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BA460-Week #2: Strategic Planning “If you don’t know where you are going any route will get you there.” Chris Bartlett, Harvard Business School Strategic Thinking : The Big-3 Questions: 1.Where do we want to go? – – – – What business(es) should be in Market positions to stake out? Consumer needs & segments serve? Outcomes to achieve? 2.Where are we now? 3.How do we get there? You have begun … Situation & SWOT Analysis Company Consumers Competitors Conditions Internal Strengths & Weaknesses External Opportunities & Threats You are finding answers re: How the market is segmented & the Consumers Competitors relevant criteria that influence consumers use in their purchasing decisions The nature & magnitude of the competition Existing & emerging Economic & Conditions Technological trends that will impact demand, pricing, product design & positioning After- SWOT analysis of the situation… the next & most critical step in strategy development…oddly enough is –thinking– Specifically-thinking about the way things have been & are now… AND- the way things could/should be Need to start thinking abt: Where you want to go? *Your Mission & Vision We will produce outstanding financial returns by providing totally reliable, competitively superior, global, airground transportation of high-priority goods and documents that require rapid, timecertain delivery." Mission or Purpose is a precise description of what an organization does. It should describe the business the organization is in. It is a definition of “why” the organization exists A vision is a statement about what your organization wants to become … A compelling description of the state and function of the organization once it has implemented and achieved the strategic plan… http://www.bplans.com/dp/missionstatement.cfm Valuable Strategies & Mission Statements http://www.bplans.com/dp/missionstatement.cfm >Strategy & Vision Statements Then decide-- How you will get there? *Growth, Competitive & Functional Strategies 3 Levels of Strategy Corporate-Level : In what business do we compete? Corporation Business-Level : How do we compete? Sensors Unit Nano-Tech Unit Cons.Elec. Unit Functional-Level : How do we coordinate? Finance HR / R&D Production Marketing Corporate Growth Strategy Business Unit Competitive Strategy Functional Strategies R&D Marketing Positioning Finance Production Human Resources Level 1-Corporate Strategy In which businesses do we compete? Corporation Corporation STRATEGIC BUSINESS UNIT #1 MARKET COMPETITOR A COMPETITOR B STRATEGIC BUSINESS UNIT #3 STRATEGIC BUSINESS UNIT #2 COMPETITOR C COMPETITOR D COMPETITOR E ? MARKET MARKET COMPETITOR F COMPETITOR G COMPETITOR H COMPETITOR I Growth Strategy Deciding on what Products & Markets to compete with & in… Growth Strategies PRODUCT Present Present Market Penetration New Product Development MARKET New Market Development Diversification Concentrate on your primary line of business & look for ways to meet growth objectives thru increasing your level of operation in your primary business Market Penetration Increase market share among existing customers. Market Development Attract new customers to existing products Product Development Create new products for present markets Level 2: Business Unit Strategy How do we compete? STRATEGIC BUSINESS UNIT Focus? Quality? Price? MARKET COMPETITOR A COMPETITOR B COMPETITOR C Also need to decide-- how you are going to compete… w/ what Competitive Advantage Thru Cost Advantage•Offer same benefit as competitor but at lower cost Thru Differential Advantage•Offer benefits which exceed competitors w/in which Market Segments All market segments Niche segments Evolving segments Competitive Strategy is the creation of a unique & valuable position- The position is based on– Performing the same activities as competitors, but differently --or performing a different set of activities • Porters Generic Strategies •Strategies & Mission Statements You can also Formulate Strategy by what dimension you compete on: Cost: Design, produce, market more efficiently than competitors Differentiation: Deliver unique & superior value in terms of product quality, features, service You can Formulate Strategy by theNumber & nature of segments compete w/inUndifferentiated Differentiated Niche Strategy & You can Formulate Strategy byRiding A Products Life Cycle Adjust Marketing Mix according to natural Drift of products w/in segments- Put them all together &… 1. 