WHATIS “STRATEGY”?

Consists of competitive moves & business approaches management employsin

running a company
Management’s “gameplan”for
-Running the business
«Strengthening firm’s competitive position
Satisfying customers
‘Achieving performance target.

‘Without a Strategy the organisationis like a ship without a rudder around

in the circles” — Joel Ross & Michael Kami

THINKING STRATEGICALLY- THREE BIG STRATEGIC QUESTIONS

1. WHERE ARE WE NOW?

2. WHERE DO WE WANT TO GO?
Businesspositions management wants to stake out
FINANCIAL outcomes to achieve
STRATEGIC outcomesto achieve
3. HOW WILL WE GET THERE?

FIVE TASKS OF STRATEGIC MANAGEMENT

1. Defining business, stating a mission, & forming a strategic vision

2. Setting measurable objectives
3. Crafting a strategy to achieve objectives
4. Implementing & executing strategy
5. Evaluating performance, reviewing new developments, & initiating corrective
adjustments

WHATIS STRATEGIC MANAGEMENT?

Strategic managementcan be defined as the art and science of formulating,
implementing, and evaluating cross-functional decisions that enable an
organization to achieve its objectives.

Introductionto Strategic Management Shailesh Dudani

 #The term strategic managementis used synonymously with strategic planning.

Stages of Strategic Management:

«The strategic-managementprocessconsists of 3 stages.

«Strategy formulation includes developing a vision and mission, identifying an

organization’s external opportunities and threats, determining internal strengths
and weaknesses, establishing long-term objectives, generating alternative
strategies, and choosing particular strategies to pursue.

«Strategy implementation requires a firm to establish annual objectives, devise

policies, motivate employees, and allocate resources so that formulated
strategies can be executed; strategy implementation includes developing a
strategy-supportive culture, creating an effective organizational structure,
redirecting marketing efforts, preparing budgets, developing andutilizing
information systems, and linking employee compensation to organizational
performance.

»Strategy evaluationis the final stage in strategic management. Managers

desperately need to know whenparticular strategies are not working well;
strategy evaluation is the primary meansfor obtaining this information.
-Three fundamental strategy evaluation activities are provided below:
-Reviewing external and internal factors that are the basesfor current strategies,
-Measuring performance,
-Taking corrective action.

BENEFITS OF STRATEGIC MANAGEMENT

Communication is the key to success. The major aim of the

communication processis to achieve understanding and commitment throughout
the organization. !t results in the great benefit of empowerment.

Financial Benefits

»Researchindicates that organizations using strategic-management concepts are

more profitable and successful than those that do not.
+High-performingfirms tend to do systematic planning to prepare for future
fluctuations in the external and internal environments. Firms with planning
systems more closely resembling strategic-management theory generally exhibit
superior long-term financial performancerelative to their industry.

Introductionto Strategic Management Shailesh Dudani

 DEVELOPINGA VISION & MISSION

#VISION

«A Strategic Vision is a roadmap of Company’s Future

Direction a co is headed
«Business Positionit intends to stake out
»Capabilities it plans to develop
«Customers it needs to serve
sin short a Strategic Vision concerns a Firm’s ‘FUTURE” businessactivities i.e. :
+The kind of companyit is trying to become
+Customer needsto besatisfied in future

DEVELOPINGA VISION & MISSION

+MISSION
‘An Business Mission Statement focuses on “CURRENT” businessactivities.
‘Business Companyis in now
-Customer needs currently being served

Thus a Strategic Vision and a Business Mission points the organisation

in a particular direction and charts a strategic path forit to follow

SPECIFIC QUESTIONS THAT HELP FORM STRATEGIC VISIONS

-What business are we in now?

-What business do we wantto be in?
Whatwill our customers wantin future?
-Whatare expectations of our stakeholders?
-Whowill be our future competitors? suppliers? partners?
-What should our competitive scope be?
-Howwill technology impact our industry?
-Whatenvironmental scenarios are possible?

WHY A SHARED VISION MATTERS

-A strategic vision widely shared amongall employees functionssimilar to how a
magnet alignsiron filings
-Whenall employees are committed to firm's long-term direction, optimum
choices on business decisions are morelikely
-Individuals & teams knowintentof firm's strategic vision
-Daily execution of strategy is improved

Characterstics of a Shared Vision

EG of Strategic Vision
*Delta Airlines
+Wewantdelta to be the WORLDWIDE AIRLINE OF CHOICE

Vision & Mission - Strategic Management Shailesh Dudani

#Walt Disney
»- to make people happy

#Merck
«Weare in the business of preserving humanlife. All our actions are measured
by our success in achieving this.

Vision Statement
%*To be a globally respected corporation that provides best-of-breed business
solutions, leveraging technology, delivered by best-in-class people

Vision Statement
# By 2010 Airtel will be the most admired brand in India:
#Loved by more customers
*Targeted by top talent
#Benchmarked by more business

Vision Statement
To be amongthe global top 10 by 2010
Mission Statements
SAMPLE MISSION STATEMENTS

*#Key Market: To provide any customer

«Contribution: a means of moving people and things up, down and
sideways over short distances
«Distinction: with higherreliability than any similar enterprise in the world.
+Otis Elevator

SAMPLE MISSION STATEMENTS

«Key Market: To provide all banks, S&Ls and investmentfirms

«Contribution: with error-free financial instruments delivered in a timely
fashion.
«Distinction: Error-free means absolutely no errors; timely means a 48-
hour turnaround.
«Deluxe Checks

SAMPLE MISSION STATEMENTS

«Key Market: To provide economy and quality mindedtravelers

+Contribution: with a premier, moderate priced lodging facility
«Distinction: which is consistently perceived as clean, comfortable, well
maintained, and attractive, staffed by friendly, attentive and efficient
people.
«Courtyard by Marriott

Vision & Mission - Strategic Management Shailesh Dudani

 SAMPLEMISSION STATEMENTS

*Key Market: To offer the fast food customer

*Contribution: food prepared in the same high-quality manner world-wide,
tasty and reasonably priced,
«Distinction: delivered in a consistent, low-key decor and friendly
atmosphere.
«McDonald’s

SAMPLE MISSION STATEMENTS

#Key Market: To offer all of the fine customersin ourterritories

*Contribution: all of their household needs
«Distinction: in a manner in whichthey continueto think of us fondly.
»Wal-Mart

PepsiCo Mission Statement

PepsiCo’s mission is to increase the value of our shareholders’ investment. We
do this through sales growth, cost controls, and wise investment resources.
Webelieve our commercial success depends uponoffering quality and value
to our consumers and customers; providing products thatare safe,
wholesome, economically efficient and environmentally sound; and providing
a fair return to our investors while adhering to the highest standardsof
integrity.
WHY BOTHER TO DEFINE “WHO,” “WHAT,” & “WHERE?

#WHY BOTHER TO DEFINE “WHO,” “WHAT,” & “WHERE?

-Helps managers avoid trap oftrying to movein too manydirections
-Being so confused aboutfirm’s direction that effective actions are NOT taken to
movein ANYdirection
-To successfully chart firm’s future, managers must
-Know wherefirm is now
-Have view of where it ought to be headed
‘Recognize time to shift to a new direction

Importance of Mission
Mission Characteristics
CustomerOrientation
Customer Orientation
Importance of Vision & Mission

l, WHAT DO WE WANT TO BECOME?

A. Importanceof a Vision Statement

Vision & Mission- Strategic Management Shailesh Dudani

 1. Avision statement should answer the basic question, “What do we
want to become?” A clear vision provides the foundation for
developing a comprehensive mission statement.
2. Many organizations have both a vision and a mission statement,
but the vision statement should be establishedfirst and foremost.
a. The vision statement should be short, preferably one sentence,
and as many managers as possible should have input into
developing the statement.

IW. WHATIS OUR BUSINESS?

