Chapter Six Strategy Formulation: Situation Analysis and Business Strategy

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This chapter is the first of three chapters dealing with the formulation of strategy. Following the strategic decision-making process introduced in Chapter One and depicted in Figure 1.5, these chapters emphasize steps 5(a), situation analysis of strategic factors, 5(b), the review and revision of a firm's current mission and objectives, 6(a), the generation and evaluation of strategic alternatives, and 6(b), the selection and recommendation of the best alternative. Situation analysis is conducted using S.W.O.T. in the form of generating a Strategic Factors Analysis Summary (SFAS) Matrix to summarize a corporation's strategic factors and to help identify propitious niches. Once a corporation's strengths, weaknesses, opportunities, and threats are identified, strategic managers should review and revise, if necessary, the mission and objectives before proceeding to developing feasible alternative strategies. The chapter then presents the TOWS Matrix as one way of generating alternative corporate and business unit strategies by using strengths to capitalize on opportunities and/or working around weaknesses to avoid threats. Business strategies are explained in terms of competitive and cooperative strategies. Competitive tactics are also discussed.

TOPICS COVERED

Identifying a corporation's strategic factors using the SFAS Matrix.

Finding a propitious niche.

Using the TOWS Matrix to generate potential strategic alternatives.

Using the competitive strategies of lower cost and differentiation.

Competitive strategy, industry structure, and hypercompetition.

The use of offensive and defensive competitive tactics.

Using the cooperative strategies of collusion and strategic alliances.

SUGGESTED ANSWERS TO DISCUSSION QUESTIONS

1.What industry forces might cause a company's propitious niche to disappear?

Newman's argument for a propitious niche includes the implication that a corporation with such a niche will be successful so long as it fills that niche. This niche is the specific competitive role held by a corporation, division, or product/service. A "propitious" niche is one that is so well-suited to the firm's internal and external environment that competitors are not likely to challenge or dislodge it. In terms of automobiles, both Rolls Royce and Ferrari fill two very different niches in the industry.

The key to answering this question is understanding that a propitious niche exists not only because of environmental opportunities, but also because a company has the resources to take advantage of these opportunities. Therefore a niche can disappear because of changes within a company as well as because of environmental changes. Some of the possible changes are:

a.The environment/industry changes. The company/SBU continues to make its products or services, but the size of the market changes.

1)Contracts - The market gets smaller because of factors beyond the control of the company/SBU. For example, the increasing price of gasoline in 2008 followed by a recession contracted the market for gas-guzzling performance-oriented automobiles. The niche could then only support the strongest companies/SBUs.

2)Expands - The company/SBU, through its own efforts, not only fills a demand in the market but actually causes the market to expand. Unless the company/SBU can manufacture sufficient products to meet growing demand or is able to defend a patented process (as Proctor & Gamble did with Crest-Fluoride toothpaste for years), profit opportunities will cause competitors with sufficient internal resources to join the niche. Such competitors may be stronger and drive the original company/SBU out of the market, thus causing it to lose its niche.

b.The company/SBU Changes. The same market demand continues for specific products or services, but the company/SBU itself changes so that there is no longer a synchronization between itself and the market....
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