Strategic Management New _2

Strategic Management Notes

1

A. NATURE OF STRATEGIC MANAGEMENT

Definition: Strategic Management is the set of decisions and actions that result in the formulation and implementation of plans designed to achieve a company’s objectives. It comprises nine critical tasks.

1. Formulate the company’s mission, including broad statements about its purpose, philosophy, and goals.

2. Conduct an analysis that reflects the company’s internal conditions and capabilities.

3. Access the company’s external environment, including both the competitive and the general contextual factors.

4. Analyze the company’s options by matching its resources with the external environment

5. Identify the most desirable options by evaluating each option in light of the company’s mission

6. Select a set of long-term objectives and grand strategies that will achieve the most desirable options

7. Develop annual objectives and short-term strategies that are compatible with the selected set of long-term objectives and grand strategies

8. Implement the strategic choices by means of budgeted resource allocations in which the matching of tasks, people, structures, technologies, and reward systems is emphasized

9. Evaluate the success of the strategic process as an input for future decision-making

B. DIMENSIONS OF STRATEGIC MANAGEMENT

Strategic issues require top management decisions: because strategic decisions overarch several areas of a firm’s operations, they require top-management involvement. Usually only top management has the perspective needed to understand the broad implications of such decisions and the power to authorize the necessary resource allocations.

Strategic issues require large amounts of the firm’s resources: strategic decisions involve substantial allocations of people, physical assets, or moneys that either must be redirected from internal sources or secured from outside the firm

Strategic issues often affect the firm’s long-term prosperity: strategic decisions ostensibly 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 advantage usually are tied to that strategy.

Strategic issues are future oriented: strategic decisions are based on what managers forecast, rather than on what they know. In such decisions, emphasis is placed on the


2

development of projections that will enable the firm to select the promising strategic options.

Strategic issues usually have multifunctional or multibusiness 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 firm’s strategic business unit (SBUs), divisions, or program units.

Strategic issues require considering the firm’s external environment: all business firms exist in an open system. They affect and are affected by external conditions that are largely beyond their control. Therefore, to successfully position a firm in competitive situations, its strategic managers must look beyond its operations. they must consider what relevant others e.g. competitors, suppliers, customers, creditors, government, and labour are likely to do.

C. LEVELS OF STRATEGIC MANAGEMENT

Corporate Level: this is composed principally of board of directors and the chief executive and administrative officers. They are responsible for the firm’s financial performance and for the achievement of nonfinancial goals, such as enhancing the firm’s image, and fulfilling its social responsibilities. To a large extent attitude at the corporate level reflect the concerns of stockholders and society at large.

Business Level: this is composed of business and corporate mangers. 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. In essence business level managers determine how the firm will compete in the selected product-market arena.

Functional level: this is composed of managers of product, geographic, and functional areas. They develop annual objectives and short-term strategies in such areas as production, operations, research and development, finance and accounting, marketing, and human relation. However, their principal responsibility is to implement the firm’s strategic plans.

D. CHARACTERISTICS OF DECISIONS AT THE VARIOUS LEVE LS

The characteristics of strategic management decisions vary with the level of strategic activity considered. Decisions at the corporate level tend to be more value oriented, more conceptual, and less concrete than decisions at the business or functional level. Corporate-level decisions are often characterized by greater risk, cost and profit potential; greater need for flexibility; and longer time horizons.

Business-level decisions help bridge decisions at the corporate and functional levels. Such decisions are less costly, risky, and potentially profitable than functional-level decisions. Common business-level decisions include decisions on plant location, marketing segmentation and geographic coverage, and distribution channels.


3

Functional-level decisions implement the overall strategy formulated at the corporate and business levels. They involve action-oriented operational issues and are relatively short-range low risk. Functional –level decisions incur only modest costs, because they depend on available resource. Because functional-level decisions are relatively concrete and quantifiable, they receive critical attention and analysis even though their comparative profit potential is low.

E. FORMALITY IN STRATEGIC MANAGEMENT

Formality refers to the degree to which participants, responsibilities, authority, and discretion in decision-making are specified. Greater formality is usually required or associated with cost comprehensiveness accuracy as we decide.

THREE KINDS OF FORMALITIES

In particular, formality is associated with the size of the firm and with its stage of development.

1. Entrepreneurial mode: Some firms especially smaller ones follow this mode. They are basically under the control of a single individual, and they produce a limited number of products or services. Decisions here are informal , intuitive, and limited because it is owner managed.

2. Planning mode: this is the kind of strategic formalities associated with big companies or business. Here, strategic evaluation is made part of a comprehensive formal planning system. Here decisions go through a lot of processes to be implemented.

3. Adaptive mode: This is the strategic formality associated with medium-sized firms that emphasize the incremental modification of existing competitive approaches. This means adaptive mode deals with very few people. People here are normally not creative, but rather copy from others. This is said to be adaptive because the decision-making process is short.

F. STRATEGY MAKERS (WHO DECIDES WHAT?)

1. Functional Level: This level demands more technical skills.

Supervisors: They are usually engineers. Supervisors here provide input (data) for strategic decisions, and later implement. They develop annual objectives and short-term strategies in such areas as production, operations, research and development, finance and accounting, marketing, and human relations. However, their principal responsibility is to implement or execute the firm’s strategic plans.

2. Business Level (strategic unit business level):


4

General Managers: they develop environmental analysis and forecasting, and establishing business objectives. They develop business plans, which are prepared by staff. In essence, business-level strategic managers determine how the firm will compete in the selected product-market arena.

3.Top Management Level: Their responsibilities are long-term objectives under which we can identify

Generic objectives

Low cost,

Product or service differentiation,

Market leadership, focus strategies

Grand strategies:

Concentration (market penetration, product development, market development)

Vertical integration (forward and backward)

Horizontal integration etc

G. BENEFITS OF STRATEGIC MANAGEMENT

Group Decision: people with diverse background will generate lot of information that provides a pool of knowledge, which would lead to quality decision-making, in that best alternatives are likely to be selected. Put differently, group based strategic decisions are likely to be drawn from the best available alternatives.

Motivational: the involvement of employees in strategy formulation improves their understanding of the productivity-reward relationship in every strategic plan and, thus, heightens their motivation.

Efficiency and Effectiveness: This leads to avoidance of duplicates and reduction of gaps. That is, gaps and overlaps in activities among individuals and groups are reduced as participation in strategy formulation clarifies differences in roles.

Commitment: Involvement of employees and subordinates etc in decision-making makes them more likely to accept those decisions, and makes them less resistant to change

Implementation: Strategy formulation activities enhance the firm’s ability to prevent problems.

Managers who encourage subordinates’ attention to planning are aided in their monitoring and forecasting responsibilities by subordinates who are aware of the needs of strategic planning.

H. RISK IN STRATEGIC MANAGEMENT PROCESS


5

1. It is time consuming. The time that managers’ spend on Strategic management process might have negative impact on operational activities. Therefore, managers are to learn to minimize that impact by scheduling their duties to allow the necessary time for strategic activities.

2. It may be a problem if strategy makers are not involved in the implementation. This means if the formulators of strategy are not intimately involved in its implementation, they may shirk their individual responsibility for the decisions reached. Thus, strategic managers must be trained to limit their promises to performance that the decision makers and their subordinates can deliver.

3. Strategic managers must be trained to anticipate, and respond to the disappointment of participating subordinates over expectations, which are not achieved.

SECTION 2: STRATEGIC MANAGEMENT PROCESS

A. COMPONENTS OF STRATEGIC MANAGEMENT

1. The mission statement: Is the unique purpose that sets a company apart from others of its type and identifies the scope of its operations in product market and technology terms. The mission statement should actually identify the product, the type of technology, the market, and what the company is doing in terms of social responsibility, and how the public perceives the company.

