strategic management-sem iii

STRATEGIC MANAGEMENT

SEMESTER III – COMPULSORY PAPERCRDIT – 3 – 45 HOURS

OBJECTIVE

• This core course deals with the craft of strategy; that is, how to identify and choose a superior competitive position, how to analyse a strategic situation, and finally how to create the organisational context to make the chosen strategy work.

• Introduction to Corporate Strategy• Strategy and the Quest for Competitive Advantage.• Corporate Social Responsibility• Enabling Drivers for Strategies • Strategy and leadership 9. J David Hunger & Thomas L Wheelen, Essentials of Strategic

Management, 3rd ed., Prentice Hall of India, 2002.

11. R Srinivasan, Strategic Management: The Indian Context, 2nd ed., Prentice Hall of India,

A PERSPECTIVE INTO STRATEGY- EXAMPLE

GROWTH OF BANKING SECTOR IN INDIAPRE-NATIONALISATIONNATIONATIONALISATIONPOST NATIONALISATION TILL 1991OPENING UP OF BANKING SECTOR-NEW PRIVATE SECTOR BANKSIMPACT OF LIBERALISATIONGOVT REGULATION –DILUTEDMULTIFOLD EXPANSION IN BANKING SERVICES….NON-FUNDED

FINANCIAL SERVICESCOMPETITION……..CUSTOMER SUPREMENEW PRODUCTS AND NEW SCENARIO

23. Philip Sadler, Strategic Management, 2nd ed., Kogan Page India, 2002.24. Garth Saloner, Andrea Shepard, Joel Podolny, Strategic Management, John Wiley & Sons (Asia), 2001.

26. John A Pearce II, Richard B Robinson, Jr., Strategic Management: StrategyFormulation and Implementation, 5TH ed. AND LATTER EDITIONS, AITBS Publishers & Distributors, 2002. (Irwin publications-usa)

Introduction to Corporate Strategy-Unit 1

• Strategy and Strategic Management• Mission and Vision Statements• Goals & Objectives• Competitive advantage• SWOT Analysis

• STRATEGIC PLANNING – PLANNING WITH AN EXTENDED TIME FRAME COVERING WIDE SPECTRUM OF ACTIVITIES AND CONTINUOUS VIGIL ON CHANGES IN ENVIRONMENT ESPECIALLY EXTERNAL (Alfred Chandler…Strategy and Structure)

• Strategic, Operational and Tactical• Strategic Planning is NOT Forecasting(Drucker)• Levels of Strategic Planning-corporate,

business(SBU),functional-----------with COORDINATION of all the three levels

Elements of strategy• Goals• Scope• Competitive Advantage• Logic

• Strategic Management involves developing a game plan to guide an organisation as it strives to achieves its goals, objectives and aims to keep it in that direction

Competative Advantage indicates to a composition of factors that provides to a company an unique advantage/position in the market---------USP?

Plans to acquire/attain this unique advantage----Strategies – an impressionable image in the minds of customers?

Core Competencies:A Unique set of capabilities in operational

areas that makes the company go beyond its competitors

Key Attributes of Strategic Management: Directs the organization toward overall goals

and objectives. Involves the inclusion of multiple stakeholders

in decision making. Needs to incorporate short-term and long-term

perspectives. Recognizes tradeoffs between efficiency and

effectiveness.

The Strategic Management Process Analyzing

Goals and Objectives

Analyzing the External

Environment

Analyzing the Internal

Environment

Assessing Intellectual

Capital

Formulating Business-Level Strategies

Formulating International

Strategies

Formulating Corporate-Level

Strategies

Formulating Internet Strategies

Implementation:Strategic Controls

Implementation: Organization

Design

Strategic Leadership:

Excellence, Ethics, and Change

Strategic Leadership: Fostering

Entrepreneurship

Strategy Analysis

Strategy Formulation Strategy Implementation

WELPOINT-HEALTH’S NETWORK

• Vision• WELLPOINT will redefine our industry:

• Through a new generation of consumer-friendly products that put individuals back in control of their future.

• Mission• The WELLPOINT companies provide health security by

offering a choice of quality branded health and related financial services designed to meet the changing expectations of individuals, families and their sponsors throughout a lifelong relationship.

