Strategic Management I All Chapter

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Unit :1 Strategic Management 1Strategy Strategy (Greek Word)is a general, undetailedplanof action, encompassing a long period of time, to achieve a complicated goal.Strategy, as a way of action, becomes necessary in a situation when, for the direct achievement of the main goal, the available resources are not enough. The task of strategy is an efficient use of the available resources for the achievement of the main goal.Detailing it further, strategy is all about gaining (or being prepared to gain) a position of advantage over competitors or best exploiting emerging possibilities. As there is always an element of uncertainty about the future, strategy is more about a set of options ("strategic choices") than a fixed plan.Strategy as a pattern in a stream of decisions.ConceptsMilitary Science In military science , strategy is the utilization during both peace and war, of all of the nation's forces, through large scale, long-range planning and development, to ensure security and victory.Game /Competition Ingame, astrategyrefers to the rules that aplayer uses to choose between the available actionable options. Every player in aimportant game has a set of possible strategies to use when choosing what moves to make.A strategy refers to look ahead and considers what actions can happen in each contingent state of the game for instance, if the player takes action 1, then that presents the opponent with a certain situation, which might be good or bad, whereas if the player takes action 2 then the opponents will be presented with a different situation, and in each case the choices they make will determine our own future situation.

Continue..Strategy based games generally require a player to think through a sequence of solutions to determine the best way to defeat the opponent.Management Science /BusinessIn management science/business field it is the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.

ContinueStrategy is large-scale, future oriented plans for interacting with the competitive environment to achieve company objectives.It is a companys game plan.It is a detail plan about how, when, and where the company should compete against whom it should compete, and for what purposes it should compete. Continue..Strategic planning/management is defined as the set of decisions and actions that result in the formulation and implementation of plans designed to achieve a companys objectives.Strategic management is a set of managerial decisions and actions that determines the long-run performance of a corporation.It includes environmental scanning (both external and internal), strategy formulation (strategic or long-range planning), strategy implementation, and evaluation and control.It emphasizes the monitoring and evaluating of external opportunities and threats in light of a corporations strengths and weaknesses.

Session 1 Perform External AuditPerform Internal AuditFormulationImplementationEvaluationA Comprehensive Strategic Management ModelSource : Fred R. David, How Companies Define Their Mission, Long Range Planning (June 1988)Dimensions of Strategic DecisionsDimensions of Strategic Decisions refers to the types of decision that the organizations make.It refers to the strategic issues which are associated with the business organization.It brings strategic management attention to the decision making.The following are the dimensions of strategic decisions.Strategic Issues Require Top Management DecisionsStrategic decisions impact several areas of a firms 'operation so they require top management involvement.Only top management has the perspective needed to understand the broad implications of such decisions and power to authorize the necessary resource allocations.