Purpose,

Philosophy: values of the company having to do with customers, employees, and stakeholders.

Goal:

2. Internal Analysis: Identifying the company’s weaknesses and take responsibilities for them, and also identifying the strengths and improving upon them. The company must analyze the quantity and quality of the company’s financial, human, and physical resources. It also assesses the company’s organizational structure, and contracts the company’s past successes and traditional concerns with the company’s current capabilities in an attempt to identify the company’s future capabilities.

3. External Analysis: Identify opportunities and threats. A firm’s external environment consists of all the conditions and forces that affect its strategic options and define its competitive situation.

4. Strategic analysis: identify options or alternatives available towards problem solving. Accessing various options quantitatively and selecting those options that anticipate a higher yield.

5. Long-term objectives: These are the results that an organization seeks over a multiyear period. Such objectives typically involve areas such as profitability, investment, and competitive position, technological leadership; improve productivity, improvement of employee relationships and employee development.


6

6. Short-term objectives: have to do with desired results that provide specific guidance for action during a period of one year or less. They are logically consistent with the firm’s long-term objectives. For instance marketing activity, raw material usage, employee turnover, sales objectives etc.

7. Tactical objectives: These are short-term, limited-scope plans, for example, a radio advertisement campaign, an inventory reduction, and an introductory loan rate.

8. Policies: These are the guidelines, which pre authorize the decision, thinking and action of managers. They empower actions, and they allow you to decide without consulting anyone.

9. Restructure, re-engineer, and refocus the organization. This means that the company’s structure, leadership, culture and reward system may all change to make sure that cost is minimized and we have high quality products or services.

10. Strategic control and continuous improvement:

Strategic control is concerned with tracking a strategy as it is being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments.

Continuous improvement is a form of strategic control in which managers are encouraged to be proactive in improving all operations of the firm. It provides a way for managers to provide a form of strategic control that allows their organization to respond more proactively and timely to rapid developments in hundreds of areas that influence a business’s success.

B. STRATEGIC MANAGEMENT AS A PROCESS

A process is a flow of information through interrelated stages of analysis towards the achievement of an objective. This implies

1. A change in any component will affect several/many or all of the company. For instance the external environment may influence the nature of a company’s mission, and the change in a company’s mission may in turn affect all the other components of the process.

2. Strategy formulation precedes strategy implementation. This is a second implication of viewing strategic management as a process. Strategy formulation and implementation are sequential. This step begins with development or reevaluation of the company mission. This step is associated with, but essentially followed by, development of a company profile and assessment of the external environment. Then follow in order, strategic choice, definition of long-term objectives, design of grand strategies, definition of short-term objectives etc.

3. It requires feedback. A third implication for viewing strategic management as a process is the necessity of feedback from institutionalization, review, and evaluation to the early stages of the process. Feedback can be defined as the


7

analysis of post implementation results that can be used to enhance future decision-making.

4. Strategic management is a dynamic process, in that it is not static, but rather evolves in the environment. The fourth implication of viewing strategic management as a process is the need to regard it as a dynamic system. The term dynamic characterizes the constantly changing conditions that affect interrelated and interdependent strategic activities.

CHAPTER TWO: COMPANY’S MISSION

SECTION 1: Notion (Concept)

Definition: Is the unique purpose that sets a company apart from others of its type and identifies the scope of its operations in product market and technology terms.

The company mission is a broadly framed but enduring statement of a firm’s intent. It embodies the business philosophy of the firm’s strategic decision makers, implies the image the firms seeks to project, reflects the firm’s self-concept, and indicates the firm’s principal product or service areas and the primary customer need the firm will attempt to satisfy. In short, it describes the firm’s product, market, and technological areas of emphasis, and it does so in a way that reflects the values and priorities of the firm’s strategic decision-makers.

Why do we need a mission statement?

An explicit mission statement is needed to be able to answer the ff questions

Why do we find ourselves in the business? (The raison d’être of the business)

What are the economic goals of the business?

What is our operating philosophy in terms of quality, company image, and self-concept?

What are our core competencies (ability accumulated over time), and competitive advantages?

What are your customers?

How do we view our responsibilities to stockholders, employees, communities, environment, social issues and competitors?


8

SECTION 2: FORMULATING A MISSION

A. Fundamental Beliefs:

The process of defining the company mission for a specific business can perhaps be best understood by thinking about the business at its inception.

It is essential to know the fundamental beliefs of the company regarding the following

1. The product or service, which can provide benefit to customers

2. Technology that is to be used in production. Whether it would minimize cost or enhance quality of products and services.

3. Businesses, which cannot only survive but also grow and be profitable.

4. Management philosophy of the business, which will result in a favourable public image, and will provide financial and psychological reward for those who are willing to invest their labour and money in helping the business to succeed.

5. The self-concept of the business

B. Basic product or service; Primary market; and Principal Technology

These are three indispensable components of the mission statement. These components are discussed as one because only in combination do they describe the company’s business activity.

C. Goals (SMART): Survival; Growth; Profitability

These are three economic goals that guide the strategic direction of almost every business organization. A firm that is unable to survive will be incapable of satisfying the aims of any of its stakeholders. Profitability is the mainstay goal of a business organization. No matter how profit is measured or defined, profit over the long term is the clearest indication of a firm’s ability to satisfy the principal claims and desires of employees and


9

stockholders. A firm’s goal is tied inextricably to its survival and profitability.

D. Company Philosophy: The statement of a company’s philosophy, often called the company creed, usually accompanies or appears within the mission statement. It reflects or specifies the basic beliefs, values, aspirations, and philosophical priorities to which strategic decision makers are committed in managing the company. It also includes public image of the company, training, benefits, job enhancements, benefits that would be provided by your product, and values that have to do with profit maximization.

E. Public Image This refers to the attributes that potential and current customers give to the company. Positive public image is a desideratum.

F. Company’s self-concept: The firm realistically must evaluate its competitive strengths and weaknesses to achieve its proper place in a competitive situation. This idea that a firm must know itself is the essence of the company self-concept. A major determinant of a firm’s success is the extent to which the firm can relate functionally to its external environment.

G. Newest Trends in Mission Statement/ components: Recently three issues have become so prominent in the strategic planning for organizations that they are increasingly becoming integral parts in the development and revision of mission statements: sensitivity to consumer wants, concern for quality, and statements of company vision.

Customer: Customers should be seen as a top priority. Hence providing them with safe product, quality product, fair price, good customer service, and after sale support.

Quality: this should be a comprehensive subject; quality in administration, human relation, supervision, employee training, production, development, and quality in fair treatment.

Vision statement: The vision statement is statement that presents the organization’s strategic intent designed to focus energies, and resources of the company on achieving a desirable future.

Whereas the mission statement expresses an answer to the question “what business are we in?” The vision statement is sometimes developed to express the aspirations of the executive leaders. The mission statement and the vision statement are frequently combined into a single statement. When they


10

are separated, the vision statement is often a single statement like “our vision is salvation”.

SECTION 3: BOARD OF DIRECTORS

They are a group of stockholder representatives and strategic managers responsible for overseeing the creation and accomplishment of the company mission. The board has this major

Responsibilities: (They)

State the Mission Statement, and review it if necessary

Elect the company’s officers

Decide compensation levels, salaries and bonuses

Declare dividends

Establish company policies

Set objectives and authorize managers to implement the long-term strategies

Ensure compliance with legal and ethical issues

SECTION 4: AGENCY THEORY

The Agency theory refers to a set of ideas on organizational control based on the beliefs that the separation of ownership from management creates the potential for wishes of owners to be ignored as managers may be self interested.

