Strategy and Structure of

Organizations

Dr. Benjamin KAKAVAND

 Strategy and Structure of Organizations

 Level: Bachelor – Year 3

 Duration: 16h CM

 Language: English

Evaluation:
 Final Exam (90%)
 In-Class Discussions (10%)
 References

 Fred R. David, Forest R. David, and Meredith E. (2023),

Management: Concepts and Cases, 17th Edition, Pearson.
 The External Assessment
Porter’s Five-Forces Model
This model suggests that firms should strive to compete in attractive industries,
avoid weak or faltering industries, and gain a full understanding of key external
factors within that attractive industry.
 The External Assessment
Rivalry among Competing Firms
This rivalry among firms is the most important of the five competitive forces
and a focal point for managers.
Itis heavily influenced by changes in other factors and crucial for achieving
competitive advantage.
Intenserivalry leads firms to lower prices and increase advertising to maintain
market share, reducing industry profits.
Factors like increased competitors and equalized capabilities escalate rivalry,
potentially making industries less attractive.
Such intense rivalry is responded with price cuts, quality enhancements,
additional features, services, warranties, and more advertising.
Competing through differentiation can sustain profitability amidst fierce
competition.
 The External Assessment

Potential Entry of New Competitors

In industries where new firms can easily enter, existing firms face threats to
their market share.
Strategies must discourage new entrants to prevent market saturation.
Barriers like economies of scale, specialized knowledge, strong brand
reputation, customer loyalty, high capital requirements, cost advantages,
efficient supply chains, distribution channels, raw material access, and patents
can deter new competition.
Despite barriers, new firms may enter with superior products, lower prices,
and robust marketing.
The threat of new entrants can intensify rivalry and reduce profitability.
 The External Assessment
Potential Development of Substitute Products
Many industries face intense competition from substitute products in other
sectors.
Examples include beer, wine, and liquor; public transportation versus car, bike,
and taxi/Uber services.
Substitute products pose a significant threat when they can easily satisfy
consumer needs outside of the industry, leading to increased competitive
pressure as substitute prices fall and switching costs for consumers decrease.

Example, Newspapers and magazines encounter substitute-product pressures

from the Internet and 24-hour cable television.
 The External Assessment
Bargaining Power of Suppliers
The bargaining power of suppliers refers to their ability to increase input
prices within an industry, influencing competitiveness significantly.

This force is stronger when there are few substitutes for the suppliers'
products, switching costs to alternatives are high, the industry isn't a primary
revenue source for suppliers, or there are few suppliers available.

Industries benefit from having multiple suppliers, encouraging mutual support

through reasonable pricing, quality improvements, new services, just-in-time
deliveries, and reduced inventory costs.
Firmsand suppliers are forming strategic partnerships to cut costs, speed up
component availability, lower defect rates, and achieve savings.
 The External Assessment

Bargaining Power of Consumers

The bargaining power of buyers refers to their ability to drive down prices for
products offered by companies within an industry.
This force is particularly strong when industries have few buyers or when
buyers have multiple choices of suppliers, purchase in large volumes, or face
low switching costs.
 The External Assessment

 This force impacts industry competitiveness more significantly when

products are standardized or undifferentiated, allowing consumers to
negotiate prices, warranties, and accessory packages more effectively.

 Firms may respond by offering extended warranties or special services to

enhance customer loyalty when faced with strong buyer bargaining power.

Example, new car buyers often compare prices across dealerships, negotiating
better deals and additional services.
 Discussion Question

Explain how Facebook, Twitter, and Instagram can represent a major threat
or opportunity for a company.
The Internal Assessment
 The Internal Assessment
The Internal Assessment Phase of Strategy Formulation
Allorganizations possess strengths and weaknesses across various functional
areas of business.
No enterprise excels equally in all domains. Objectives and strategies are
crafted to leverage internal strengths and address weaknesses.

Resource-Based View
The resource-based view (RBV) approach to competitive advantage asserts that
internal resources are more critical to a firm's success than external factors in
achieving and sustaining competitive edge.
These resources can be tangible, like labor and equipment, or intangible, such
as knowledge, brand equity, and intellectual property.
 The Internal Assessment
 Intangible resources, which are often harder to imitate or substitute, are
particularly crucial for gaining and maintaining competitive advantages
because they are not easily bought or sold.
 Strategically managing based on RBV involves developing and leveraging
unique resources and capabilities while continuously enhancing and
safeguarding them.
 The Internal Assessment

Key Internal Forces

A strategic management assessment evaluates a firm's strength in key
business areas like management, marketing, finance, accounting, and MIS.