2. 3. Cost/Quality Differentiation Number & nature of segments compete w/in Riding the Product Life Cycle Competitive Strategy Matrix: #2 Compete on: Cost #1 Broad Market Niche Mrkt Number & nature of segments compete w/in Product Quality Cost/Quality Differentiation Riding Product Life Cycle #3 Evolving Mrkt Competitive Strategies Product Life-Cycle Competitive Strategy Matrix Broad Mrkt Compete on: Cost Product Quality Niche Mrkt Evolving Mrkt Overall Cost Cost LeaderLo -Tech Leader Cost Leader - Differentiator- Differentiator Differentiator- Focus Hi- End Focus PLC Lo+Trad+Hi PLC Lo+Trad+Hi Cost Leadership Strategic Choices A cost leader does not try to be industry innovator A cost leader positions products to appeal to mainstream customers The overriding goal isincreased efficiency & lower costs relative to rivals Generic Business-Level Strategy:Cost Leadership Advantages If rivals charge similar prices, a cost leader achieves superior profitability – A cost leader is able to charge a lower price than competitors – Overall Cost Cost LeaderLo -Tech Leader Focus Cost Leader - PLC Lo+Trad+Hi An overall cost leader will attempt to be low-cost producer in every segment of the market. will have good profit margins on all sales while keeping prices low for price-sensitive customers. Overall Cost Cost LeaderLo -Tech Leader Focus Cost Leader - PLC Lo+Trad+Hi -- seeks to dominate the price sensitive market segments. --sets prices below all competitors — and still be profitable Overall Cost Cost LeaderLo -Tech Leader Focus Cost Leader - PLC Lo+Trad+Hi -- Will seek to minimize costs in marketing & production Products will be allowed to age & change in appeal from High End, to Traditional, and eventually Low End buyers. Competitive Strategy Matrix Broad Mrkt Compete on: Cost Product Quality Niche Mrkt Evolving Mrkt Overall Cost Cost LeaderLo -Tech Leader Cost Leader - Differentiator- Differentiator Differentiator- Focus Hi- End Focus PLC Lo+Trad+Hi PLC Lo+Trad+Hi Generic Business-Level Strategy: Differentiation Create a product that customers perceive as different or distinct in an important way Advantages – Premium price – Increased revenues = superior profitability Differentiator A differentiator will seek to create maximum awareness & brand equity. Wants to be well known as maker of high quality/highly desirable products Differentiation Advantages Customers develop brand loyalty: The greater the loyalty.. The less the price sensitivity… Differentiators can pass price increases on to customers Differentiation and brand loyalty are barriers to entry Differentiation: Disadvantages Difficulty in maintaining long-term distinction in customers’ eyes – Agile competitors can quickly imitate – Patents & first-mover advantages are limited Difficulty/expense of maintaining premium pricing– requires greater marketing costs DIFFERENTIATOR w/ HIGH-TECH FOCUS A high-tech differentiator seeks to be top producer of best performing leading-edge products Competitive Strategies; Focused Differentiation: Focus on particular group or geographic market – – Seek differentiation in targeted market segment Serve special needs of narrow target market DIFFERENTIATOR w/ PRODUCT LIFE-CYCLE FOCUS A product life-cycle differentiator seeks to be well-known as a top producer of good performing products in each of the targeted segments. Level 3- Functional Strategy How do we coordinate? STRATEGIC BUSINESS UNIT FINANCE R&D PRODUCTION PURCHASING INVENTORY MARKETING /SALES What makes a decision strategic? Multi-functional in scope & consequences Requires choice & trade-offs, integration & alignment R&D Prdtn Mrktg In order to execute & achieve selected growth & competitive strategies--Need to coordinate decisions across all Functional domains Production R&D Marketing Finance HR Functional Integration & Strategic Alignment Getting In-Sync w/ Functional Planning The goal of functional planning is to achieve a state of Internal Strategic Alignment FINANCE PRODUCTION MARKETING INTERNAL STRATEGIC ALIGNMENT Achieved when : All Decisions made by & within all functional areas are in sync w/ one another, As well as with the overall strategic direction of the firm FINANCE PRODUCTION MARKETING Functional Planning Matrices Examples of: internal strategic alignment Functional Alignment: In