Agency Theory Cost: This has to do with lost of potential gain because decision-making authority is dedicated to managers by owners. The cost to minimize them is often related to direct benefits for the agents.

Put differently, agency theory cost is in combination, the cost of agency problems and the cost of actions taken to minimize agency problems.

A. Cause of agency problems/ how agency problems occur

Moral Hazards: this is the situation where owners have limited access to company information, making executives free to pursue their own interests.


11

Adverse selection: This is because of the limited ability of stockholders to precisely determine the competencies and priorities of the executives at the time they are hired.

B. Problems that can result from agency

1. Managers pursue growth in company size rather than in earnings. Shareholders generally want to maximize earnings, because earnings growth yields stock appreciation. However, because managers are typically more heavily compensated for increases than for earnings growth, they may recommend strategies that yield company growth such as mergers and acquisition.

2. Managers may attempt to diversify their corporate risk. Whereas stockholders can vary their investment risks through management of their individual stock portfolios, managers’ careers and stock incentives are tied to the performance of a single corporation. Albeit the one that employs them.

3. Managers try to optimize their personal payoffs. If executives can gain more from an annual performance bonus by achieving objective 1 than from stock appreciation resulting from the achievement of objective 2, then owners must anticipate that the executives will target objective 1 as their priority, even though objective 2 is clearly in the best interest of the shareholders.

4. Executives act to protect their status. When their companies expand, executives want to ensure that their knowledge, experience, and skills remain relevant and central to the strategic direction of the corporation.

C. Solutions to Agency problem

Big bonuses and incentives: these help executives to see their loyalty to the stockholders as the key to achieving their personal financial targets.

Handsome premium: a second solution to agency problems is for executives to receive back loaded compensation. This means that executives are paid a handsome premium for superior future performance.

Creating teams of executives across different units of the company can help to focus performance measures on organizational rather than personal goals. Through the use of executive teams, owner interests often receive the priority that they deserve.


12

CHAPTER 3

CORPORATE SOCIAL RESPONSIBILITY AND BUSINESS ETHICS

SECTION 1

A. The stakeholder approach to social responsibility

Shareholders:

Patience to the distribution of profit,

Inspection of the company’s books,

Transfer of stock,

Election of the board of directors,

Right to share in the liquidation of the company.

Creditors:

The right to be paid interest on their securities

The right to redeem their securities

Security of pledge assets

Relative priority in the event of liquidation

Employees:

Fair treatment

Right to share in fringe benefits

Economic, social and psychological satisfaction in the place of work.

Customers:

Save product

Quality product

Information on how to use products, and ingredients of the product

Fair prices

Suppliers:


13

Continuation source of business

Timely consummation of trade, credit obligations

Professional relationships

Government:

Payment of taxes

Compliance with legal obligations like fair and free competition, or adherence to anti trust laws

Labour unions: Companies need to recognize these as negotiating agents for employees

Competitors: they expect from companies the observation of the norms for competitive conducts established by society and the industry

Local communities:

Participation of officers of the company in the affairs of the community

Provisions of employment

Purchase of raw material from the local community if available

General public/ society:

Contribution for the betterment of the society

B. TYPES OF SOCIAL RESPONSIBILITY

1. Economic responsibility: this is the duty of managers as agents of the company owners to maximization of shareholders’ wealth

2. Legal responsibilities: this is the firm’s obligations to comply with the laws that regulate business activities

3. Ethical responsibilities: doing what is right, i.e. the company is to exhibit the right and proper behaviour in all its dealings

4. Moral responsibilities: these are responsibilities voluntarily assumed by a business, such as public relations, good citizenship, and full corporate responsibility.


14

C. CORPORATE SOCIAL RESPONSIBILITY AND PROFITABILITY

Corporate social responsibility is the idea that business has a duty to serve society in general as well as the financial interest of stockholders.

A company that is socially responsible will improve its public image.

Social responsibility today

Increasing buyers’ power

Ecology: the company should not only not defy the environment but should also protect it.

Globalization of business: this implies going beyond the boundaries of ones country with an objective to do business.

- International companies from developed countries investing in poor countries in quest of cheap labour – Human rights violation

Meager salaries

Poor working environment

- Companies investing in poor countries deny employment opportunities to some people in their respective countries.

D. THE NEW CORPORATE GOVERNANCE STRUCTURE

The company may itself conduct a social audit to measure the company’s actual social performance against its social objectives. However, an outside auditor brings credibility to the evaluation.

E. SATISFYING SOCIAL RESPONSIBILITY

A. Giving to charitable organizations

B. Collaborative social initiative: with this the company joins with an organization that has particular expertise in managing the way benefits are derived from corporate support.

C. Social corporate responsibility dominated mission


15

F. PRINCIPLES OF SUCCESSFUL SOCIAL RESPONSIBILITY

1. Identify a long-term durable mission in the area of hunger, inadequate housing, ill health, sub-standard education, and degradation of the environment etc.

2. Contribution to specialized services to a large-scale undertaking; Have the greatest social impact by making specialized contribution to large-scale cooperative efforts.

3. Weigh government influence. Government support for corporate participation in Collaborative social Initiative, or at least government’s willingness to remove barriers in the area of tax, liability protection, and other forms of direct and indirect support for businesses can have a positive influence.

4. Assemble and value the total package of benefits. Companies gain the greatest benefits from their social contributions when they put a price on the total benefit package. The valuation should include both the social contributions delivered and the reputation effects that solidify or enhance the company’s position among its constituencies.

CHAPTER 4: EXTERNAL ENVIRONMENT

These are factors beyond the control of the firm that influence its choice of direction and action, organizational structure, and internal processes.

SECTION 1: REMOTE ENVIRONMENT

This comprises factors that originate beyond, and usually irrespective of any single firm’s operating situation.

A. Economic Factors: These concern the nature and direction of the economy in which a firm operates. Because consumption patterns are affected by the relative affluence of various market segments, each firm must consider economic trends in the segments that affect its industry. On both national and international level, these must be considered

-General availability of credit

-The level of disposable income

-Propensity of people to spend


16

-Interest rate

-Inflation

-Growth of national product

B. Social Factors: social factors are dynamic, with constant resulting from the efforts of individuals to satisfy their desires and needs by controlling and adapting to environmental factors. Therefore, the company should always be abreast with changes in these factors

Cultural

Religious affiliation

Education

Age growth

C. Political Factors define the legal and regulatory parameters within which firms must operate.

Investment code

Stability

Minimum wage legislation

Pollution and pricing programme

Peace and security

D. Ecological Factors: specific concerns under this include

Global warming

Loss of habitat and biodiversity

Air, land and water pollution

E. Technological: To avoid obsolescence and promote innovation, a firm must be aware of technological changes that might influence its industry. Creative technological adaptations can suggest possibilities for new products or for improvements in existing products or in manufacturing and marketing techniques.


17

A technological breakthrough can have a sudden and dramatic effect on a firm’s environment. It may spawn sophisticate new markets and products or significantly shorten the anticipated life of a manufacturing facility. Thus, all firms and most particularly those in turbulent growth industries, must strive for an understanding both of the existing technological advances and the probable future advances that can affect their products and services

F. International Environment : This involves assessing each nondomestic/foreign market on the same factors that are used in a domestic assessment.

SECTION 2: INDUSTRY ENVIRONMENT

This is the general conditions for competition that influence all businesses that provide similar products and services

A. CONTENDING FORCES

1. THREAT TO ENTRY

The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that the entrant can expect. There are six major sources of barriers to entry:

Economies of scale: This is the savings that companies achieve because of increased volume. These economies deter entry by forcing the aspirant either to come in on a large scale or to accept a cost disadvantage.

