BBA Strategic Management - I

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STRATEGIC MANAGEMENT - I 1

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Transcript of BBA Strategic Management - I

Strategic Management - I

Strategic Management - I

1Meaning Strategic management is defined as the set of decisions and actions that result in the formulation and implementation of plans designed to achieve a companys objectives.

Strategic Management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives

2nine critical tasks: Strategic Management1. Formulate the companys mission, including broad statements about its purpose, philosophy, and goals.2. Conduct an analysis that reflects the companys internal conditions and capabilities.3. Assess the companys external environment, including both the competitive and general contextual factors.4. Analyze the companys options by matching its resources with the external environment.5. Identify the most desirable options by evaluating each option in light of the companys mission.

3nine critical tasks: Strategic Management6. Select a set of long-term objectives and grand strategies that will achieve the most desirable options.7. Develop annual objectives and short-term strategies that are compatible with the selected set of long-term objectives and grand strategies.8.Implement the strategic choices by means of budgeted resource allocations in which the matching of tasks, people, structures, technologies, and reward systems is emphasized.9.Evaluate the success of the strategic process as an input for future decision-making.

4nine critical tasks: Strategic ManagementAs these nine tasks indicate, strategic management involves the planning, directing, organizing, and controlling of a companys strategy-related decisions and actions. By strategy, managers mean their large-scale, future-oriented plans for interacting with the competitive environment to achieve company objectives. A strategy is a companys game plan. Although that plan does not precisely detail all future deployments (of people, finances, and material), it does provide a framework for managerial decisions.

5DIMENSIONS OF STRATEGIC DECISIONS

Strategic issues require top-management decisions.Strategic issues require large amounts of the firms resources. Strategic issues often affect the firms long-term prosperity.Strategic issues are future oriented.Strategic issues usually have multifunctional or multi- business consequences.Strategic issues require considering the firms external environment.

6Levels of strategy

7Characteristic of strategic management DecisionsStrategic decisions are likely to affect the long-term direction of an organization.

Strategic decisions are normally about trying to achieve some advantage for the organization.

Strategic decisions are likely to be concerned with the scope of an organization's activities: Does (and should) the organization concentrate on one area of activity, or does it have many? The issue of scope of activity is fundamental to strategic decisions because it concerns the way in which those responsible for managing the organization conceive its boundaries. It is to do with what they want the organization to be like and to be about.

Strategy is to do with the matching of the activities of an organization to the environment in which it operates.

8Characteristic of strategic management Decisions5. Strategy can also be seen as 'stretching' an organization's resources and competences to create opportunities or capitalize on them. It is not just about countering environmental threats and taking advantage of environmental opportunities; it is also about matching organizational resources to these threats and opportunities. There would be little point in trying to take advantage of some new opportunity if the resources needed were not available or could not be made available, or if the strategy was rooted in an inadequate resource-base.

6. Strategic decisions therefore often have major resource implications for an organization. In the 1980s a number of UK retail firms had attempted to develop overseas with little success and one of the major reasons was that they had underestimated the extent to which their resource commitments would rise and how the need to control them would take on quite different proportions. Strategies, then, need to be considered not only in terms of the extent to which the existing resource-base of the organization is suited to the environmental opportunities but also in terms of the extent to which resources can be obtained and controlled to develop a strategy for the future.

9Characteristic of strategic management Decisions7. Strategic decisions are therefore likely to affect operational decisions, to set off waves of lesser decisions.

8. The strategy of an organization will be affected not only by environmental forces and resource availability, but also by the values and expectations of those who have power in and around the organization. In some respects, strategy can be thought of as a reflection of the attitudes and beliefs of those who have the most influence on the organization. Whether a company is expansionist or more concerned with consolidation, and where the boundaries are drawn for a companys activities, may say much about the values and attitudes of those who influence strategy -- the stakeholders of the organization. The beliefs and values of these stakeholders will have a more or less direct influence on the organization.

