An Introduction to Strategy New

8/7/2019 An Introduction to Strategy New

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Learning Take Away

What is Strategic Management?

Why is Strategic Management important?

Who is involved with Strategic Management?

Strategic Management today.t


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Goal directed decisions and actions in whichcapabilities and resources are matched with theopportunities and threats in the environment.

Military influences in strategyStrategos referred to a general in command of anarmy


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Gives everyone a role

Makes a difference in performance levels

Provides systematic approach to uncertainties

Coordinates and focuses employees


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Strategy StrategicManagement

A series of goal directed decisionsand actions matching an organizationsskills and resources with theopportunities and threats in its

environment

Analyze current situation Develop appropriate strategies Put strategies into action Evaluate, modify, or change strategy

Strategy involves: Organizations goals Goal oriented action Related decisions and actions Internal strengths

External opportunities & threats

Strategic Management involves: Planning Organizing Implementing Controlling


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Four aspects that set Strategic Management apart

Interdisciplinaryo Capstone of the Management Degree

External Focuso Competition

Internal Focus

Future Direction


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Corporate: (What direction are we going and what business are wein or do we want to be in this business?)

Competitive (How are we going to compete in our chosebusiness?) Functional -(What resources and capabilities do we have to support

the corporate and competitive strategies?)


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Board of Directorso Elected representative of the companys stockholderso Legally obligated to represent and protect stockholders

Top Managemento Responsible for decisions and actions of every employeeo Providing effective leadership

Employeeso Implement put the strategies into action and monitor

performanceo Evaluate do the actual evaluations and take necessary

actions


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Effective strategy making begins with a Vision of

where the organization needs to head!


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Define current business activities

Highlights boundaries of current business

Conveyso Who we are?o What we do?o Where we are now?


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Company specific, not generic so as to give acompany its own identity

A companys mission is not to make a profit!

The real mission is always What will we do tomake a profit?


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Microsoft Corporation Empower people throughgreat software anytime, anyplace and on anydevice.

Otis Elevator Our mission is to provide anycustomer a means of moving people and thingsup, down and sideways over short distances withhigher reliability than any similar enterprise in the

world.


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American Red Cross The mission of theAmerican Red Cross is to improve the quality ofhuman life; to enhance self reliance and concernfor others; and to help people avoid, prepare forand cope with emergencies.


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Charts a companys future strategic course

Defines the business makeup for 5 years or more

Specifies future technology product customerfocus


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Challenges and motivates workforce

Provokes strong sense of organizational purpose

Induces employee buy in

Galvanizes people to live the business


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Crystallizes long term direction

Reduces risk of rudderless decision making

Conveys organizational purpose and identity

Keeps direction related actions of lower levelmanagers on common path

Helps organization prepare for the future


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In todays world, it take less and less time for oneproduct or technology to replace another,companies are finding that there is no such thingas a permanent competitive advantage.

So, every company needs to make sure that itkeeps evolving as per the environment it operatesin & achieve success by correctly implementing

the business strategy.


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Learning Take Away What is Environmental Scanning ?

What external environment variables should be

scanned? How to identify External Strategic Factors?

How to measure external strategic factors?

What is Michael Poters Five Force Driving Modelfor Industry Analysis?


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Environmental Scanning is the monitoring,

evaluating and disseminating of information fromthe external and internal environment to keypeople within the corporation.

Every corporation must be aware about thedifferent variable within a corporations internal andexternal environment in order to manage, lead andforesee changes to ensure long term health.


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Societal Environment: Forces that do not directlyaffect the short run activities of an organization but

that can influence its long run decisions. Economic Factors regulate the exchanges of

money, materials, energy & information Technological Factors generate problem solving

inventions Political & Legal Factors allocate power &

provide constraining & protecting laws &regulations.

SocioculturalF

actors regulate the values, morals& customs of society


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Task Environment (Industry): Forces that directlyaffect the corporations & in turn are affected by it.