Product differentiation: This refers to the extent to which customers perceive differences among products and services. Product differentiation creates a barrier by forcing entrants to spend heavily to be able to differentiate their product and to overcome customer loyalty.

Capital requirement: The need to invest large financial resources in order to compete creates a barrier to entry; resources for fixed facility and start up cost may be high.

Cost disadvantages independent of size: entrenched companies may have cost advantages not available to potential rivals, no matter what the size and attainable economies of scale. These advantages can stem from

- Effect of learning curve

- Ownership of technology


18

- Assets purchased at pre-inflation prices

- Access to raw materials

- Government subsidy

- Favourable locations

Sometimes cost advantages are enforceable legally, as they are through patents.

Distribution channels by existing firms: The more limited the wholesale or retail channels are and the more that existing competitors have these tied up, obviously the tougher that entry into the industry would be. Sometimes this barrier is so high that, to surmount it, a new entrant must create its own distribution channels.

Government policy: The number of regulation to comply with in order to enter the industry. The government can limit or even foreclose entry to industries, with such controls as license requirements, limits on access to raw materials, and tax incentives

2. POWERFUL SUPPLIER

Suppliers can exert bargaining power on participants in an industry by raising prices or reducing the quality of purchased goods and services. Powerful suppliers thereby, can squeeze profitability out of an industry unable to recover cost increases in its own prices.

A supplier group is powerful if

- It is dominated by a few companies and is more concentrated than the industry it sells

- Its product is unique or at least differentiated, or if it has built-up switching cost.

- It is not obliged to contend with other products for sale to the industry

- It poses a credible threat of integrating forward into the industry’s business

- The industry is not an important customer of the supplier group.

3. POWERFUL BUYERS


19

Customers likewise can force down prices, demand higher quality or more service, and play competitors off against each other - all at the expense of industry profit

A buyer group is powerful if

1. If it is concentrated or purchased in large volumes

2. The product it purchases from the industry are standard or undifferentiated

3. The products it purchases from the industry form a component of its product and represent a significant fraction of its cost

4. It earns low profits, which create great incentive to lower its purchasing costs.

5. The industry’s product is unimportant to the quality of the buyers’ products or services.

6. The industry’s product does not save the buyer money. Where the industry’s product or service can pay for itself many times over, the buyer is rarely price sensitive; rather, he or she is interested in quality.

7. The buyers pose a credible threat of integrating backward to make the industry’s product.

4. SUBSTITUTABILITY OF PRODUCTS

By placing a ceiling on the prices it can charge, substitute products or services limit the potential of an industry. Unless it can upgrade the quality of the product or differentiate it somehow, the industry will suffer in earnings and possibly in growth.

5. JOCKEYING FOR POSITION

Rivalry among existing competitors takes the familiar form of jockeying for position – using tactics like price competition, product introduction, and advertising slugfests. This type of intense rivalry is related to the presence of a number of factors:

1. Competitors are numerous or are roughly equal in size and power

2. Industry growth is slow, precipitating fights for market share that involve expansion minded members


20

3. The product or service lacks differentiation or switching costs, which lock in buyers and protect one combatant from raids on its customers by another

4. Fixed costs are high or the product is perishable, creating strong temptation to cut prices

5. Capacity normally is augmented in large increments,

6. Exit barriers are high

7. The rivals are diverse in strategies, origins, and “personalities”

SECTION 3: INDUSTRY ANALYSIS AND COMPETITIVE ANALYSIS

A. INDUSTRY BOUNDARIES

An industry is a collection of firms that offer similar products or services. By “similar products” we mean products that customers perceive to be substitutable for one another. Consider, for example, the brands of PCs that are now being marketed – the firms that produce these PCs such as HP, IBM, Apple and Dell form the nucleus of the microcomputer industry.

Importance of definition

- Competitors: It helps the firm identify its competitors and producers of substitute products. This is critically important to the firm’s design of its competitive strategy.

- Working area: A definition of industry boundary helps executives determine the arena in which their firm is competing, for example a firm competing in the microcomputer industry participates in an environment very different from that of the broader electronic business.

- Identification of skills, technology etc: It also helps executives determine key factors for success. Defining industry boundaries enables executives to ask these questions: do we have the skills it takes to succeed here? If not, what must we do to develop these skills?

- Substitutes

- Evaluation of goals: A definition of industry boundaries gives executives another basis on which to evaluate their firm’s goals. Executives use that definition to forecast demand for their firm’s products and services. Armed with that forecast, they can determine whether those goals are realistic.


21

- Knowing your opportunities:

B. PROBLEMS ASSOCIATED WITH THE DEFINITION OF INDUSTRY

Defining industry boundaries is a very difficult task. The difficulty stems from three sources:

1. The evolution of industries over time creates new opportunities and threats.

2. Industrial evolution creates industries within industries. The electronics industry of the 1960s has been transformed into many “industries” – TV sets, transistor radios, microcomputers etc. such transformation allows some firms to specialize and others to compete in different, related industries.

3. Industries are becoming global in scope.

C. DEVELOPING A REASLISTIC DEFINITION

To realistically define their industry, executives need to examine five issues:

1. Identification of the scope of the market of other firms

2. How similar are the benefits that the customers derive from the product and services that other firms offer?

3. How committed are other firms to the industry?

SECTION 4: OPERATING ENVIRONMENT (Immediate Environment)

This comprises factors in the immediate competitive situation that affect a firm’s success in acquiring needed resources or in profitably marketing its goods and services.

A. Customers’ profile

- Location (geographic area)

- Demographic factors (Gender, Age, Income, Marital status, Personality and lifestyle)

- Buyers’ behaviour (How often, How much)

B. Suppliers


22

- Fair prices

- Quality goods and services

- Better service

- Location

C. Labour Market (Employees)

- Reputation (Public image)

- Qualification of employees

- Availability

- Labour union

D. Competitive Position

Assessing its competitive position improves a firm’s chances of designing strategies that optimize its environmental opportunities.

Product differentiation

Communication

Constant modification

E. Creditors

Because the quantity, quality, price, and accessibility of financial, human, and material resources are rarely ideal assessment of suppliers and creditors is critical to an accurate evaluation of a firm’s operating environment. With regard to its competitive position with its creditors, among the most important questions that the firm should address are the following

Are the creditors able to extend lines of credit?

Are the creditors’ loan terms compatible with the firm’s profitability objectives?

CHAPTER 5: GLOBALIZATION Internationalization of bu siness activities

SECTION 1: CONCEPT OF GLOBALIZATION


23

The concept of globalization refers to the strategy of approaching worldwide market with standardize products.

Benefits of globalization

Low prices

Quality for informed customers

Technology

Increase in employment

Location near raw material

Expertise

Balance of payment (more export)

Disadvantages of globalization

Cheap products coming in

Threat to local industries

Unemployment in the north

Violation of human rights/poor working conditions in poor countries

Meager salaries

SECTION 2: DEVELOPMENT OF GLOBALIZATION

Step 1. Exports

2. Establishment of points of sales

3. Licensing (allowing people to use our technology)

4. Foreign facilities

5. Multi nationalize management from top to bottom

6. Multi nationalize of ownership

SECTION 3: WHY DO WE GO GLOBAL

Growth of operation – because we want to expand our business activities


24

Competitive weapon –

Risk diversification

Approaching the location of raw materials and taking advantage of opportunities

SECTION 4: AT THE START OF GLOBALIZTION

External and internal assessments are conducted before a firm enters global markets.