THREE LEVELS OF STRATEGY-TOP LEVEL/CORPORATE LEVEL-BUSINESS LEVEL-OPERATION LEVEL

STRATEGY MAKERSBENEFITS OF STRATEGIC MANAGEMENTSTRATEGIC MANAGEMENT AS A PROCESS

COMPANY MISSION

• THE NEED FOR AN EXPLICIT MISSION• FORMULATING MISSION• PREAMBLE>BASIC PURPOSE>WHAT WE

DO>WHERE WE DO IT>• MISSION STATEMENT COMPONENTS• COMPANY GOALS: SURVIVAL ,GROWTH,

PROFITABILITY, PHILOSOPHY, PUBLIC IMAGE, CUSTOMERS, QUALITY

• Igor Ansoff (1965) :The common thread among the organisations, activities, and product markets, that defines the essential nature of business the the organisation was or planned to be in future.

• Henry Mintzerg (1987) “ Strategies are not always the outcome of rational planning…..a pattern in a stream of decisions and actions”

• Ansoff (1984) “Basically strategy is a set of decision making rules for the guidance of organisational behaviour”

• William Glueck: “Strategy is unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designed to ensure that the basic objectives of the enterprise are achieved through implementation process.

w.Glueck “Business Policy and Strategic Management” McGraw Hill

• Corporate strategy is gaining importance with globalisation and privatisation

• It deals mostly with external environment• It is being formulated at the higher levels of

management• It integrates-planning, implementation, evaluation&

control.• It is related to long-term• It provides an overall direction for guiding the

organisation

Components of Corporate strategy

• Objectives – timeframe, attainable, challenging, measurable and controllable

• Vector• Competitive Advantage• Synergy – effective means to accomplish

objectives.Functions of Corporate Strategy:• Assists in deployment of scarce resources

• Focuses on the appropriate organisational set up, administration of organisational processes.

• It offers techniques to manage changes• It furnishes the management with a

perspective….and gives equal weight to present and future opportunities

• Provides management an important tool to tackle highly complex environment especially external one

Kinds of corporate strage

• Stability Strategy• Expansion Strategy• Retrenchment• Combination Strategy

Business Strategy of Porter:Cost Leadership; differentiation; focus( lower

cost or differentiation/narrow target)

Case of two-wheeler industry in india

• World scenario - $25 billion worth market• 60% market in India and China• Honda-Yamaha-Suzuki-Kawaski• Japan Strategy of setting shops in low cost

countries

Indian Scenario: Scooter a Fading concept – we to me among customers!!; also fuel efficiency engines

The Strategic Management Process Analyzing

Goals and Objectives

Analyzing the External

Environment

Analyzing the Internal

Environment

Assessing Intellectual

Capital

Formulating Business-Level Strategies

Formulating International

Strategies

Formulating Corporate-Level

Strategies

Formulating Internet Strategies

Implementation:Strategic Controls

Implementation: Organization

Design

Strategic Leadership:

Excellence, Ethics, and Change

Strategic Leadership: Fostering

Entrepreneurship

Strategy Analysis

Strategy Formulation Strategy Implementation

• Strategic management process – in two parts- information process part and decision making part

• Information process-external and internal• Decision making process-development of

alternatives, choice, implementation and control

Steps in Strategic management

• Set out the vision, Mission • External Analysis• Internal analysis• Strategies Formulation• Business Strategy formulation• Assessment and Control

SWOT ANALYSIS

• STRENGTH

• WEAKNESSES

• OPPORTUNITIES

• THREATS

• DYNAMIC AND STABLE ENVIRONMENT• CONCEPT OF LIFE CYCLE OF PRODUCTS AND

DYNAMICS IN THE ENVIRONMENT• CHARECTERISTICS OF DYNAMIC

ENVIRONMENT• STRATEGIES IN STABLE ENVIRONMENT

• PRODUCT LIFE CYCLE CONCEPT• INDUSTRY PASSES THROUCH DIFFERENT PHASES

INTRODUCTION

GROWTH MATURITY DECLINE

PRODUCT POOR QLTY.

GOOD SUPERIOR LITTLE DIFF.

BUYER BEHAVIOR

PERSUASION

WIDENING MASS MARKET

SOPHIS.BUYERS

MARKETING

>ADV. REDUCED SERVICEREQD.

<ADV.

STRAT. MARK.SHARE, r&d

MARK. KEY COMP.COST

COST CONTROL

COMP. FEW MANY PRICE COMP.