10Formality of strategic managementDefinitionDegree to which participants, responsibilities, authority, and discretion in decision making are specified.Forces affecting degree of formalitySize of organizationPredominant management stylesComplexity ofEnvironmentProduction processProblemsPurpose of planning system

11Value of strategic managementA number of reasons are given by authors to as why organizations should engage in strategic management. Many research studies show both financial and nonfinancial benefits which can be derived from a strategic-management approach to decision making. Financial Benefits The question "Why should an organization engage in strategic management?" must be answered by looking at the relationship between strategic management and performance. Research performed by Eastlack and McDonald (1970), Thune and House (1970), Ansoff et. al. (1971), Karger and Malik (1975), and Hofer and Schendel (1978) indicate that formalized strategic management (strategic planning) does result in superior performance by organizations. Each of these studies was able to provide conceiving evidence of the profitability of strategy formulation and implementation. The formalized strategic management process does make a difference in the recorded measurements of profits, sales, and return on assets. Organizations that adopt a strategic management approach can expect that the news system will lead to improved financial performance. 12Value of strategic managementNonfinancial Benefits Regardless of the profitability of strategic management, several behavioral effects can be expected to improve the welfare of the firm. Yoo and Digman emphasize that strategic management is needed to cope with and manage uncertainty in decision making. They present several benefits of strategic management: It provides a way to anticipate future problems and opportunities. It provides employees with clear objectives and directions for the future of the organization. It results in more effective and better performance compared to non-strategic management organizations. It increases employee satisfaction and motivation. It results in faster and better decision making and It results on cost savings.

13ROLE OF CHIEF EXECUTIVE IN S.M.The chief executive is the executive head of the organization. He represents the management.

The chief executive's principle duty is to define long-term direction and scope of the organization. He has ultimate responsibility for its success. He leads the formulation and implementation of the strategy. He guided by the board of directors.Formulation of strategicImplementation of strategic

14Formulation of strategiesFormulation of strategies :Strategy provides future direction and scope to the organization for gaining competitive advantage. The roles of chief executive in strategic formulation are :Key strategic role :The chief executive plays the role of chief architect in defining vision, mission, and objective of the organization. He conceptualizes and crafts strategic to achieve objectives.Decision making role :The chief executive makes strategic decisions related to strategy formulation .He makes strategic choice from among strategic options for achieving objectives. This role involves risk-taking.Resources planning role :This role of chief executive involves coordinated allocation of significant resources to planes. such plans can be organization wide or related to strategic business units or function. Resources can be people, money, technology, time and information.Negotiator role :Strategic must fulfill the expectation of various stakeholders of the organization. The chief executive balance there conflicting interest by negotiating disputes. The stakeholder can be owners, customers, employees, suppliers, government, labor unions, and financial institution.

15Implementation of strategicImplementation is putting strategy into action. The chief information about strategy to the implementers within the organization. He serve as a spokesperson for strategic implementation.

Leadership role :The chief executive assumes overall leadership for the implementation of strategy. He inspire trust and self-confidence among implements of strategy. He ensures there participation. He motivates them for higher productivity. He provides direction for implementation of strategy.

Organizer role :The chief executive is an organization builder. He determines the structure for strategy implementation. He establishes reporting relationship and span of control. He assigns authority and responsibility for petitions and people in the organization for key result areas.

Resources manager role :The chief executive ensures officiate and effective mobilization, allocation and utilization of resource for implementation strategy. Budgets are prepare for management or resources.

Monitoring :The chief executive monitors and evaluates the performance results of strategy implementation. He takes corrective actions to resolve performance problems. He handles unexpected distributors and crisis situation.

16Unit: 2EXTERNAL environment and forecasting17Component of remote environment(pestl)EconomicalSocialPoliticalLegalTechnological18Component of remote environment(pestl)

Political EnvironmentConstitutionPolitical philosophyPolitical partiesPolitical InstitutionsLegal InstitutionsEconomic Environment

Economic SystemEconomic PoliciesEconomic ConditionsCapital MarketGlobalizationSocio Culture EnvironmentDemographyLife CycleSocial ValuesSocial InstitutionsReligionLanguage

Technological EnvironmentNature of TechnologyPace of TechnologyTechnology TransferResearch and Development

19LINKING STRATEGY WITH ETHICS AND SOCIAL RESPONSIBILITYShould there be a link between a companys efforts to craft and execute a winning strategy and its duties to:Conduct activities in an ethical manner?Demonstrate socially responsible behavior byBeing a committed corporate citizen?Attending to needs of non-owner stakeholders?

