Strategic Management

What is Strategy?

Strategy is the overall plan for

deploying resources to
establish a favorable position.
Tactic is a scheme for a specific
maneuver.
Characteristics of strategic decisions…

 Important
 Involve a significant commitment of
resources
 Not easily reversible
 Basic Framework

External
The firm
Environment
Goals & Values
Competitors
Resources &
Strategy Customers
Capabilities
Structures & Suppliers
Systems etc
Basic Model of
Strategic Management

Four Basic Elements

1. Environmental Scanning
 Environmental Scanning

 SWOT analysis
 PEST analysis
 Five forces analysis

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 SWOT analysis

 Strengths (internal)
 Weaknesses (internal)
 Opportunities (external)
 Threats (external)

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 PEST Analysis

 Political factors
 Economic factors
 Socio-cultural factors
 Technological factors

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 Political/Legal Factors

 Political ideology of the government

 Legislation and Acts
 Anti Monopolies legislation
 Environmental protection laws
 Taxation policy
 Employment laws
 National Public policy
 Global Public Policies
EEP Session-2 10
 1.5 Economic Factors

 Economic growth
 Inflation
 Employment
 Disposable income
 Business cycles
 Availability and cost of energy
 Availability and prices of raw materials
 Socio-Cultural Factors

 Demographic factors
 Role of women
 Extent of Poverty
 Extent of Inequality
 Regional Disparities
 Caste and creed
 Race and religion
 Food habits

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 Technological Factors

 New discoveries and innovations

 Speed of technology transfer
 Rates of obsolescence
 Internet connections
 Information and Communications
Technology (ICT)
Strategic Management Process

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Strategic Management Process

 Step 1: Identifying the organisation’s current

mission, objectives, and strategies
 Mission: the firm’s reason for being
 Who we are,
 What we do, and
 Where we are now
 Goals: the foundation for further planning
 Measurable performance targets

 Step 2: Conducting an external analysis

 The environmental scanning of specific and general
environments
 Focuses on identifying opportunities and threats

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Strategic Management Process
(cont’d)
 Step 3: Conducting an internal analysis
 Assessing organisational resources, capabilities,
activities and culture:
 Strengths (core competencies) create value for
the customer and strengthen the competitive
position of the firm.
 Weaknesses (things done poorly or not at all)
can place the firm at a competitive
disadvantage.

Steps 2 and 3 combined are called a SWOT

analysis (Strengths, Weaknesses,
Opportunities, and Threats)

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Strategic Management Process
(cont’d)
 Step 4: Formulating strategies
 Develop and evaluate strategic
alternatives
 Select appropriate strategies for all levels
in the organization that provide relative
advantage over competitors
 Match organizational strengths to
environmental opportunities
 Correct weaknesses and guard against
threats

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Strategic Management Process
(cont’d)
 Step 5: Implementing strategies
 Implementation: effectively fitting
organisational structure and activities to the
environment
 Effective strategy implementation requires
an organisational structure matched to its
requirements.

 Step 6: Evaluating results

 How effective have strategies been?
 What adjustments, if any, are necessary?

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 The most important strategy concepts:

 Vision: what does the company see for the future?

 Mission: why does the company exist?
 Strategy: covers the definition of objectives as well
as the methods and tools to help reaching the
objectives.
 Objective: they say, what does the company want
to implement in a given time?
 Tools: the way defined to fulfil the mission and
objectives, at the end of which the vision becomes
reality.
 Strategic action: a main task derived from
strategic objectives  often formulated as
“projects”.
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 Vision and Mission

 Vision
 Picture of what the firm wants to be
 What the firm ultimately wants to achieve
 An effective vision statement is the responsibility
of the leader who should work with others to form
it
 Foundation for the mission
 Mission
 Specifics business(es) in which firm intends to
compete and customers it intends to serve
 More specific than the vision
The Strategic Management Process
 Owners/Stakeholders

Local community
Trade Associations

Suppliers Managers Customers

Governme Employe The Public at

nt es large

Constituents of Strategic Building

 Financial
performance

Competitive
advantage

Structural Process
Position Execution

Enterprise Synergies

Organizational
Capacity

The Architecture of Strategy

 Competitive Advantage: The focal Point of Strategy

Differentiation

Competitiv Economic Market

Cost leadership e Value Value
Advantage added added

Quick Response
Criteria for Resources and Capabilities That
Become Core Competencies

Valuable
Valuable Rare
Rare

Core
Core
Competencies
Competencies

Nonsubstitutable
Nonsubstitutable Costly
Costly to
to Imitate
Imitate
 How Resources and Capabilities
Provide Competitive Advantage

Valuable Allow the firm to exploit opportunities

or neutralize threats in its external
environment
Rare Possessed by few, if any, current and
potential competitors

Costly to When other firms cannot obtain them

imitate or must obtain them at a much higher
cost
Nonsubstitutable The firm is organized appropriately to
obtain the full benefits of the resources
in order to realize a competitive
advantage
Strategy Framework