Distinctive competencies: Unique strengths that are difficult for competitors to

replicate—are crucial for competitive advantage.
 Success in strategic planning hinges on continually leveraging strengths and
improving weaknesses to maintain a competitive edge, regardless of firm size or
type.
 The Internal Assessment

1. Management
There are four basic activities that comprise management.
 The Internal Assessment

Integrating Strategy and Culture

Effectivemanagement functions best when aligned with a firm's strategy and
integrated organizational culture.
Each business entity possesses a unique culture that significantly influences
strategic planning.
Organizational culture, defined as a pattern of behavior developed by an
organization to cope with external challenges and internal integration.
The strategic management process unfolds within this cultural framework,
ideally fostering collective commitment and competence among employees.
Leveraging cultural strengths, such as a strong work ethic or ethical values,
can facilitate swift strategy implementation.
 The Internal Assessment
Management Audit Checklist of Questions
The following checklist of questions can help determine specific strengths and
weaknesses in the management functional area of business.
1. Does the firm use strategic-management concepts?
2. Are company objectives and goals measurable and well communicated?
3. Do managers at all hierarchical levels plan effectively?
4. Do managers delegate authority well?
5. Is the organization’s structure appropriate?
6. Are job descriptions and job specifications clear?
7. Is employee morale high?
Note: no to any question could indicate a potential weakness, yes suggest
potential areas of strength.
 The Internal Assessment
2. Marketing
Marketing is the process of identifying, anticipating, and meeting consumer
needs and desires. It focuses on satisfying both current and potential
customers.

The core activities of marketing encompass:

Conducting marketing research and analyzing target markets,
Planning products,
Setting prices,
Promoting products, and
 Distributing products.
 The Internal Assessment

a. Marketing Research and Target Market Analysis

Marketing research involves systematically gathering, recording, and
analyzing data to identify opportunities and challenges in marketing goods
and services.

Utilizing various scales, instruments, procedures, and techniques, marketing

researchers uncover critical strengths and weaknesses that provide
organizations with a competitive advantage.

Methods such as customer surveys, consumer data analysis, market

positioning evaluation, customer profiling, and segmentation strategies
contribute to effective customer analysis.
 The Internal Assessment
 Successful firms continuously monitor consumer behavior and preferences,
adapting product offerings accordingly.
Example, many companies are now targeting millennials, the largest consumer
group in the U.S., with tailored products and online educational resources.
 The Internal Assessment
b. Product Planning
Most firms continually develop new and improved products because of
changing consumer needs and tastes, new technologies, shortened product life
cycles, and increased domestic and foreign competition.
A shortage of ideas for new products, increased global competition, increased
market segmentation, strong special-interest groups, and increased
government regulations are several factors making the successful development
of new products more and more difficult, costly, and risky.

Example: In the pharmaceutical industry, only one of every few thousand drugs
created in the laboratory ends up on pharmacists’ shelves.
 The Internal Assessment

c. Pricing
Pricing involves determining the amount customers must pay to obtain a
firm's products or services.

Objectives in pricing strategy typically include maximizing profit, sales, or

market share, disrupting competitors' efforts, enhancing customer satisfaction,
or bolstering product image and prestige.

Strategiesoften hinge on factors like costs, demand, competition, or customer

preferences.
 The Internal Assessment

 Strengths and weaknesses in pricing strategies can significantly impact a

firm's competitiveness.

 Key considerations include whether a firm price-matches competitors,

compliance with regulations, and how pricing strategies align with
customer expectations and market conditions.
 The Internal Assessment

d. Promotion
Promotion encompasses various marketing activities like advertising, sales
promotions, public relations, personal selling, and direct marketing.

Evaluating a firm's promotional strengths and weaknesses is essential.

Key considerations include the effectiveness of the firm's website,

engagement on social media, partnerships with influencers, and the impact of
advertising campaigns and brand image.

Understanding and optimizing promotional strategies are vital components

of strategic management audits to maintain competitiveness.
 The Internal Assessment

Channels of Distribution
Channels of distribution refer to the intermediaries that facilitate the
movement of products from producers to end customers, including
wholesalers, retailers, brokers, agents, and vendors.

Distribution influence a firm's ability to reach its target market effectively.

Many companies now offer products online through their websites, though
this can create tensions with traditional retailers.

Efficient supply chain and distribution systems are essential for firms to
establish and maintain a competitive advantage.
 The Internal Assessment

3. Finance and Accounting

Financial condition is widely regarded as the primary gauge of a firm's
competitive standing and attractiveness to investors.

