strategic managementlesson 1-4
TRANSCRIPT
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Strategic Management
Genie in a Lamp
A man was walking along a road when he found a lamp. Upon rubbing the lamp a genie appeared who stated "I am the most powerful genie in the world. Because I am so powerful, I can
grant you any wish you want, but only one wish."
The man pulled out a map of Asia and said "I'd like there to be peace among the people." The genie responded, "Gee, I don't know. Those people have been fighting since the beginning of time. They are always going to be fighting. I can do just about
anything, but this is beyond my limits."
The man then said, "Well, we are starting a Management programme. I wonder if you could teach the students this
MBA thing."
Genie: "Uh, let me see that map again."
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Strategic Management
If a Manager Were a Car...
It would crash two or three times per day for no apparent reason. The driver is often hurt, but the car itself receives no permanent damage. You'd just accept
this fact, restart the car, and begin your trip again.
Occasionally, your car would fail to restart after a crash, and you'd have to reinstall the engine. For some strange reason, you'd just accept this too.
You would be forced to buy a new model every 18 months, and your old model would have no resale value. Each new model would be bigger than the
previous one, require more petrol, and would operate differently. Furthermore, parts from the old car would not be interchangeable with the new car.
You could call a special phone number when you have a problem. The phone would be staffed by people who know less about your car than you do.
However, there is available a special MBA-Telecom model, powered by Amity.
Since we know what you want
It can run on 100 percent of the roads and requires easy driving skills.
&
The newest Model is here now!
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Strategic Management
Scientists Tell Us...The average MBA spends:
9.5 years sleeping
4.2 years eating
3.8 years on the toilet
2.8 years traveling
and...
1.9 years waiting for a job!
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“Strategy is a framework which guides those choices that determine
the nature and direction of an organization.”
-Benjamin B. Tregoe &John W. Zimmerman
“Top Management Strategy”
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“Strategy is the creation of a unique and valuable position, involving a
different set of activities.”
-Michael Porter“What is Strategy?”
Harvard Business Review
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“In terms of the three key players (competitors, customers, company)
strategy is defined as the way in which a corporation endeavors to differentiate itself positively from its competitors,
using its relative corporate strengths to better satisfy customer needs.”
-Kenichi Ohmae“The Mind of the Strategist”
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Planning Defined
In the business world, Henri Fayol, the French industrialist, is creditedwith the first successful attempts at formal planning.
Growth is an accepted expectation of a firm; however, growth does nothappen by itself. Growth must be carefully planned: questions such as how much, when, in which areas, where to grow, and who will be responsible for different tasks must be answered. Unplanned growth will be haphazard and may fail to provide desired levels of profit.
Planning is required in making a choice among the many equallyattractive alternative investment opportunities a firm may have. Thus, the introduction of the concept of risk & uncertainty
Planning for future action has been called by many different names:long-range planning, corporate planning, comprehensive planning, and formalplanning. Whatever its name, the reference is obviously to the future.
Planning is essentially a process directed toward making today’s decisions with tomorrow in mind and a means of preparing for future decisions so that they may be made rapidly, economically, and with as little disruption to the business as possible.
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Planning
Planning PrinciplesAs far as possible the following principle should be adhered to:• Plans should be based on facts rather than opinions.• Plans should include some degree of flexibility to allow for
unforeseeable events.• A plan should be as detailed as expenditure constraints allow.• Plans should not extend too far into the future as accurate prediction of
the distant future is impossible.• All alternative courses of action should be considered.• Side effects and implications of the actions envisaged should be
examined.• Instructions to individuals and departments should be incorporated into
the plan.• Plans should be concise and easy to understand.• Plans should be monitored for effectiveness as they are implemented.• Targets embodied in plans should be reasonable and not over-
ambitious.• The key factors determining the success of the plan should be identified
and receive the greatest emphasis.
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Philosophies of Planning
Three different philosophies of planning - satisfying, optimizing, and adaptivizing.
Planning on the basis of the satisfying philosophy aims at easily achievable goals and molds planning efforts accordingly. This type of planning requires setting objectives and goals that are “high enough’’ but not as “high as possible.’’ The satisfying planner, therefore, devises only one feasible and acceptable way of achieving goals, which may notnecessarily be the best possible way. Under a satisfying philosophy, confrontations that might be caused by conflicts in programs are diffused through politicking, underplaying change, and accepting a fall in performance as unavoidable.
For example, the present government.
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Philosophies of Planning
Three different philosophies of planning - satisfying, optimizing, and adaptivizing.