20Business ethicsBusiness ethics involves applying general ethical principles and standards to business behaviorEthical principles in business are not different from ethical principles in generalBusiness actions are judgedBy general ethical standards of society Not by a set of rules business peopleapply to their own conduct

21The Business Case for an Ethical Strategy and Business Behavior

22Examples of UniversalEthical Principles or NormsHonestyTrustworthinessRespecting the rights of othersPracticing the Golden RuleAvoiding unnecessary harm toWorkersUsers of a companys product or service

23CORPORATE SOCIAL RESPONSIBILITYThe notion that corporate executives should balance interests of all stakeholders began to blossom in the 1960sSocial responsibility as it applies to businesses concerns a companys duty toOperate in an honorable mannerProvide good working conditions for employeesBe a good steward of the environmentActively work to better quality of life inLocal communities where it operates andSociety at large

24CORPORATE SOCIAL RESPONSIBILITY

25Unit: 3Establishing Company direction26Developing business mission and strategic visionMission StatementLeaders should emphasize the current mission statement to employees, which clarifies the purpose and primary, measurable objectives of the organization. A mission statement is meant for employees and leaders of the organization. Strategic plans may involve changing the mission statement to reflect a new direction of the organization. Highlighting the benefits of the change and minimizing the deficits will help employees and the public buy into the change.27Developing business mission and strategic visionVision StatementLike mission statements, vision statements help to describe the organization's purpose. Vision statements also include the organization values. Vision statements give direction for employee behavior and helps provide inspiration. Strategic plans may require a marketing strategy, which could include the vision statement to also help inspire consumers to work with the organization.

28Developing business mission and strategic visionA mission and vision are standard and critical elements of a company's organizational strategy. Most established companies develop organizational mission statements and vision statements, which serve as foundational guides in the establishment of company objectives. The company then develops strategic and tactical plans for objectives.29Developing business mission and strategic visionVision StatementA vision statement sets out a company's long-term goals and aspirations clearly and concisely. A vision statement is intended to inspire and motivate the company's workforce by providing a picture of where the organization is heading. It also provides a reality check for managers, who can compare their strategic objectives and operational plans to the vision statement. If a planned course of action doesn't move the company toward its vision, it may need to be revised.Mission StatementA mission statement defines the business sector in which a company operates and sets out its key purpose. It summarizes what the company does and why. It also sets out how the company conducts its business and identifies key stakeholders, such as shareholders, customers and employees. A mission statement helps employees understand where their contribution fits into the company's objectives. It also helps other stakeholders decide whether they want to do business with the organization.

30Communicating strategic vision1. Keep the message simple, but deep in meaning.

2. Build behavior based on market and customer insights

3. Use the discipline of a framework.

4. Think broader than the typical CEO-delivered message. And dont disappear.

5. Put on your real person hat.

6. Tell a story.

7. Use 21st-century media and be unexpected.

8. Make the necessary investment.

31Setting performance objectivesPerformance Management is about setting targets to achieve and then tracking the progress towards achieving them To understand and to set up performance targets we can ask a simple question from our self is what performance targets can achieve?

To monitor and assess how the employees of any organization are performing, it's useful to set out clear objectives, ideally with quantifiable performance targets. This will help ensure the employees understand what they are expected to do for the organization.

SpecificMeasurableAccountable

32Setting performance objectivesRealistic Time basedStrategically Linked

Every performance objective must always be linked to the overall business plan and over-arching strategy of the organization. Well thought out performance objectives create a link between the direction of each individual employee which also align upstream through departments and divisions to unify the goals of the entire organization.

33Benefits of defining performance targets

Defining performance targets for employees could help us to:ensure that every employee's contribution fits into the overall aims of the businesshelp individual employees better understand their aims and role within the businesshelp employees feel valuedcreate standards to measure the quantity and quality of employees' workmonitor the success of the businessidentify ways to make the business run more efficientlyidentify ways to expand the business

34Strategic objectives Vs financial objectivesWhen a business consistently is losing money, top leadership may vent a frustration and an urgency that department heads are not doing the kinds of things necessary to prevent the operational demise that is unfolding and to deal with it effectively. To right the organization's operating ship, senior executives may formulate fresh financial and strategic goals that functional heads must follow to the letter.

35Financial OBJECTIVESFinancial goals touch on everything money-related that a company wants to achieve within a given period --- say, one month, quarter or fiscal year.

These objectives may span a shorter stretch if top leadership must cope with an immediate operational crisis, the kind that may happen if a major customer owing substantial amounts suddenly files for bankruptcy.

