Ch 1 Introduction to Bsusiness Strategy and Policy

CH-1_ Basic Concepts of Strategic Management

By:Sajeeb K. ShresthaPh.D. Scholar (FOM), TUShanker Dev Campus, TU

BBA 8th Semester, IAUBUS 400 Business Strategy and Policy

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Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Chapter ObjectivesWhen you finish this chapter, you should understand:Understand the benefits of strategic management. Explain how globalization and environmental sustainability influence strategic management. Understand the basic model of strategic management and its components. Identify some common triggering events that act as stimuli for strategic change. Understand strategic decision-making modes. Use the strategic audit as a method of analyzing corporate functions and activities.

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*1. Concept of Strategy(Concept of Brand)

*StrategyStrategy is a key planning tool for the smooth running of an organization and the achievement of its goal of long-term survival and growth. It is an essential tool of top management to cope with external environmental challenges.Military science, where the strategy concept originated, defines strategy from a positional perspective: the way troops are arranged and placed on the battlefield to secure an advantage over them. Imagine, a small army positioning its troops on the top of a hill to gain an advantage a larger enemy.

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*Strategy is a set of decisions and actions that managers make and take to attain superior company performance relative to rivals.Strategy guides to allocate resources in a way that would endow the firm with an advantage over rivals a strong market position, and exceptional internal capabilities leading to superior company performance. Globalization, Liberalization, changes in economic and political system and technological advancement creates competition in the industry.

*For e.g., in an industry where pricing power of the firm is low, managers may allocate marketing resources to the product so as to position it as a premium brand (known as differentiation strategy of Rolex watch). When effective, a strong market position gives the firm a pricing advantage the ability to charge a higher price even when others are offering similar product at a lower price.

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Competitive Advantage

Market Position Internal Capabilities

Performance

Profitability

Strategy

Decision and actions aimed to achieveStrategy, Competitive Advantage and Performance

*"Strategy is the direction & scope of an organization over long-term, which achieve advantage for the organization through its configuration of resources within a changing environment and to fulfill stakeholders' expectations". Johnson and Scholes."A strategy is a set of decision-making rules for guidance of organizational behaviour." ..Ansoff."A strategy is a unified, comprehensive and integrated plan that relates the strategic advantages of the firm to the challenges of environment" Jauch and Glueck.

*"Strategy is the means by which long term objectives will be achieved." .. Fred David. "Moving from where you are to where you want to be in the future through sustainable competitive advantage".. Ansoff."Strategy as creative, imagination and analytical process"G. Hamel."The cunning Plan"Quinn."Thing future and how will you compete differently in the future"Hamel and Prahalad.

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Strategy is the process of matching the strength with opportunitiesProf. Puskar Bajracharya, TU.

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Current Business(PBS College)

Future Business(PBS University)

Strategy

Vision

Mission

*It defines:i. Current and future business. (Future business is guided by 'Vision' and Current business is guided by 'Mission').ii. Products to be offered, Customers and market segments to be served.iii. Resource allocation to business units.iv. Competitive advantage.vi. Ways for environmental adaptation. (Strategic Fit).

*Strategy should focus:i. What is our business?ii. What should it be? iii. What are our products, markets and functions?iv. What can our firm do to accomplish objectives?

*Military and Business Strategy

*Nature or Characteristics of Strategyi. Top management decisionii.Log-term direction.iii.To get some advantage (positioning)iv.Scope of an organization's activities/ boundary of business v.Should the organization concentrate on one area of activity, or should it have many markets?v.Environmental adaptation (strategic fit).vi.Affect operational decision.viii.Affect values & expectation of stakeholders.

*2. Concept of Strategic Management

*Concept of Strategic ManagementStrategic decision-making is done through the process of strategic management. Strategic management is defined as the dynamic process of formulation, implementation, evaluation, and control of strategies to realize the organization's strategic intent. Strategic management is that set of managerial decisions and actions that determine the long-run performance of the company.

*It includes environmental scanning (both external and internal), strategy formulation, strategy implementation, evaluation and control. The study of strategic management, therefore, emphasizes the monitoring and evaluating of external opportunities and threats in light of a corporation's strengths and weaknesses.

Johnson and Scholes "Strategic management includes understanding the strategic position of an organization, strategic choices for the future, and turning strategies into action".

*Why the Concept EvolveIn earlier times, the managers focused on Todays decisions for todays business. They have prepared systems, procedures, allocated budgets, monitoring & evaluation systems (i.e. Capital Budgeting and MBO techniques). Company managers have experienced that they have to anticipate future & prepare it. The inadequacy of these techniques has led to the emergence of long-range planning which in turn gives rise to strategic planning and subsequently to strategic management.