EXIT/FEWER

RISK HIGH GROWTH=RISK

CYCLE

MARGIN/PROFITS

HIGH/LOW HIGHEST LOW LOW

• STABLE AND DYNAMIC ENVIRONMENT DIFFER DUE TO:

• Long-term changes in growth• Changes in buyers’ segments• Diffusion in proprietary knowledge• Product innovation• Process innovation• Govt. policy changes• Entry & exit of competitors

Industry environment is impacted by dimensions like:

Industry concentrationState of Industry MaturityExposure to international competition

Characteristics of dynamic environment

• Embryonic and spin-off firms• Technological and Strategic uncertainty• High initial costs coupled with speedy cost

reduction• First-time buyers• Short-time horizons

Strategic choices in dynamic environment

• Strategy to influence industry structure• Impacting supplier’s orientation• Strategy of competitive advantage through

low cost or product differentiation or strategic alliances

• Strategy of appropriate timing of entry into industry

Stable environment

• Outbreaks of price, service, promotional warfare

• Competition becomes costly and service oriented, since buyers become knowledgeable

• Capacity addition difficult and hence strategy for capacity addition is the key

• Emergence of international competition• Falling profits and reduced cash flow

Strategies in Stable environment

• Product proliferation• Rationalising the product mix• Price cutting• Excess capacity• Competing internationally• Market penetration• Product developmentMichael A. Hitt, Duane Ireland, Rober E.H- Strategic

Management: Competitiveness & Globalisation…………………..6th edition by South-Western College Pub.

MISSION & VISION ANALYSIS

• THE FUNDAMENTAL PURPOSE THAT SETS A FIRM APART FROM OTHER FIRMS OF ITS TYPE AND IDENTIFY THE SCOPE OF ITS OPERATION IN PRODUCTS/SERVICES AND MARKET TERMS IS DEFINED AS COMPANY MISSION

• MISSION IS THE ENDURING STATEMENT OF FIRM’S INTENT

• Remember, the power of a Vision is not in the wording itself, but in how much your Vision truly reflects the aspirations of your organization’s stakeholders (employees, clients, stockholders, etc.), and in how much it is embodied in your entire workforce everyday behaviors

“At Alcoa, our vision is to be the best company in the world--in the eyes of our customers, shareholders, communities and people. We expect and demand the best we have to offer by always keeping Alcoa's values top of mind.”

Boeing sample vision statements• 1950: Become the dominant player in commercial aircraft and bring the

world into the jet age.• Current: People working together as one global enterprise for aerospace

leadership

Nike sample vision statements• 1960s: Crush Adidas• Current: To be the number one athletic company in the world• Note: Browsing through the web I have found that many people confuse

Mission statements with Vision statements – for instance, I have found several websites claiming that Nike’s Vision statement is: “To bring inspiration and innovation to every athlete in the World” – but this is Nike’s Mission statement. A Vision statement by definition is something you want to become, to achieve, it is a seductive image of an ideal future – whereas a Mission statement explains the purpose of the organization – why it exists – it captures the organization’s soul.

American Standard Company

• Slogan / MottoRaising the Standard

• DescriptionThe American Standard Company is into supplying air-conditioning systems, plumbing products, and automotive braking systems. Their products are well-known under the brands Trane(r) and American Standard(r) for their air conditioning systems, American Standard(r) and Ideal Standard(r) for their plumbing fixtures, and WABCO(r) for their electronic braking, stability, suspension and transmission control systems.

• Mission StatementAmerican Standard's mission is to "Be the best in the eyes of our customers, employees and shareholders."

Citigroup

• Slogan / MottoKnowledge is your greatest asset

• DescriptionCitigroup is a financial institution divided into these major segments: Global Consumer, Corporate and Investment Banking, and Global Wealth Management. Citigroup Global Consumer business offers banking services such as bank accounts, deposits, loans, portfolio and investment management, insurance, etc. The Corporate and Investment Banking business involves banking transactions on an international level. Global Wealth Management involves having portfolio management and investment advisory services.

• Mission StatementOur goal for Citigroup is to be the most respected global financial services company. Like any other public company, we're obligated to deliver profits and growth to our shareholders. Of equal importance is to deliver those profits and generate growth responsibly.