For a company, economic objectives may be making a specified amount of money at year-end, increasing sales by 15 percent, cutting costs by 20 percent in segments that are bleeding cash and raising long-term debts on credit markets by targeting interest rates between 4 and 5 percent and avoiding lender restrictions that are too stringent.

36Strategic Objectives

Formulating strategies is what company executives do to cope with competitive tedium, understand the tactical moves that rivals surreptitiously are making, deal with the hybrid problem of customer loyalty and brand positioning, hire competent professionals and nurture the company's mid-level brass.

Strategic objectives may cover things like expanding market share overseas and domestically by 8 percent and 10 percent, respectively; reducing the corporate employee turnover ratio by 2 percent; cultivating more amicable ties with lenders, business partners and shareholders; and communicating with regulators more effectively.

Employee turnover deals with how many employees leave a company compared to its total work force.

37Strategic intentStrategic intent is more than unfettered ambition. It encompasses an active management process that focuses the organization on the essence of winning. It is stable over time and lengthens the attention span of the company. Because it involves a broad and long-term target, it should be worthy of the personal attention and commitment of top management. It creates a sense of urgency and improvement drive.38Strategic making PYRAMID

39operational strategyFamed management consultant Peter Drucker first proposed a focus on operational level strategy in the mid-20th century. He noted that most organizations have many levels of management. This is true even in businesses where tasks might be delegated across a small number of employees or outsourced to third parties.

The strategic decisions a business must make about its current and future plans are, in Drucker's view, decisions about the operations of the company: They deal with scheduling activities, paying invoices, supply chain management and the use of assets and resources. Focusing on operations has its advantages.

It allows the business to harvest the worth of the asset or resource for many different purposes. An employee can be seen as an asset, for instance, that generates income, performs a vital business function and helps produce goods and services. The same could be said of technology, such as a computer, which serves the business' operations in many ways.40functional level strategyFunctional level strategy is a response to operational level strategy. It advocates for the business to see its management decisions as specific to a functional area of the organization, such as marketing, human resources, finance, information management and public relations.

The advantages of this are that employees and resources can be assigned to the tasks that best suit their skills and interests. If you have an employee with expertise in HR, for instance, it makes logical sense to assign her to the human resources function instead of the finance division. Functional level strategy aims to see people and resources as an end in themselves, not a means to an end.41CORPORATE level strategyCorporate level strategy is concerned with the strategic decisions a business makes that affect the entire organization.

Financial performance, mergers and acquisitions, human resource management and the allocation of resources are considered part of corporate level strategy. 42CORPORATE level strategyThere are three types of corporate level strategy that a business can employ.Value-Creating StrategyValue-Neutral StrategyValue-Reducing Strategy

43Business level strategyA strategic business unit may be a division, product line, or other profit center that can be planned independently from the other business units of the firm.At the business unit level, the strategic issues are less about the coordination of operating units and more about developing and sustaining a competitive advantage for the goods and services that are produced. At the business level, the strategy formulation phase deals with:positioning the business against rivalsanticipating changes in demand and technologies and adjusting the strategy to accommodate theminfluencing the nature of competition through strategic actions such as vertical integration and through political actions such as lobbying.Michael Porter identified three generic strategies (cost leadership, differentiation, and focus) that can be implemented at the business unit level to create a competitive advantage and defend against the adverse effects of the five forces.

44UNITING THE STRATEGY MAKING EFFORTA companys strategy is a collection of strategies and initiatives Separate levels of strategy must be unified into a cohesive, company-wide action plan Pieces of strategy should fit together like puzzle pieces

45Unit:4Industry and Competitive Analysis

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Methods of industry and competitive analysisThe competitive analysis is a statement of the business strategy and how it relates to the competition. The purpose of the competitive analysis is to determine the strengths and weaknesses of the competitors within your market, strategies that will provide you with a distinct advantage, the barriers that can be developed in order to prevent competition from entering your market, and any weaknesses that can be exploited within the product development cycle.47Methods of industry and competitive analysisTo determine just what constitutes a key asset or skill within an industry, David A. Aaker in his book, Developing Business Strategies suggests concentrating your efforts in four areas:1. The reasons behind successful as well as unsuccessful firms2. Prime customer motivators3. Major component costs4. Industry mobility barriers