A. Mission Statements
1. Drucker says asking the question, “What is our business?” is
synonymouswith asking the question, “What is our mission?”
a. An enduring statement of purpose that distinguishes one
organization from other similar enterprises, the mission
statement is a declaration of an organization’s “reason for
being.”
b. Sometimes called a creed statement, a statement of purpose, a
statement of philosophy, a statement of beliefs, a statement of
business principles, or a statement “defining our business,” a
mission statement reveals.what an organization wants to be and
whom it wants to serve.
B. Vision versus Mission
1. Many organizations develop both a mission statement and a vision
statement. Whereas the mission statement answers the question,
“What is our business?”the vision statement answers the question,
“What do we want to become?”
C. The Process of Developing a Vision and Mission Statement
1. As indicated in the strategic-management model, a clear mission
statement is needed before alternative strategies can be formulated
and implemented.
2. It is important to involve as many managers as possible in the
process of developing a mission statement, because through
involvement, people become committed to an organization.

3. A widely used approach to developing a mission statementis to

a. Select several articles about mission statements and ask all
managers to read these as backgroundinformation.
b. Ask managers to prepare a mission statement for the
organization.

Vision & Mission - Strategic Management Shailesh Dudani

 c. A facilitator, or committee of top managers, should then merge
these statements into a single documentanddistribute this draft
to all managers.
d. A request for modifications, additions, and deletions is needed
next along with a meeting to revise the document.

I. IMPORTANCE OFVISION AND MISSION STATEMENTS

A. The importance of Mission Statements is Well Documented

Rarick and Vitton foundthat firms with a formalized mission statement

have twice the average return on shareholders’ equity than thosefirms
without a formalized mission statement. Bart and Baetz found a
positive relationship between mission statements and organizational
performance. Business Weekreports that firms using mission
statement have a 30 percenthigherreturn on financial measures than
those without such statements.
B. Reasons for Developing a Written Mission Statement

1. To ensure unanimity of purpose within the organization

2. To provide a basis, or standard, for allocating organizational
resources
3. To establish a generaltone or organizational climate
4. To serve as a focal point for individuals to identify with the
organization’s purpose and direction, and to deter those who
cannot from participating further in the organization’s activities
To facilitate the translation of objectives into a work structure
involving the assignment of tasks to responsible elements within
the organization
To specify organizational purposes and the translation of these
purposes into objectives in such a way that cost, time, and
performance parameters can be assessed and controlled
C. A Resolution of Divergent Views
1. Developing a comprehensive mission statement is important
because divergent views among managers can be revealed and
resolved through this process.
Considerable disagreement among an organization’s strategists
over vision and mission can causetrouble if not resolved.
An organization thatfails to develop a vision statement as well as a
comprehensive and inspiring mission statement loses the
opportunity to present itself favorably to existing and potential
stakeholders.

IV. CHARACTERISTICS OF A MISSION STATEMENT

Vision & Mission- Strategic Management Shailesh Dudani

 A. A Declaration of Attitude
1. A mission statement is a declaration of attitude and outlook more
than a statementof specific details. It is usually broad in scope for
at least two reasons:
a. First, a good mission statement allows for the generation and
consideration of a range of feasible alternative objectives and
strategies without unduly stifling managementcreativity.
b. Second, a mission statement needs to be broad to effectively
reconcile differences among and appeal to an organization’s
diverse stakeholders, the individuals and groups of persons who
have a special stake or claim on the company.
2. An effective mission statement arouses positive feelings and
emotions about an organization; it is inspiring in the sense thatit
motivates readersto action.

3. It should be short — less than 200 words.

B. A CustomerOrientation
1. A good mission statement reflects the anticipation of customers.
Rather than developing a product and then trying to find a market,
the operating philosophy of organizations should be to identify
customers’ needs and then to provide a product or servicetofulfill
those needs.
2. According to Vern McGinnis, mission statements should 1) define
what the organization is and what it aspires to be, 2) belimited
enough to exclude some ventures and broad enough to allow for
creative growth, 3) distinguish a given organization from all others,
4) serve as a framework for evaluating both current and prospective
activities, and 5) be stated in terms sufficiently clear to be widely
understood throughout the organization.
C. A Deceleration of Social Policy
1. The words social policy embrace managerial philosophy and
thinking at the highest levels of an organization. For this reason,
social policy affects the development of a business mission
statement.
2. Despite differences in approaches, most American companiestry to
assure outsiders that they conduct business in a_ socially
responsible way. The mission statement is an effective instrument
for conveying this message.

Vision & Mission - Strategic Management Shailesh Dudani

 THE EXTERNAL ASSESSMENT
OUTLINE

The Nature of an External Audit

Oe

Economic Forces
Social, Cultural, Demographic, and Environmental Forces
He

Political, Governmental, and Legal Forces

ee

Technological Forces
Competitive Forces
ee

Competitive Analysis: Porter’s Five-Forces Model

Sources of External Information
ef

Forecasting Tools and Techniques

“effete

The Global Challenge

Industry Analysis: The External Factor Evaluation (EFE) Matrix
The Competitive Profile Matrix (CPM)

A. Key External Forces

1, External forces can be divided into five broad categories: (1) economic forces; (2) social,
cultural, demographic, and environmental forces; (3) political, governmental, and legal forces;
(4) technological forces; and (5) competitive forces.

2. External trends and events significantly affect all products, services, markets, and
organizations in the world.

3. Changesin external forces translate into changes in consumer demand for both industrial and
consumerproducts and services.

B. The Process of Performing an External Audit

1. The process of performing an external audit must involve as many managers and employeesas
possible, As emphasizedin earlier chapters, involvementin the strategic-managementprocess
can lead to understanding and commitmentfromorganizational members.

2. To perform an external audit, a company first must gather competitive intelligence and
information about social, cultural, demographic, environmental, economic, political, legal,
governmental, and technologicaltrends.

a. Individuals can be asked to monitorvarious sources of information such as key magazines,

trade journals, and newspapers.

b. The Internet is another source for gathering strategic information, as are corporate,
university, and public libraries.

c. Suppliers, distributors, salespersons, customers, and competitors represent othersources of

vital information.

3. Once information is gathered,it should be assimilated, evaluated, and prioritized.

External Assessment in Corporate Strategy Shailesh Dudani

 Key external factors should be important to achieving long term and annual objectives,
measurable, applicable to all competing firms, and hierarchical in the sense that some will
pertain to the overall company while others will be more narrowly focused.

ECONOMIC FORCES

Economic Factors Have a Direct Impact

Economic factors havea direct impact on the potentialattractiveness of variousstrategies. For

example,if interest rates rise, then funds needed forcapital expansion become more costly or
unavailable.

The key economic variables that a firm should monitor are (1) shifts to a service
economy in the United States; (2) availability of credit; (3) level of disposable income; (4)
propensity of people to spend; (5) interest rates; (6) inflation rate; (7) unemploymenttrends;
and so on.

Russia’s Economy

a. Economy. The Russian economyis in shambles. Business Week magazinecalls

the Russian economybizarre because real money, goods, and output play such a small
role.

b. Trade. The major barriers to increased U.S. exports to Russia are a substantial
value-added tax, high import duties, and onerous Russian excise levies. In addition, the
government has imposed strict quality and safety standards on the majority of goods
entering Russia.

SOCIAL, CULTURAL, DEMOGRAPHIC, AND ENVIRONMENTAL FORCES

A. Social, Cultural, Demographic, and Environmental Impact

1. Social, cultural, demographic, and environmental changes have a major impact on

virtually all products, services, markets, and customers.

2. Social, cultural, demographic, and environmental trends are shaping the way
Americanslive, work, produce, and consume. New trends are creating a different type
of consumerand, consequently, a need fordifferent products,services, andstrategies.

3. Significant trends for the future include consumers becoming more educated, the
population aging, minorities becoming more influential, people looking for local
ratherthan federal solutions to problems, andfixation on youth decreasing.

Iv. POLITICAL, GOVERNMENTAL, AND LEGAL FORCES

A. Political, Governmental, and Legal Factors Represent Key Forces. Federal, state, local,
and foreign governments are majorregulators, deregulators, subsidizers, employers, and
customers of organizations,

B. Political, governmental, and legal factors therefore can represent key opportunities or
threats for both small and large organizations.

External Assessment in Corporate Strategy Shailesh Dudani

 1. For industries and firms that depend heavily on government contracts or subsidies,
political forecasts can be the most importantpart of an externalaudit.