Economic factors

Political factors

Geographic factors

Labour factors

Tax factors

Capital source factors

Business factors

SECTION 5: COMPLEXITY OF THE GLOBAL ENVIRONMENT

1. Multiple political, economic, social and cultural environments, keeps on changing

2. Interactions between national and foreign environment are complex because of national sovereignty issues, and economic and social conditions which are different.

3. Geographical separation, cultural and national differences, and variations in business practices all tend to make communication and control efforts between headquarters and the overseas affiliates difficult.

4. Extreme competition: Globals face extreme competition, because of differences in industry structures within countries

5. Global companies are restricted in their selection of competitive strategies by various regional blocs and economic integrations like ECOWAS, and EEC (European Economic Community) etc.

SECTION 6: CONTROL PROBLEMS FACING GLOBAL FIRMS


25

- Global firms want to maximize financial objectives and pay little attention to the goals of the host countries. This creates conflict between the host country and the foreign country on one hand, and the host country and the country of origin on the other hand

- The global firm will like to repatriate the profit and invest these profits in another country where it thinks there is a better opportunity. Policies of the host country might to reinvest

SECTION 7: GLOBAL STRATEGIC MANAGEMENT

A. Multi domestic Industries: A multi domestic industry is one in which competition is essentially segmented form country to country. Even if global operations are in the industry, competition in one country is independent of competition in other countries, so the global company’s subsidiaries have a certain amount of autonomy to devise marketing strategies in their respective local market.

B. Global industry: Global industry refers to an industry in which competition goes beyond national borders on a worldwide basis; so strategic move in one country can be significantly affected by its competitive position in another country.

Strategic management planning must be global for the following reasons:

1. Increased scope of global management task: Growth in the size and complexity of global firms made management virtually impossible without a coordinated plan of action detailing what is expected of whom during a given period.

2. The increased globalization of firms: Three aspects of global business make global planning necessary:

a. Differences among the environmental forces in different countries

b. Greater distances, and

c. The interrelationships of global operations

3. The information technology: A global planning process provides an ordered means for assembling, analyzing and distilling the information required for sound decisions.


26

It is estimated that the world’s stock of knowledge is doubling every 10 years. Without the aid of a formal plan, executives can no longer know all that they must now to solve the complex problems they face.

4. The increased global competition: This requires that we need to have a comprehensive marketing strategy for the entire company. Because of the rapid increase in global competition, firms must constantly adjust to changing conditions or lose markets to competitors. The increase in global competition also spurs managements to search for methods of increasing efficiency and economy.

5. The rapid development of technology: Rapid technological development has shortened product life cycles. Strategic management planning is necessary to ensure the replacement of products that are moving into maturity stage, with fewer sales and declining profits, planning give management greater control of all aspects of new product introduction.

6. Global strategic management planning breeds managerial confidence: Managers with a plan for reaching their objectives know where they are going. Such a plan breeds confidence, because it spells out every step along the way and assigns responsibility for every task. The plan simplifies the managerial job.

FACTORS THAT DRIVE THE SUCCESS OF GLOBAL FIRMS

1.Global management team:

Possesses global vision and culture

Includes foreign nationals

Leaves management of subsidiaries to foreign nationals

Frequently travels internationally

Has cross cultural training

2. Global strategy:

Implement strategy as opposed to independent country strategies

Develop significant cross-country alliances

Select country targets strategically rather than opportunistically


27

3. Global operations:

Use common core operating processes worldwide to ensure quantity & uniformity

Product globally to obtain best cost and market advantage

4. Global technology:

Design global products but take regional differences into account

Manage development work centrally but carry out globally

5. Global financing:

Finance globally to obtain lowest cost

Price in local currencies

6. Global marketing:

Market global products but provide regional discretion if economies of scale are not affected

Develop global brands

FACTORS THAT MAKE FOR THE CREATION OF GLOBAL INDUSTRY

A firm in a global industry must maximize its capabilities through a worldwide strategy. Among the factors that make for the creation for a global industry are

1. Economies of scale of the functional activities of the firms in the industry.

2. A high level of research and development expenditures on products that require more than one market to recover development costs

3. The presence of homogeneous products across the markets, which reduce the requirement of customizing the product for each market

4. Consistency in customer service

SECTION 8: COMPETITIVE STRATEGIES FOR FIRMS IN FOREIGN


28

MARKETS

1. Exports:

2. Licensing: Licensing involves the transfer of some industrial property right from the licensor to a motivated licensee. Most tend to be patents, trademarks, or technical know how that are granted to the licensee for a specified time in return for a royalty and for avoiding tariffs or import quotas.

3. Franchising: franchising is a special form of licensing, which allows a franchisee to sell a highly publicized product or service using the parent brand name or trade mark, carefully developed procedures and. The franchisee pays a fee to the parent company typically based on the volume of sale of the franchisor in its defined market area. The franchise is operated by the local investor who must adhere to the strict policies of the parent

4. Joint Venture: Joint ventures are companies, which are set up by two or more companies, which commit their resources together to initiate the creation of another company.

5. Foreign Branching: A foreign branch is an extension of the company in its foreign market, which has responsibility to fulfill the operational duties like sales, customer service, and physical distribution of goods.

6. Equity Investment: is a kind of venture capital or private equity the company provides to a foreign company as well as a range of business services inc luding management expertise

7. Wholly owned subsidiaries: this is the highest investment commitment to the foreign market. These companies insist on full ownership for reasons of control, and managerial efficiency. Fully owned subsidiary can be started either from scratch or by acquiring established firms in the host industry.

CHAPTER 6: INTERNAL ANALYSIS

SECTION 1: SWOT ANALYSIS

A. SWOT analysis

SWOT analysis is a technique through which managers create a quick overview of a company’s strategic situation. It is based on the assumption


29

that an effective strategy derives from a sound “fit” between a firm’s internal resources (strength and weaknesses) and its external situation (opportunities and threats).

Strength. This refers to resource advantage relative to competitors, and the needs of the market a business firms serves or expects to serve. Generally strengths arise from the resources and competencies available to an organization.

Weaknesses. A weakness is a limitation or deficiency in one or more resources, or competencies relative to competitors that impedes a firm’s effective performance.

Opportunity. An opportunity is a major favorable situation in a firm’s environment. Key trends are one source of opportunities. Identification of a previously overliiked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm.

Threats. A threat is a major unfavourable situation in a firm’s environment like entrance of new competitors, slow market growth, increase bargaining power of buyer/customers, or suppliers, technological changes, or new/revised regulations, which could represent threats to a firm’s performance. Threats are key impediments to the firm’s current or desired position.

B. Importance of SWOT analysis (why?)

1. In order to re-evaluate and eventually redefine (if need be) the firm’s objectives, and the mission.

C. Steps in SWOT analysis

Step 1. Identify strengths and weaknesses

Step 2. Identify opportunities and threats

Step 3. Match strength, weaknesses, and opportunities in order to minimize the effect of threats.

D. Limitations Of SWOT Analysis


30

1. A SWOT analysis can put more emphasis on internal strengths, and neglect external threats. Strategists in every company have to remain vigilant against building strategies around what the firm does well now its strengths without due consideration of the external environment’s impact on those strengths.

2. The SWOT analysis can be static ignoring changing environment and circumstances. Critics of SWOT analysis, with good reason, warn that it is a one-time view of changing, or moving, situation.

3. A SWOT analysis can put more emphasis on a single strength or one element of strategy.

4. A strength is not necessarily a source of competitive advantage.

SECTION 2: VALUE CHAIN ANALYSIS

The term value chain describes a way of looking at a business as a chain of activities that transform input into output, which customers value.