• IT EMBODIES THE BUSINESS PHILOSOPHY OF STRATEGY MAKERS

• IMPLIES THE IMAGE THE FIRM SEEKS TO PROJECT

• REFLECTS THE FIRM’S SELF-CONCEPT• INDICATES FIRM’S PRINCIPAL

PRODUCT/SERVICE AREAS• PRIMARY CUSTOMER NEEDS THE FIRM SEEKS

TO SATISFY

• NEED FOR MISSION1. ENSURE UNIFORMITY WITHIN FIRM2. BASIS FOR MOTIVATING THE USE OF FIRM’S

RESOURCES3. ESTABLISH THE GENERAL TONE OF THE FIRM4. TO SERVE AS A FOCAL POINT FOR THOSE WHO WISH

TO MOVE FURTHER AND DETER OTHERS5. FACILITATE FRAMING OF WORK STRUCTURE6. TRANSLATE THE PURPOSE INTO TRANSACTION GOALS

LIKE COST, TIME, PERFORMANCE PARAMETERS

• FORMULATING MISSIONBUSINESS AT ITS INCEPTIONBASIC PRODUCT/SERVICE/PRIMARY

MARKET/PRINCIPAL TECHNOLOGYITT BARTON(Now barton Instruments) “ THE UNIT’S

MISSION IS TO SERVICE INDUSTRY AND GOVERNMENT WITH QUALITY INSTRUMENTS USED FOR THE PRIMARY MEASUREMENT, ANALYSIS, AND LOCAL CONTROL OF FLUID FLOW, LEVEL, PRESSURE, TEMPERATURE AND FLUID PROPERTIES…………………”

Company goals: Survival, Growth,& ProfitabilityHP :”To achieve sufficient profit to finance our

company growth and to provide the resources we need to achieve our other corporate objectives………….”

Growth> HP :”To let our growth be limited only by our profits and our ability to develop and produce technical products that satisfy real customer needs……….”

The Mission statement to state the scope for diversion in growth strategies

COMPONENETS OF EXTERNAL ENVIRONMENT

• ECONOMIC ENVIRONMENT• SOCIAL AND CULTURAL ENVIRONMENT• POLITICAL ENVIRONMENT• LEGAL ENVIRONMENT• TECHNOLOGICAL ENVIRONMENT• NATURAL ENVIRONMENT• INTERNATIONAL ENVIRONMENT• COMPETITIVE ENVIRONMENT

Internal Analysis

Introduction

Strategic analysis of any Business enterprise involves two stages: Internal and External analysis.

Internal analysis is the systematic evaluation of the key internal features of an organization.

External analysis will be discussed later.

Four broad areas need to be considered for internal analysis

The organization’s resources, capabilitiesThe way in which the organization

configures and co-ordinates its key value-adding activities

The structure of the organization and the characteristics of its culture

The performance of the organization as measured by the strength of its products.

Analysis of the global business

Resources, capabilities and

core competences

Cultural and structural analysis

Global value chain analysis: configuration

and co-ordination

Global products and performance

Internal analysis

ResourcesResources are assets employed in the activities and

processes of the organization.

They can be tangible or intangible.They can be obtained externally (organization-

addressable) or internally generated (organization-specific).

They can be specific and non-specific:Specific resources can only be used for highly

specialized purposes and are very important to the organization in adding value to goods and services.

Assets that are less specific are less important in adding value, but are more flexible.

Resources fall within several categories:HumanFinancialPhysicalTechnologicalInformational

An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and performance.

General Competences/capabilitiesThey are assets like industry-specific skills,

relationships and organizational knowledge which are largely intangible and invisible assets.

Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations.

Certain competences are likely common to competing businesses within a global industry or strategic group.

Core Competences/Distinctive CapabilitiesCore competences or distinctive capabilities

are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage.

Kay (1993) identified four potential sources of Core competences:ReputationArchitecture (i.e., internal and external relationship)InnovationStrategic assets

Criteria to evaluate Core CompetencesComplexity: How elaborate is the bundle of resources

and capabilities which comprise the core competence?Identifiability: How difficult is it to identify?Imitability: How difficult is it to imitate?Durability: How long does it be replaced by an

alternative competences?Superiority: Is it clearly superior to the competences of

other organizations?Adaptability: How easily can the competence be

leveraged or adapted? Customer orientation: How is the competence perceived

by customers and how far is it linked to their needs?