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Long-range Planning

Strategic Planning

Strategic Management

*3. Benefits of Strategic Management

*Benefitsi. Strategic management emphasize long-term performance: Company can get more profit in the short term with high performance, but for the long term survival strategic orientation is must.Strategic management helps firm to sustain over a longer period of time.For e.g., Forbes 100 companies listed in 1917, only 13 have survived to the present day.To be successful in the long run, company should execute activities that adapt to satisfy new and changing markets.

*ii. To identify opportunities: Strategic management helps organizations to identify opportunities of competitive advantage in the external environment. It make companies alert to new opportunities from a long term perspective.iii. To compete:Strategic management help companies to face competition.Companies develops its core competencies areas where it can hit the competition.

*iv. Change management: Strategic managers are always ready for accepting change management. Companies should be able to manage change process to get new state. Companies are doing activities to make strategic fit .v. To enhance CSR:Strategic management makes us aware the corporate social responsibilities of a business firm so that firms are concerned with the welfare of employees, shareholders, customers, government and society at a large.

*A survey of nearly 50 companies in a variety of countries and industries found that the three most highly related benefits of strategic management to be:Clearer sense of strategic vision for the firmSharper focus on what is strategically importantImproved understanding of a rapidly changing environment

*4. Influence of Globalization and Environmental Sustainability

*In the beginning, companies were successful only selling goods and services in the national boundaries.International considerations were minimal.Profits from foreign markets considered as jam on the bread.During 1990s American companies were focusing their domestic markets with varieties of products division. And global business were handled by only one international division

*Untill 20th century, business firm are not being environmentally sensitive.Companies dumped their waste products nearby streams or lakes and freely polluted the air with smoke containing harmful gases.Responding to complaints, governments finally passed laws restricting the freedom to pollute the environment. Lawsuits forced companies to stop old practices.Until the dawn of the 21st century, most companies considered pollution reduction measure as a part of business that was either minimized or avoided.

*Rather than cleaning up the manufacturing site, they closed the plant and moved to establish their plant in the developing nations with fewer environmental restrictions.For them, sustainability means competitive advantage, not the environment.

*Impact of GlobalizationGlobalization means the integrated internationalization of markets and companies.Globalization has changed the way modern companies do business.Thomas Friedman says The world is Flat because jobs, knowledge, and capital are now easily move across borders with far greater speed and far less friction than was possible only a few years ago.The world wide availability of the Internet and supply chain logistical improvements, such as containerized shipping, makes companies can operate anywhere with multiple partners to service any markets.

*Companies are producing goods in low costs in countries to make their prices low to achieve economy of scale and competitive advantage. For e.g., Nike, Reebok manufacture their athletic shoes in various countries throughout Asia to sell in the global markets.Companies are doing outsourcing their manufacturing, software development, or customer service to companies in another countries. Large talented pooled of software programmers, English language proficiency and lower wages in South Asia makes possible for outsourcing business.

*Companies organizational has been changes from one international division to matrix organizations structure in which products unites are connected with country or regional units. Strategic management is becoming an increasing important way to keep track of international developments and position a company for long-term competitive advantage. For. E.g., General Electric moved a R&D lab of medical divisions from Japan to China in order to learn more about developing new products for developing economies.

*The formation of regional or global trading blocks (SAFTA, ASEAN, WTO) has changed the way of international business. They have focus on enhancing foreign trade by making similar rules and regulations on trade.

*Impact of Environment SustainabilityEnvironmental sustainability refers to the use of business practices to reduce a companys impact on natural and physical environment. For e.g., to meet environmental responsibilities Johnson an Johnson Ltd. has invested a technology in its plant where biodegradable waste is recycled.Tata Energy Research System (TERI) is powered by renewable energy system, which uses waste biomass and solar radiation as source of energy. It also has solar roof to generate energy. Air conditioning is provided by an earth air tunnel. In short complex emits no wate.

*Grasim Industries an Aditya Birla Group is doing experiment with alternate fuel for manufacturing cement.A survey by different groups revealed that climate change is playing a growing role in the companies business decisions. Similarly, government regulation is also increasing during this decade.

The effect of climate change on industries and companies throughout the world can be grouped into six categories of risk.

*Six categories of risk due to climate changeGrasim Industries an Aditya Birla Group is doing experiment with alternate fuel for manufacturing cement.A survey by different groups revealed that climate change is playing a growing role in the companies business decisions. Similarly, government regulation is also increasing during this decade.

The effect of climate change on industries and companies throughout the world can be grouped into six categories of risk.