2. Changesinpatent laws, antitrustlegislation, tax rates, and lobbying activities can affect
firms significantly.

C. The increasing global interdependence among economies, markets, governments, and

organizations make it imperative that firms consider the possible impact of political
variables on the formulation and implementation of competitive strategies. Increasing
global competition accents the need for accurate political, governmental, and legal
forecasts,

D. Local, state, and federal laws, regulatory agencies, and special interest groups can have a
major impactonthestrategies of small, large, for-profit, and nonprofit organizations.

E. Russiais thelast large country outside of the World Trade Organization (WTO), In efforts
to join the WTO, Russia has agreed to openits markets in banking, insurance, and
agriculture but not in the automobile and aircraft industries. The Russian parliamentis
currently passing legislation to pave the way for WTO mules and policies. Russia’s
government has failed at adequately collecting taxes and consequently has difficulty
paying for social services and military and government payroll and expenditures. Russian
tax laws are also among the most confusing in the world so many businesses avoid
keeping accurate recordsto eliminate tax implications.

Vv. TECHNOLOGICAL FORCES

A. Technological Forces Play a Key Role. The Internetis changing the very nature of
opportunities and threats by alteringthe life cycles of products, increasing the speed of
distribution, creating new products andservices, erasinglimitations oftraditional
geographic markets, and changing the historicaltrade-off between production
standardization andflexibility.

B. Toeffectively capitalize on information technology, a numberof organizations are

establishing two new positionsin their firms: chief information officer (CIO) and chief
technology officer (CTO).

VL COMPETITIVE FORCES

A. An Awareness of Competitive Forces Is Essential for Success

1. An important part of an external auditis identifying rival firms and determining their
strengths, weaknesses, capabilities, opportunities, threats, objectives, andstrategies.

2. Collecting and evaluating information on competitors are essential for successful

strategy formulation.

B. Competitive Intelligence (CI) Programs

1. Good CI in business, as in the military, is one of the keys to success. The more
information and knowledgea firm can obtain about competitors, the morelikely it can
formulate and implementeffective strategies,

External Assessment in Corporate Strategy Shailesh Dudani

 a, What is CI? CI, as formally defined by the Society of Competitive Intelligence
Professionals (SCIP), is a systematic and ethical process of gathering and
analyzing information about the competition’s activities and general business
trends to further a business’ own goals (SCIP website).

Firmsneed an effective competitive intelligence program. The three basic missions of

a CI program are (1) to provide a general understanding of an industry andits
competitors, (2) to identify areas in which competitors are vulnerable and to assesses
the impact strategic actions would have on competitors, and (3) to identify potential
movesthat a competitor might make that would endangera firm’s position in the
~ market.

Unethical tactics such as bribery, wiretapping, and computer break-ins should never
be used to obtain information.

C, Cooperation Among Competitors

1. Strategies that stress cooperation among competitors are being used more. For
example, Lockheed recently teamed up with British Aerospace PLC to compete
against Boeing Companyto developthe next generation U.S. fighter jet.

The idea ofjoining forces with a competitoris not easily accepted by Americans, who
often view cooperation and partnerships with skepticism and suspicion. Indeed,joint
ventures and cooperative arrangements among competitors demand a certain amount
oftrust to combat paranoia about whetherone firm will injure the other.

VIL.COMPETITIVE ANALYSIS: PORTER’S FIVE-FORCES MODEL

A. Porter’s Five-Forces Model

i. According to Porter, the nature of competitiveness in a given industry can be viewed

as a composite offive forces.
External Assessment in Corporate Strategy Shailesh Dudani
 Rivalry among competitivefirms.

oe Ros P
Potential entry of new competitors.
Potential developmentof substitute products,
Bargaining powerof suppliers.
Bargaining powerof consumers.

Rivalry among competing firms. Usuallyis the most powerful of the five competitive
forces. The strategies pursued by one firm can be successful only to the extent that
they provide competitive advantage overthe strategies pursued byrival firms.

Potential entry of new competitors. Whenever new firms can easily enter a particular
industry, the intensity of competitiveness amongfirms increases.

Potential development of substitute products, In many industries, firms are in close

competition with producers of substitute products in otherindustries.

Bargaining powerofsuppliers. The bargaining powerof suppliers affects theintensity

of competition in an industry, especially whenthere are a large number of suppliers,
whenthere are only a few good substitute raw materials, or whenthe cost of switching
raw materials is especially costly.

Bargaining power of consumers. When customers are concentrated,large, or buy in

volume, their bargaining power represents a major force affecting intensity of
competition in an industry. ,

SOURCES OF EXTERNAL INFORMATION

A. Information Is Available from Both Published and Unpublished Sources

Unpublished sources include customer surveys, market research, speeches at

professional and shareholders’ meetings, television programs, interviews, and
conversations with stakeholders.

Published sources of strategic information include periodicals, journals, reports,

government documents, abstracts, books, directories, newspapers, and manuals.

B. Internet

Millions of people today use on-line services for both business and personal purposes.

2. The Internet offers consumers and businesses a widening range of services and
information resources fromall over the world.

External Assessment in Corporate Strategy Shailesh Dudani

 STRATEGY ANALYSIS AND CHOICE

OUTLINE

The Nature of Strategy Analysis and Choice

“et ¢+ © Oe Oe Oo

A Comprehensive Strategy-Formulation Framework

The InputStage
The Matching Stage
The Decision Stage
Cultural Aspects of Strategy Choice
ThePolitics of Strategy Choice
The Role of a Board of Directors

THE NATURE OF STRATEGY ANALYSIS AND CHOICE

nt

The Process of Generating and Selecting Strategies

because
1. Strategists never consider all feasible alternatives that could benefit the firm,
of ways to
there are an infinite numberof possible actions and an infinite number
implementthose actions. Therefore, a manageableset ofthe most attractive alternative
strategies must be developed.

Identifying and evaluating alternativestrategies should involve many of the managers

statement,
and employees who earlier assembled the organizational mission
performed the external audit, and conducted the internal audit.
in
Alternative strategies proposed by participants should be considered and discussed
a meeting or series of meetings.

IL. A COMPREHENSIVE STRATEGY-FORMULATION FRAMEWORK.

A. Important Strategy-Formulation Techniques

age
1. Important strategy-formulation techniques can be integrated into a three-st
to
decision-making framework. Thetools presented in this framework are applicable
, and
all sizes and types of organizations and can help strategists identify, evaluate
select strategies.

The framework hasthree stages:

a. Stage 1: The Input Stage

b. Stage 2: The Matching Stage
c. Stage 3: The Decision Stage
require
All nine techniques included in the strategy-formulation framework
integration ofintuition and analysis.

i. THE INPUT STAGE

the Competitive
A. The Input Stage includes the External Factor Evaluation (EFE) Matrix,
Profile Matrix (CPM),and the Internal Factor Evaluation (IFE) Matrix.

Shailesh Dudani
Strategy Analysis & Choice
 B. Procedures for developing an EFE Matrix, an IFE Matrix, and a CPM were presented
earlier in the textbook,

C. The input tools require strategists to quantify subjectively during early stages of the
strategy-formulation process. Making small decisions in the input matrices regarding the
relative importance of external and internal factors allows strategists to generate and
evaluate alternative strategies more effectively.

Iv. THE MATCHING STAGE

A. The Matching Stage

1. The Matching Stage includes the Threats-Opportunities-Weaknesses-Strengths

(TOWS) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the
Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the
Grand Strategy Matrix.

2. Anyorganization, whether military, product-oriented, service-oriented, governmental,

or even athletic must develop and execute goodstrategies to win,

B. The TOWSMatrix

1. The TOWS Matrix is an important matching tool that helps managers develop four
typesofstrategies:

a. SO strategies—use a firm’s internal strengths to take advantage of external

opportunities.
b. WOstrategies—are aimed at improving internal weaknesses by taking advantage
of external opportunities.
c. ST strategies—use a firm’s strengths to avoid or reduce the impact of external
threats,
d. WTstrategies—are defensivetactics directed at reducing internal weaknesses and
avoiding externalthreats.

2. There are eight steps to construct a TOWS Matrix:

List the firm’s key external opportunities.