Achieving Cost Efficiency Functional Alignment: Implementing Differentiation Strategy Functional Alignment: In Achieving Superior Innovation Functional Alignment: Superior Customer Rlshps When all decisions made by & within all functional areas are in sync w/ one another, As well as w/ your overall strategic direction -- you achieve… Distinctive Distinctive Competencies Competencies Distinct competencies needed to achieve selected competitive strategy Distinctive Competencies Competitive Advantage* *Achieved when you sustain profits above Industry Average Areas in which you can develop “Distinct Competencies” MARKETING: Awareness & Accessibility R&D: Product innovation & design PRODUCTION: Plant Automation & utilization Human Resources: Worker Expertise & Training Distinct Competencies Competencies in automation & human resources could lead to a competitive advantage in cost leadership. Achieving Competitive Advantage thru Cost-Focused Strategy Allows for good profit margins on sales while keeping prices low especially in price-sensitive segments… Functional Alignment Automation - pursued early & Production aggressively Capacity improvements unlikely Marketing (may run overtime instead) Spend moderately on promotion & sales R&D Spend minimally on R&D Distinct Competencies Competencies in awareness, accessibility & design could lead to a competitive advantage built upon differentiation Differentiator Seeks to create maximum awareness & brand equity. Wants to be well known as a maker of high quality/highly desirable products Production Functional Alignment Less likely to invest in increased automation or production capacity Marketing Spend heavy on advertising & sales to create maximum awareness & accessibility Prices tend to be higher R&D High R&D spending - keep products fresh Virtually all tactical mistakes that are made when implementing strategy are a consequence of the lack of synchronization of decisions made in at least two functional areas You develop a new product but forget to buy plant & equipment for it…the year before it is to be launched… R&D and Production breakdown The company takes an emergency loan because inventory levels increase… Marketing, Production & Finance out of sync You reposition a product from the High End to the Traditional segment, but do not address their material & labor costs… Marketing, R&D, and Production out of sync Financial decisions are made before knowing the budget demands of all R&D, Marketing and Production decisions… Everybody is out of sync! Functional alignment- decisions matrix Competitive Strategy:______ Marketing R&D Production HR Finance Strategic Objectives Brand Tactics Rnd1 Rnd2 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 EXAMPLE: Functional alignmentdecisions matrix BRAND:_new Competitive Strategy: Niche Differentiation Marketing R&D Production HR Finance Strategic Tactics Tactics Objectives Rnd1 Rnd2 Competitive Strategy:ND Strategic Objectives Marketing Spend aggressively in promotion & sales in Hitech segments…. make our products easy for customers to find. .. price at a premium. In the low tech segments we”ll exit gracefully, … as they exit the Low End R&D We will keep our existing HiTech products (HI, PRF, & SIZE), phase out TRAD and LO, and introduce a new brand in the High End segment. Our goal is to offer technology oriented customers products that match their ideal criteria for positioning, age, and reliability Production Grow capacity to meet demand … avoid overtime After products well positioned, investigate modest increases in automation levels to improve margins, but keep ability to reposition products HR Spend aggressively on recruitment, training; minimize labor T/O w/ +wage & benefit packages; Focus TQM & Process initiatives on reducing labor & material costs, R&D time and enhancing effectiveness of promo & sales budgets… Finance We”ll finance investments primarily thru stock issues, retained earnings, supplement w/ bond offerings as needed .. When our cash position allows- issue dividends & retire stock.