Assessing a firm's financial strengths and weaknesses is crucial for strategic

formulation.

Key financial indicators such as liquidity, leverage, working capital,

profitability, asset efficiency, cash flow, and equity play pivotal roles in
evaluating strategic alternatives.
A Sampling of Top Companies for Financial Strength
 The Internal Assessment
a. Finance and Accounting activities are considered into:

1. Investment Decision (Capital Budgeting): Involves allocating capital and

resources to projects, products, assets, and divisions within an organization.

2. Financing Decision: It includes evaluating methods to raise capital, such as

issuing stock, increasing debt, selling assets, or combinations thereof.

3. Dividend Decision: Focuses on issues such as determining the dividend

amount per share paid quarterly to stockholders.
Financial ratios used to evaluate dividend decisions include earnings per
share, dividends per share, and price-earnings ratio.
 The Internal Assessment

b. Financial Ratios
Financial ratio analysis is a fundamental method for evaluating an
organization's strengths and weaknesses across its investment, financing, and
dividend decision areas.
These ratios, derived from income statements and balance sheets, provide
snapshots of financial health at specific points in time.
To extract meaningful insights:
1. Trend Analysis:
Tracks changes in ratios over time to assess historical performance trends.
Percentage changes from year to year highlight significant shifts, though care
is needed with small base numbers where large percentage changes can be
misleading.
 The Internal Assessment
b. Industry Comparison:
Compares ratios against industry norms to benchmark performance.
Recognizes that ratios can vary widely across industries; for instance,
inventory turnover is high in groceries but lower in automobile dealerships.
c. Competitor Comparison:
Evaluates ratios against key competitors within the same industry or location.
Reveals relative strengths or weaknesses compared to direct rivals, crucial for
strategic planning and positioning.
 The Internal Assessment

4. Management Information Systems

Information plays a pivotal role in integrating all business functions and serves
as the foundation for managerial decision-making.

Effective management of information can either provide a significant

competitive advantage or, conversely, create vulnerabilities as internal
strengths and weaknesses for a firm.

A Management Information System (MIS) is designed to collect, organize,

store, process, and present information in a manner that supports both
operational activities and strategic decision-making processes.
 The Internal Assessment
Business analytics represents a powerful tool in contemporary business
strategy, leveraging software to analyze vast amounts of data for informed
decision-making.
Data mining allow organizations to create their accumulated experiences and
data interactions with customers, suppliers, competitors, and more.

Key aspects of business analytics include:

Predictive Models: Utilizing historical data to create predictive models that
aid in decision-making across various business functions.
Risk Management: business analytics helps firms measure and mitigate risks
associated with strategic and tactical decisions.
 The Internal Assessment
 Operational Efficiency: By analyzing data, businesses can enhance
operational efficiency.

 Competitive Advantage: Business analytics also uncovers competitor

weaknesses, enabling targeted marketing strategies to capitalize on
market opportunities.

 Decision Support: By analyzing patterns and predicting outcomes, businesses

can optimize resource allocation and improve overall decision-making
processes.

 Market Growth: Leading software providers like IBM, SAP, Oracle, and
others play a pivotal role in advancing business analytics capabilities.
 Discussion Question

Explain why communication may be the most important word in

management.

What do you think is the most important word in marketing?

In finance?
In accounting?
Strategies in Action
 Strategies in Action

Types of Strategies

There are 11 types of strategies, each strategy can be customized extensively.

Most organizations pursue multiple strategies simultaneously, though a blend

can pose significant risk if not carefully managed.

Successful strategic planning entails educated predictions and ongoing

refinement through knowledge, research, experience, and learning.
 Strategies in Action
Levels of Strategies
In strategic planning, involvement extends beyond top executives to include
middle and lower-level managers in large firms, encompassing four levels of
strategies:
Corporate,