*Regulatory Risk: Regulatory risk is the risk of a change in regulations and law that might affect an industry or a business. Such changes in regulations can make significant changes in the framework of an industry, changes in cost-structure, etc.Regulatory Risk For some companies, the expectation of greenhouse gas regulation (Kyoto Protocol) poses new costs and compliance obligations to manage. For others, regulation will not affect them directly, but a new market environment may emerge through increased fuel prices and/or changed consumer demand.Supreme Court of India has obliges certain guidelines to reduce emissions of Auto sector. All the buses and auto rickshaws in Delhi are using CNG (Compressed natural gas).

Source: Ceres. (2010). Climate Change Risk Perception and Management: A Survey of Risk Managers. Boston.*

*Supply Chain Risk: Suppliers will be increasingly vulnerable to government regulations leading to higher component and energy costs as they pass along increasing carbon-related costs to their customers.Melting of polar ice will increase higher sea levels that will create problems on seaport supply. Chinese ministries reported on global warming foreseeing a 5%-10% reduction in agricultural output by 2030; more droughts, floods, typhoons, and sandstorms; and 40% increase in population threatened by plague.

*Product and Technology Risk: Worldwide investments in sustainable energy(wind solar, and water power) is tremendously increasing.Consumers are purchasing products of those companies sensitive environmental consciousness. Carbon-friendly products using new technologies are being popular with consumers.Automobiles companies that are adopting hybrid or alternative energy cars gained a competitive advantage.

*Litigation Risk: Companies that generate significant carbon emissions face the threat of lawsuits similar to those in the tobacco, pharmaceutical, and building supplies industries.Companies are charged costs for water pollution in water-stressed areas, cost recovery related to the relocation of human settlement away from land reclaimed by rising seas, or damages from extreme events intensified by greenhouse gas emissions.

*Reputational Risk: Firms exposed to any of the above risks may suffer reputational risk if brand names are associated with climate-related damages or perceived mismanagement of the climate change risk environment.Company with a good record of environmental sustainability may create a competitive advantage in terms of attracting and keeping loyal consumers, employees and investors.For e.g., Wal-Marts pursuit of environmental sustainability as a core business strategy has helped soften its negative reputation as low-wage, low-benefit employer.

*Physical Risk: The direct risks posed by climate change includes the physical effects of floods, droughts, storms, and rising sea levels.Temperature has been rising in the past fifty years, affecting to melting glaciers and sea levels rising one inch per decade.Affecting industries are insurance, agriculture, fishing, forestry, real estate, and tourism.

*5. Basic Model of Strategic Management and Its Components

*Model of Strategic Management Process

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*Basic model/Process of Strategic Managementi. Environmental Scanning: Environmental scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the organizations.Organizations continuously monitors and evaluates the changes and developments in the external and internal environment to identify strategic factors.External environment provides opportunities and threats. Internal environmental provides strengths and weaknesses.

*ii. Strategy Formulation: Strategy formulation is the development of long-range plan for the effective management of environmental opportunities and threats, in the light of organizations strengths and weaknesses (SWOT).It includes the identify strategic intent. Strategic intents are mission, vision, and long-term objectives. Mission:An organizations mission is the purpose or reason for the organizations existence. It tells what the organization is providing to society.

*A well conceived mission statement defines the fundamental, unique purpose that sets a company apart from its competitors about companies products, markets and customers.A mission statement includes firms value and philosophy about how it does business. Mission describes What the organization is nowVision:Vision is the future aspiration of the organization. Vision describes what the organization would like to become in the future.

*Mission statement of Google:To organize the worlds information and make it universally accessible and useful.Objectives:Objectives are the end results of planned activity. They should be stated as action verbs and tell what is to be accomplished by when and quantified if possible.Goal vs objectives:Goals are abstracts term. For e.g., increase profit. BHAG (Big Hairy Audacious Goals)Objectives are specific: Profit increase 5% in 2015. SMART (Specific, Measurable, Attainable, Realistic, and Time bound).

*Strategy:A strategy of a company is a comprehensive master plan that states how the company will achieve its mission and objectives. Policy:A policy is broad guideline for decision making that links the formulation of a strategy with its implementation.Companies use policies to make sure that employees throughout the firm make decisions and take actions that support the corporations mission, objectives and strategies. For e.g., Southwest Airlines offers no meals or reserved seating on airplanes. This support Southwests competitive strategy of having the budget airlines in the industry.

*iii. Strategy Implementation: Strategy implementation is a process by which strategies and policies are put into action through the development of programs, budgets, and procedures. Formulation of strategy addressed What & Why of actions whereas implementation of strategy addresses Who, Where, When and How.Strategy formulation requires conceptual & analytical skill while implementation needs administrative skills.The formulation strategy ends where implementation.