The philosophy of optimizing planning has its foundation in operationsresearch. The optimizing planner seeks to model various aspects of the organization and define them as objective functions. Efforts are then directed so that an objective function is maximized (or minimized), subject to the constraints imposed by management or forced by the environment.
For example, an objective may be to obtain the highest feasible market share; planning then amounts to searching for different variables that affect market share: price elasticity, plant capacity, competitive behavior, the product’s stage in the life cycle, and so on. The effect of each variable is reduced to constraints on the market share. Then an analysis is undertaken to find out the optimum market share to target.
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Philosophies of Planning
Three different philosophies of planning - satisfying, optimizing, and adaptivizing.
The philosophy of adaptivizing planning is an innovative approach. To understand the nature of this type of planning, let us compare it to optimizing planning. In optimization, the significant variables and their effects are taken for granted. Given these, an effort is made to achievethe optimal result. With an adaptivizing approach, on the other hand, planning may be undertaken to produce changes in the underlying relationships themselvesand thereby create a desired future. Underlying relationships refer to anorganization’s internal and external environment and the dynamics of thevalues of the actors in these environments (i.e., how values relate to needs and to the satisfaction of needs, how changes in needs produce changes in values, and how changes in needs are produced).
Example, acceptance of mobiles.
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Every plan should have: Objectives, Strategies, Programmes, Controls
Planning in Organizations
Mission : purpose, scope
Vision/Intent, desired future state Goal
Objectives : SMART
Strategies : How to Achieve the Objective
Policies – Clear guidelines for decisions and actions
Programmes: The Operational Activities Involved
The programmes are the details of the plan; they clarify:• Responsibilities• Money• Controls - Measurements
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Evolution of Strategic Management
Planning in Organizations
Strategy’s Military Roots
•Battlefield strategies to gain an edge
•Exploit weak spots
Academic Origins of Strategic Management
•Economic theory
•Early organizational studies
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Evolution of Strategic Management
Planning in Organizations
• 1960s Design School
• 1970s BCG Portfolio Management
• 1980s Porter Positioning School
• Early 1990s Resource-based View
(Core Competence), & Learning Organization
• Mid 1990s Stretching ambition, not just positioning/Fit
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Levels of Strategy; Hierarchy of Strategies
Planning in Organizations
• Corporate level: Purpose and scope, Long Term Survival
• Business Level: Competition
• Operations Level: Action plans and implementation for human resources,financing, manufacturing, R&D, etc.
• Short term 0 to 12 months.• Medium term 12 to 36 months.• Long term over three years.
Unfortunately, these sets of processes are not carried out as discrete actions and do not follow nicely in a linear manner.
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The concern of strategy is effectiveness (doing the right things). The concerns of operations are efficiency (doing things right).
Planning in Organizations
Strategic PlanningStrategic planning is a systematic, analytical approach that reviews the business as
a whole in relation to its environment, with the objective of:• Developing an integrated, co-ordinated and consistent view of the route the
company wishes to follow.• Facilitating the adaptation of the organisation to environmental change.
The aim of strategic planning is to create a viable link between the organisation’s objectives and resources and its environmental opportunities.
Strategic And Operational PlanningStrategic management planning produces both the primary goals for operational
plans and the framework in which they can be realised. The main intended outcome of strategy is the successful positioning of the company in the market place (including satisfactory market share, adequate profitability, possible market leadership, etc.).
The main intended outcome of operational planning is the efficient attainment of budgeted sales and/or revenue targets. Operational planning is sometimes also referred to as tactical planning.
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Planning Process
The Planning CycleMajor corporate planning exercises normally take place every three to six yearsOperational planning exercises may take place every year or half year.
Benefits to be gained from planning include:•Risk Reduction•Reduction of Uncertainty•Setting Targets and Standards•Guidance•Commitment•Improves Decision Making
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Planning Process
No Strategic Planning• Poor Reward Structures.• Fire-fighting.• Waste of Time.• Too Expensive.• Laziness.• Content with Success.• Fear of Failure.• Overconfidence.• Prior Bad Experience.• Self-Interest.• Fear of the Unknown.• Honest Difference of Opinion.• Suspicion.
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Planning Process Activity
Take an organisation that you are familiar with and answer the followingquestions:
1. Does the organisation have a mission statement?• Yes• No• Don’t Know
2. If the answer to 1 is Yes, write out the mission statement as accurately as you can.
3. If the answer to 1 was No or Don’t Know, suggest a suitable mission statement from your knowledge of the organisation and its activities.
