Sony Electronics
and Toshiba to build its next generation of computer chips.
– The mutual service consortia is a fairly weak and distant
alliance—appropriate for partners that wish to work together
but not share their core competencies.
– There is very little interaction or communication among the
partners.

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 Types of Alliances (2 of 4)
2. (a) Joint venture
– Is a cooperative business activity:
• Formed by two or more separate organizations for strategic
purposes, that creates an independent business entity and
• Allocates ownership, operational responsibilities, and financial risks
and rewards to each member,
• While preserving their separate identity/autonomy.
– Along with licensing arrangements (next slide):
• Joint ventures lie at the midpoint of the continuum and
• Are formed to pursue an opportunity that needs a capability from
two or more companies or business units, such as the technology
of one and the distribution channels of another.
– Joint ventures are the most popular form of strategic alliance.
– They often occur because the companies involved do not want to or
cannot legally merge permanently.

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 Types of Alliances (3 of 4)
2. (b) Licensing arrangement
– Is an agreement in which the licensing firm grants rights to
another firm in another country or market to produce and/or
sell a product.
– The licensee pays compensation to the licensing firm in
return for technical expertise.
– Licensing is an especially useful strategy if the trademark
or brand name is well known but the MNC does not have
sufficient funds to finance its entering the country directly.
– For example, Yum! Brands successfully used franchising
and licensing to establish its KFC, Pizza Hut, Taco Bell,
Long John Silver’s, and A&W restaurants throughout the
world.
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 Types of Alliances (4 of 4)
3. Value-chain partnership
– Is a strong and close alliance in which one company or
unit forms a long-term arrangement with a key supplier or
distributor for mutual advantage.
– In 2015 Facebook partnered with nine news organizations
to allow them (including powerhouses like the New York
Times and NBC News) to post stories on the Facebook
site.
– That partnership allows the news organizations to keep
the advertising revenue from those posts while Facebook
increases the amount of time that a particular customer is
on their site.

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Table 6-1: Strategic Alliance Success Factors
It is
important
that a
company or
business
unit that is
interested
in joining or
forming a
strategic
alliance
consider
the
strategic
alliance
success
factors
listed in
Table 6–1.

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