A corporations task environment can be thought ofas the industry within which it operates.

Task Environment includes factors like

Governments, Local Communities, Suppliers,Trade Associations, Competitors, Customers,Creditors, Employees, Labor Union etc.


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One way to identify & analyze development is touse the issues priority matrix as follows:

Identify a number of likely trends emerging in the

societal & task environments affecting various

companies in a particular industry.

Assess the probability (from Low to High) of

these trends or events actually occurring.

Attempt to ascertain the likely impact (from Low

to High) of each of these trends on the company.


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` The collective strength of these forces

determine the ultimate profit potential in an

industry.` The stronger force can be regarded as threat

because it limits companys ability to raise

prices or earn greater profits.

` On the contrary, weaker force can be regardedas opportunity because it may allow the

company to earn greater profits.

` It may be possible, in the long run a company

can convert stronger forces into an advantagethrough its choice of strategy.


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Threat of New Entrants New entrants are

newcomers to an existing industry. The threat

of entry depends on the presence of entrybarriers. High entry barriers create obstructions

for a new company to enter an industry

whereas low barriers make the entry easy for

newcomers.Some possible entry barriers

Economics of Scale

Product Differentiation

Capital Requirement

Switching Cost

Access to Distribution Channels

Govt. Policy


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Rivalry Among Existing Firms A competitivemove by one firm can be expected to have a

noticeable effect on its competitors & thus maycause retaliation or counter efforts.

Intense rivalry happens due to following factors

Number of Competitors

Rate on Industry Growth

Product or Service Characteristics

Amount ofFix Cost or Capacity

High exit barriers

Diversity of Rivals (different ideas to compete)


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Threat of Substitute Products or Services

Substitute products are those products that

appear to be different but can satisfy the sameneed as another products. (e.g. Tea & Coffee)

Substitutes limits the potential return of an

industry by placing a ceiling on the prices firms

in the industry can charge to customers as

switching cost is very low.

If the price of coffee goes up high enough, slowly

coffee drinker will start switching to tea, as the

price of tea puts a price ceiling on the prices of

coffee.


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Bargaining Power of Buyers Buyers affect an

industry through their ability to force down

prices, bargain for better quality or highstandard of services.

A buyer become powerful if the following factors

are present Purchase a large proportion of Sellers goods

or services

Buyers can integrate backwards

Suppliers are many, buyers are few Switching suppliers cost very little

Purchase product is unimportant to final

product


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Bargaining Power of Suppliers Suppliers canaffect an industry through their ability to raise

prices or reduce quality of goods or services.A suppliers become powerful if the following

factors are present

Buyers are many, Suppliers are few

Provide unique product or service Switching cost is very high & substitutes are

not available

Supplier can integrate forward

Buyer only buys a small portion of theSuppliers goods or services (e.g. sale of lawnmover tiers to tire industry)


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Bargaining Power of Stakeholders

Stakeholders like government, local

communities, creditors, shareholders, tradeassociation, unions etc. can affect the entire

industry. Stakeholders can force to company to

absorb additional cost or reduce profit, sales

etc.


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What is a Strategic group?

A strategic group is a set of business firms that

pursue similar strategies with similar resources.Categorizing firms in any one industry into a setof strategic groups is very needed in order tounderstand the competitive environment.

The business units belonging to a particularstrategic groups within the same industry tendto be strong rivals & more similar to each otherthan to competitors in other strategic groupswithin the same industry.


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Different Strategic Types

According to Miles & Snow, competing firms within a

single industry can be categorized on the basis of

their general strategic orientation into one of four

basic types defenders, prospectors, analyzers &

reactors. This distinction among firms operating

with a single industry will explain us why companiesfacing similar situations behave differently.

Defenders are companies with a limited products

line that focus on improving the efficiency of theirexisting operations. Being cost oriented these firms

are unlikely to innovate in new areas.


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Prospectors are companies with fairly broad

product lines that focus on products innovation &

market opportunities. Being sales oriented thesefirms are somewhat inefficient as they give more

emphasize on creativity over efficiency.