Core competenceDistinctive and superior

skills, technology relationships,

knowledge and reputation of the firm

Unique, and difficult to copy

Resources:human, financial,

physical, technological,

legal, informational

Tangible andvisible assets

Capabilities:Industry-specific

skills, relationships,organizational

knowledgeIntangible

and invisibleassets

Perceivedcustomer

benefits/value added

+ =

Inputs to the firm’sprocesses

Integration ofresources intovalue-addingactivities

Not all capabilities are corecompetences – only thosethat add greater value thanthose of competitors

Denotes feedback loop denotes core competence development

The relationships between resources, capabilities and core competence

Global Value Chain Analysis

Competitive advantage depends on the ability of the organization to organize its resources and value-adding activities in a way that is superior to its competitors.

Value chain analysis is a technique developed by Porter (1985) for understanding an organization’s value-adding activities and relationship between them.

Value can be added in two ways:By producing products at a lower cost than

competitorsBy producing products of greater

perceived value than those of competitors.

Porter extended value chain analysis to the

value system, analysis of the relationship

between the organization, its suppliers,

distribution channels and customers.

The Value Chain

The value chain is the chain of activities which results in the final value of a business’s products.

Value added, or margin is indicated by sales revenue minus costs.

Porter divided internal parts of organization into primary and support activities

Primary activities are those that directly contribute to production of good or services and organization’s provision to customer

Support activities are those that aid primary activities, but do not themselves add value

Company Infrastructure

Information Systems

Human Resources

Materials Management

Primary Activities

Support Activities

The Firm as a Value Chain

R & D Production Marketing & Sales Service

Certain activities or combinations of activities are

likely to relate closely to the organization’s core

competences, termed core activities. They are:

Add the greatest value

Add more value than the same activities in

competitors’ value chains

Relate to and reinforce core competences

Other value chain activities relate to capabilities,

but do not add greater value than competitors

and therefore do not relate to core competence.

The Value SystemThe value chain of an individual organization

provide an incomplete picture of its ability to add value.

Many value-adding activities are shared between organizations often in the form of a collaborative network.

As organizations identify and concentrate on their core competences and core activities, they increasingly outsource activities to other business for whom such activities are core.

The value system is the chain of activities from supply of resources through to final consumption of a product.

The total value system, in addition to the organization’s own value chain, can consists of upstream linkages with suppliers and downstream linkages with distributions and customers.

The value system is a similar concept to that of the supply chain and illustrates the interactions between an organization, its suppliers, distribution channels and customers.

Supplier Competitor Distributionchannel Customers

Supplier Organization Distributionchannel Customers

Supplier Competitor Distributionchannel Customers

The Value System

The “Global” Value Chain

The configuration of an organization’s activities relates to where and in how many nations each activities in the value chain is performed.

Co-ordination is concerned with the management of dispersed international activities and the linkages between them.

Managers must examine the current configuration of value-adding activities and the extent and methods of co-ordination as part of their strategic analysis, which may determine possibilities for reconfiguration or improving co-ordination

A global business has two broad choices of configuration:Concentration of the activity in a limited

number of locations to take advantage of benefits offered by those locations.

Dispersion of the activity to a large number of locations.

Change in the business environment (e.g., technological change) may well lead to changes over time in the configuration that gives greatest competitive advantage.

Co-ordination is essentially about overseeing the complexity of the organization’s configuration such that all value-adding parts of the business act in concert with each other to facilitate an effective overall synergy.

Those business that overcome the potential difficulties of co-ordination are those that sustain the greatest competitive advantage.

Analysis of configuration and methods of co-ordination assists in the process of understanding current competences and identifying the potential for strengthening and adding to them.

Corecompetences

Coreactivities

Valuechain

Configuration

Concentration Dispersion

Internalactivities

Externalactivities

Co-ordination

Internalco-ordination

InternallinkagesValue-adding

activities

Externalco-ordination

ExternallinkagesSuppliers Channels

Customers

Value system

Managing the value system

Global Organizational Culture and Structure

A global business must have a culture and structure which allow it to carry out its global activities.

The structure of the business must allow it to accomplish its objectives as effectively and as efficiently as possible.

Culture is an important determinant of how effectively the organization operates and has important implications for employee motivation.

Portfolio Analysis

A key concept with regard to successful product or subsidiary strategy is that of portfolio.

Portfolio analysis is used in evaluating the balance of an organization’s range of products.

A broad portfolio can spread risk across more than one market.