4. What do you think is the best way of making employees aware of an organisation’s mission statement.
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Strategic Planning Models
The Linear Static Model of Strategy
Strategic thinking can be divided into two segments : strategy formulation and strategyimplementation. Strategy formulation involves: 1. Doing a situation analysis: both internal and external; both micro-environmental and macro-
environmental. (where you are now)2. Concurrent with this assessment, objectives are set. This involves crafting vision statements
(long term), mission statements (medium term), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives. (where you want to go)
3. These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to obtain these goals. (how to get there)
The next phase, is the implementation of the strategy. This involves: 1. Allocation of sufficient resources 2. Establishing a chain of command or some alternative structure3. Assigning responsibility of specific tasks or processes to specific individuals or groups 4. Involves managing the process - this includes monitoring results, comparing to benchmarks and
best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.
When implementing specific programs, this involves acquiring the requisite resources, developingthe process, training, process testing, documentation, and integration with (and/or conversion from)legacy processes.
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Strategic Planning Models
The Dynamic Model of Strategy
Charles Lindblom (1959) claimed that strategy is a fragmented process of serial and incremental decisions.
James Brian Quinn (1980) developed an approach that he called "logical incrementalism“ : "Constantly integrating the simultaneous incremental process of strategy formulation and implementation is the central art of effective strategic management."
Whereas Lindblom saw strategy as a disjointed process without conscious direction, Quinn saw the process as fluid but controlable.
Henry Mintzberg (1978) made a distinction between deliberate strategy and emergent strategy. Emergent strategy originates not in the mind of the strategist, but in the interaction of the organization with its environment. He claims that emergent strategies tend to exhibit a type of convergence in which ideas and actions from multiple sources integrate into a pattern.
This is a form of organizational learning, in fact, on this view, organizational learning is one of the core functions of any business enterprise (Peter Senge's The Fifth Discipline)
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Strategic Planning Models
The Dynamic Model of Strategy
Constantinos Markides (1999) describes strategy formation and implementation as an on-going, never-ending, integrated process requiring continuous reassessment and reformation. In this model, strategy is both planned and emergent, dynamic, and interactive.
The alignment of action with strategic intent (the top line in the diagram), is the blending of strategic intent, emergent strategies, and strategies in action, to produce strategic outcomes. The continuous monitoring of these strategic outcomes produces strategic learning (the bottom line in the diagram). This learning is comprised of feedback into internal processes, the environment, and strategic intentions.
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Strategic Management Defined
Set of managerial decisions and actions that determines the long-run performance of a firm.
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Externally Oriented Planning
Forecast Based
Planning
Basic Financial Planning
FullStrategic
Management
markets, industry,
benchmarking
sales,production, manpower
Rs
people, markets, numbers, industry,
production
Stage 1 Stage 2 Stage 3 Stage 4
The Four Stages of Strategic Management
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Basic Concepts of Strategic Management
Basic Elements of the Strategic Management Process
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Evaluation and Control
and ControlStrategy Formulation
Strategy Implementation
Mission
Objectives
Strategies
Policies
Feedback/Learning
Environmental
Scanning
Societal Environment
General Forces
Task Environment
Industry Analysis
Structure Chain of Command
Resources Assets, Skills
Competencies, Knowledge
Culture Beliefs, Expectations,
Values
Reason for existence
What results to accomplish by when Plan to
achieve the mission & objectives Broad
guidelines for decision making
Programs
Activities needed to accomplish a plan
Budgets
Cost of the programs Procedures
Sequence of steps needed to do the job
Process to monitor performanceand take corrective action
Performance
External
Internal
Evaluationand Control
Strategic Management Model
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Outcome of Strategic Management
Superior Profit
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Alternative Models of Superior ReturnsAlternative Models of Superior Returns
Resource-BasedResource-BasedModelModel
Industrial Industrial Organization ModelOrganization Model
The External EnvironmentThe External Environment
An Attractive IndustryAn Attractive Industry
Strategy FormulationStrategy Formulation
Assets and SkillsAssets and Skills
Strategy ImplementationStrategy Implementation
Superior ReturnsSuperior Returns
ResourcesResources
CapabilityCapability
Competitive AdvantageCompetitive Advantage
An Attractive IndustryAn Attractive Industry
Strategy ImplementationStrategy Implementation
Superior ReturnsSuperior Returns
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I/O Model of Superior ReturnsI/O Model of Superior Returns
The Industrial Organization model suggests that above-average returns for any firm are largely determined by characteristics outside the firm.
This model largely focuses on industry structure or attractiveness of the external environment rather than internal characteristics of the firm.
