strategic managementlesson 1-4

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1-1 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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Page 1: Strategic Managementlesson 1-4

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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

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

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

isti

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

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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

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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

Differentiation Differentiation

Focused Low Cost

Focused Low Cost

CostCostLeadershipLeadership

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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 Differentiation

Focused Differentiation

CostLeadership

CostLeadership

Differentiation Differentiation

Focused Low CostFocused Low Cost

CostCostLeadershipLeadership

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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

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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

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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

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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?