Strategy Frameworks

q Industry level analysis

u Porter’ s 5 Forces

q Firm level analysis

u SWOT
u Core competencies
u Value Chain

q Other forms of analysis

u BCG 2x2 Matrix
u Benchmarking, best practices
 Porter’s 5 Forces
Risk of Entry
(Barriers to Entry)
• brand loyalty
• absolute cost advantages
• econ of scale, cap req’t
• government regulations
• distribution access

Bargaining Power of Suppliers Bargaining Power of Buyers

High if:
High if: THE INDUSTRY
• product has few substitutes and • few large buyers
Rivalry Among • product unimportant to output
is important, few suppliers
• supplier has many other outlets Established Firms • buyers purchase in large
for product •competitive structure quantities and purchase large
• high switching costs •demand conditions percentage of industry output
• threat of vertical integration •exit barriers • low switching costs, little
forward differentiation
• threat of vertical integration
backward

Threat of Substitute Products

• existence of different products
that serve consumers’ needs in
a similar way
Bases of
competition
1. Customer oriented
a. Who they are?
b. When they use it?
c. How they use it??

2. Marketing Oriented
d. Theme/ Copy Strategy
e. Media Distribution Strategy
f. Distribution Strategy
g. Pricing Strategy

Resource –Oriented
Strategy
h. Raw Material
i. Employees
j. Financial –Resources
The Five Forces of
Competition Model
Threat of New Entrants: Barriers to
Entry
 Economies of scale
 Product differentiation
 Capital requirements
 Switching costs
 Access to distribution channels
 Cost disadvantages independent of
scale
 Government policy
 Expected retaliation
Barriers to Entry
 Economies of Scale
 Marginal improvements in efficiency
that a firm experiences as it
incrementally increases its size
 Advantages and disadvantages of
large-scale and small-scale entry
Barriers to Entry (cont’d)
 ProductRequirements
Capital differentiation
 Unique products
Physical facilities
 Customer loyalty
Inventories
 Products atactivities
Marketing competitive prices
 Availability of capital
Barriers to Entry (cont’d)
 Switching Costs
 One-time costs customers incur when
they buy from a different supplier
 New equipment
 Retraining employees
 Psychic costs of ending a relationship
Barriers to Entry (cont’d)
 Access to Distribution Channels
 Stocking or shelf space
 Price breaks
 Cooperative advertising allowances
 Cost Disadvantages Independent of
Scale
 Proprietary product technology
 Favorable access to raw materials
 Desirable locations
Barriers to Entry (cont’d)
 Cost disadvantages independent of
scale
 Proprietary product technology
 Favorable access to raw materials
 Desirable locations
 Government policy
 Licensing and permit requirements
 Deregulation of industries
Barriers to Entry (cont’d)
 Expected retaliation
 Responses by existing competitors may
depend on a firm’s present stake in the
industry (available business options)
 Bargaining Power of Suppliers
 Supplier power increases when:

 Suppliers are large and few in number

 Suitable substitute products are not
available
 Individual buyers are not large customers of
suppliers and there are many of them
 Suppliers’ goods are critical to buyers’ marketplace
success
 Suppliers’ products create high switching costs.
 Suppliers pose a threat to integrate forward into
buyers’ industry
 Bargaining Power of Buyers
 Buyer power increase when:

 Buyers are large and few in number

 Buyers purchase a large portion of an
industry’s total output
 Buyers’ purchases are a significant portion of a
supplier’s annual revenues
 Buyers can switch to another product without
incurring high switching costs
 Threat of Substitute Products
 The threat of substitute products
increases when:
 Buyers face few switching costs
 The substitute product’s price is
lower
 Substitute product’s quality and
performance are equal to or greater than
the existing product
 Differentiated industry products that are valued
by customers reduce this threat
 Intensity of Rivalry Among
Competitors
 Industry rivalry increases when:
 There are numerous or equally
balanced competitors
 Industry growth slows or declines
 There are high fixed costs or high
storage costs
 There is a lack of differentiation
opportunities or low switching costs
 When the strategic stakes are high

 When high exit barriers prevent

competitors from leaving the industry
 Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers have

strong positions

Unattractive
Strong threats from
substitute products
Industry

Intense rivalry among

competitors Low profit potential
 Interpreting Industry Analyses
High entry barriers

Suppliers and buyers have

weak positions

Attractive
Few threats from
substitute products
Industry

Moderate rivalry among

competitors High profit potential
Competitor Analysis
 Competitor Intelligence
 The ethical gathering of needed
information and data that provides
insight into:
 A competitor’s direction (future objectives)
 A competitor’s capabilities and intentions (current
strategy)
 A competitor’s beliefs about the industry (its
assumptions)
 A competitor’s capabilities
Competitor Analysis
Components
 Competitor Analysis (cont’d)
• How do our goals
Future Objectives
compare with our
competitors’ goals?
• Where will the
emphasis be placed
in the future?
• What is the attitude
toward risk?
 Competitor Analysis (cont’d)
Future Objectives
• How are we currently
competing?
Current Strategy • Does this strategy
support changes in
the competitive
structure?
 Competitor Analysis (cont’d)
Future Objectives

