Chapter 6

Swot analysis
Strategy formulation, often referred to as strategic planning or long-range planning, is concerned with
developing a corporation’s mission, objectives, strategies, and policies. It begins with situation analysis:
the process of finding a strategic fit between external opportunities and internal strengths while
working around external threats and internal weaknesses.

It can be said that the essence of strategy is opportunity divided by capacity.4 An opportunity by itself
has no real value unless a company has the capacity (i.e., resources) to take advantage of that
opportunity.

SA = O/(S – W) that is, (Strategic Alternative equals Opportunity divided by Strengths minus
Weaknesses).

STRATEGIC FACTORS ANALYSIS

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.
Such a niche may also be called a strategic sweet spot where a company is able to satisfy customers’
needs in a way that rivals cannot, given the context in which it operates.
A firm’s management must be always looking for a strategic window—that is, a unique market
opportunity that is available only for a particular time. As a niche grows, so can a company within that
niche—by increasing its operations’ capacity or through alliances with larger firms. The key is to identify
a market opportunity in which the first firm to reach that market segment can obtain and keep
dominant market share.

Mission and objective

Business Strategy:
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). Just as corporate
strategy asks what industry(ies) the company should be in, business strategy asks how the company or
its units should compete or cooperate in each industry.

PORTER’S COMPETITIVE STRATEGIES

Michael Porter proposes two “generic” competitive strategies for outperforming other corporations in a
particular industry: lower cost and differentiation.

 Lower cost strategy is the ability of a company or a business unit to design, produce, and market
a comparable product more efficiently than its competitors.
 Differentiation strategy is the ability of a company to provide unique and superior value to the
buyer in terms of product quality, special features, or after-sale service.

Porter further proposes 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.

When the lower-cost and differentiation strategies have a broad mass-market target, they are simply
called cost leadership and differentiation. When they are focused on a market niche (narrow target),
however, they are called cost focus and differentiation focus.
Issues in Competitive Strategies
Porter agrees that it is possible for a company or a business unit to achieve low cost and differentiation
simultaneously, he continues to argue that this state is often temporary.
Industry Structure and Competitive Strategy
 In a fragmented industry, for example, where many small- and medium-sized local companies
compete for relatively small shares of the total market, focus strategies will likely predominate.
 consolidated industry dominated by a few large 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.

Rollups differ from conventional mergers and acquisitions in three ways: (1) they involve large numbers
of firms, (2) the acquired firms are typically owner operated, and (3) the objective is not to gain
incremental advantage, but to reinvent an entire industry

Hypercompetition views competition, in effect, as a distinct series of ocean waves on what used to be a
fairly calm stretch of water. As industry competition becomes more intense, the waves grow higher and
require more dexterity to handle. Although a strategy is still needed to sail from point A to point B, more
turbulent water means that a craft must continually adjust course to suit each new large wave.
Timing Tactics: When to Compete A timing tactic deals with when a company implements a strategy.
The first company to manufacture and sell a new product or service is called the first mover (or pioneer).
Some of the advantages of being a first mover are that the company is able to establish a reputation as
an industry leader, move down the learning curve to assume the cost-leader position, and earn
temporarily high profits from buyers who value the product or service very highly. Late movers may be
able to imitate the technological advances of others (and thus keep R&D costs low), keep risks down by
waiting until a new technological standard or market is established, and take advantage of the first
mover’s natural inclination to ignore market segments.

Market Location Tactics: Where to Compete A market location tactic deals with where a company
implements a strategy. A company or business unit can implement a competitive strategy either
offensively or defensively. An offensive tactic usually takes place in an established competitor’s market
location. A defensive tactic usually takes place in the firm’s own current market position as a defense
against possible attack by a rival.

COOPERATIVE STRATEGIES

Collusion is the active cooperation of firms within an industry to reduce output and raise prices in order
to get around the normal 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.
A strategic alliance is a long-term cooperative arrangement between two or more independent firms or
business units that engage in business activities for mutual economic gain

Companies or business units may form a strategic alliance for a number of reasons, including:

1. To obtain or learn new capabilities:

2. To obtain access to specific markets:

3. To reduce financial risk:

4. To reduce political risk:

Mutual Service Consortia. A 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. For example, IBM established a research alliance with Sony Electronics
and Toshiba to build its next generation of computer chips.

Joint Venture. 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.” 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. Joint ventures provide a way to temporarily combine the different strengths of partners to
achieve an outcome of value to all. For example, Proctor & Gamble formed a joint venture with Clorox
to produce food-storage wraps. P&G brought its cling-film technology and 20 full-time employees to the
venture, while Clorox contributed its bags, containers, and wraps business

Licensing Arrangements. A 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.

Value-Chain Partnerships. A 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. For
example, P&G, the maker of Folgers and Millstone coffee, worked with coffee appliance makers Mr.
Coffee, Krups, and Hamilton Beach to use technology licensed from Black & Decker to market a
pressurized, single-serve coffee-making system called Home Cafe.