Sao TP

List the firm’s key externalthreats.

Listthe firm’s key internalstrengths.
List the firm’s key internal weaknesses.
Matchinternal strengths with external opportunities and record the resulting SO
strategies in the appropriate cell.
Match internal weaknesses with external opportunities and record the resulting
mh

WOstrategies.
g. Match internal strengths with external threats and record the resultant ST
strategies.
h. Match internal weaknesses with external threats and record the resulting WT
strategies.

C. The SPACE Matrix

1. The SPACE Matrix, has four-quadrant framework indicates whether aggressive,

conservative, defensive, or competitive strategies are more appropriate for a given
organization.
Strategy Analysis & Choice Shailesh Dudani
 2. Depending onthe type of organization, numerous variables could make up eachofthe
dimensions represented onthe axes ofthe SPACE Matrix.

3. The steps to develop a SPACE Matrix:

a. Select a set of variables to define financial strength (FS), competitive advantage

(CA), environmentalstability (ES), and industry strength (IS).
b. Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that
make up the FS and IS dimensions. Assign a number between —1 (best) to -6
(worst) forvariables that make up the ES and CA dimensions.
Compute an average score for FS, CA, IS, and ES by summingthe values given
to the variables and dividing by the number of variables included in each
dimension.
Plot the average scores for FS, IS, ES, and CA onthe appropriate axis in the
SPACE Matrix.
Add the two scores on the x-axis and plot the resultant point on X, Add the two
scores on the y-axis andplot the resultant point on Y. Plot the intersection of the
new xy point.
Draw a directional vector from the origin of the SPACE matrix through the new
intersection point. This vectorreveals the type of strategies recommendedforthe
organization.

1. Aggressive
2. Competitive
3. Defensive
4. Conservative

D. The BCG Matrix

1. The BCG Matrix graphically portrays differences amongdivisions(of'a firm) in terms

of relative market share position and industry growthrate.

2. The BCG Matrix appears hasdivisionsin the respective circles in the BCG Matrix are
called question marks, stars, cash cows, and dogs.

3. The four quadrants represent the following:

a. Question Marks—Divisions in Quadrant I have a low relative market share

position, yet compete in a high-growth industry. Generally these firms’ cash
needs are high andtheir cash generation is low.

Stars—Quadrant I businesses represent the organization’s best long-run

opportunities for growth and profitability. These businesses have a high relative
matket share and competein high growthrate industries.

Cash Cows—Divisions positioned in Quadrant II have a highrelative market

position, but compete in a low-growth industry. Called cash cows because they
generate cash in excess oftheir needs.

Dogs—Quadrant IV divisions of the organization have a low relative market

share position and compete in a slowed or no-growth industry; they are Dogsin a
firm’s portfolio.
Strategy Analysis & Choice Shailesh Dudani
 E. The IE Matrix.

1. The IE Matrix positions an organization’s various divisionsin a nine-cell display . The

IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization
divisions in a schematic diagram;this is why they are called portfolio matrices.

2. Differences between the IE Matrix and the BCG Matrix

a. Axes are different
b. IE Matrix requires more information about divisions than BCG
c. Strategic implications of each matrix are different

F. The Grand Strategy Matrix

1. Jn addition to the TOWS Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the
Grand Strategy Matrix has become a popular tool for formulating alternative
strategies. All organizations can bepositioned in oneofthe Grand Strategy Mattix’s
fourstrategy quadrants.

2. It is based on two evaluative dimensions: competitive position and market growth.

Vv, THE DECISION STAGE

A. The Quantitative Strategic Planning Matrix (QSPM)

1. Otherthan ranking strategies to achieve the prioritizedlist, there is only one analytical
techniquein the literature designed to determinetherelative attractiveness of feasible
alternative actions.

2. This technique is the QSPM, which comprises Stage 3 of the strategy-formulation

analytical framework. This technique objectively indicates which alternative strategies
are best.

3. Six steps to developing a QSPM:

a. Make a list of the firm’s key external opportunities/threats and internal

strengths/weaknessesin the left column ofthe QSPM.
b. Assign weights to each key external andinternal factor.
c. Examine the Stage 2 matrices and identify alternative strategies that the
organization should consider implementing.
d. Determinethe Attractiveness Scores (AS).
e. Computethe total AS.
f. Computethe sum Total AS.

. B. Positive Features and Limitations of the QSPM

1. A positive feature ofthe QSPM is that sets of strategies can be examined sequentially
or simultaneously. Anotherpositive feature of the QSPM is thatit requires strategists
to integrate pertinent external and internal factors into the decision process,
Developing a QSPM makesit less likely that key factors will be overlooked or
weighted inappropriately.

Strategy Analysis & Choice Shailesh Dudani

 requires intuitive
2. The QSPM is not without some limitations. First, it always
and
judgment. Second, it can only be as good as the prerequisite information
matching analyses upon whichit is based.

Vi CULTURAL ASPECTS OF STRATEGIC CHOICE

es, customs, norms, personalities,
A. Culture includesthe set of shared values, beliefs, attitud
heroes, and heroinesthat describe a firm.

B. Ail Organizations Have a Culture

l perspective because
1. It is beneficial to view strategic management from a cultura
receive from a firm’s
success often rests on the degree of support that strategies
culture.

as values, beliefs, rites,

2. Ifa fum’s strategies are supported by cultural products such rs
heroines then manage
rituals, ceremonies, stories, symbols, language, heroes, and
often can implement changesswiftly andeasily.
more attractive because
3. Strategies that require fewer cultural changes may be
extensive changes cantake considerable time and effort.

VILTHE POLITICS OF STRATEGY CHOICE

often are based on thepolitics
A. In the absence ofobjective analyses, strategy decisions too
ontools,political factors
ofthe moment. With developmentof improved strategy-formulati
become less important in making strategic decisions.

B.. Tacticsto aid in strategy:

Equifinality
VFYeRS

Satisfying
Generalization
Focus on Higher-Order Issues
Provide Political Access on Important Issues

VI. $THEROLE OF A BOARD OF DIRECTORS

the overall direction of a corporate
A. A directoris one of a group of persons entrusted with a
d by the ownership of
enterprise. A board of directors is a group of persons efecte
oversight and guidance over manag ement and to look out for the
corporation to have
shareholders’ interests.
posited that good boards of
B. Business Week’s annual board of directors’ evaluation
directors actively perform the following responsibilities:

Evaluate the CEO annually.

SPADE YNE

Link the CEO’s payto specific goals.

Evaluate long-rangestrategy.
Evaluate board performance.
Compensate board memberonly in company stock.
Require each director to owna large amount of company stock.
Ensure no morethat two board membersare insiders.
Require directors to retire at age seventy.
Shailesh Dudani
Strategy Analysis & Choice
 9. Place the entire board up forelection every year.
10. Limit the numberof other boards a membercanserve on.
11. Ban directors who draw consulting fees or other monies from the company.
12. Baninterlocking directorships.

Strategy Analysis & Choice Shailesh Dudani

 STRATEGIES IN ACTION

OUTLINE

Long-Term Objectives
i

Types ofStrategies
i

Integration Strategies
Intensive Strategies
i

Diversification Strategies
in

Defensive Strategies
i

Michael Porter’s Generic Strategies

Meansfor Achieving Strategies
i

Merger/Acquisition

LONG-TERM OBJECTIVES
a)

A. The Nature ofLong-Term Objectives

1. Objectives should be quantitative, measurable, realistic, understandable, challenging,

hierarchical, obtainable, and congruent among organizational units. Each objective
also should be associated with a timeline.

a. Objectives are commonly stated in terms such as growth in assets, growth in

sales, profitability, market share, degree and nature of diversification, and so on.

b. Long-term objectives are neededat the corporate, divisional, and functionallevels in an

organization. They are an important measure of managerial performance.

B. Not Managing by Objectives

1, Strategists should avoid the following alternative ways of “not managing by

objectives.”

a. Managing by extrapolation
b. Managingby crisis
c. Managing by subjectives
d. Managing by hope

IL TYPES OF STRATEGIES

A. A Comprehensive Strategic Management Model

1. alternative strategies that an enterprise could pursue can be categorized into 13

actions—forward integration, backward integration, horizontal integration, market
penetration, market development, product development, concentric diversification,
conglomerate diversification, horizontal diversification, joint venture, retrenchment,
divestiture, and liquidation—and a combination strategy.