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Action required:Action required:External EnvironmentExternal Environment
General EnvironmentGeneral EnvironmentIndustry EnvironmentIndustry EnvironmentCompetitive EnvironmentCompetitive Environment
Study the external environment, especially the industry environment.
I/O Model of Superior ReturnsI/O Model of Superior Returns
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External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Action required:Action required:Locate an industry with high potential for above-average returns.
I/O Model of Superior ReturnsI/O Model of Superior Returns
An industry whose structural characteristics suggest above-average returns are possible
An Attractive Industry
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External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Action required:Action required:
Identify strategy called for by the industry to earn above-average returns.
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
StrategyFormulationStrategyFormulation
I/O Model of Superior ReturnsI/O Model of Superior Returns
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External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Strategy FormulationStrategy Formulation
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
Action required:Action required:
Develop or acquire assets and skills needed to implement the strategy.
Assets and SkillsAssets and Skills
Assets and skills required to implement a chosen strategy
Assets and skills required to implement a chosen strategy
I/O Model of Superior ReturnsI/O Model of Superior Returns
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External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Strategy FormulationStrategy Formulation
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
Assets and SkillsAssets and Skills
Assets and skills required to implement a chosen strategy
Assets and skills required to implement a chosen strategy
Action required:Action required:
Use the firm’s strengths (its assets or skills) to implement the strategy.
Strategy ImplementationStrategy Implementation
Selection of strategic actions linked with effective implementation of the chosen strategy
Selection of strategic actions linked with effective implementation of the chosen strategy
I/O Model of Superior ReturnsI/O Model of Superior Returns
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External EnvironmentExternal Environment
General EnvironmentGeneral Environment
Industry EnvironmentIndustry Environment
Competitive EnvironmentCompetitive Environment
Attractive IndustryAttractive Industry
An industry whose structural characteristics suggest above-average returns are possible
An industry whose structural characteristics suggest above-average returns are possible
Strategy FormulationStrategy Formulation
Selection of a strategy linked with above-average returns in a particular industry
Selection of a strategy linked with above-average returns in a particular industry
Assets and SkillsAssets and Skills
Assets and skills required to implement a chosen strategy
Assets and skills required to implement a chosen strategy
Action required:Action required:
Strategy ImplementationStrategy Implementation
Selection of strategic actions linked with effective implementation of the chosen strategy
Selection of strategic actions linked with effective implementation of the chosen strategy
Superior ReturnsSuperior Returns
Earning of above-average returnsEarning of above-average returns
Maintain selected strategy in order to outperform industry rivals.
I/O Model of Superior ReturnsI/O Model of Superior Returns
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The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm.
The Resource-Based model suggests that above-average returns for any firm are largely determined by characteristics inside the firm. This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.
This model focuses on developing or obtaining valuable resources and capabilities which are difficult or impossible for rivals to imitate.
Resource-Based Model of Superior Resource-Based Model of Superior ReturnsReturns
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Action required:Action required:Identify firm resources. Study strengths and weak- nesses relative to rivals.
Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns
Inputs to a firm’s production process
Resources
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ResourcesResources
Inputs to a firm’s production process.Inputs to a firm’s production process.
Action required:Action required:Determine what firm capabilities allow it to do better than rivals.
CapabilityCapability
Capacity for an integrated set of resources to perform a task or activity.
Capacity for an integrated set of resources to perform a task or activity.
Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns
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ResourcesResources
Inputs to a firm’s production process.Inputs to a firm’s production process.
CapabilityCapability
Capacity for an integrated set of resources to integratively perform a task or activity.
Capacity for an integrated set of resources to integratively perform a task or activity.
Competitive AdvantageCompetitive Advantage
Ability of a firm to outperform its rivalsAbility of a firm to outperform its rivals
Action required:Action required:Determine how firm’s resources and capabilities may create competitive advantage.
Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns
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ResourcesResources
Inputs to a firm’s production process.Inputs to a firm’s production process.
CapabilityCapability
Capacity for an integrated set of resources to integratively perform a task or activity.
Capacity for an integrated set of resources to integratively perform a task or activity.
Competitive AdvantageCompetitive Advantage
Ability of a firm to outperform its rivalsAbility of a firm to outperform its rivals
An AttractiveIndustryAn AttractiveIndustry
Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities
Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities
Action required:Action required:Locate an attractive industry.
Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns
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ResourcesResources
Inputs to a firm’s production process.Inputs to a firm’s production process.
CapabilityCapability
Capacity for an integrated set of resources to integratively perform a task or activity.
Capacity for an integrated set of resources to integratively perform a task or activity.
