-What is strategic planning? -What is a strategic business unit (SBU)? -Strategic alternatives: -Ansoff's Strategic Opportunity Matrix -The Innovation Matrix -The Boston Consulting Group Model -The General Electric Model [SLIDE 1] In the first two lessons, we described how the marketing philosophies impact not just the marketing department but the entire organization. The marketing orientation also has a focus on long term profitability, not short-term goals. For both reasons, companies use strategic plans in order to manage for long-term operations and growth. One example of the difference between short-term and long-term growth is the March of Dimes. While it is a non-profit, it must still manage for sustainability. Its initial focus was on fighting polio. If the group had stuck to that, where would they be now that polio is effectively eradicated from the US and disappearing around the world? The charity had a strategic strategy to slowly move from fighting polio to fighting birth defects. [SLIDE 2] While a corporate strategic plan covers manufacturing, operations and many other efforts, we will focus on the strategic marketing plan. The two questions to address are: -What is the organization’s main activity at a particular time? -How will the organization reach its goals? The particular time matters. We are not focused just on today but looking also at how we think the market will change over time. Will demand be the same in 3 months, six months, a year, or in two years? How about in longer time frames? Examples of strategic decisions over time: 1)-McDonalds has seen the decline in sales and compared themselves to other fast food chains and to fast casual dining. They have announced plans to allow people to customize their orders – a major change in how McDonalds has operated. 2)-Walmart has tries smaller stores labeled Walmart Express. That was an original strategic decision to address different geographic markets than in their core. In 2016, the executives ended the program. The reason was the stores could not carry larger margin items such as appliances and apparels. Strategic plans are not static. 3)-While Starbucks Coffee has grown to a large size by franchising a simple, repeatable process, their strategic plan has always included the ability to innovate. In 2014, they opened the Starbucks Reserve Roastery and Tasting Room. Customers can try fancier coffees and a wider range of food than in standard stores. Successful ideas can be rolled out to a wider audience. [SLIDE 3] Smaller companies can focus on an individual market with a single strategy. However, as companies grow, they can lose focus by working on too many things at once. Creating strategic business units (SBUs) can help address that challenge. Each SBU acts as its own business, creating a strategy to provide appropriate products and services to its target market. While an SBU must still fit into the overall corporate strategy, it has its own strategy, funding and expected rate of return on investment from the parent company – not sharing those with other SBUs. Each SBU defines itself by differentiating in the following characteristics: -Distinct target market and mission: How is the SBU going to address its target market? -Control over resources: While modern businesses can often share back office and manufacturing resources, the SBU can expand or contract those resources without restrictions from other SBUs. -Its own competition: As it has a unique target market and mission, the SBU will have a different set of competitors from sibling SBUs. -A single business or group of tightly related businesses: focus is critical for an SBU or the same challenges that caused the parent company to create SBUs will occur. -Independent planning: The SBU need not rely on siblings to make planning decisions to address its goals. [SLIDE 4] The complexity of business means that people have focuses on strategic planning. While there are a number of formalized methods for strategic planning, four have received much exposure: -Ansoff's Strategic Opportunity Matrix -The Innovation Matrix -The Boston Consulting Group Model -The General Electric Model While they will be discussed in detail later, here is a brief overview: Ansoff’s Strategic Opportunity Matrix focuses on matching customers with products. The Innovation Matrix adds to the Ansoff method by analyzing how well products match the existing and emerging markets, to help plan based on time to market. The Boston Consulting Groups Model is a way for companies to balance the differences across diverse SBUs in a portfolio matrix. The General Electric Model focuses on how SBUs perform on a matrix of market attractiveness and business position. Let us look at each in a bit more detail. [SLIDE 5] Ansoff's strategic opportunity matrix has four quadrants based on two difference in markets and products: -Is the market current or new? -Is the product existing or new? The strategy differs based on the intersection of those two choices: -Market penetration: when there is an existing product for an existing market. -Market development: when an existing product can be sold to a *new* market. -Product development: when the existing market has a new opportunity the current product does not address. -Diversification: when there is an opportunity not tied to an existing product or market. The