Strategies in Action Shailesh Dudani

 3. Each alternative strategy has countless variations. For example, market penetration
can include adding salespersons, increasing advertising expenditures, couponing, and
using similaractions to increase market share in a given geographic area.

TL. INTEGRATION STRATEGIES

A. Forward Integration

1, Forward integration involves gaining ownership orincreased control overdistributors

orretailers.

Six guidelines when forward integration may be an especially effective strategy:

a. When an organization’s present distributors are especially expensive or
unreliable, or incapable of meeting firm’s distribution needs.
b. Whentheavailability of quality distributors is so limited as to offer a competitive
advantageto those firms that integrate forward.
c. When an organization competes in an industry that is growing and expected to
continue to grow markedly.
d. When an organization has both the capital and human resources needed to
managethe new business.
e. Whenthe advantagesofstable production are particularly high.
f. When presentdistributors have high profit margins.

B. Backward Integration

1. Backward integration is a strategy of seeking ownership or increased control of a

firm’s suppliers. This strategy can be especially appropriate when a firm’s current
suppliers are unreliable, too costly, or cannot meetthe firm’s needs.

Someindustries (such as automotive and aluminum industries) are reducing their

historic pursuit of backward integration. Instead of owningtheir suppliers, companies
negotiate with several outside suppliers.

Outsourcing, whereby companies use outside suppliers, shop around, play one seller
against another, and go with the best deal is becoming widely practiced.

C. Horizontal Integration

L. Horizontalintegration refers to a strategy of seeking ownership of or increased control

over a firm’s competitors. One ofthe most significant trends in strategic management
today is the increased use of horizontal integration as a growth strategy. Mergers,
acquisitions, and takeovers among competitors allow for increased economiesofscale
and enhancedtransfer ofresources and competencies.

Horizontal integration has become the most-favored growth strategy in many

industries. For example, explosive growth in e-commerce has telecommunications
firms worldwide frantically merging and pursuing horizontal integration to gain
competitiveness,

There are five guidelines for when horizontal integration may be an especially
effective strategy:

Strategies in Action Shailesh Dudani

 When anorganization can gain monopolistic characteristics.

aor
Whenanorganization competesin a growingindustry.
When increased economiesof scale provide major competitive advantages.
When an organization has both the capital and human talent needed to
successfully manage an expandedorganization.

IV. INTENSIVE STRATEGIES

A. Market Penetration

1. A market-penetration strategy seeks to increase market share for present products or

services in present markets through greater marketing efforts.

2. Market penetration includes increasing the number of salespersons, advertising

expenditures, and publicity efforts or offering extensive sales promotionitems.

3. Five guidelines for when market penetration is especially effective:

a. When current markets are not saturated.

b. When usagerate ofcurrent customers could be increased.
c. When market shares of major competitors have been declining while total
industry sales have been increasing.
d. When the correlation between dollar sales and dollar marketing expenditures
historically has been high.
e, When increased economiesofscale provide major advantages.

B. Market Development

1, Market development involves introducing present products or services into new

geographicareas.

2. The climate for international market development is becoming more favorable. In

many industries, suchasairlines, it is going to be hard to maintain a competitive edge
by staying close to home.
/

3. Six guidelines for whenthis is may be effective:

a. When new channels of distribution are available that are reliable, inexpensive,
and of goodquality.
b. When an organization is very successful at whatit does.
Whennew untappedorunsaturated markets exist.
°

d. When an organization has the needed capital and human resources to manage
expanded operations.
e. When an organization has excess production capacity.
f. When an organization’s basic industry rapidly is becoming globalin scope.

C. Product Development

1. Product development is a strategy that seeks increased sales by improving or

modifying present products or services. Product development usually entails large
research and developmentexpenditures.

2. Five guidelines for when to use product development:

Strategies in Action Shailesh Dudani

 a. When an organization has successful products that are in the maturity stage
of the productlife cycle.
b. When an organization competes in an industry that is characterized by rapid
technological developments.
When major competitors offerbetter-quality products at comparableprices.

a9
Whenan organization competesin a high-growth industry.
e. When an organization has especially strong research and development
capabilities. :

Vv. DIVERSIFICATION STRATEGIES

A. Concentric Diversification

1. Adding new, but related, products or services is widely called concentric

diversification.

2. Six guidelines for when to use concentric diversification:

Whenan organization competes in a no-growth orslow growth industry.

aes.

When adding new,butrelated products would enhancesales of current products.

Whennew,butrelated products could be offered at competitive prices.
When new, but related products have seasonalsales levels that counterbalance
existing peaks and valleys.
When an organization’s products are in the decline stageofthe life cycle.
mo

Whenan organization has a strong management team.

B. Horizontal Diversification

1. Adding new, unrelated products or services for present customersis called horizontal
diversification. This strategy is not as risky as conglomerate diversification because a
firm already should be familiarwith its present customers.

2. Four guidelines for whento use horizontaldiversification:

a. When revenuesderived from an organization’s current products orservices would

increase significantly by adding the new, unrelated products.
b. When an organization competes in a highly competitive and/or no-growth
industry.
c. Whenanorganization’s present channelsofdistribution can be used to marketthe
new products to current customers.
d. When the new products have countercyclical sales patterns compared to an
organization’s present products.

C. Conglomerate Diversification

1. Adding new, unrelated productsorservicesis called conglomerate diversification.

2. Some firms pursue conglomerate diversification based in part on an expectation of

profits from breaking up acquired firmsandselling divisions piecemeal.

3. General Electric is a classic firm that is highly diversified. GE makes locomotives,

lightbulbs, power plants, and reftigerators; GE manages more credit cards than
American Express and owns more commercialaircraft than American Airlines.
Strategies in Action Shailesh Dudani
 4, Six guidelines explain whenit is effective to use conglomeratediversification:

Whenan organization’s basic industry is experiencing declining annualsales

andprofits.
Whenan organizationhas the capital and managerialtalent needed to compete.
When anorganization has the opportunity to purchase an unrelated business that
is an attractive investment.
Whenthere exists financial synergy between the acquired and acquiring firms.
Whenexisting markets for an organization’s present products are saturated.
When antitrust action could be charged against an organization that historically
has concentrated ona single industry.

VI. DEFENSIVE STRATEGIES

A. Retrenchment

1. Retrenchmentoccurs when an organization regroups through cost and asset reduction

to reverse declining sales and profits.

Sometimescalled a turnaround or reorganizational strategy, retrenchmentis designed

to fortify an organization’s basic distinctive competence.

Bankruptcy canbeaneffective retrenchmentstrategy. In USthere are following types

of bankruptcy

a. Chapter 7 bankruptcy is a liquidation procedure used only when a

corporation sees no hope of being able to operate successfully or to obtain
the necessary creditor agreements.
Chapter9 bankruptcy applies to municipalities.
Chapter 11 bankruptcy allows organizations to reorganize and comebackafter
filing.
Chapter 12 bankruptcy providesspecial reliefto family farmers with debt equal to
orless than $1.5 million.
Chapter 13 bankruptcy is similar to Chapter 11 but available only to small
businesses owned by individuals with unsecured debts of less than $100,000 and
secured debts ofless than $350,000.

Five guidelines when retrenchment may be an especially effective strategy to pursue:

When an organization hasa clearly distinctive competence but has failed to

meet objectives consistently.
Whenanorganizationis one ofthe weaker competitors in a given industry.
When an organization is plagued by inefficiency, low profitability, poor
employee morale,and pressure from stockholders to improve performance.
When an organization hasfailed to capitalize on external opportunities, minimize
external threats, take advantage of internal strengths, and overcome internal
weaknessesovertime.
When an organization has grown so large so quickly that major internal
reorganizationis needed.

B. Divestiture
Strategies in Action Shailesh Dudani
 Selling a division or part of an organizationis called divestiture. Divestiture often is
used to raise capitalforfurtherstrategic acquisitions orinvestments.