• Do we assume the
Current Strategy future will be volatile?
• Are we operating
Assumptions under a status quo?
• What assumptions do
our competitors hold
about the industry
and themselves?
 Competitor Analysis (cont’d)
Future Objectives

Current Strategy

Assumptions
• What are our
strengths and
Capabilities weaknesses?
• How do we rate
compared to our
competitors?
 Competitor Analysis (cont’d)
Future Objectives Response

• What will our

Current Strategy competitors do in
the future?
Assumptions • Where do we hold
an advantage over
our competitors?
Capabilities • How will this
change our
relationship with
our competitors?
Stakeholders
 Individuals and groups who can
affect, and are affected by, the
strategic outcomes achieved and
who have enforceable claims on a
firm’s performance
 Claims are enforced by the
stakeholder’s ability to withhold
essential participation
 The Three
Stakeholder
Groups
Capital Market Stakeholders
 Shareholders and lenders expect
the firm to preserve and enhance
the wealth they have entrusted to it
 Returns should be commensurate
with the degree of risk to the
shareholder
 Product Market Stakeholders

 Customers
 Demand reliable products at low prices
 Suppliers
 Seek loyal customers willing to pay highest
sustainable prices for goods and services
 Host communities
 Want companies willing to be long-term employers
and providers of tax revenues while minimizing
demands on public support services
 Union officials
 Want secure jobs and desirable working conditions
Organizational Stakeholders
 Employees
 Expect a dynamic, stimulating and
rewarding work environment
 Are satisfied by a company that is
growing and actively developing their
skills
 Stakeholder Involvement
 Two issues affect the extent of stakeholder
involvement in the firm
1.How to divide returns
to keep stakeholders
involved?
Capital
Organizational
Market
2.How to increase
returns so everyone
Product
Product
Market
Market
has more to share?
 Firm level analysis
q First, consider units of
analysis
u Corporate level
u Business level
uFunctional level
 Levels of strategy

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 Tasks of Corporate Strategy
 Moves to achieve diversification

 Actions to boost performance of individual businesses

 Capturing valuable cross-business synergies to provide

1 + 1 = 3 effects!

 Establishing investment
priorities and steering
corporate resources into the
most attractive businesses
 Tasks of Business Strategy

 Initiating approaches to produce successful performance in a specific

business
 Crafting competitive moves to build
sustainable competitive advantage
 Developing competitively valuable
competencies and capabilities
 Uniting strategic activities of functional areas
 Gaining approval of business strategies by corporate-level officers
and directors
Tasks of Functional Strategies
 Game plan for a strategically-relevant
function, activity, or business process

 Detail how key activities

will be managed

 Provide support for

business strategy

 Specify how functional objectives

are to be achieved
 What Is a Strategic Plan?

Its strategic vision

and business
mission
A
Company’s
Strategic Its strategic and
Plan
Consists financial
of objectives

Its strategy
 Thinking Strategically:
Three Big Central Questions

1. What’s the company’s present situation?

- industry conditions and competitive pressure
- current performance and market standing
- resource strength and capabilities and competitive weaknesses
2. Where does the company need to go from here?
 Business(es) to be in and market positions to stake out
 Buyer needs and groups to serve
 Direction to head

3. How should it get there?

 A company’s answer to “how
will we get there?” is its strategy
Mintzberg’s Definition

Strategy is a pattern in a stream of

actions over time.
Mintzberg’s Definition

Strategy is a pattern in a stream of

actions

over time.
The Five P’s
Plan
 The Five P’s
Ploy
Plan
 The Five P’s
Ploy
Plan

Pattern
 The Five P’s
Ploy
Plan

Perspective Pattern
Position
Different Kinds of Strategy

Intended Strategy
Different Kinds of Strategy

Deliberate

Intended Strategy

Unrealized
Strategy
Different Kinds of Strategy

Deliberate

Intended Strategy

Emergent
Strategy
Unrealized
Strategy
 Different Kinds of Strategy

Deliberate

Intended Strategy Realized

Strategy

Emergent
Unrealized Strategy
Strategy
 Dimensions of Strategy
 Strategies contain goals, policies, and
action sequences.
 Strategies develop around a few key
concepts.
 Strategies deal with the unpredictable
and the unknowable.
 Strategies require hierarchies of mutual
support strategies.
Examples of Strategies Based
on Distinctive Capabilities
 Sophisticated distribution systems – Wal-Mart
 Product innovation capabilities – 3M Corporation
 Complex technological process – Michelin
 Defect-free manufacturing – Toyota and Honda
 Specialized marketing and merchandising know-
how – Coca-Cola
Global sales and distribution capability – Black & Decker
Superior e-commerce capabilities – Dell Computer
Personalized customer service – Ritz Carlton hotels