Competitive AdvantageCompetitive Advantage
Ability of a firm to outperform its rivalsAbility of a firm to outperform its rivals
An AttractiveIndustryAn AttractiveIndustry
Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities
Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities
Action required:Action required:Select strategy that best exploits resources and capabilities relative to opportunities in environs.
Strategy Formulation and Implementation
Strategy Formulation and Implementation
Strategic actions taken to earn above-average returns
Strategic actions taken to earn above-average returns
Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns
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ResourcesResources
Inputs to a firm’s production process.Inputs to a firm’s production process.
CapabilityCapability
Capacity for an integrated set of resources to integratively perform a task or activity.
Capacity for an integrated set of resources to integratively perform a task or activity.
Competitive AdvantageCompetitive Advantage
Ability of a firm to outperform its rivalsAbility of a firm to outperform its rivals
An AttractiveIndustryAn AttractiveIndustry
Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities
Location of an industry with opportunities that can be exploited by the firm’s resources and capabilities
Action required:Action required:Maintain selected strategy in order to outperform industry rivals.
Strategy Formulation and Implementation
Strategy Formulation and Implementation
Strategic actions taken to earn above-average returns
Strategic actions taken to earn above-average returns
Superior ReturnsSuperior Returns
Earning of above-average returnsEarning of above-average returns
Resource-Based Model of Superior ReturnsResource-Based Model of Superior Returns
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Non-substitutableNon-substitutable the firm must be organized appropriately to the firm must be organized appropriately to obtain the full benefits of the resources in order obtain the full benefits of the resources in order to realize a competitive advantage to realize a competitive advantage
ValuableValuable allow the firm to exploit opportunities or allow the firm to exploit opportunities or neutralize threats in its external environmentneutralize threats in its external environment
RareRare possessed by few, if any, current and potential possessed by few, if any, current and potential competitorscompetitors
Costly to ImitateCostly to Imitate when other firms either cannot obtain them or when other firms either cannot obtain them or must obtain them at a much higher costmust obtain them at a much higher cost
Resources and capabilities lead to Resources and capabilities lead to Competitive AdvantageCompetitive Advantage when they are:when they are:
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Core CompetenciesCore Competencies
When these four When these four criteria are met, criteria are met, Resources and Resources and Capabilities Capabilities become:become:
Core Competencies are resources and capabilities Core Competencies are resources and capabilities that can serve as a source of that can serve as a source of Competitive AdvantageCompetitive Advantage..
The Resource-Based model argues that Core The Resource-Based model argues that Core Competencies are the basis for a firm’s Competitive Competencies are the basis for a firm’s Competitive Advantage, Strategic Competitiveness and Ability to Advantage, Strategic Competitiveness and Ability to Earn Above-average Returns. Earn Above-average Returns.
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Competitive Advantage and the Value Chain
• A firm can gain competitive advantage by finding differentiation or low costs in its activities
• Value chain is a convenient way of looking at the firm’s activities
• Value chain: all the activities that a firm used to design, produce, market, deliver, and support its product
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The Value Chain
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Components of the Value Chain
• Primary activities: physical actions of creating, selling, and after-sale service of products
• Upstream: early activities in the value chain– R&D– Dealing with suppliers
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Components of the Value Chain (cont.)
• Downstream: later value chain activities– Sales and dealing with distribution channels
• Support activities: systems for human resources management, organizational design and control, and technology
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StrategyAn integrated and coordinated set of actions taken to exploit core competencies and gain a competitive advantage.
Business Level Business Level StrategyStrategyBusiness Level Business Level StrategyStrategy
Actions taken to provide value to customers Actions taken to provide value to customers and gain a competitive advantage by and gain a competitive advantage by exploiting core competencies in specific, exploiting core competencies in specific, individual product markets.individual product markets.
Actions taken to provide value to customers Actions taken to provide value to customers and gain a competitive advantage by and gain a competitive advantage by exploiting core competencies in specific, exploiting core competencies in specific, individual product markets.individual product markets.
CoreCompetency
The resources and capabilities that have been determined to be a source of competitive advantage for a firm over its rivals.