Analyzers are companies that operate in at least

two different product-market area, one stable & onevariable. In the stable area, efficiency is

emphasized whereas in the variable area,

innovation is emphasized.

Reactors are companies that lack a consistentstrategy structure culture relationship. Due to

their passive approach their responses are often

ineffective to environmental pressures


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Learning Take Away

` Define internal environment?

` What determines competitive advantages?` Resource based approach to strategy analysis?

` What factors determine competitive advantage?

` What is Value chain Analysis?


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Any companys competitive advantage is primarily

determined by the firms resource endowments.

According to R.M. Grant resource based approach tostrategy analysis contains five steps:

` Identify & classify the firms resources in terms of

strengths & weaknesses

`

Combine the firms strengths into specific capabilities.These are core competencies: the things that a

corporation can do exceedingly well.


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` Evaluate the profit potential of these resources &

competencies in terms of their potential for

sustainable competitive advantage & the ability toproduce the profit form the use of these resources

& capabilities.

` Select the strategy that best exploits the firm's

resources & competencies relative to externalopportunities.

` Identify resource gap & invest in upgrading

weaknesses.

When an organizations resources are combined intocapabilities they form a number of core

competencies.


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An organization can develop the core competencies

by using its resources & capabilities, but there are

two basic characteristics determine the sustainabilityof these competencies.

Durability -is the rate at which a firms underlying

resources & capabilities (core competencies)

depreciate or become obsolete. E.g. Newtechnology can make a companys core competency

old-fashioned or irrelevant.


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Imitability is the rate at which a firms underlyingresources & capabilities (core competencies) can be

duplicated by others.A core competency can be easily imitated to the

extent that it is transparent, transferable & replicable.

` Transparency the speed at which the competitors

can understand the relationship between the firmsresources & capabilities supporting a firms strategysuccessfully.

` Transferability competitors ability to gatherresources & capabilities necessary to create their

own competitive advantage. E.g. Its not easy for anywine maker to replicate a French Wine.


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` Replicability competitors ability to duplicate

resources & capabilities to imitate the other firms

success.

Level of Resource Sustainability

High Low

Slow Cycle Standard Cycle Fast Cycle

Resources Resources ResourcesStrongly Shielded Standardized mass Easily

duplicated

Patents, Brand Name production Idea driven

Economics of Scale


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A value chain is a liked set of value creating activitiesbeginning with basic raw materials coming fromsuppliers, moving on to a series of value addingactivities involved in producing & marketing a product orservices and ending with distributors getting the finalgoods into the hands of the ultimate consumers.

Industry Value Chain The value chain can to divided intotwo segments upstream & downstream. In thepetroleum industry upstream refers to oil exploration,

drilling & moving the crude oil to refinery whereasdownstream refers to refining the oil, transporting &marketing of gasoline & refined oil to distributors & gasstation


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Raw Material Primary Manufacturing

Fabrication Product Producer Distributor

RetailerCorporate Value Chain every firm has its own value

chain of activities, because most corporations make

several different products & services an internal

analysis of the firms involves analyzing a series of

different value chain.

` Examine each products vale chain & determine which

activities can be considered as strength & weaknesses?

` Examine linkages between different value activities are

performed within a product line.` Explore potential synergies among the value chain of

different product lines or business units.


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` Strategy formulation is often referred to asStrategic Planning or long range planning & isconcerned with developing corporations mission,objective, strategies & policies.

` It begins with situation analysis, the process of

finding a strategic fit between external opportunities& internal strengths while working around externalthreats & internal weaknesses.

` SWOT Analysis assist not only in identifying

companys distinctive competencies, but also inidentification of opportunities that the firm is unableto take advantage of due to lack of required skills &resources


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Corporate Strategy deals with three key issues

facing the company as a whole:

` The firms overall orientation towards growth,

stability or retrenchment (directional strategy).

` The industries or markets in which the firms

competes through its products & services (portfolio

strategy).