Strategic Issues Require Large Amounts of the Firms ResourcesStrategic decisions involve substantial allocations of people, physical assets, or moneys that either must be redirected from internal sources or secured from outside the firm.They also commit the firm to actions over an extended period.For these reasons they require substantial resources.Strategic Issues Often Affect the Firms Long Term ProsperityStrategic decisions generally commit the firm for a long time, typically five years.However, the impact of such decisions often lasts much longer.Once a firm has committed itself to a particular strategy, its image and competitive advantages usually are tied to that strategy.Firms become known in certain markets, for certain products, with certain technologies.They would put in risk their previous gains if they shifted from these markets, products, or technologies by adopting a radically different strategy. strategic decisions have enduring effects on firms- for better or worse.Strategic Issues Are Future OrientedStrategic decisions are based on what managers forecast, rather than on what they know.More emphasis is placed on the development of projections that will enable the firm to select the most promising strategic options.In the turbulent and competitive free enterprise environment, a firm will succeed only if it takes proactive (anticipatory) stance toward change. Strategic Issues Usually Have Multifunctional and Multi Business Consequences Strategic decisions have complex implications for most areas of the firm.Decisions about such matters as customer mix, competitive emphasis, or organizational structure necessarily involve a number of the firms strategic business units(SBUs),divisions, or program units.All of these areas will be affected by allocations or reallocations of responsibilities and resources that result from these decisions.Strategic Issues Require Considering the Firms External EnvironmentAll business firms exist in an open system.They affect and are affected by external conditions that are likely beyond their control.To successfully position a firm in competitive situations, its strategic managers must look beyond its operations.They must consider what relevant others such as competitors, customers, suppliers, creditors, governments and labors are likely to do.Levels of StrategyCorporate/Business LevelFunctional LevelSingle Business FirmMultiple Business FirmsCorporate LevelBusiness LevelFunctional LevelLevels of StrategyThe decision making hierarchy of a firm typically contains three levels.Corporate levelComposed principally of a board of directors and the chief executive and administrative officers.They are responsible for the firms financial performance and for the achievement of nonfinancial goals such as enhancing the firms image and fulfilling its social responsibilities.Primarily corporate unit focus of their concern with stockholders and society in large.ContinueIn a multi business firm, corporate level executives determine the businesses in which the firm should be involved.They set objectives and formulate strategies that span the activities and functional areas of businesses.Corporate level managers attempt to exploit their firms distinctive competencies by adopting a portfolio approach to the management of its businesses and by developing long term plans, typically for a three to five year period.Continue.Business /Medium LevelBusiness level will be composed of business and corporate managers.These managers translate the statements of direction and intent generated at the corporate level into concrete objectives and strategies for individual business divisions or SBUs.Business level managers determine how the firm will compete in the selected product market arena.They try to find out most secure and promising market segment from which they can gain the competitive advantage.

ContinueFunctional LevelThis level will be composed principally of managers of product, geographic, and functional areas.They develop annual objectives and short term strategies in such areas such as production, operations, research and development, finance and accounting, marketing and human resource management.The responsibility of these managers is to implement or execute the firms strategic plans.Characteristics of Strategic Management Decisions The characteristics of strategic management decisions vary with the level of strategic activity considered.

Corporate Level DecisionsBusiness Level DecisionsFunctional Level DecisionsMore Value orientedMore ConceptGreater riskHigh costMore profit potentialGreater need for flexibilityLonger time horizonsDecisions areas are: choice of businessesDividend policiesSources of long term financingPriorities for growthLess costly,risky,potentially profitable than corporate level decisionsMore costly,risky,and potentially profitable than functional level decisionsDecisions making areas are:Plant locationMarket segmentationGeographic coverageDistribution channels

Action orientedRelatively short rangeLow riskModest costsHighly flexibleRequires less cooperationQuantifiableDecisions areas are:Generic Vs brand name labelingBasic research vs applied research and developmentHigh vs low inventory levelsGeneral purpose vs specific purpose production equipmentLose vs close supervisionFormality in Strategic ManagementThe formality of strategic management systems varies widely among companies.Formality refers to the degree to which participants, responsibilities, authority, and caution in decision making are specified.Greater formality is usually positively correlated with the cost,comprehensiveness,accuracy,and success of planning.A number of forces determine how much formality is needed in strategic management.Size of organizationPredominant management stylesComplexity of environmentProduction processProblems

Formality is associated with the size of the firm and with its stage of development.Small FirmsThese forms follow the entrepreneurial mode in strategic managementThese firms are basically under the control of a single individual, and they produce a limited number of products and services.In these firms strategic evaluation is informal, intuitive and limited.

Medium Size FirmsThese firms follow adaptive mode in relatively stable environments.The identification and evaluation of alternative strategies are closely related to existing strategy.These firms emphasize the incremental modification of existing competitive approaches.Large FirmsThese firms follow the planning mode in strategic managementThe strategic formality will be comprehensive, and formal planning system.

Role of CEO in Strategic ManagementThe Ideal Strategic Management Team IncludesChief executive officer (CEO)Product managersHeads of functional areasThe Strategic Management Team Obtains Input FromPlanning staffLower-level management and supervisorsRole of CEOProvides long-term directionAssumes ultimate responsibility for firms successSolicits (seeking) guidance from Board of DirectorsBenefits of Strategic ManagementEnhances the firms ability to prevent problemsEmphasizes group-based strategic decisions likely to be based on best available alternativesImproves employees understanding of the productivity-reward relationshipReduces gaps/overlaps in activities among employees as their participation clarifies differences in rolesResistance to change is reduced

Risks of Strategic ManagementTime involved may negatively impact operational responsibilities of managersLack of involvement of strategy makers in strategy implementation may result in shirking of responsibility for strategic decisionsPotential disappointment of employees over unattained expectations requires managerial time and training

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Unit: 2 Environmental Analysis

The 1st step of the strategy management process is environmental analysis. An organization can only be successful if it is appropriately matched to its environment.