A narrow portfolio mean that the organalization become more specialized in its knowledge of fewer products and markets

The BCG MatrixThe Boston Consulting Group (BCG) growth-share

matrix is most often used by organizations in multiproduct and multimarket situations.

BCG matrix offers a way of examining and making sense of a company’s portfolio of product and market interests.

It based on the idea that market share in mature markets is highly correlated with profitability and that is relatively less expensive and less risky to attempt to win share in the growth stage of the market.

Stars Question marks

Cash cows Dogs

Relative market shareHigh Low

1X10X

Rate

of m

arke

t gro

wth

Hig

hLo

w

The Boston Consulting Group matrix

BCG Matrix: Cash cows

Cash cows: A product with a high market share in a low-growth market is normally both profitable and a generator of cash.

Profits from this product can be used to support other products that are in their development phase, ‘milked’ on an on going basis.

Standard strategy would be to manage conservatively, but to defend strongly against competitors.

BCG Matrix: Dogs

Dogs: A product that has a low market share in a low-growth market is termed a dog in that it is typically not very profitable.

Once a dog has been identified as part of a portfolio, it is often discontinued or disposed of.

More creatively, a small share product can be used to price aggressively against a very large competitor as it is expensive for the large competitor to follow suit.

BCG Matrix: Stars

Stars have a high share of a rapidly growing market and therefore rapidly growing sales.

It is the sales manager’s dream, but the account’s nightmare.

It is often necessary to spend heavily on advertising and product improvement so that when the market slows these products become ‘cash flow.’

If market share is lost, the product will eventually become a ‘dog’ when the market stops growing.

BCG Matrix: Question marks

Question marks are aptly named they create a dilemma.

They already have a foothold in a growing market, but if market share cannot be improved they will become ‘dogs.’

Resources need to be devoted to winning market share.

Limitation of the BCG Matrix

There are many relevant aspects relating to products that are not taken into account.

The imprecise nature of its four categories and the difficulties inherent in predicting future market growth.

Global activity may add extra dimension to the process of portfolio analysis.

Value Creation per Unit

Value Creation and Pricing Options

The Value Chain: Primary and Support Activities

Differentiation and Cost Structure: Roots of Competitive Advantage

Efficiency

• The quantity of inputs it takes to produce a given output. Usually measured as outputs over inputs; examples of latter– No. of employees– Capital investment

• Productivity leads to greater efficiency and lower costs– Employee productivity– Capital productivity

Quality

• Superior quality = customer perception of greater value in a specific product’s attributes– Form, features, performance, durability, reliability,

style, design• Quality products = goods and services that are

reliable and that are differentiated by attributes that customers perceive to have higher value

Quality (cont’d)

• The impact of quality on competitive advantage– High-quality products increase the value of

(differentiate) the products in customers’ eyes– Greater efficiency and lower unit costs are

associated with reliable products

Innovation

• The act of creating new, commercially viable products or processes– Product innovation• Creates products that customers perceive as more

valuable, increasing the company’s pricing options

– Process innovation• Creates value by lowering production costs

• Perhaps the most important building block of competitive advantage

Responsiveness to Customers

• Doing a better job than competitors of identifying and satisfying customers’ needs– Superior quality and innovation are integral to

superior responsiveness to customers– Customizing goods and services to the unique

demands of individual customers or customer groups

Responsiveness to Customers (cont’d)

• Sources of enhanced customer responsiveness– Customer response time, design, service, after-

sales service and support • Differentiates a company’s products; leads to

brand loyalty and premium pricing

Drivers of Profitability (ROIC)

Ways to Increase ROIC

• Increase the company’s return on sales– Reduce cost of goods sold– Reduce spending on sales force, marketing,

general, and administrative expenses– Reduce R&D spending– Increase sales revenue more than costs

• Increase sales revenues from invested capital– Reduce the amount of working capital– Reduce amount of fixed capital

The Durability of Competitive Advantage

• Barriers to Imitation– Imitating Resources– Imitating Capabilities

• Capability of Competitors– Strategic commitment– Absorptive capacity

• Industry Dynamism

Why Companies Fail

• Inertia– Companies find it difficult to change their strategies and

structures

• Prior strategic commitments– Limit a company’s ability to imitate and cause competitive

disadvantage

• The Icarus paradox– A company can become so specialized based on past

success that it loses sight of market realities– Craftsmen, builders, pioneers, salesmen

SWOT Analysis

• Strengths• Weaknesses• Opportunities • Threats

The purpose of SWOT Analysis

• It is an easy-to-use tool for developing an overview of a company’s strategic situation– It forms a basis for matching your company’s

strategy to its situation

SWOT is the starting point

• It provides an overview of the strategic situation.