` The manner in which management coordinates

activities, utilizes resources & cultivates capabilities

(Corporate Parenting)


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Refers to choice of direction the firm should take, be it

SSI or MNC.Eg. Consider a situation where a firm is facing intense

competition in the markets it serves. What do you

think the organization should do?

` Reduce Price Cost Advantage

` Improve Quality Differentiation Advantage

` Amix of both the above factors

`

Improve Distribution Network` New Promotional & Marketing Activities.

` Merger, Acquisition, Joint Venture, Disinvestment,

etc.


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Growth can be via Vertical Integration by taking over afunction previously provided by suppliers (backwardintegration) or by distributor (forward integration).

Backward Integration can help the business to

produce critical inputs for the main product. Eg.RELIANCE

Forward Integration can help the business to take

advantage of closer contact with the customers andensure a control over retail price of their product. Eg.FUTURE GROUP.


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Horizontal Integration refer to the degree to which a firm

operates in multiple geographic locations at the same

point in an industrys value chain.

Growth can be achieved by expanding the firms

products & services into other geographic locations or

by increasing the firms products or services offered tocurrent markets.

A company can acquire market share, production

facilities or distribution outlets through internaldevelopment or externally through acquisition, merger

or joint venture.


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If a companys current product does not have potential to

grow, management can decide to diversify. There aretwo basic diversification strategy:

Concentric Diversification Growing the company byexpanding into related industry.

`

This is a appropriate strategy when a firm has strongcompetitive position in the industry it operates in.

` By concentrating on its distinctive competence firm usesthe strength, as its means of diversification.

` The products are related and the idea is to take

advantage ofsynergies (common thread betweendifferent products).


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A corporation may choose stability over growth by

continuing its current activities without any significant

changes. The following are stability strategies:

Proceed with Caution - Sometimes its appropriate as atemporary strategy to enable a company to consolidate

its resources after prolonged rapid growth in an industry

that faces an uncertain future. In effect, it means timeout

take by the company to rest before continuing a growthor retrenchment strategy.


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This strategy was adopted by Dell Computer Corp in

1993 after their growth strategy result in so much

business that company was unable to hand it. Michael Dell says We grew 285% in 2 years, and

were having some growing pains. Dell was not giving

up on its growth strategy but merely putting temporary

brakes so that company can hire human resource andimprove infrastructure & facilities.


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No Change - Decision to do nothing new, just continue

with current operation & policies. The relative stability

created by the firms competitive position in an industryfacing little or no growth, encourages the company to

continue doing business just making small adjustment for

inflation in sales & profit.

In US, most small business player follow this strategy

before Wal - Mart enter into their territory.


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A firm may pursue retrenchment strategies when thecompany has a weak competitive position in some or all

its product lines resulting in poor performance, when

sales are down & profit are becoming losses.

In an attempt to eliminate the weaknesses which are

dragging the company down, management may follow

one of several retrenchment strategies.


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Turnaround - Focuses on improving operational

efficiency of the firm & is appropriate when a

corporations problem are pervasive but not yet critical.

Turnaround strategy include two phases Contraction &

Consolidation.

Contraction - is the initial effort to quickly stop the

bleeding with a overall across the board cutback in

size & cost.


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Consolidation - implement improvement program to

stabilize the new leaner corporation. To streamline the

company, management develops plans to reduce overhead& unnecessary functional cost.

This is a very crucial time for the firm, if the

consolidation is not done properly the key people will

leave the organization, on the other hand if the employees

are motivated to participate in the consolidation program.

The firm will emerge as a much stronger player with an

improved competitive position which will help the

company to once again expand the business.


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Captive Strategy - means becoming another companys

sole supplier or distributor in exchange for a long term

commitment form the other company. In other words the

firm gives up independence in exchange for security.

A company with a weak competitive position may offer to

be captive company to one of its larger customers in orderto guarantee the companys continued existence with a

long term contract. This way the firm is able to reduce

some of it functional cost like marketing, advertising,

promotional, etc. expenses.