ENVIRONMENT ANALYSISis the study of the organizational environment to pinpoint environmental factors that can significantly influence organizational operations.33MANAGERS commonly perform environmental analyses to help them understand what is happening both inside and outside their organizations and to increase the probability that the organizational strategies they develop will appropriately reflect the organizational environment.

In order to perform an environmental analysis efficiently and effectively, a manager must thoroughly understand how organizational environments are structured.

34For purposes of environmental analysis, the environment of an organization is generally divided into 3 distinct levels:

General EnvironmentOperating EnvironmentInternal Environment

Managers must be well aware of these 3 organizational environmental levels, understand how each level affects organizational performance and then formulate organizational strategies in response to this understanding.

35THE GENERAL ENVIRONMENT:The components normally considered part of the general environment are:EconomicSocial: Including Demographics and Social ValuesPoliticalLegalTechnological

36THE OPERATING ENVIRONMENT:The operating Environment includes various components like:CustomerCompetitionLabourSupplierInternational Issues.

37THE INTERNAL ENVIRONMENT:The level of an organizations environment that exists inside the organization and normally has immediate and specific implications for managing the organization is the internal environment. It includes marketingfinance and accounting,planningorganizing influencing and controlling within the organization.

38Purpose of General Environmental AnalysisOrganizations are affected by conditions in the environmentManagers need to be aware of these conditions in order toTake advantage of opportunities that can lead to higher profitsReduce the impact of threats that can harm the organizations future39Gathering Information for External Environmental AnalysisManagers need information in order to know and develop an understanding about what is happening in the external environmentThree approaches to information gathering:Scanning: general surveillance of environmental changes; looking for early signals of changesMonitoring: close attention to specific developments that could affect the organizationCompetitive Intelligence: following actions of competitors40Sources of Environmental DataInternal sources may also be a good source of data on customer needs, attitudes, and behavior. The organization's own records are the best source of data on current objectives, performance, and available resources. The sheer volume of available information on the economy, and business activities is the major strength of most government data sources. The articles and research reports that are available in periodicals and books provide a gamut of information about many organizations, industries, and nations. Commercial sources are almost always relevant to a specific issue because they deal with the actual behaviors of customers in the marketplace.The best approach to secondary data collection is one that blends data and information from a variety of sources.If needed secondary data is not available, out of date, inaccurate or unreliable, or irrelevant to the specific problem at hand, the manager may have little choice but to collect primary data through marketing research. 41Overcoming Problems with Data CollectionOne of the most common problems is an incomplete or inaccurate assessment of the situation for which data is being gathered to address.Another common difficulty is the expense of collecting environmental data.A third issue is the time it takes to collect environmental data.A final challenge is finding a way to organize the vast amount of data and information that are collected during the environmental analysis. 3-24Three Areas for AnalysisGeneral EnvironmentCompetitive/task/operating EnvironmentInternal Environment43General & Competitive EnvironmentsGeneral Environment44Competitive EnvironmentThreat on new entrantsBargaining power of suppliersBargaining power of buyersThreat of substitute productsCompetitive rivalry

DemographicsPolitical/LegalTechnologicalGlobalSocioculturalMacoreconomic44GENERAL EnvironmentDEMOGRAPHICSCharacteristics of a countrys populationSize of population and growth rateAge distribution of populationEducation levelsIncome distributionEthnic diversityGeographic distribution45General EnvironmentPOLITICAL/LEGALPolitical and legal conditions affecting businessGovernment policies toward businessInvestment policyBusiness regulation: labor, environmentEducation prioritiesBudget conditions and plans46General EnvironmentTECHNOLOGICALTechnological developments relevant to a businessTelecommunicationsInternetOn-line trainingProduct and process innovations47General EnvironmentMACROECONOMICImpact of the economy on businessSize and change in gross domestic productPer capita income levelsInflation rateInterest ratesForeign trade deficit or surplusUnemploymentRates of saving and investment