Divisional,

Functional, and
Operational

Effective coordination, commitment, and consistency across all levels are

crucial for successful implementation of the firm’s strategic plan, minimizing
inefficiencies and miscommunication.
 Strategies in Action
1. Integration Strategies
Vertical and horizontal actions by firms are broadly referred to as integration
strategies.
a. Forward Integration
Forward integration involves gaining ownership or increased control over
distributors or retailers as a means of moving closer to the end customer and
cutting out the middleman.
Example, Nike sells millions of shoes and shirts in a variety of retail stores
ranging from Foot Locker to J. C. Penney, but the company is rapidly boosting
its direct- to-consumer business and bypassing.
 Strategies in Action
b. Backward Integration
Backward integration is a strategy of seeking ownership or increased control
of a firm’s suppliers.
This strategy can be especially appropriate when a firm’s current suppliers are
unreliable, too costly, or cannot meet the firm’s needs.
Example: Starbucks recently purchased its first coffee farm, a 600-acre
property in Costa Rica. This backward integration strategy was used primarily
to develop new coffee varieties and to test methods to combat a fungal
disease known as coffee rust that plagues the industry.
 Strategies in Action
Horizontal Integration
Horizontal integration is a strategy aimed at gaining control over a firm’s
competitors.
This is arguably the most common growth strategy.
Thousands of mergers, acquisitions, and takeovers among competitors are
consummated annually and most aim for increased economies of scale,
enhanced transfer of resources and competencies, reduced competition, and
fewer price wars.
 Strategies in Action
2. Intensive Strategies
Market penetration, market development, and product development are
referred to intensive strategies because they require intensive efforts if a firm’s
competitive position with existing products is to improve.
 Strategies in Action
a. Market Penetration
A market penetration strategy seeks to increase market share for present
products or services in present markets through greater marketing efforts.
Itincludes increasing the number of salespersons, increasing advertising
expenditures, offering extensive sales promotions, or increasing publicity.

b. Market Development
Market development involves introducing present products or services into
new geographic areas.
Example: Tesla will soon manufacture (and sell) cars in China based on the
Chinese government’s plans to relax restrictions on automakers needing a local
partner.
 Strategies in Action
c. Product Development
Product development is a strategy that seeks increased sales by improving or
modifying present products or services.
Product development usually entails large research-and-development (R&D)
expenditures.
Example, Ford recently announced that up to one-third of its R&D budget
scheduled for research on combustible engines would be shifted to battery and
electric car research. Ford also shifted $7 billion in investment away from
smaller cars into trucks and SUVs.
 Strategies in Action
3. Diversification Strategies
Diversification strategies in business can be categorized into related
diversification and unrelated diversification.

a. Related diversification involves businesses whose value chains exhibit

beneficial cross-business strategic fits.
This strategy allows firms to leverage capabilities like technological expertise
across different operations, consolidate activities for cost efficiency, utilize a
shared brand reputation, and foster collaboration for competitive advantages.
Example: Walt Disney recently acquired 21st Century Fox’s film and TV studios
in a deal worth over $52 million. The deal included Fox-owned cable networks,
including FX and National Geographic, and Fox’s stakes in international
networks like Star TV, Sky, and Hulu.
 Strategies in Action
b. Unrelated diversification aims to assemble a portfolio of businesses
delivering strong financial performances across different industries, focusing
less on strategic fits between businesses.
Thisstrategy involves acquiring undervalued assets, financially distressed
companies, or high-growth firms lacking investment capital.
Example: Amazon's move into the pharmacy business and CVS's acquisition of
Aetna demonstrates unrelated diversification strategies aimed at adapting to
evolving market dynamics.
 Strategies in Action
4. Defensive Strategies

a. Retrenchment, also known as a turnaround strategy, is implemented by

organizations facing declining sales and profits.
Itsgoal is to strengthen the organization's core competencies through cost
and asset reduction.
Strategies typically involve selling off assets like land and buildings, pruning
product lines, closing unprofitable businesses and factories, automating
processes, reducing staff, and implementing strict expense controls.
Example: Eli Lilly is cutting 8 percent of its global workforce mostly centered on
the production and marketing of existing drugs that are nearing patent
expiration because competition from lower-priced generics is forecasted to be
fierce. Eli Lilly is deploying much of the salary savings into R&D of new drugs.
 Strategies in Action
b. Divestiture
Selling a division or part of an organization is called divestiture.
It is often used to raise capital for further strategic acquisitions or
investments.
Divestiture can be part of an overall retrenchment strategy to rid an
organization of businesses that are unprofitable, that require too much capital,
or that do not fit well with the firm’s other activities.
Divestiture has also become a popular strategy for firms to refocus on their
core businesses and become less diversified.
Example: Commonwealth Bank of Australia recently divested all of its life
insurance businesses in Australia and New Zealand totaling more than $3
billion, partly in response to pressure from regulators in the countries.
 Strategies in Action
c. Liquidation
It involves selling all of a company's assets individually to recover their
tangible value.
It'sconsidered a last resort strategy when a corporation concludes it cannot
sustain profitable operations or secure necessary creditor agreements.
Example: The American iconic toy store chain Toys “R” Us Inc. in 2018
liquidated, selling or closing all its 885 U.S. stores deleting about 33,000 jobs.
The company is likely to liquidate also in France, Spain, Poland, and Australia.