• It provides the “raw material” to do more extensive internal and external analysis.

Opportunities

• An OPPORTUNITY is a chance for firm growth or progress due to a favorable juncture of circumstances in the business environment.

• Possible Opportunities:– Emerging customer needs– Quality Improvements– Expanding global markets– Vertical Integration

Threats

• A THREAT is a factor in your company’s external environment that poses a danger to its well-being.

• Possible Threats:– New entry by competitors– Changing demographics/shifting demand– Emergence of cheaper technologies– Regulatory requirements

Opportunities and Threats form a basis for EXTERNAL analysis

• By examining opportunities, you can discover untapped markets, and new products or technologies, or identify potential avenues for diversification.

• By examining threats, you can identify unfavorable market shifts or changes in technology, and create a defensive posture aimed at preserving your competitive position.

The purpose of Five-Forces Analysis

• The five forces are environmental forces that impact on a company’s ability to compete in a given market.

• The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.

Threat of New Entrants

Threat of New EntrantsThreat of New

EntrantsThreat of New

Entrants

Porter’s Five Forces Model of CompetitionPorter’s Five Forces

Model of Competition

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Barriers to Entry

Expected Retaliation

Government Policy

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Bargaining Power of Suppliers




Entrants



Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:Suppliers exert power in the industry by:

* Threatening to raise* Threatening to raiseprices or to reduce qualityprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if:

Supplier industry is dominated by a few firms

Suppliers’ products have few substitutes

Buyer is not an important customer to supplier

Suppliers’ product is an important input to buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Supplier poses credible threat of forward integration

Bargaining Power of Buyers




Entrants





Bargaining Power of BuyersBargaining Power of Buyers

Buyers compete with the supplying industry by:

Buyers compete with the supplying industry by:

* Bargaining down prices* Bargaining down prices

* Forcing higher quality* Forcing higher quality

* Playing firms off of* Playing firms off ofeach

othereach

other

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large relative to seller’s sales

Purchase accounts for a significant fraction of supplier’s sales

Products are undifferentiated

Buyers face few switching costs

Buyers’ industry earns low profits

Buyer presents a credible threat of backward integration

Product unimportant to quality

Buyer has full information

Threat of Substitute Products




Entrants







Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with similar function limit the prices firms can charge

Keys to evaluate substitute products:

Products with improving price/performance tradeoffs relative to present industry products

Example:

Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery





Entrants

Rivalry Among Competing Firms in Industry

Rivalry Among Competing Firms in Industry







Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Intense rivalry often plays out in the following ways:Jockeying for strategic position

Using price competition

Staging advertising battles

Making new product introductions

Increasing consumer warranties or service

Occurs when a firm is pressured or sees an opportunityPrice competition often leaves the entire industry worse off

Advertising battles may increase total industry demand, but may be costly to smaller competitors

Cutthroat competition is more likely to occur when:

Rivalry Among Existing CompetitorsRivalry Among Existing Competitors

Numerous or equally balanced competitorsSlow growth industryHigh fixed costs

Lack of differentiation or switching costs

High storage costs

Capacity added in large increments

High strategic stakesHigh exit barriers

Diverse competitors

The Five Forces are Unique to Your Industry

• Five-Forces Analysis is a framework for analyzing a particular industry.– Yet, the five forces affect all the other

businesses in that industry.

TYPES OF STRATEGIES

DIRECTIONAL STRATEGIESGrowth

Concentration Vertical Growth Horizontal GrowthDiversification Concentric Conglomerate

Stability

Cautiously proceedMaintain

Profit

Retrenchment

TurnaroundDivest/SaleLiquidation

STRATEGIC ALTERNATIVES

Generic or grand or basic strategies•Stability - better after sales service, modernize plant,

bulk discount, Improve performance to sustain•Expansion - Change in customer group, function,

technology•Retrenchment - Withdrawal - Customer group, function,

technology (unprofitable)•Combination•E.g. Wide variety of services to customers (stability)

- New products in product range (expansion)