-We are adverse to debt & prefer to avoid interest payments. We’ll keep assets/equity (leverage) betw. 1.5 - 2.0. We measure performance w/ ROS, Asset T/O,& ROA. EXAMPLE: Functional alignmentdecisions matrix Competitive Strategy: Niche Differentiation Marketing R&D Production HR Finance Strategic Tactics Tactics Objectives Rnd1 Rnd2 Competitive Strategy:ND Marketing Tactics Year 1 TRAD – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: price $28.50, promotion budget $600, sales budget $600, and sales forecast 1000. LO – increase price, make modest cuts in promotion and sales budget. Forecast a modest reduction in unit sales compared to last year. Example: $23.50, promotion budget $600, sales $800, and sales forecast 1400. HI – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $39.50, promotion budget $1900, sales $1900, sales forecast 400. PRF – increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1900, sales $1900, sales forecast 440. SIZ –increase price, promotion budget and sales budget. Forecast flat unit sales. Example: $34.50, promotion budget $1700, sales $1700, sales forecast 390. New HI – no action required because the product will not emerge from R&D until next year. Competitive Strategy:ND R&D Tactics Year 1 TRAD – tweak positioning to reduce age. Reduce reliability to reduce material cost. Example: Increase Performance by 0.1 and reduce MTBF by 1000 hours. LO – leave positioning alone, allowing the product to age further. Reduce reliability to reduce material cost. Example: reduce MTBF by 1000 hours.. HI– improve positioning and reduce age. Hold reliability (MTBF) steady. Example: reduce Size by 1.2, and increase Performance by 1.2. PRF – improve positioning and reduce age. Improve reliability to enhance demand. Example: Increase Performance by 1.4, reduce Size by 0.5, and increase MTBF by 1000 hours. SIZE – improve positioning and reduce age. Hold reliability (MTBF) steady. Example: Reduce Size by 1.4, and increase Performance by 0.5. New HI – Launch a new High End product, with a project length of 20 to 23 months (no later than December of next year.) Example: positioned at leading edge of High End segment, -- Performance 10.2, Size 9.8. Set MTBF in the middle of the High End reliability range: MTBF 23,000. TACTICS -Example: decision matrix- to add a new High End product… What= A New product- Size coordinate = 10. Performance coordinate = 11. MTBF = 25,000 R&D hours. When Due out in 2007 Competitively Price @ $35. Target 68% Awareness (50% @intro +18% will cost=$2M promo budgetMARKETING allocate web, email & Trade Shows) maintain hilevel Distribution w/ Sales budget = $1.4M…w/ appropo allocations- When 2007. What Produce 75,000 units at automation level of 3. PRODUCTION When Ready by second month of 2007. How Purchase capacity in 2006. What Investments in Concurrent Engineering & Quality Deployment- to reduce R&D Times When & HR How Much $2M-2005; $1.5M-2006;$1M-2007 What Finance $11M. When NOW. How Issue long FINANCE term debt. Competitive Strategy:ND Production Tactics Year 1 For each product, schedule production using the formula: (UnitSalesForecast X 112%) – InventoryOnHand. Adam – sell 200 to 300 units of capacity. Adam has too much capacity, and given our new product it is unlikely that we will need 900 units of capacity in the future. Make no other plant improvements to capacity or automation UNTIL YEAR 2- WHEN New High End product DEVLOPMENT COMPLETE – buy 600 units of capacity at automation level 5.0. Competitive Strategy:ND HR Tactics Year 1 Invest $1.5 million per selected – critical TQM (Quality Function Deployment; CCE ) & Process Initiatives (CPI,JIT,QIT, Channel Support & Concurrent Engineering) Finance On proforma Balance Sheet-- add together Cash and Inventory accounts. -- Keep between 15% and 20% of balance sheet assets in Cash plus Inventory. Drive Cash position until it roughly equals your Inventory position. …. If you are cash poor, issue additional stock to cover the investment in new capacity. If you are cash rich, pay dividends. AVOID Short Term Debt. M A R KE T I N G TODAY’S M A N A G E M E N T 1. Finish Situation Analysis 2. Draft Mission & Vision Statements 3. Select Growth & Competitive Strategies To compete on cost or differentiation… that is the question Also on Today’s Begin drafting “functionally aligned” strategic & tactical decisions matrices Competitive Strategy Strategic Objectives Brand Rnd1 Tactics Rnd2 1 2 3 4 1 2 3 4 1 2 3 4 Marketing R&D Production HR Finance 1 2 3 4 1 2 3 4 1 2 3 4 Need to begin to determine the basic objectives & specific tactical decisions that need to be made within & across each management domain …in order to successfully implement your growth & competitive strategies Getting it together