48Methods of industry and competitive analysisCompetitive strategies usually fall into these five areas:.Product.Distribution.Pricing.Promotion.Advertising

49(Michael porter) Five forces of competition

50Environmental scanning techniques

51Environmental scanning techniquesVarious authors have mentioned the methods and tech. Used for ES. Le Bell and Krasner have outlined 9 groups of techniques: 1.Single variable extrapolation 2.Theoretical limit envelopes 3.Dynamic modes 4.mapping 5.multivariable interaction analysis 6.unstructured expert opinion 7.structured expert opinion 8.structured in expert opinion 9.unstructured in expert speculation

52Most popular ones are:The chaos theory by Edward Lorenz and Michael Feigenbaum. Chaos theory uses mathematical models, known as chaotic models, to interpret the process of non linear and dynamic system. The phenomenon of Chaos is observed in a wide variety of processes biological, sociological, economic, and meteorological. The applications of Chaos theory in management may range from predicting market behavior, financial forecasting and anticipating competitive strategies.

53Most popular ones are:The QUEST (Quick environmental scanning techniques) is a four step process which uses scenario writing for scanning the environment and identify the strategic options. The Four steps involved in applying this technique are

1. Internal strategists will observe and identify the major events and trends in the Industry 2. Speculate on a wide range of important Issue that might affect the future of their organization 3. Preparing a report summarizing the major issues and their implications and 3-5 scenarios incorporating the major themes of their discussion. 4. Report and scenarios are reviewed by a group of strategists who identify feasible strategic options to deal with the evolving environment.

54Most popular ones are:SWOT AnalysisPESTLE Analysis

55Strategic group mapsThe purpose of constructing a Strategic Group Map is to not only illustrate how rivals within an industry compete but also should reveal which rival stands out and why.

Your map should clearly reveal the competitive positions of the firms which compete as rivals in a given segment of the industry. It should support your conclusions from your industry analysis. It should also support any strategic recommendations that you make for the firm.

You should be able to envision the repositioning of the firm you are analyzing as a result of the firm implementing the strategic recommendations you give the firm.

56Strategic group mapsStep 1 Identify Competitors in the IndustryStep 2 Identify the Two Key VariablesStep 3 Identify the Third VariableStep 4 - Plot the Strategic Groups Identified in Step 1 & 3Step 5 - Aha or Not?57Strategic group maps58Monitoring competition5 Key Tips on using social media monitoring for competitive analysis:1. Understand Why You Should Assess the Competition2. What should you monitor at the Competition?3. What to Assess at the Competition4. What Results are you Looking for ?5. Social Media Presence Analysis

59Key factors for competitive success evaluationIDENTIFY KEY SUCCESS FACTORS. The primary purpose of industry analysis is to identify the requirements and trends that determine the key success factors for the business. These factors encompass (1) customer requirements, (2) competitive factors that must be met, (3) regulations/industry standards in the business, (4) the resource requirements to implement competitive strategy, and other 5) technical requirements to build a competitive position.

Customers are looking for products that provide some level of value for the price they pay. Each buyer segment has different requirements that affect its key success factors. Requirements can include high performance, durability, special features or fashion, ease of use, or rapid availability. Competing firms often use similar product-market strategies. Competition is often based on price, quality, and delivery. Depending on their strategic focus, each firm must develop a set of skills (strategic weapons) that allow it to perform better than their competitors on each competitive dimension.

60Key factors for competitive success evaluationIndustry regulations or standards are often minimum requirements for participation in a competitive arena. Government regulations often affect safety issues for the environment or end users. Industry standards often determine technical compatibility, process performance, and interface issues for network or system products. Industry standards can be set by a special body, like the Industry Standards Organization (ISO), or become ad hoc standards set by leading competitors, like Intel and Microsoft.

Resource requirements are be coming increasingly critical as markets become global and economies of scale become critical for research and development, manufacturing, and marketing. Investments now exceed $1 billion for facilities in semiconductors, paper making, and steel production. In high technology areas, like information technology, shortages of qualified personnel are forcing firms to outsource much of their capabilities.

Technical requirements are also key to today's competitive environment. Without access to, or internal technology, firms are not able to participate in many industries. This is especially important for suppliers, such as component suppliers for electronics or automobiles. As firms reduce their number of suppliers, suppliers must increasingly add research and development capabilities to stay in the game.