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Eg: In order to become the sole supplier to General

Motors, Simpson Industries from Michigan agreed to

have its engine part factory & financial books inspectedby the GM employees. In return, 80 % companys

production was sold to GM.


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Disinvestment Strategy - If the firm with a weak

competitive position in the industry is unable either to

pull itself up from the problem or to find a customer to

which it can become a captive company. The only other

choice it has now is to sell out or leave the industry

completely.

The sell out or disinvestment strategy make sense when

the company can still obtain a good price by selling the

entire company to another firm. Sometimes if the firm

has multiple business lines, it may choose to

disinvestment strategy by selling a business line.


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Bankruptcy or Liquidation Strategy - If a firm findsitself in the worst possible situation with poor

competitive position then it has limited alternative atdisposal. Because no one is interested in buying a weakbusiness in an unattractive industry, the firm pursues abankruptcy or liquidation strategy.

Bankruptcy involves giving up management of the firmto the court in return for some settlement of thecorporations obligation. Top management thinks thatafter the court decides & settles the claims of the

company, the remaining new firm will be stronger & ina better position to compete in a more attractiveindustry.


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Bankruptcy gives perpetuate to the firm whereas

Liquidation Strategy means selling the firm assets in

parts. As the industry is unattractive & company isweak, the top management decides to convert as many

saleable assets into cash as possible, which is then

distributed to stock holder after settling all the

obligations of the firm.

The benefit of liquidation over bankruptcy is that

Board of Directors as representative of stock holder

along with the top management make the decisionsinstead of turning them over to the court, which may

choose to ignore the stockholder completely.


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Functional strategy is the approach a functional areatakes in order to achieve business objectives.

It is concerned with developing & nurturing a distinctive

competence to provide a company with a competitive

advantage.

Amultidivisional corporation has many business units with

its own strategy, each unit will have its own

departments, each with its own functional strategy.


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Key Strength v\s Distinctive Competencies

Key strength is something that a corporation can do exceedingly

well, where as distinctive competencies is something that isunique to the corporation or superior from competition.

To be considered a distinctive competencies three criteria

should be fulfilled: Customer Value, Competitor Unique &

Extendibility.

A distinctive competency is certainly a key strength, however

key strengths are not always considered as distinctive

competencies. As competition tries to imitate another

companys strength, what was once considered as a keystrength becomes a minimum level entry requirement in the

industry.


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Pull & Push Method

Push Products by spending larger amount of money on

trade promotions in order to gain self space in retail storesor push products through distribution system.

Trade discounts, in store special offers, etc.

Pricing Strategy:

Skim Pricing offers opportunity to skim the top of the

demand curve with high curve especially when the product

is new & competitors are less.

Penetration introduce products with low price to gain

market share. Depending on the corporate strategy either pricing strategy is

desirable. However, penetration strategy is more profitable in the

long run.


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FINANCIAL STRATEGIES

It examines financial implications and identifies the best financial

course of action.

It can provide competitive advantage, by keeping the cost of

capital low or by raising capital to support a business strategy.

Debt v\s Equity manage desired level of debt equity to keep

the overall cost of capital low.

Leverage Buy Out company is acquired by debts take from

third party. Debt servicing is debt through the profits generated

by the business.

Dividend Policy analyze whether to distribute to excessfunds or keeps them for future growth activities.


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Human Resource Management Strategy

It tries to find a best fit between people & organizations.

Recruitment, Training & Development hire a large

number of low skill people with low pay scale to perform

repetitive jobs (McDonalds) or employ skilled people

with high scale pay & cross trained to participate in self

managed teams (Google). Reduce cost by usingtemporary, part time or contractual employees.

Team & Workforce Diversity hire diverse workforce

(age, race, nationality, etc) can provide competitive

advantage. DuPont African American employees,create new market by focusing on black farmers.