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Generic Business Level StrategiesGeneric Business Level Strategies
CostCost UniquenessUniqueness
Source of Competitive AdvantageSource of Competitive Advantage
Breadth of Breadth of Competitive Competitive
ScopeScope
BroadBroadTargetTargetMarketMarket
NarrowNarrowTargetTargetMarketMarket
Focused Differen-
tiation
Focused Differen-
tiation
CostLeadership
CostLeadership
Differen-tiation
Differen-tiation
Focused Low Cost
Focused Low Cost
CostCostLeadershipLeadership
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Primary Activities
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
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Log
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Op
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Ou
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Log
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Mar
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MARG
IN
MARGIN
Value Creating ActivitiesValue Creating Activities Common to a Common to a Cost LeadershipCost Leadership Business Level StrategyBusiness Level StrategyValue Creating ActivitiesValue Creating Activities Common to a Common to a Cost LeadershipCost Leadership Business Level StrategyBusiness Level Strategy
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Primary Activities
Su
pp
ort
Act
ivit
ies
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
oun
d
Log
isti
cs
Op
erat
ion
s
Ou
tbou
nd
Log
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cs
Mar
ket
ing
& S
ales
Ser
vice
MARG
IN
MARGIN
Cost Effective MIS Systems
Relatively Few Management Layers to Reduce Overhead
Simplified Planning Practices to Reduce Planning Costs
Consistent Policies to Reduce Turnover Costs
Effective Training Programs to Improve Worker Efficiency and Effectiveness
Highly Efficient Systems to Link Suppliers’ Products with the Firm’s Production Processes Timing of Asset
Purchases
Efficient Plant Scale to Minimize Manufacturing Costs
Selection of Low Cost Transport Carriers
Delivery Schedule that Reduces Costs
National Scale Advertising
Products Priced to Generate Sales Volume
Small, Highly Trained Sales Force
Effective Product Installations to Reduce Frequency and Severity of Recalls
Easy-to-Use Manufacturing Technologies
Investments in Technology in order to Reduce Costs Associated with Manufacturing Processes
Systems and Procedures to find the Lowest Cost Products to Purchase Raw Materials
Frequent Evaluation Processes to Monitor Suppliers’ Performances
Located in Close Proximity with Suppliers
Policy Choice of Plant Technology
Organizational Learning
Efficient Order Sizes
Interrelationships with Sister Units
Value Creating ActivitiesValue Creating Activities Common to a Common to a Cost LeadershipCost Leadership Business Level StrategyBusiness Level StrategyValue Creating ActivitiesValue Creating Activities Common to a Common to a Cost LeadershipCost Leadership Business Level StrategyBusiness Level Strategy
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Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
Threat of New
Entrants
Threat of New
Entrants
Can frighten off Can frighten off New Entrants New Entrants due to the need to: due to the need to:
Enter at large scale to be Cost CompetitiveEnter at large scale to be Cost Competitive**
Take time to move down the “Learning Curve”Take time to move down the “Learning Curve”**
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Can frighten off New Entrants due to the need to:
Enter at Large Scale to be Cost Competitive
*
Take time to move down the “Learning Curve”
*
Bargaining Power of Buyers
Bargaining Power of Buyers
Threat of New
Entrants
Can mitigate Buyer Power by:Can mitigate Buyer Power by:
** Driving prices far below competitors may cause exit and shift power back to firm
Driving prices far below competitors may cause exit and shift power back to firm
Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
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Can frighten off New Entrants due to the need to:
Enter at Large Scale to be Cost Competitive
*
Take time to move down the “Learning Curve”
*
Can mitigate Buyer Power by:
Threat of New
Entrants
Bargaining Power of Buyers
Driving prices far below competitors which may cause exit and shift power back to firm
Well positioned relative toWell positioned relative to SubstitutesSubstitutes in order to: in order to:Well positioned relative toWell positioned relative to SubstitutesSubstitutes in order to: in order to:
Make investments to create Make investments to create substitutes firstsubstitutes firstMake investments to create Make investments to create substitutes firstsubstitutes first
****
Buy patents developed by Buy patents developed by potential substitutespotential substitutesBuy patents developed by Buy patents developed by potential substitutespotential substitutes
****
Lower prices to maintain Lower prices to maintain value positionvalue positionLower prices to maintain Lower prices to maintain value positionvalue position
****
Threat of Substitute Products
Threat of Substitute Products
Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
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Can frighten off New Entrants due to the need to:
Enter at Large Scale to be Cost Competitive
*
Take time to move down the “Learning Curve”
*
Well positioned relative to Substitutes in order to:
Make investments to create substitutes*