*This process involves: Organizational structure: Organizational structure is designed to implement strategy smoothly. It establishes reporting relationships, span of control and level of hierarchy. Duties and responsibility are clearly defined.Resource planning: Resources like people, money, technology, time and information are matched with opportunities. Resources are allocated to different Strategy Business Units (SBUs).Management System: A system is maintained through HRM, Information management (ICT) and Leadership.

*iv. Strategy Evaluation and Control: Evaluation and control is a process in which organizational activities and performance results are monitored so that actual performance can be compared with desired performance.Performance is the actual output of the strategic management process. These are profit and return on investment. Corrective actions are taken to resolve problems. The evaluation and control of performance completes the strategic management model. Based on performance results, management may need to make adjustments in its strategy formulation, in implementation, or in both.

*6. Triggering Events for Strategic Change.

*Triggering EventsA triggering event is something that stimulates a change in strategy.Some of the possible triggering events is: New CEO: New CEO is asked what will he do for the companies existence. External Intervention: External threat is encountered suddenly.E.g., the bank suddenly refuses to provide a new loan or suddenly calls for payment in full on an old one.

*Triggering EventsThreat of a change in ownership:Another firm may initiate a takeover by buying the companys common stock. Performance gap: A performance gap exists when performance does not meet expectations. Sales and profits either are no longer increasing or may even be falling.Strategic inflection point:What happens to business when a major change take place due to the introduction of new technologies, a different regulatory environment, a change in customers value, and customer preference.

*7. Strategic Decision-Making Modes.

*Mintzbergs Modes of Strategic Decision MakingSome strategic decisions are made in lead by one person (an entrepreneur or powerful CEO) who has insights and able to convince others.Some decisions are taken as incremental choices from time to time.Henry Mintzberg has suggested three most typical approach.i. Entrepreneurial Mode:Strategy is made by one powerful individual.The focus is on opportunities; problems are secondary.

*Strategy is guided by the founders own vision of direction and is exemplified by large, bold decisions.The dominant goal is growth of the organization.E.g., Amazon.com, founded by Jeff Bezos, is run as entrepreneurial mode.The company reflected Bezos vision of using internet to market books and more. But, Bezos abnormal management style made it difficult to retain senior executives.

*ii. Adaptive Mode:It referred as muddling through.Decision making is characterized by reactive solutions to existing problems.It does not take a proactive approach to search new opportunities.Priority of objectives are not clear.It is decided through bargaining.Decision making is fragmented.It takes an incremental approach to forward movement of the organization.

*Most universities, large hospitals, large number of governmental departments, and large companies use adaptive mode of strategic decision making.Encyclopedia Britannica Inc. found in 1996 that door-to-door selling of books had become old and performance became worthless.The company organized television advertising and television marketing.Now the company charges libraries and individual subscribers for complete access to Brittanica.com and offers CD-ROMs with 32-volume print set.

*iii. Planning Mode:Decision making mode involves the systematic gathering of appropriate information for situational analysis, the generation of feasible alternatives, and the rational selection of most appropriate strategy.It includes both the proactive search for new opportunities and the reactive solution of existing problems.For e.g., IBM under CEO Louis Gerstner. In 1993 when Louis Gerstner accepted the job of CEO in IBM, he realized that IBM was is serious difficulty.

*Sales and market share of the companys main product mainframe computer was declining rapidly. An in-depth analysis of IBMs product lines revealed that only part of the company that was growing services and it was relatively small segment and not profitable.Rather than focusing of selling its own computer hardware, IBM made the strategic decision to invest in services that integrated IT. IBM decided to provide a completed set of services from building systems to defining architecture to running and managing the computers. Since the starting year 1993, 80 percent of IBMs revenue growth had come from services.

*iv. Logical Incrementalism:The mode was added by Quinn to Mintzbergs modes.It is a synthesis of planning, adaptive and entrepreneurial modes. Strategic decisions develop out of series of incremental choices over time in a changing environment.Top management has clear idea of mission and objectives.Decisions are not made at once. Interaction on and discussion is allowed to take decisions.

*This approach appears to be useful when the environment is changing rapidly and when it is important to build consensus and develop needed resources before committing a whole organization to a specific strategy.For e.g., in the petroleum industry, Grant described strategic planning as planned emergence.Corporate headquarters established the mission and objectives but allowed the business units to propose strategies to achieve them.

*8. Use the strategic audit as a method of analyzing corporate functions and activities. (Strategic Audit)

*Strategic decision making process is put into action by strategic audit.Strategic audit provides a checklist of questions, by area or issue, that enables a systematic analysis to be made of various corporate functions and activities.Beginning with an evaluation of current performance, the audit continues with environmental scanning, strategy formulation, and strategy implementation, and it concludes with evaluation and control.It is a type of management audit that focus on corporate problems and highlight organizational strengths and weaknesses.

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Thank You.*

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