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Selecting best Strategy

After assessing the pros & cons of different strategy,

one alternatives must be chosen.

Most important criterion in selecting a strategic

alternative should be its ability to achieve

predetermined corporate objective with least use ofresources & with no or few side effects.

A tentative execution plans should be made to address

the difficulties that management is likely to face whileactually implementing the strategy, using situation

based scenarios simulation models.

Construct Corporate Scenarios


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Construct Corporate Scenarios

For every alternative strategic program sample pro forma balance

sheet & income statement should be create to calculate the

return on investment.

For every alternative, set of assumption should be made and three

scenarios must be constructed Optimistic, Pessimistic & Most

Likely.

Construct detailed pro forma financial statement using current year

financial figures and record the optimistic, pessimistic & most

likely financial figures over a extended time frame. The ideal is to

get detailed figures of Net Profit, Cash Flow, Working Capital,

etc. for each strategic alternative. In order to choose the rightalternative what if analysis should be used for reasoning.

Regardless of the quantifiable pro & cons, actual decision will be

influenced by several other factors.


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Managements attitude towards RISK

The attractiveness of a particular strategic alternative

depends not only, upon the probability that it will be

effective but also on the amount of resources

allocated to that alternative & for what time duration.

The greater the amount of asset involved & the longerthey are committed, then top management wants a

higher probability of success.

P f E t l E i t Th tt ti f


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Pressure from External Environment - The attractiveness of a

strategic alternative is affected by its compatibility with the key

stakeholders like creditors, employee union, stockholders, etc.

Management must consider the following while deciding uponthe strategic alternative identify most crucial stakeholder,

assess their needs & chances of meeting those needs, actions

stakeholder will take if needs are not met & the probability of

stakeholder taking these actions.

Pressure from Corporate Culture If a strategy is incompatible

wit the corporate culture, it will probably not succeed.

Management must assess the compatibility of the available

strategic alternatives wit the corporate culture. If there is little fit,

management must decide what actions should be taken ignore the culture, manage around & modify the

implementation, try to change the culture, change the strategy

to fit the culture, etc.

N d & D i f K E l E th t tt ti


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Needs & Desire of Key Employees Even the most attractive

strategic alternative will not get selected if it does not fulfill the

needs & desire of the key managers in the corporations. They

key managers can influence the management decision in thefavor of a particular alternative or to ignore disadvantages of a

particular alternative.

Managers may ignore a negative information about a particular

decision, as they want to show that they are committed &consistent in their performance. Sometimes it take a unlikely

event or some form of crisis in order to attract attention from

the strategic decision makers towards the ignored facts. Eg.

ConAgra Healthy Foods Products.


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Strategy Formulation & Implementation are two sides of

the same coin. Although implementation is usuallyconsidered after strategy has been formulated, but it

is the key part of strategic management.

To begin the implementation of the chosen strategic

alternative management must look into the followingmatter:

Identify people who will implement the strategy

Develop Program, Budget & Procedure

Organize for action how to implement the strategy.

Challenges faced by the corporation when they attempt to


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Challenges faced by the corporation when they attempt to

implement a strategic choice:

Slower implementation than originally planned

Unanticipated major problem

Ineffective coordination of activities

Competing activities & & crises that distract attention away

from implementation

Insufficient capabilities of the involved employees Inadequate training & instruction of lower level employees

Uncontrollable external factors

Inadequate leader ship & direction by department managers

Poor definition of key implementation tasks & activities Inadequate monitoring of activities by the information system


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Develop Programs Budgets & Procedures


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Develop Programs, Budgets & Procedures

A program is a statement of activities or steps needed to

accomplish a single use plan.

A budget is a statement of corporations program in money

terms. After programs are developed, the budgets process

begins. Planning a budget is the last real check a corporation

has on the feasibility of its selected strategy.

Procedures or SOP are system of sequential steps that

describe in detail how a particular task should be completed.

Achieve synergy between function & business units, especiallyafter mergers or acquisition.

An Introduction to Strategy New

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