Can buy patents developed by potential substitutes
*
Lower prices to maintain value position
*
Bargaining Power of Suppliers
Bargaining Power of Suppliers
Threat of New
Entrants
Threat of Threat of Substitute Substitute ProductsProducts
Can mitigate Buyer Power by:
Bargaining Power of Buyers
Driving prices far below competitors which may cause exit and shift power back to firm
Can mitigate Supplier Power by:Can mitigate Supplier Power by:
Low cost position makes them better able to absorb cost increasesLow cost position makes them better able to absorb cost increases
**
More likely to make very large purchases which reduces chance of supplier powerMore likely to make very large purchases which reduces chance of supplier power
**
Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
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Threat of New
Entrants
Bargaining Power of Suppliers
Threat of Substitute Products
Can frighten off New Entrants due to the need to:
Enter at Large Scale to be Cost Competitive
*
Take time to move down the “Learning Curve”
*
Well positioned relative to Substitutes in order to:
Make investments to create substitutes*
Can buy patents developed by potential substitutes
*
Lower prices to maintain value position
*
Competitors avoid Competitors avoid price wars with Cost price wars with Cost Leaders, which Leaders, which creates higher profits creates higher profits for entire industryfor entire industry
Rivalry Among Competing Firms
in Industry
Rivalry Among Competing Firms
in Industry
Can mitigate Buyer Power by:
Bargaining Power of Buyers
Driving prices far below competitors which may cause exit and shift power back to firm
Can mitigate Supplier Power by:
Low cost position makes them better able to absorb cost increases
*
More likely to make very large purchases which reduces chance of supplier power
*
Effective Cost Leaders can remain profitable even when the Five Forces appear unattractive
1-58
DramaticDramatic technological change technological change could take away your cost could take away your cost advantageadvantage
Competitors may learn how toCompetitors may learn how to imitate Value Chainimitate Value Chain
Focus on efficiency could cause Cost Leader toFocus on efficiency could cause Cost Leader to overlookoverlook changes in customer preferenceschanges in customer preferences
Major Risks of Cost Leadership Business Level Strategy
1-59
Generic Business Level StrategiesGeneric Business Level Strategies
CostCost UniquenessUniqueness
Source of Competitive AdvantageSource of Competitive Advantage
Breadth of Breadth of Competitive Competitive
ScopeScope
BroadBroadTargetTargetMarketMarket
NarrowNarrowTargetTargetMarketMarket
Focused Differen-
tiation
Focused Differen-
tiation
CostLeadership
CostLeadership
Differentiation Differentiation
Focused Low Cost
Focused Low Cost
CostCostLeadershipLeadership
1-60
Differentiation Business Level Strategy
Key Criteria:
•Value provided by unique features and value characteristics
•Command premium price
•High customer service
•Superior quality
•Prestige or exclusivity
•Rapid innovation
1-61
Differentiation Business Level Strategy
Requirements: Requirements: Constant effort to differentiate products through:Constant effort to differentiate products through:
•Developing new systems and processesDeveloping new systems and processes
•Shaping perceptions through advertisingShaping perceptions through advertising
•Quality focusQuality focus
•Capability in R&DCapability in R&D
•Maximize H R contributions through low turnover and high motivationMaximize H R contributions through low turnover and high motivation
1-62
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inb
oun
d
Log
isti
cs
Op
erat
ion
s
Ou
tbou
nd
Log
isti
cs
Mar
ket
ing
& S
ales
Ser
vice
MARG
IN
MARGIN
A companywide emphasis on producing high quality products
Highly Developed Information Systems to better understand customers’ purchasing preferences
Compensation programs intended to encourage worker creativity and productivity
Extensive use of subjective rather than objective performance measures
Superior handling of incoming raw materials to minimize damage and improve the quality of the final product
Rapid responses to customers unique manufacturing specifications
Consistent manufacturing of attractive products
Accurate and responsive order processing procedures
Complete field stocking of replacement parts
Strong capability in basic research
Investments in technologies that will allow the firm to consistently produce highly differentiated products
Systems and procedures used to find the highest quality raw materials
Purchase of highest quality replacement parts
Rapid and timely product deliveries to customers
Superior personnel training
Coordination among R&D, product development and marketing
Extensive personal relationships with buyers
Strong Coordin-ation among functions in R&D, Marketing and Product Development
Premium Pricing
Primary Activities
Su
pp
ort
Act
ivit
ies
Value Creating ActivitiesValue Creating Activities Common to a Common to a
DifferentiationDifferentiation Business Level StrategyBusiness Level Strategy
1-63
Threat of New
Entrants
Threat of New
Entrants
Can fend off Can fend off New Entrants New Entrants because: because:
New products must surpass proven New products must surpass proven productsproducts
*
Or be equal to performance at lower Or be equal to performance at lower pricesprices
*