Divestiture has become a very popularstrategy as firms try to focus on their core
strengths, lessening their level of diversification.
Six guidelines for whento use divestiture:

a. When an organization has pursued a retrenchment strategy and it failed to

accomplish needed improvement.
b. When a division needs more resources to be competitive than the company
can provide.
c. When a division is responsible for an organization’s overall poor
performance.
d. Whena divisionis a misfit with the rest of an organization.
Whena large amount of cash is needed quickly and cannotbe obtained.
@

f. When governmentantitrust action threatens an organization.

C. Liquidation

1, Selling all of a company’s assets, in parts, for their tangible worthis called liquidation.
Liquidation is recognition of defeat and consequently can be an emotionally difficult
strategy.

Three guidelines of when to use liquidation:

a. When an organization has pursued both a retrenchment and a divestiture

strategy andneither has been successful.
b. When an organization’s only alternative is bankruptcy.
c, Whenthe stockholders of a firm can minimize their losses by selling assets.

VIL.MICHAEL PORTER’S GENERIC STRATEGIES

A. Cost Leadership Strategies

lL. A primary reason for pursuing forward, backward, and horizontal integration
strategiesis to gain cost leadership benefits.

Striving to be the low-cost producerin an industry can be especially effective when

the market is composed of many price-sensitive buyers, when there are few ways to
achieve productdifferentiation, when buyers do not care much aboutdifferences from
brand to brand, or whenthere are a large numberof buyers with significant bargaining
power.

The basic idea behind a cost leadership strategy is to underprice competitors and
thereby gain market share and sales, driving some competitors out of the market
entirely.

B. Differentiation Strategies

Strategies in Action Shailesh Dudani

 1. A successful differentiation strategy allows a firm to charge higher prices for its
products to gain customerloyalty because consumers may becomestrongly attached
to the differentiation features.

2. A risk of pursuing a differentiation strategy is that the unique product may not be
valued highly enough by customersto justify the higherprice.

3. Commonorganizational requirements for a successful differentiation strategy include

strong coordination among the R&D and marketing functions and substantial
amenities to attract scientists and creative people.

C. FocusStrategies

1. A successful focus strategy depends on an industry segmentthatis of sufficientsize,

has good growth potential, and is not crucial to the success of other major competitors.

2. Strategies such as market penetration and market development offer substantial

focusing advantages.

3. Focus strategies are most effective when consumers have distinctive preferences or
requirements and whenrival firms are not attempting to specialize in the sametarget
segment, Firms pursuing a focus strategy include Midas, Red Lobster, Federal
Express, and Schwinn.

D. The Value Chain

1. According to Porter, the business of a firm can be best described as a value chain in
which total revenues minustotal: costs of all activities undertaken to develop and
marketa productorservice yields value.

2. Firms should strive to understand not only their own value chain operations, but also
their competitors’, suppliers’, and distributors’ value chains.

VII. JOINT VENTURE/PARTNERING

A. Joint Venture

1, Joint venture is a popularstrategy that occurs when two or more companies form a
temporary partnership or consortium for the purpose of capitalizing on some
opportunity.

2. Other types of cooperative arrangements include R&D partnerships, cross-distribution

agreements, cross-licensing agreements, cross-manufacturing agreements, and joint-
bidding consortia.

3. Joint ventures and cooperative arrangements are being used increasingly because they
allow companies to improve communications and networking, to globalize operations
and minimizerisk.

4. Many, if not most, organizations pursue a combination of two or more strategies

simultaneously, but a combination strategy can be exceptionally risky if carried too
far. No organization can afford to pursueali the strategies that might benefit the firm.
Difficult decisions must be made. Priorities must be established. Organizations, like

Strategies in Action Shailesh Dudani

 individuals, have limited resources. Both organizations and individuals must choose
amongalternative strategies and avoid excess indebtedness.

5. Joint ventures mayfail when:

a. Managers who mustcollaborate regularly are not involved in the venture.

b, The venture may benefit partnering companies but not the customers,
c. Both partners may not support the venture equally.
d. The venture may begin to compete with oneofthe partners.

B. Joint Ventures into Russia

1. A joint venture strategy offers a possible way to enter the Russian market.

2. Joint ventures create a mechanism to generate hard currency, which is important

because of problemsvaluing the ruble. Russia’s joint venture law has been revised to
allow foreigners to own up to 99 percent of the venture and to allow a foreignerto
serve as chief executive officer.

3. The following guidelines are appropriate:

a. First, avoid regions with ethnic conflicts and violence.

b. Second, make sure the potential partner has a proper charter that has been
amendedto permitjoint venture participation.
c. Third, be aware that businesspeople in these lands have little knowledge of
marketing, contract law, corporate law, fax machines, voice mail, and other
business practices that Westerners take for granted.

4, A numberoforganizations in Russia assist foreign companiesinterested in initiating,

continuing, or expanding business operationsthere.

IX, MERGER/ACQUISITION

A. Mergers and acquisitions are two commonly used waysto pursuestrategies.

1. A merger occurs when two organizations of about equal size unite to form one
enterprise.

2. An acquisition occurs when a large organization purchases (acquires) a smallerfirm

orvice versa,

B. There are many reasons for mergers and acquisitions, including the following:

To provide improved capacity utilization.

rR mene ss

To makebetter use of an existing sales force.

To reduce managerialstaff.
To gain economiesofscale.
To smoothout seasonaltrends in sales.
To gain access to new suppliers, distributors, customers, products, and creditors.
To gain new technology.
To reducetax obligations.

C. Leveraged Buyouts (LBOs)

Strategies in Action Shailesh Dudani

 1. An LBO occurs when a corporation’s shareholders are bought out (hence duyout) by
the company’s managementand otherprivate investors using borrowed funds (hence
leveraged).

3. Besides trying to avoid a hostile takeover, other reasons for the initiation of an LBO by
senior management are that particular divisions do not fit into an overall corporate
strategy, must be sold to raise cash, or receive anattractive offering price. A LBO takes a
corporationprivate.

Strategies in Action Shailesh Dudani

 STRATEGY REVIEW, EVALUATION, AND CONTROL

OUTLINE

¢ The Nature of Strategy Evaluation

¢ A Strategy-Evaluation Framework
¢ Published Sources of Strategy-Evaluation Information
@ Characteristics of an Effective Evaluation System
¢ Contingency Planning

I THE NATURE OF STRATEGY EVALUATION

A. Importance of Strategy Evaluation

The strategic-management process results in decisions that can have significant, long-
lasting consequences. Erroneous strategic decisions caninflict severe penalties and
can be exceedingly difficult, if not impossible, to reverse.

Moststrategists agree,therefore, that strategy evaluationis vital to an organization’s

well-being; timely evaluations can alert management to problems or potential
problemsbefore a situation becomescritical.

Strategy evaluation includes three basic activities:

a. Examining the underlying bases of a firm’s strategy.

b, Comparing expected results with actual results,
c. ‘Taking corrective actions to ensure that performance conformslo plans.

Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis
on evaluating strategies may be expensive and counterproductive. Yet, too litde or no
evaluation can create even worse problems. Strategy evaluationis essential to ensure
that stated objectives are being achieved.

It is impossible to demonstrate conclusively that a particularstrategy is optimal, butit

can be evaluated forcritical flaws. fourcriteria to use in evaluating a strategy:

a, consistency
b, consonance
c, feasibility
d, advantage

These trends make strategy evaluation difficult:

a. dramatic increase in environmental complexity

b. difficult in predicting future
¢. increasing numberofvariables
d, rapid rate of obsolescence
c. increase in the numberof world events affecting organization
f. decreasing time spansfor planning

Strategy Review, Evaluation & Control Shailesh Dudani

 B. The Process of Evaluating Strategies

1. Strategy evaluation is necessary forall sizes and kinds of organizations,

a, Strategy evaluation should initiate managerial questioning of expectations and

assumptions, triggera review of objectives and values, and stimulate creativity in
generating alternatives and formulating criteria of evaluation,

Evaluating strategies on a continuous rather than a periodic basis allows benchmarks

of progress to be established and more effectively monitored,

Managers and employees of the firm should continually be aware of progress being
made toward achieving the firm’s objectives. Ascritical success factors change,
organizational members should be involved in determining appropriate corrective
actions.