48General EnvironmentSOCIOCULTURALInfluence of values, beliefs, and lifestyles of a country on businessFamily relationshipsAttitudes about workLiving arrangementsStyles of entertainmentAttitudes toward health49General EnvironmentGLOBALInternational developments that can impact a businessRise of China as economic powerRising global trade and WTOIntellectual property protectionImportant political events: Iraq warSearch for low cost suppliers50COMPETITIVE EnvironmentManagers must understand the conditions of competition within their industryPorter Five-Forces Model of Competition (determining the attractiveness of an industry)Key Success FactorsCompetitive Changes During industry EvolutionStrategic GroupsNational Competitive Advantage5152Porters Five Forces Model of CompetitionSubstitute Products(of firms inother industries)Suppliers of Key InputsBuyersPotentialNewEntrantsRivalryAmongCompetingSellersThreat of New EntrantsFundamental question: how easy is it for another company to enter the industry?Factors making easy entry to industryLow economies of scaleLow product differentiationLow capital requirementsNo switching costs for buyerEasy access to distribution channelsLittle government regulation53Supplier PowerFundamental question: how badly does a supplier need your business?Factors giving power to supplier:Supplier industry dominated by few firmsSuppliers product is important input to buyers productSuppliers products have high switching costsSupplier becomes competitor of buyer

54Threat of SubstitutesFundamental question: what other products or services could perform the same function as your products or services?Factors indicating high threat of substitutes:Customer switching cost are lowPrice of substitute lower quality higher than for your products

55Buyer PowerFundamental questions: How badly does a buyer need your products or services? Factors contributing to high buyer power: Few buyers compared to the number of sellers Buyer switching costs are low Buyer is price sensitive Buyer is well-educated regarding the product Buyer purchases product in high volume Product is undifferentiated Substitutes are available56Competitive RivalryFundamental question: how intense(extreme) is competition in the industry? Factors leading to high competitive rivalry:Numerous or equally balanced competitorsSlow industry growthLack of differentiation or switching costsHigh strategic stakesHigh exit barriers

57Four Basic Types of CompetitionBrand Competitors: market products that are similar in features and benefits to the same customers at similar pricesProduct Competitors: compete in the same product class, but with products that are different in features, benefits, and priceGeneric Competitors: market very different products that solve the same problem or satisfy the same basic need Budget Competitors: compete for the limited financial resources of the customers.58The 6-W ModelWho are our current and potential customers? What do our customers do with our products? Where do our customers purchase our products?When do our customers purchase our products? Why do our customers select our products? Why do potential customers not purchase our products?59Unit 4 : Industry and Competitive AnalysisUntil and unless managers do not understand the companys surroundings they can not set the ultimate direction of the company.

The industry and competitive environment in which the company operates and forces acting to reshape the environment.

The companys own market position and competitiveness resources,strenghts,capabilities and weaknesses, opportunities for growth as compared to rivals.

The strategic makers key task is to organize diverse of market change, and what rival companies are doing.

All managers should review all surrounding relevant factors and influences important enough to make direction, objectives, strategy and business model.

Competitive pressures from rivals, buyer behavior, supplier related considerations, actions from rival firms etc. are comes into our investigation.

Strategy Selection ProcessThinking Strategically about a companys external environmentThinking strategically about a companys internal environmentFrom a strategic vision of where the company needs to headIdentify promising strategic options for the companySelect the best strategy and business model for the companyMethods of Strategy and Competitive Analysis

Industrys dominant economic featuresFive forces of competitionDriving forcesEnvironmental scanning Strategic group mapsMonitoring competitionKey success factorsIndustrys Dominant Economic Features

Market Size and Growth Rate Number of Rivals Scope of Competitive RivalryNumber of BuyersDegree of Product Differentiation6.Product Innovation

64Five Forces of Competition Bargaining power of buyersBargaining power of suppliersThreat of substitute productsThreat of new entrantsRival among competing sellers Driving Forces Emerging New Internet Capabilities and Applications.Online buying and selling (e-commerce)Voice over the internet protocol(VOIP) (Music industry-iTunes)E-mail service has replaced the fax and postal service,Videoconferencing has replaced the business travel.Online education has replaced the traditional universities education.Cloud computing has replaced the huge computing storage devices.