The customer value derives from three basic sources:

1. Activities that differentiate the product

2. Activities, which lower its cost

3. Activities that meet the customers’ needs quickly

Value chain analysis is an analysis that attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value. Value chain analysis will divide the business into sets of activities that occur within the business, starting with the inputs a firm receives, and finishing with the firm’s product/services, and after sales services to the customer.

There are two sets of activities

1. Primary activities

Inbound logistics

Operations: all the processes needed to transform inputs into outputs

Outbound logistics


31

Marketing and sales

2. Support activities: this provides services to the primary activities

General administration

Human Resource management

Research

Technology

System development

Procurement: associated with purchasing raw materials

B. CONDUCTING A VALUE CHAIN ANALYSIS

1. Identify activities. The initial step in value chain analysis is to divide a company’s operations into specific activities or business processes, usually grouping them similarly to the primary and support activity categories discussed earlier.

2. Allocate costs.

C. DIFFICULTY IN ACTIVITY BASED COST ACCOUNTING

1. Identify the activities that differentiate the firm: The difficulty has to do with the fact that the firm has to analyze deeply the firm’s value chain, which may not only reveal cost advantages or disadvantages. It may also bring attention to several source s of differentiation advantages relative to competitors.

2. Examine the value chain: as we examine the value chain, we have to take into consideration three essential elements namely:

First, the company’s mission need to influence manager’s choice of activities to be examined in detail.

Second, the nature of value chains and the relative importance of the activities within them vary by industry

Third, the relative important of value activities can vary by a company’s position in a broader value system that includes the value chains of its upstream suppliers and downstream customers or partners involved in providing products or services to end users.


32

D. RESOURCE BASED APPROACH OF THE FIRM

Resource-based approach is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities and intangible as an organization.

The company has three basic resources

1. Tangible assets: these are the most easily identified assets, often found on a firm’s balance sheet. They include production facilities, raw materials, financial resources etc.

2. Intangible assets: are a firm’s assets that you cannot touch or see but that are very often critical in creating competitive advantage. Resources such as brand names, company reputation, organizational morale, technical knowledge, patents and trademarks, and accumulated experiences within an organization.

3. Organizational capabilities are skills or abilities and ways of combining assets, people and processes that a company uses to transform inputs into outputs.

Competency

A core competency

A distinctive core competence

CHAPTER 7

LONG TERM OBJECTIVES AND STRATEGIES

SECTION 1

A. Areas to establish long-term objectives

Profitability

Productivity

Competitive position


33

Employee development

Employee relations

Technological leadership

In the area of public responsibility

B. Qualities of long-term objectives

Acceptable to groups, which are

- External to the firm

- Within the firm

Flexible

Measurable

Understandable

Achievable

SECTION 2 GENERIC STRATEGIESS/OBJECTIVES

Generic strategy is simply a core idea about how a firm can best compete in the market place.

a. Low cost:

b. Product differentiation:

c. Focus strategies: attempt to attend to the needs of a particular market segment.

SECTTION 3 THE VALUE DISCIPLINES

A. Operation Excellence in

Production

Delivery

Services

B. Customer Intimacy


34

C. Product Leadership (high quality)

SECTION 4 GRAND STRATEGIES

A. Stable Growth strategies

B. Growth strategies

1. Concentration strategy:

Market development: It is a strategy to sell current products to new markets. Typically, management will employ this strategy when existing markets are stagnant, and when market-share increases are difficult to achieve because market shares are already very high or because competitors are very powerful. This is done by opening additional geographical markets through regional, national, and international expansion, and attracting other market segment through developing product versions to appeal to other segments, entering other channels of distribution, and advertising in other media.

Product development: This involves the substantial modification of existing products or the creation of new but related products that can be marketed to current customers through established channels. This is often adopted either to prolong the life cycle of current products or to take advantage of a favorite reputation or brand name. This can be achieved by developing new product features, developing quality variation, and developing additional models and sizes.

Market penetration: it refers to a strategy in which a firm expands its marketing effort to increase sales or use of existing products in its current markets. This is done by

Increasing present customers’ rate of use through (increasing the size of purchase, increasing the rate of product obsolescence, and advertising other uses)

Attracting competitors’ customers by (establishing sharper brand differentiation, increasing promotional effort, and initiating price cuts)

Attracting non-users to buy the product by (inducing trial use through sampling, price incentives, and so on, pricing up or down, and advertising new uses)


35

2. Horizontal integration: This is a strategy based on growth through the acquisition of similar firms operating at the same stage of the production-marketing chain. Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets. E.g. Mergers and acquisitions.

3. Vertical integration: This is a grand strategy based on the acquisition of firms that supply the acquiring firm with inputs such as raw materials, or new customers for its outputs such as warehouses for finished products.

Forward integration (downstream): it is a corporate level strategy through which an organization becomes involved in distributing and selling its own outputs. Involves gaining ownership and increased control over distributors or retailers.

Backward integration (upstream): it is a corporate level strategy through which an organization becomes involved in producing its own inputs

4. Diversification: Here, an organization expands by developing new products for new markets. Put differently, it is a growth strategy in which the company moves into other product lines in other industries. This happens when an industry is at the maturity stage and most of the surviving firms have reached the limits of growth using the concentration strategies.

Concentric – This is a strategy that involves the operation of a second business that benefits from access to the first firm’s core competencies. In other words adding new,but related products or service. The new products or services involved may relate to existing products or services through wither technology or marketing etc.

Conglomerate – This is a strategy that involves the acquisition of a business because it presents the most promising investment opportunity available. This has to do with adding new, but unrelated products

C. Defensive/ Retrenchment strategies

Turn-around strategy: This is a strategy of cost reduction (e.g. decreasing the workforce through employee attrition, leasing rather than purchasing equipment etc), and asset reduction (e.g. sale of land, buildings and equipment not essential to the basic activity of the firm, and elimination of


36

‘perks’ such as the company’s airplane) by a company to survive and recover from declining profits.

Divestment (Divestment): Selling a division or part of an organization is called divestiture. Divestiture may be necessary to balance a company’s equity with its long-term risks or to balance short-term and long-term debt payments to optimize the cost of capital. Divestiture is commonly used to raise funds for further strategies acquisitions or investments.

Divestment, then, is most likely when a company needs to raise money quickly, or when a business is seen as having a poor strategic fit with the rest of the portfolio and, as a result is holding back the whole organization.

Bankruptcy: This is when a company is a unable to pay its debts as they become due, or has more debts than assets.

Liquidation: This strategy involves the sale of the assets of the business for their salvage value/ tangible worth. Here the firm typically is sold in part, only occasionally as a whole – but tor its tangible asset value and not as a going concern. In selecting liquidation, the owners and strategic managers of a firm are admitting failure and recognize that this action is likely to result in treat hardship to themselves and their employees.

D. Combination strategies

Many, if not most organizations pursue a combination of two or more strategies simultaneously. For example product development and market development may all take place at the same time. However, no organization can afford to pursue all the strategies that might benefit the firm.

E. Other strategies

Joint ventures: A grand strategy in which companies create a co-owned business that operates for their mutual benefit. A joint venture occurs when two or more sponsoring firms form a separate organization for cooperative purposes; the sponsoring firms have shared equity ownership in the new entity.

Pruning strategies: this occurs when a firm reduces the number of products offered in a market. In effect pruning is the opposite of product development and occurs when a firm decides that some market segments are too small or too costly to continue to serve.


37

Strategic alliance: These are contractual partnerships because the companies involved do not take an equity position in one another. They are partnerships that exist for a defined period during which partners contribute their skills and expertise to a cooperative project.