diversification strategy is the riskiest strategy since there is no existing product and you are addressing a new market. However, if there are no significant existing competitors, it can be a very profitable strategy. [SLIDE 6] Bansi Nagji and Geoff Tuff at the Monitor group felt Ansoff’s matrix missed how businesses grow into new products and technologies. They created a matrix based on how the core capabilities of a company allow companies to grow. It’s broken into three bands: -Core Innovation: when an existing product is serving an existing market, core innovation is used to attract customers of competing brands. Example, Tide added Tide Pods as an easier way to use the existing product. -Adjacent Innovation: When an adjacent market can be met with a slightly modified product or marketing message. Example, Botox was originally aimed at intestinal issues and then the same product was aimed at the cosmetic medicine market. -Transformational Market: Finding a market for a new product or a new market for an existing product requires new decisions and potentially new assets to meet the opportunity. Example, the GoPro video camera was a new product for a market people had not yet addressed. [SLIDE 7] With every SBU functioning independently, using its own mission to focus on its market, the parent company can have a very difficult time evaluating the success and failure of SBUs, and when and how to help those organizations. How much revenue should be expected? How much cash might need to be allocated to an SBU to support growth? The Boston Consulting group created the Portfolio Matrix to address that challenge. Market growth (Y-axis) is an evaluation of how fast the company is growing in the market. That’s from one time period to another based on constant dollars. Market share is the percentage of the market weighted against that of the competition The four quadrants of the matrix are: -Star: A strong growth SBU with a large market share needs cash to continue expanding and remaining in charge of market share. The Apple iPad is an example over the previous decade. -Cash Cow: A strong position in a market that is not growing rapidly can provide a strong revenue stream without as large a cash outlay. Desktop PCs have been an example though there are indications they have the risk of becoming a dog. -Problem Child (or Question Mark): A product in a rapidly growing market that is falling behind competitors or not growing profits. The Apple iPhone was initially a Star then Google Android devices took large market share. It has become a problem child but might also be moving to cash cow it stabilizes and remains profitable. -Dog: A small market share and low growth potential means a dog. Mainframe computers are still around because of legacy applications, but the cloud means lots of smaller servers working together are replacing much of what mainframes did. [SLIDE 8] Once SBUs have been identified as being in each quadrant (Star, cash cow, problem child, dog), the company needs to choose how to manage the SBUs. There are four strategies, but they are not linked one-for-one to the quadrants. Build An SBU that can become a star should be built. While market or product changes might mean building cash cows or dogs, the “building” strategy is more often applied to a problem child. For instance, the early iPad was a problem child. However, iPhone development provided technology that helped improve the iPad and speed time to market. Building turned that product around. Hold Usually focused on a cash cow, to provide addition revenue for other SBUs such as stars or other builds. However, the above example of holding the iPad problem child while the iPhone was developed shows it is not only limited to cash cows. Harvest This is when there is a focus on short-term revenue to the SBU to generate even more cash for other SBUs. It usually means cutting expenses. Harvesting is usually applied to cash cows in the short term or dogs prior to divesting. Divest Problem children and dogs are the usual targets of divesting when management does not think there is a turnaround in revenue potential. However, depending on conditions of the parent company, cash cows and even stars can be divested in order to generate needed cash. [SLIDE 9] The General Electric model was, unsurprisingly, invented at General Electric (GE), a large conglomerate with many SBUs. The executives wanted a finer level of analysis than the other methods provided. The result is the matrix shown. The two vectors are: -Market attractiveness: A combination evaluation of quantitative and qualitative features included, but not limited to: -Rapid growth -High profitability -Lack of regulations -Price insensitive -Lack of competition -Business position: How well is the SBU set up to take advantage of the opportunity? Factors include, but are not limited to: -Does the firm have the technology to make the product? -Can the costs be kept low enough to be profitable -Are there the financial resources to enter the market -Can the firm handle the change The chart shows three areas and the strategies that made sense: -High business position and market attractiveness means investing in the SBU to grow it -Low position and attractiveness suggest harvesting or divesting in the SBU -In between is a mix where the company should cautiously invest in the SBU