Technological Change and Manufacturing Process InnovationTechnological change can produce better and innovative products at lower costs and open new industry frontiers.VOIP-Traditional telephoningFlat screen PC monitors- Cathode Ray Tube (CRT) monitorsLED technology-CRT .MP3 technology-walk man, tape recorder etc.Satellite radio technology-traditional F.M and Radio stations.

Environmental Scanning*Extrapolation*Brainstorming*Expert Opinion *Delphi Technique *Scenario Writing

Strategic Group MapRival firm occupancy. comparing the market positions of each firm separately.similar competitive approaches and positions in the market.Comparable product line breadthEmphasize the same distribution channelsidentical technological approachesSell in the same price/quality range

High

Price

LowFew Locations Geographic Coverage Many Locations Wal-MartGapAudiPoloMonitoring Competition concerned with knowing competitors strengths and weaknesses.Competitive intelligence is associated with rivals strategieswindow of opportunitiesCompetitive Analysis has the Following OutcomesWhich competitor has the best strategy? Which competitors appear to have flawed or weak strategies?Which competitors are poised to gain market?Which competitors are likely to rank among the industry leaders five years from now? Key Success Factors Key success factors are the particular strategic elements, product attributes, resources, competencies, competitive capabilities, and

Relevant Examples: Beer IndustryFull utilization of brewing capacity(to keep manufacturing cost low).A strong network of wholesale distributers (to get the companys brand stocked and favorably displayed in retail outlets where beer is sold)Clever advertising (to induce beer drinkers to buy the companys brand and there by pull beer sales through the established wholesale /retail channels) Unit 5 :Evaluating Company Resources and Competitive CapabilitiesResources A companys resource strengths represent competitive assets and are big determinants of its competitiveness and ability to succeed in the market place.Resources are an organizations assetsThey include Tangible assets -- plant, equipment and location Human assets in terms of number of the employees, their skills and motivation. Intangible assets --patents and copyrights, culture, and reputationValuable Physical AssetsState of the art plants and equipmentAttractive real estate locationsWorldwide distribution facilities

Valuable Human Assets And Intellectual CapitalAn experienced and capable workforceTalented employees in key areasCutting edge knowledge in technology or other important areas of the businessCollective learning embedded in the organization.

Valuable Organizational Assets Proven quality control systemsTechnologyOwnership of important natural resourcesHighly trained customer service representativesA strong network of distributors or retailersA strong balance sheet and credit ratingValuable Intangible Assets A powerful or well known brand nameA reputation for technological leadershipStrong buyer loyalty and goodwillAn Achievement or Attribute That Puts The Company in a Position Of Market AdvantageLow overall costs relative to competitorsMarket share leadershipA superior product A wider product line than rivalsWide geographic coverage Award winning customer service Competitively Valuable Alliances or Cooperative VenturesFruitful partnership with suppliers that reduce costs or enhance product quality and performanceAlliances or joint ventures that provide access to valuable technologiesSpecialized know-howCapabilities Capabilities refer to a corporations ability to exploit its resourcesBusiness processes routines that manager the interaction among resources to turn inputs into outputs.The capabilities are functionally based and is resident in a particular function.There are: marketing capabilities, manufacturing capabilities and human resource management capabilities.When functional capabilities are constantly being changed and reconfigured to make them more adaptive to an uncertain environment, they are called dynamic capabilities. For example a companys marketing capability can be based on the interaction among its marketing specialists, distribution channels and sales peopleCompetencies A cluster of related abilities ,commitments, knowledge and skills that enable a organization to act effectively in job or a situation

For instance a competency in a new product development in one division of a corporation may be the consequence of integrating management of information system capabilities, marketing capabilities, R&D capabilities, and production capabilities within the divisionCore competencyNew product development is a core competency if it goes beyond one division.For example a core competency of Avon products is its expertise in door to door selling.FedEx has a core competency in its application of information technology to all of its operations.