CHAPTER 8

STRATEGY ANALYSIS AND SELECTION

Boston Consulting Group’s Growth-Share Matrix

Developed by the BCG, the growth-share matrix proposes that all except the smallest and simplest organizations are composed of more than one business. These businesses in an organization are called its corporate portfolio. The BCG approach proposes that a separate strategy be developed for each of these largely independent units, i.e. the SBU’s.

The four-quadrant grid displays an organization’s portfolio. The horizontal axis indicates the market share of the business relative to its major competitor and characterizes the strength of the organization in that business. The vertical axis indicates the percent of growth in the market (i.e. annual industry growth rate) in the current year and characterizes the attractiveness of the market for the business unit.

The market share and market growth for any particular year is calculated as follows

Relative market share (current year) = Business unit sales (current year)

Leading competitors sale (current year)

Market growth rate (current year) = Total market (CY)-Total market (PY) x100

Total market (previous year)

Stars

Question Marks


38

Cash cows

Dogs

High Low

Relative market share

The lines that divide the matrix into four quadrants are somewhat arbitrarily set. A high market growth rate is taken to be over 10 percent. The demarcation between high and low relative market shares is set at 1.5. this means that, if a particular business unit’s current sales are 1.5 times or greater than its leading competitor’s sales, then it is considered to have a high relative market share. These lines of demarcation are not absolutes and can be modified to fit the particular needs of an organization.

BCG describes the four quadrants of the growth-share matrix as follows:

Cash Cow is a leading SBU (high market share) in a mature or declining industry (low growth). Because of high market share, profits and cash generation should be high. The low rate of growth means that the cash demands should be low. Thus, large cash surpluses are normally generated by cash cows. They provide the cash to meet company needs and are thus the foundation of the company. Cash cows pay the dividends and interest, provide the debt capacity, pay the corporate overhead and provide the cash for investment elsewhere in the company’s portfolio of businesses.

A dog is an SBU with low market share and low market growth. The former normally implies poor profits. Because the growth rate is low, investments to increase market share are often prohibitive. Unfortunately, the cash required to maintaining a competitive position often exceeds the cash generated. Thus, dogs often become cash traps. According to Evans and Berman (1995), a dog usually has cost disadvantages and few growth opportunities.

A question mark is an SBU with low market share growth and high market growth rate. Their cash needs are high because of their growth, and the cash generated is low because of their market share. Because growth is high, one strategy for a question mark is to make the necessary investments to gain market share and become a star.

A star is a leading SBU (high market share) in an expanding industry (high growth). Because of the high growth and the high market share, stars use and


39

generate large amounts of cash. Stars generally represent the best profit and investment opportunities. Obviously, the best strategy for stars is to make the necessary investments to maintain or improve their competitive position.

BCG uses market share to determine the strategic choice for individual business units. The four major strategic choices indentified are

1. Increase market share for “stars”

2. Hold market share for “cash cows”

3. Harvest for “dogs”

4. Divest for “question marks”

The growth-share matrix can also be used to prepare a portfolio display for the organization at different times (present, three to five years ago, and forecast in three to five years). This gives management a picture of what the results of its strategic choices have been and might be.

Problems and limitations of the BCG Matrix

Several potential difficulties with the use of the growth-share matrix have been widely described.

The four-cell matrix, it has been argued, is not sophisticated enough to take care of all possible factors affecting the performance of business segments. For instance, as per BCG prescription, introduction of innovative new products is not possible since by definition, new products would start in the “dog” or “question mark” category. Moreover, with the simple high/low classification scheme, the matrix does not leave any room for the “average “ growth/share categories.

Secondary, the model is based on the relationship between cash generation and market share, which is derived from the effect of the experience curve. These are long-term relationships. The model does not provide for short-term relationships. The model does not provide for a short-term adjustment technique. Many organizations may find it difficult to balance both short-term and long-term investments and growth.

One major problem of analysis in the model is the definition of market share. Ot is often difficult to precisely determine the exact boundaries of the specific market. Errors in this respect can make the analysis invalid.


40

How strong is the competitive position, i.e., the quality of market share, is an important consideration to be kept in view. This aspect of analysis is not built into the technique. If the quality of market share is high, a low market share business can be as attractive as a high market-share business. Low market-share firms have been known sometimes to outperform high-share competitors.

Another problem iin the application of BCG model relates to the determination of potential growth rate of a market segment, particularly with the impact of inflation. There are no exact ways of predicting the growth potential of new innovations even with the available forecasting techniques. According to Hofer and Schendel (1978), growth rate is not always correlated with profitability. Obviously, countermoves of competitors can make a difference.

In the BCG model, assumptions underlying prescriptions for “dogs” have also been found to be of doubtful validity. There are examples of money-losing business units (dog) of one company having been acquired and turned into profitable business.

The BCG matrix does not provide any clue for assessing the relative investment opportunities across different SBU’s in the corporate portfolio. If there are two units, for example, in the question mark category, how should one unit be compared to the other in terms of whether it should be divested or built into a star?

Relative market share and marke growthare two dimesions considered in the BCG model for relative evaluation of business units. But the value of a business unit within a corporate portfolio may have to be considered not only on the basis of market share but on other bases as well, such as ability to compete on price and quality, or profit margin, etc. similarly, attractiveness of an industry may depend on several other consideration besides its growth rate.

The labels used in the BCG matrix, dog, question mark, cash cow, and star have been found ill-suited for appropriate managerial motivation, indeed, they may create motivational problems. Executives are known to prefer labels such as build, hold, harvest, and withdraw, rather than these. Obviously the former terms have a positive connotation, are more dynamic and action-oriented, and may be said to have wider validity rather only than in the limited context of BCG model.


41

Planning Grid (General Electric)

COMPETITIVE STRATEGY FORMULATION APPROACH

Another approach to evaluating and selecting corporate and business unit strategies has been proposed by Michael E. Porter and is known as competitive strategy formulation. Porter contends that every firm in an industry has a competitive strategy, whether it is explicit or implicit, he further contends that competitive strategy formulation involves the consideration of four key factors:

1. Company strengths and weaknesses

2. Industry opportunities and threats

3. Personal values of the key managers; and

4. Broader societal expectations, such as government policy, social concerns, and evolving mores

Life Cycle Approach

This approach to strategy evaluation and selection classifies business units in an organization by industry maturity and by competitive position, resulting in the matrix. The life cycle approach postulates that industries can be grouped into the following stages of maturity:

Embryonic – characterized by rapid growth, rapid changes in technology, pursuit of new customers, and fragmented and changing shares of market

Growth – characterized by rapid growth; but customers, market share, and technology are better known and entry into the industry is more difficult.

Mature – characterized by stability in known customers, technology, and markets shares. The industry can, however, still be competitive.

Ageing – characterized by falling demand, declining number of competitors, and, in many such industries, a narrowing of the product line.

The determination of a business unit’s competitive position using the life cycle approach calls for a qualitative decision based on multiple criteria, sucha as breadth of product line, market share, movement on market share, and changes in technology. The life cycle approach maintains that, as these criteria change over time, a business unit either gains or loses competitive advantage and can be classified as being dominant, strong, favourable,


42

tenable, or weak. After a business unit has been positioned in the matrix, a strategy can be formulated for each business unit.

Profit Impact of Market Strategy (PIMS) Model

The strategic Planning Institute develops and manages the Profit impact of Market Strategy (PIMS) database. The PIMS DATABASE consists of strategic data that include financial data, information on customers, competitors, quality and structure. These data are provided to SPI by client companies, which contribute data on their business.