Effective Differentiators can remain profitable even when the Five Forces appear unattractive
1-64
Can mitigate Buyer Power because:Can mitigate Buyer Power because:
Well differentiated products reduce customer sensitivity to price increases Well differentiated products reduce customer sensitivity to price increases
Bargaining Power of
Buyers
Bargaining Power of
Buyers
Threat of New
Entrants
Can fend off New Entrants because:
New products must surpass proven products
*
Or be equal to performance at lower prices
*
Effective Differentiators can remain profitable even when the Five Forces appear unattractive
1-65
Threat of New
Entrants
Can fend off New Entrants because:
New products must surpass proven products
*
Or be equal to performance at lower prices
*
Bargaining Power of Suppliers
Well positioned relative to Substitutes because:Well positioned relative to Substitutes because:
Brand loyalty tends to reduce new product trial and brand switching
Brand loyalty tends to reduce new product trial and brand switching
**
Threat of Substitute Products
Threat of Substitute Products
Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Effective Differentiators can remain profitable even when the Five Forces appear unattractive
1-66
Threat of New
Entrants
Can fend off New Entrants because:
New products must surpass proven products
*
Or be equal to performance at lower prices
*
Bargaining Bargaining Power of Power of SuppliersSuppliers
Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Threat of Substitute Products
Well positioned relative to Substitutes because:
Brand loyalty tends to reduce new product trial and brand switching
*
Can mitigate Supplier Power by:Can mitigate Supplier Power by:
Absorbing price increases due to higher marginsAbsorbing price increases due to higher margins
**
Passing on higher supplier prices because buyers are brand loyalPassing on higher supplier prices because buyers are brand loyal
**
Bargaining Power of Suppliers
Effective Differentiators can remain profitable even when the Five Forces appear unattractive
1-67
Threat of New
Entrants
Bargaining Power of Suppliers
Bargaining Power of Buyers
Threat of Substitute Products
Well positioned relative to Substitutes because:
Brand loyalty tends to reduce new product trial and brand switching
*
Can mitigate Supplier Power by:
*
*
Absorbing price increases due to higher margins
Passing on higher supplier prices because buyers are brand loyal
Can mitigate Buyer Power because well differentiated products reduce customer sensitivity to price increases
Can fend off New Entrants because:
New products must surpass proven products
*
Or be equal to performance at lower prices
*
Brand loyalty overcomes much price competition
Brand loyalty overcomes much price competition
Rivalry Among Competing Firms in Industry
Effective Differentiators can remain profitable even when the Five Forces appear unattractive
1-68
Major Risks of a Differentiation Business Level Strategy
•Customers may decide that the cost of “uniqueness” is too great
•Competitors may learn how to imitate Value Chain
•The means of uniqueness may no longer be valued by customers
1-69
Generic Business Level StrategiesGeneric Business Level Strategies
CostCost UniquenessUniqueness
Source of Competitive AdvantageSource of Competitive Advantage
Breadth of Breadth of Competitive Competitive
ScopeScope
BroadBroadTargetTargetMarketMarket
NarrowNarrowTargetTargetMarketMarket
Focused Differentiation
Focused Differentiation
CostLeadership
CostLeadership
Differentiation Differentiation
Focused Low CostFocused Low Cost
CostCostLeadershipLeadership
1-70
Focused Business Level Strategies involve the same basic approach as Broad Market Focused Business Level Strategies involve the same basic approach as Broad Market Strategies. Strategies.
Focused Business Level Strategies
However, opportunities may exist because:
•Large firms may overlook small niches
•Firm may lack resources to compete industry-wide
•May be able to serve a narrow market segment more effectively than Industry wide competitors
•Focus can allow you to direct resources to certain value chain activities to build competitive advantage
•May be able to retrofit old factories to keep costs down
•Minimize R&D costs by copying innovators
1-71
Major Risks Involved With a Focused Differentiation Business Level Strategy
•Firm may be “outfocused” by competitors
•Large competitor may set its sights on your niche market
•Preferences of niche market may change to match those of broad market
1-72
Integrated Low Cost/Differentiation Strategy
Firms using an Integrated Strategy may:
•Adapt more quickly
•Learn new skills and technologies
•Utilize Flexible Manufacturing Systems to create differentiated products at low costs
•Leverage core competencies through Information Networks across multiple business units
•Utilize Total Quality Management (TQM) to create high quality differentiated products which simultaneously driving down costs
1-73
Strategic Management Questions
1. Why has strategic management become so important to today’s organizations?
2. How does strategic management typically evolve in an organization?
3. In what ways could a typical organization’s strategic management process be improved ?
4. How are strategic decisions different from other kinds of decisions?
5. When is the planning mode of strategic decision making superior to the entrepreneurial and adaptive modes?
6. What are common differences between functional and strategic actions and decisions?