STRATEGIC ALTERNATIVES

Michael Porter - Three type of generic strategies

- Overall cost leadership strategy

- Differentiation strategy

- Focus on niche market

DIMENSIONS OF GRAND/GENERIC STRATEGIES

I. Internal/External

- Independent of any other entity

- Association with other entity

II. Related/Unrelated

- To existing customer groups, existing customer function,

technologies

DIMENSIONS OF GRAND/GENERIC STRATEGIES

III. Horizontal/Vertical

- Serving additional customer groups

-consolidating backward/forward

IV. Active/Passive

Active - offensive strategy

Passive - Defensive strategy

4 grand strategies × 4 dimensions × 2 types of each dimensions × 3 dimensions of each business definition = 96 Mixed strategies

MODERNIZATION STRATEGIES

Developing new technology strategy i.e. technological upgradation as a strategy

- Increased production, lower cost, improve efficiency and productivity

- Extensively used by Indian organization - stability - prior to expansion & diversificationIf pace of modernization is low - internal stability strategy, high - internal expansion strategy

Merge with another company - for modern - external expansion strategy

DIVERSIFICATION AND INTEGRATION STRATEGIES

1. Vertical Integration

- make new products to serve its own needs

- backward/forward integration

2. Horizontal Integration

- Same product - more customer group

- merger similar companies

Spartek Ceramics takeover of Neyveli Ceramics

DIVERSIFICATION AND INTEGRATION STRATEGIES

3. Concentric diversification•Marketing & technology related - rain coat manufacturer - rubber based items - gloves, shoes•Technology related- leasing company - hire purchase•Marketing related - Unrelated technology (cosmetic & sewing machines - women)

4. Conglomerate diversification

- Unrelated to customer groups, function, technology

ITC - Cigarette & Hotel

TTK group - Chemicals, hosiery, contraceptives

MERGER, TAKEOVER AND JOINT VENTURE STRATEGIES

Diversification & Integration

Merger ( Amalgamation)

A acquires B - B merged with A

A & B C - Consolidated

Horizontal Concentric

Vertical Conglomerate

JOINT VENTURE

•2 firms in one industry•2 firms across different industries•Indian & foreign firm in India•Indian & foreign firm in foreign country•Indian & foreign firm in third country

Last two types are on increase now

TURNAROUND STRATEGIES

Reversing a negative trend

Retrenchment - internal/external - improve internal efficiency - Divestment/liquidation

Danger signs:•Persistent negative cash flows•Negative profits•Declining market share•Deterioration in physical facilities•High turnover, low morale, Mismanagement•Uncompetitive products, sick company

MANAGING TURNAROUND

•Existing team - support external consultant - credibility - rare•Existing team - withdraws temporarily - turnaround specialist - employed•Replace existing team / C.EApproaches:

- Surgical - Human approach

ACTION PLAN FOR TURNAROUND

• Analysis of product, market, production process, competition, market segment positioning

• Clear thinking - market place &production logic• Implementation of plans - target - setting,

feedback, remedial action

DIVESTMENT

Divestment

- (divestiture or cutback) - sale of or liquidation of a portion of business

- SBU or profit center

1. Spinning it off - financially and managerially independent company with stake

2. Sell a unit outright

Kelvinator India - spin-off - Avanti scooters - high production cost

LIQUIDATION•Rarely - large companies liquidate•Buyers rare for purchase of assets•Court, voluntary, subject to supervision of court

Combination strategies - popular

Criteria for strategic choice

• Does strategy exploit the opportunities present in the environment?

• Is it consistent with the resources of the firm, its competitive advantage & core competence?

• Is the chosen level of risk feasible?• Is it appropriate to the values & aspirations of

the firm?

• Gap Analysis

• Consider the Selection factor. -- Criteria for evaluation alternatives.• Evaluate strategic alternatives.• Make choice

t1 t2

P re sen t

D es ired

P e rf. g a p

Factors affecting strategic choice

• Nature of environment – stable?• Firm’s internal realities• Ambition of CEO / owners• Company culture• Firm’s capacity to execute the st.• Resource allocation

Strategy Implementation• Evolve a systematic procedure to implement the

strategy chosen– Procedural implementation plan– Proper resource allocation plan– Structural implementation plan– Functional implementation plan– Behavioural implementation plan

• Evaluate and control through strategic and operational control measures

• Success of a strategy is very much dependent on how the strategy is executed

strategic management-sem iii

Documents