The submitted data are analyzed and several reports, including the following can be generated

Portfolio Analysis - which examine an entire portfolio of businesses, identify widespread problems or opportunities, and propose resource allocations to specific businesses.

Customer Profiling – a process for identifying quality improvement opportunities for winning in the marketplace.

Special Studies on the PIMS database - designed to shed light on specific problems facing a particular business.

Analyses of Troubled Businesses – which facilitate the design of turnaround strategies

Strategic Planning Process – a process to help management develop and implement strategies for winning in their marketplace.

SPI also offers customized capabilities to its client organizations; some of these customized capabilities include the following:

Par reports – which indicate what profitability and what cash flow, are normal for a particular business.

Cross-table Placement reports – which help identify the strategic strengths and weaknesses of a particular business.

Reports on Lookalikes – which identify the tactical moves that have succeeded or failed for strategic lookalike businesses under comparable conditions.


43

Limited-Information Reports – which assist in the strategic diagnosis of businesses in limited-information situations, such as acquisitions, such as acquisition screening.

Start-up Analysis Reports - which assist in the diagnosis of start-up businesses.

QUALITATIVE FACTORS IN THE STRATEGIC EVALUATION AND SELECTION PROCESS

Several qualitative factors play a key role in this stream-of-decisions process. Some of these include:

Managerial attitudes towards risk:

A common definition of risk is the chance of incurring loss or damage. Risk generally refers to those factors that can negatively planned results. In organizations, this translates into such questions as the following:

What risks are involved in acquiring a new company?

What risks are there in entering foreign markets?

What risks are faced in enlarging plant capacity by 50%?

No amount of strategy evaluation can eliminate risk in the final strategy selection decisin. Investing resources today in expectation of future conditions is in, and of, itself a risk-taking adventure.

Environment of the organization

Organizations exist in an environment that is influenced by stockholders, competitors, customers, government, unions and society in general. The degree of dependence that an organization has on one or more of these environmental forces also influences the strategic choice process. A higher degree of dependence reduces the organization’s flexibility in its strategic choices.

Organizational Culture and Power Relationships

Organizational culture is a term used to describe the collective assumptions and beliefs of an organization’s employees that shape the behaviour of individuals and groups in the organization. Power is a relationship between


44

people that consists of the individual’s capacity to influence another individual or group of individuals to do something significantly influence the strategy evaluation and selection process.

An organization’s culture can contribute to its success or can be an obstacle to future success. Matching an organization’s culture to its environment and ensuring that it is a positive force is one of top management’s key concerns.

Competitive actions and reactions

Another factor that influences strategy selection is the external coalition of competitive actions and reactions. This factor is of critical importance, especially in certain industries. For example, the actions and reactions of Microsoft strongly influence the strategic choices of all firms in the computer software industry. Changes in product line or pricing by Microsoft cause all firms in this industry to re-examine their strategic position.

Influence of previous organizational strategies

For most organizations, past strategies serve as a beginning point in the strategy selection process. A natural result is that the number of strategic alternatives considered is limited, based on past organizational strategies. Generally, managers commit the greatest amount of resources to a previously chosen course of action, by which they are personally responsible for the negative consequences of the chosen course of action. This may partially explain why changes in top management are less likely to be bound by the previous strategies.

Timing considerations

Another factor influencing the strategy selection process is the amount of time available for making the decisions. Time pressures limit the number of alternatives that can be considered and also reduce the amount of information that can be gathered in evaluating the alternatives. When mangers are placed under time pressures, they tend to place greater weight on negative rather than positive factors and consider fewer factors in making their decision. On the other hand determining the exact time to implement the strategy is also of critical importance. Waiting too long can be just as disastrous as jumping in too quickly.

CHAPTER 9


45

IMPLEMENTING STRATEGY – MANAGEMENT ISSUES

The rationale for Strategy Implementation

Putting the strategy to work requires movement from the largely intellectual exercise of formulation to the concrete, and sometimes unpleasant, realities of tactical choices, trade offs, conflicts, obstructions, misunderstandings, and errors. Implementation carries the frustrations of working through others and is a test of administrative skill. A change in strategy may originate in the offices of top management, but until it is felt throughout the organization, it is purely an exercise and not a tool of effective management.

Linking actions to ideas

The strategist has a number of tools, which can be used to put strategy into action. These tools should be utilized in a manner that is both comprehensive and consistent. Comprehensive implementation refers to the range of techniques employed. An organization, which seeks increased allocations of resources to both R&D and marketing, may shift the reward system to encourage the extra attention needed by new activities, and a change in the way activities are grouped as well as in reporting relationships.

Consistent implementation minimizes conflicting signals when several techniques are being used. A conflict could occur, for example, when a shift in structure to allow for managerial attention to a new product is implemented under a reward system which focuses sales-force attention on repeat sales to current customers.

COMMUNICATION STRATEGY

Before a strategy can be implemented it must be clearly understood. A clear understanding of strategy gives purpose to the activities of each organization member. It allows the individual to link whatever task is at hand to the overall organizational direction. This is mutually enhancing and gives meaning to the task. It also provides the individual with general guidance for making decisions and enables him or her to direct efforts toward activities that count.

Issues in Strategy Communication

The desirability of the direct announcement of a strategy depends on several factors:

Proprietary Nature of the strategy


46

The wider the dissemination of information concerning strategic decisions, competitive moves, or shifting emphasis, the greater the likelihood that it will reach a competitor who could subvert the move, decision, or shift. A strategy, which will provide or exploit an unpublicized advantage, may be best kept undisclosed. The advantages of organizational commitment would be offset by the loss of surprise. If the strategy will divulge proprietary information, it should be shared only on need-to-know basis.

Political impact of strategy

It is not always possible to achieve consensus concerning the appropriate strategic directions for an organization. If a number of top managers participate in the formulation process, it is not unlikely that there will be differences of opinion about the final choice. In an organization in which relationships are strained, factions may form around strong individuals, and the strategy may be judged and supported according to who is backing it rather than upon its own merits. In such a situation, it may be more efficient to communicate the strategy piecemeal rather than as a whole. Strategy communication that sparks infighting will hinder implementation more than it will help.

Expectations Aroused by the Strategy

The announcement of a strategy gives all organizational stakeholders a means of evaluating operations and performance. It also raises and defines expectations about the future of the organizations, which may prove embarrassing to management if unforeseen circumstances arise and diminish performance. For this reason, many public announcements of strategy are retrospective, indicating what has been attempted and how well the objectives have been met. An organization, which announces strategy is subject to criticism form security analysis, to fluctuations in stock prices, to government scrutiny, and to buyer and supplier moves, as well as to union responses that may be generated by stakeholders.

Motivational Impact of the Strategy

A clear statement of strategy may either inspire or demoralize. The effect of a given communication must be considered in light of the personal implications for the individuals required to implement it. Growth strategies have enjoyed popularity because, among other things, the rewards – both financial and career - are perceived as greater for all concerned. Retrenchment strategies are full of financial and personal unpleasantness


47

even though they may be necessary to maintain long-term viability. Unfortunately, good managers may be tempted to leave at the time when they are most needed.

Decisional Impact of Strategy

Strategy is often an evolving understanding of where the organization is going and of how to get there. An announced strategy brings closure to the formulation question and focuses on implementation. This closure is not always desirable, because lower levels of management can make significant contributions to the strategy as they work through the implementation process. Therefore, before top management announces a strategy, it should be certain that closure of formulation is desired.

Strategic Management New _2

Documents

viewing strategic management

strategic management notes

collaborative social initiative

develop annual objectives

strategic management planning

question mark category

firms strategic plans

strategic management process