Distinctive Competencies When core competencies are superior to those of the competition, they are called distinctive competencies.For example General Electric is well known for its distinctive competency in management development. Its executives are sought out by hiring top managersVRIO FrameworkThe given framework can be applied while evaluating a firms competenciesValue Does it provide customer value and competitive advantage?Rareness Do no other competitors possess it?Imitability Is it costly for others to imitate?Organization Is the firm organized to exploit the resource?

If the answer to each of these questions is yes for a particular competency it is considered to be a strength and thus a distinctive competence.This should give the company a competitive advantage and lead to higher performance.

Weakness and Resource DeficienciesA resource weakness or competitive deficiency is something a company lacks or does poorly or a condition that puts it at a disadvantage in the market placeThe following are the weaknesses and resource deficiencies of the companyNo clear strategic directionA balance sheetHigher overall costWeak product innovation capabilitiesNarrow product lineWeaker dealer networkWeak brand image and reputationUnutilized organizational capacity Weak R&D etcMarket Opportunities The market opportunities most relevant to a company are those that matchup with the companys financial and organizational resource capabilitiesprofitability and potential for competitive advantage.

The following factors are associated with market opportunitiesSharply rising buyers demandOpenings to win market shareExpanding into new geographic marketOnline sales Forward and backward integration etc.

Threats to Future Profitability These are the unfavorable conditions posed by the different market forces such as Emergence of cheaper/better technologiesIntroduction of better products by rivalsEntry of lower-cost foreign competitorsRise in interest ratesPotential of a hostile takeoverUnfavorable demographic shiftsAdverse shifts in foreign exchange ratesPolitical upheaval in a country

Role of SWOT Analysis inCrafting a Better StrategyS W O T analysis involves more than just developing the 4 lists of strengths, weaknesses, opportunities, and threatsThe most important part of S W O T analysis isUsing the 4 lists to draw conclusionsabout a companys overall situationActing on the conclusions toBetter match a companys strategy to itsresource strengths and market opportunitiesCorrect the important weaknessesDefend against external threats

VALUE CHAIN ANALYSISA value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value.Customer value derives from three basic sources:Activities that differentiate the productActivities that lower the costAnd activities that meet the customers need quicklyValue chain analysis attempts to understand how a business creates customer value by examining the contribution of different activities within the business to that valueMargin

General AdministrationHuman Resource Management R&D,Technology and System Development Procurement Inbound LogisticsOperationsOutbound LogisticsMarketing and SalesService Support Activities Primary ActivitiesCONDUCTING A VALUE CHAIN ANALYSISIdentify activitiesAllocate costsRecognize the difficulty in activity-based cost accountingIdentify the activities that differentiate the firmExamine the value chainDevelop meaningful comparisons to use when evaluating value activitiesCompetitive Capabilities to Competitive AdvantageCompetitive AdvantageWhen a firm sustains profits that exceed the average of its industry the firm is said to possess a competitive advantage over it rivals.The goal of much of business strategy is to achieve a sustainable competitive advantage.Michael Porter identified two basic types of competitive advantage Cost AdvantageDifferentiation Advantage A competitive advantage exists when firm is able to deliver the same benefits as competitors but at a lower cost (Cost Advantage),or deliver benefits that exceed those of competing products (Differentiation Advantage).A competitive advantage enables the firm to create superior value for its customers and superior profits for itself.Cost and differentiation advantages are known as positional advantages since they describe the firms position in the industry as a leader in either cost and differentiation.Resources Value CreationCost Advantage and Differentiation AdvantageDistinctive CompetenciesCapabilitiesA Model of Competitive Advantage ResourcesResources are firm specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resourcesPatents and trademarksProprietary know-howInstalled customer baseReputation of the firmBrand equity

CapabilitiesCapabilities refers to the firms ability to utilize its resources effectively.An example of the capability is the ability to bring a product to market faster than the competitors.Such capabilities are embedded in the routines of the organization and are not easily documented as procedures and thus are difficult to competitors to replicate.

Distinctive competenciesThe firms resources and capabilities together form its distinctive competenciesThese competencies enable innovation, efficiency,quality, and customer responsiveness, all of which can be leveraged to create a cost advantage or differentiation advantage.