IL. A STRATEGY-EVALUATION FRAMEWORK

A, Reviewing Bases of Strategy

L. by developing a revised EFE Matrix and IFE Matrix, the underlying bases of an
organization’s strategy can be approached and reviewed,

a. A revised IFE Matrix should focus on changesin the organization’s management,

marketing, finance/accounting, production/operations, R&D, and MIS strengths
and weaknesses,

b. A revised EPE Matrix should indicate how effectively a firm’s strategies have
beenin response to key opportunities andthreats.

B. Measuring Organizational Performance

L Another important strategy-evaluation activity is measuring organizational

performance, This activity includes comparing expected results to actual results,
investigating deviations from plans, evaluating individual performance, and
examining progress being made toward meeting stated objectives. Both long-term
and annual objectives are commonly used in this process,

Failure to make satisfactory progress toward accomplishing long-term or annual

objectives signals a need forcorrective action.

Quantitative criteria commonly usedto evaluate strategies are financial ratios, which
strategists use to make three critical comparisons:

a. comparing the firm’s performanceoverdifferent time periods,

b. comparing the firm’s performance to competitors, and
c, comparing the firm’s performance to industry averages.

Key financial ratios for measuring organizational performance:

a. return on investment

SurategyReview, Evaluation & Contrat Shailesh Dudani

 return on equity

emenos
profit margin
market share
debtto equity
earnings per share
sales growth
asset growth
a

C. Taking Corrective Action

1. The final strategy-evaluation activity, taking corrective action, requires making

changesto reposition a firm competitively forthe future,

2. Examples of changes that may be needed are altering an organization’s structure,

replacing one or more key individuals, selling a division, or revising a business
mission,

3. Taking corrective action raises employees’ and managers’ anxieties, Research

suggests that participation in strategy-evaluation activities is one of the best ways to
overcomeindividuals’ resistance to change,

TE. PUBLISHED SOURCES OF STRATEGY-EVALUATION INFORMATION

A. Examples of Helpful Publications

1. A numberof publications are helpful in evaluating a firm’s strategies. Por example,

Fortune annually identifies and evaluates the Fortune 1,000 (the largest
manufacturers) and the Fortune 50 (the largest retailers, transportation companies,
utilities, banks, insurance companies, and diversified financial corporations in the
United States).

2, Another excellent evaluation of corporations in America, “The economic Report on

Indian Industry,”. Business Week, Business world, Business Today, ET, FT also
periodically publish detailed evaluations of Indian businesses and industries.

Iv, CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM

A. Strategy evaluation must meet several basic requirements to beeffective.

1. Strategy-evaluation activities must be economical; too much information can be just

as bad as too little information,

2. Strategy-evaluation activities should also be meaningful; they should specifically

relate to a firm’s objectives.

3. Strategy-evaluation activities should provide timely information; on occasion and in

some areas, managers may needinformationdaily.

4, Strategy evaluation should be designed to provide a true picture of whatis happening.

B. There is more than oneideal strategy-evaluation system. The unique characteristics of an

organization, including its size, management style, purpose, problems, and strengths can
determine a strategy-evaluation and control system’s final design.

Strategy Review, Evaluation & Control Shailesh Dudani

Vv, CONTINGENCY PLANNING

A. Essence of Contingency Planning

1. A basic premise of goodstrategic management is that firms plan waysto deal with
unfavorable and favorable events before they occur.

2. Contingency plans can be defined asalternative plans that can be put into effectif
certain key events do not occur as expected.

B. Effective Contingency Planning Involves These Steps:

1, Identify both beneficial and unfavorable events that could possibly derail the strategy
orstrategies.

2. Specify trigger points. Estimate when contingent events are likely to occur.

3. Assess the impact of each contingent event, Estimate the potential benefit or harm of
each contingent event.

4. Develop contingency plans. Be sure that the contingency plans are compatible with
current strategy andfinancially feasible.

5. Assess the counterimpact of each contingency plan, Thatis, estimate how much each
contingency planwill capitalize on or cancel out ils associated contingent event,

6. Determine early warning signals for key contingent events, Monitor the early warning
signals.

Strategy Review, Evaluation & Control Shailesh Dudani

 BALANCED SCORE CARD

INTRODUCTION

Pioneered by Robert Kaplan and David Norton (1990):It is a Strategy and Performance management
System

2
fe In a performance measurement and control system financial measures alone are inadequate for
strategic decision-making as they are unable to ensure goal congruence between management
decisions and actions.
Classic financial measures (return on assets, return on sales, and return on capital employed) fail
to distinguish between ‘excellent’ and ‘non-excellent’ firms.
Investment analysts who considered both financial and non-financial measures were more
accurate in their earnings forecasts than those who considered only financial indicators.
A performance management system therefore should have strategic focus and should include
both financial anc operating measures.

BSC aims to control performance measures and thus leads to managing the measures rather than
performance of the people whose performance is measured.

At the highest level, the Balanced Scorecard is A framework that helps

organizationstranslate strategy into operational objectives that drive
both behavior and performance

What Is a Balanced Scorecard?

The Premise Behind the Balanced Scorecard Is that Measurement Motivates Behavior

Balanced Scorecard Perspectives

Financial: What are the financial perspectives that would help us understand the effectiveness
and efficiency of our financial processes?
Customer: Who are our customers? What do our customers expect or demand from us? What
is our value proposition in serving them?
Internal Process: What must we excel at in order to continue to add value for our customers?
What are the processes we have/need to best execute our strategies?
Learning & development: What is the level/content of employee skills needed to meet our
mission/value? What information systems needs to support these processes? What
organizational climate (culture) supports this success?
 The Balanced Scorecard Is Based on an Understanding ofthe
Basic Building Blocks of the Strategy
: Eb et D 8 22) 1. The economic model of
: © Return on : key fevers driving financial
Revenue
<._ Invesimant TS prosusiey” performance
5 Strategy . Swaiegy I
Sources of Grown Sources of Prodtictivity

2. The value proposition of

target customers
fo Retake"
smp ff

3 Bud the
Grane
Dekver the
Product’
“Service
Exceptionally
3. The value chain of core
business processes

ae 4, The critical enablers of

ae —> | ee performance improvement,
| sCompetencies \ infrastructure’ Action change and learning

BSC Example:

Strategic Theme:
.
Operating i
Efficiency Objectives
jf Measurement Target itiati
Initiative

Fi jal
manele Proftabilty ° Profitability * Market Value » 30% CAGR
a ~ * More * Seat Revenue * 20% CAGR
, > More
Fever Planes) NN cutters Customers * Plane Lease * 5% CAGR
* Ze * Fewer planes Cost
Customer te * Flight ison- * DGCAOn Time + #1 > Quality
Cod
Flight “Lowest time Arrival Rating management
Is onrine)_Prices * Lowest prices * Customer oH * Customer
me Ranking (Market loyalty
Survey) program
g
internal | * Fast ground * On Ground Time * 30 Minutes ° Cycle time
Fast Ground turnaround * On-Time * 90% optimization
aD Departure program

Learning ( * Ground crew |* % Ground crew |* yr. t 70% |° ESOP

— alignment trained yr. 3 90% |
(Ground Crew >) 5 yt 5 100% Ground crew
\. Alignment _/ * % Ground crew training
—— — ae stockholders
 #® Michael Porter’s Value Chain Analysis

& The term value chain describes a way of looking at a business as a chain of activities
that transform inputs into outputs that customers value.
= Customervalue derives from three basic sources:
= activities that differentiate the product
> activities that lower its cost
> activities that meet the customer's need quickly.
= Value chain analysis views the organization as a sequential process of value-creating
activities, and attempts to understand how a business creates customervalue by
examining the contributions of different activities within the businessto that value.

Value Chain Analysis

um

Porter describes two different categories ofactivities:

% Primary activities (sometimes called fine functions) are those involvedin the
physical creation of the product, marketing and transfer to the buyer, and after-
sale support.
Secondary activities (sometimes called staff or overhead functions) assist the
firm as a whole by providing infrastructure or inputs that allow the primary
activities to take place on an ongoing basis.
= The value chain includes a profit margin since a markup above the cost of
providing a firm's value-adding activities is normally part of the price paid by the
buyer—creating value that exceeds cost so as to generate a return for the effort.
3
>
=> Primary Activities
= Inbound Logistics. The primary activities of inbound logistics are associated with
receiving, storing, and distributing inputs to the product. Inboundlogistics include:
activities, costs and assets associated with obtaining fuel, energy, raw materials, parts,
components, merchandise, and consumable items from vendors; receiving, storing, and
disseminating inputs from suppliers; inspection; and inventory management.
= Operations. Operationsincludeall activities associated with transforminginputsinto the
final product form, such as production, assembly, packaging, equipment maintenance,
facilities, operations, quality assurance, and environmental protection.
= OutboundLogistics. These activities are associated with collecting, storing, and
physicaily distributing the product or service to buyers (finished goods warehousing,
order processing, order picking and packing, shipping, delivery vehicle operations).
= Marketing and Sales. The marketing and sales activities are associated with purchases
of products and services by end users and the inducements used to get them to make
purchases, Theseactivities include advertising and promotion, market research and
planning, and dealer/distributor support.
© Service. This primary activity includes all activities associated with providing service to
enhanceor maintain the value of the product, suchasinstallation, repair, training, parts
supply, maintenance and repair, technical assistance, buyer inquiries, product
adjustment, and complaints.

Support Activities
a

General Administration. These activities, sometimes called “firm infrastructure”, are

the activities, costs, and assets relating to general management, accounting andfinance,
legal and regulatory affairs, safety and security management information systems, and
other “overhead”functions. Unlike the other support activities, general administration
activities generally support the entire value chain and notindividual activities.
© Human Resources Management. Human resources managementconsists ofactivities
involved in the recruiting, hiring, training, development, and compensation ofall types of
personnel; labor relations activities; and development of knowledge-basedskills.
* Support Activities(Cont.)

Value Chain Analysis - Strategic Management Shailesh Dudani

 Research, Technology, and Systems Development. The activities, costs, and assets
relating to product R&D, process design improvement, equipment design, computer
software development, telecommunications systems, computer-assisted design and
engineering, new database capabilities, and development of computerized support
systems.
Procurement. Procurement refers to the function of purchasing inputs usedin the firm's
value chain, not to the purchased inputs themselves. Purchased: inputs include raw
materials, supplies, and other consumable items, as well as assets such as machinery,
laboratory equipment, office equipment, and buildings.
" ie a

Conducting a Value Chain Analysis

Step 1. Divide the firm’s operations into specific activities or business processes, usually
grouping them according to primary and support activities. Within each category, a firm
typically performs a number ofdiscrete activities that may represent key strengths or
weaknesses.
Step 2. Next, attach costs to each discrete activity.
Step 3. Recognize the difficulty in activity-based accounting.
Step 4. identify the activities that differentiate the firm from their competitors.
Step 5. After documenting the value chain, managers need to identify the activities that
are critical to buyer satisfaction and market success. These are the activities that
deserve majorscrutiny in an internal analysis.
» The mission should influence managers’ choiceof the activities they examine in
detail.
«The nature of value chains and the relative importance ofthe activities within
them vary by industry.
« Therelative importanceof 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 customersor partners involved in providing products or
services.
Step 6. Compare to competitors.
Secondary Activities

General administration

Human resource management

Research, technology, and systems development

%,%,
Procurement

inbound Operations Outbound] Marketing Service

logistics logistics anc
Sales &
e
PS)

Primary Activiies

Value Chain Analysis - Strategic Management Shailesh Dudani

 Blue Ocean Strategy: Creating uncontested market space and make the competition irrelevant

Creating Blue Oceans

Two types of markets:
2 Red Oceans ~ all industries in existence today (known market space)
* Blue Oceans ~ all industries not in existence today {unknown market space)

New Market Space

e There is a fairly good understanding of how to compete in Red Oceans
* Blue Oceans are known to exist, however, thereis little practical guidance on how to create
them
@ This book focuses on the analytical frameworks necessary to create Blue Oceans and the
managerial strategy needed to sustain them

New Market Space

¢ In Red Oceans, industry boundaries are defined and accepted, and the competitive rules of the
game are known
* In Blue Oceans, there exists untapped market space, demand creation, and the opportunity for
highly profitable growth
® fost Blue Oceans are created from within red oceans by expanding industry boundaries

The Continuing Creation of Blue Oceans

® How many of today’s industries were unknown 100 years ago?
 e Blue Oceans have continuously been created over time
@ The key to strength in the business world is to create new, uncontested market space

Red Ocean Strategy

Compete in existing market space.

Beat the competition. Raaius try

Exploit existing demand.

Make the value-costtrade-off.

Align the whale system of a strategic firm's activities

with its choice of differentiation or low cost.

Red oceans represent all the industries in existence today. This is the known market space.
Blue oceans denote all the industries not in existence today. This is the unknown market space.
in the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game
are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As
the market space gets crowed, prospectsfor profits and growth are reduced. Products become
commodities, and cutthroat competition turns the red ocean bloody.

Blue Oceans,in contrast, are defined by untapped market space, demand creation, and the opportunity
for highly profitable growth. Although some blue oceans are created well beyond existing industry
boundaries, most are created from within red oceans by expanding existing industry boundaries. In blue
oceans competition is irrelevant because the rules of the game are waiting to be set.
Logic of Blue Ocean Strategy is so called value innovation and is the cornerstone of Blue Ocean Strategy

Value innovation places equal emphasis on value and innovation. It is a new way of thinking about and
executing strategy that results in the creation of a blue ocean and a break from the competition.
Importantly, value innovation defies one of the most commonly accepted dogmas of competition-based
strategy: The value-cost trade-off.

> It is conventionally believed that companies can either create greater value to the customersat
higher cost or create reasonable value at a lower cost. Here strategy is seen as making a choice between
differentiation and low cost. In contrast , those that seek to create blue oceans pursue differentiation
and low cost simultaneously.

Now turn the clock backonly thirty years, How many industries of today's industries were then
unknown? Mutual funds, cell phones, gas-fired electricity plants, biotechnology, discount retail,
snowboards and coffee bars to name a few.

The Rising Imperative of Creating Blue Oceans

Globalism has made many brands become increasingly similar and more of a commodity
Technological improvement has caused supply to outweigh demand
itis now harder than ever to differentiate among brands

The reason of the appearance of the Blue Ocean Strategy

-is that in increasing numbers of industries, supply exceeds demand.
-The trend toward globalization compounds the situation.

DAs trade barriers between nations and regions are dismantled and as information on products and
prices becomes instantly and globally available, niche markets and havens for monopoly continue to
disappear.
-The result has been accelerated commoditization of products and services, increasing price wars, and
shrinking profit margins.
-And for major product and service categories, brands are generally becoming more similar and as they
are becoming more similar people increasingly select based on price.

Value Innovation: The Cornerstone of Blue Ocean Strategy

Value creation alone improves value but is not sufficient to make you stand out in the
marketplace
Innovation alone will often create a product that buyers are notwilling to pay for
Value innovation occurs only when companies align innovation with utility, price, and cost
positions
Value innovation:
Make the competition irrelevant
Create a leap in value for both buyers and your company
Open up new and uncontested market space

.. overcome believes

... go for uncontested space.

... Value [innovation] first

 Reduce

Eliminate Create/Add
Creating
new markets:
Anew value
curve

Raise

The impact of Creating Blue Oceans

° Ina study of the launches of 108 companies, 86% wereline extensions (Red Ocean}
® However, these only accounted for 62% of total revenues and 39% of total profits
® The other 14% of launches were aimed at creating blue oceans and accounted for 38% of
revenue and 61% of total profit

From Company and Industry to Strategic Move

® The company is not the appropriate unit of analysis for exploring blue oceans
* Blue Oceans focus on the strategic move rather than the company or industry
* This book focuses on 150 strategic moves made from 1880 to 2000 in various industries
Blue Oceans were found to be created by new and old companies, attractive and unattractive industries,
and both private and public companies