61EVALUATE BUSINESS STRATEGThe business strategy definition provides the basis for its evaluation. This process assesses issues that are both internal and external to the firm. Internal assessments are based on the firm's functional and process capabilities and financial resources. The internal assessment leads to an understanding of the firm's strengths and weaknesses. External assessments are based on the key success factor that have been identified. The external assessment leads to an understanding of the opportunities and threats facing the firm. This assessment is often referred to as a SWOT analysis.

62UNIT: 5EVALUATING COMPANY RESOURCES AND COMPETITIVE CAPABILITIES63STREHGTHS AND RESOURCE CAPABILITIES Common types of valuable resources and competitive capabilities that management should consider when crafting strategy include:

A skill, specialized expertise, or competitively important capabilityexamples include skills in low-cost operations, proven capabilities in creating and introducing innovative products, cutting-edge supply chain management capabilities, expertise in getting new products to market quickly, and expertise in providing consistently good customer service. Valuable physical assets such as state-of-the-art plants and equipment, attractive real estate locations, or ownership of valuable natural resource deposits.

64STREHGTHS AND RESOURCE CAPABILITIESValuable human assets and intellectual capital an experienced and capable workforce, talented employees in key areas, collective learning embedded in the organization, or proven managerial know-how.

Valuable organizational assets proven quality control systems, proprietary technology, key patents, and a strong network of distributors or retail dealers. Valuable intangible assets a powerful or well-known brand name or strong buyer loyalty. Competitively valuable alliances or cooperative ventures alliances or joint ventures that provide access to valuable technologies, specialized know-how, or geographic markets.65IDENTIFYING COMPANY RESOURCE STRENGTHS AND CORE COMPETENCIES

A companys resource strengths represent its competitive assets and determine whether its competitive power in the marketplace will be impressively strong or disappointingly weak. A company that is well-endowed with potent resource strengths and core competencies normally has considerable competitive powerespecially when its management team skillfully utilizes the companys resources in ways that build sustainable competitive advantage.

Companies with modest or weak competitive assets nearly always are relegated to a trailing position in the industry.

66WEAKNESSES AND RESOURCES DEFICIENCIESA resource weakness or competitive liability is something a company lacks or does poorly or a condition that puts it at a disadvantage in the marketplace. As a rule, strategies that place heavy demands on areas where the company is weakest or has unproven ability are suspect and should be avoided. A companys resource weaknesses can relate to:Inferior or unproven skills, expertise, or intellectual capital in competitively important areas of the business.

Deficiencies in competitively important physical, organizational, or intangible assets. Missing or competitively inferior capabilities in key areas.

67Potential Resource Weaknesses and Competitive Deficiencies

No clear strategic direction. No well-developed or proven core competencies. A weak balance sheet; burdened with too much debt. Higher overall unit costs relative to key competitors. A product/service with features and attributes that are inferior to those of rivals. Too narrow a product line relative to rivals. Weak brand image or reputation. Weaker dealer network than key rivals. Behind on product quality, R&D, and/or technological know-how. Lack of management depth. Short on financial resources to grow the business and pursue promising initiatives

68COMPETENCIESOne of the most important aspects of identifying resources and capabilities that can become the basis for competitive advantage has to do with a companys competence level in performing key pieces of its businesssuch as supply chain management, R&D, production, distribution, sales and marketing, and customer service. A companys proficiency in conducting different facets of its operations can range from merely the ability to perform an activity to a competence, core competence, or distinctive competence:

69COMPETENCIESA competence is an internal activity an organization performs with proficiency. Some competencies relate to fairly specific skills and expertise (like just-in-time inventory control or picking locations for new stores) and may be performed in a single department or organizational unit.

70COMPETENCIESA core competence is a competitively important activity that a company performs better than other internal activities.A distinctive competence is a competitively important activity that a company performs better than its rivalstherefore offering the potential for competitive advantage.

71MARKET OPPORTUNITIES Serving additional customer groups or market segments. Expanding into new geographic markets. Expanding the companys product line to meet a broader range of customer needs. Utilizing existing company skills or technological know-how to enter new product lines or new businesses. Falling trade barriers in attractive foreign markets. Acquiring rival firms or companies with attractive technological expertise or capabilities.

72THREATS TO FUTURE PROFITABILITYOften, certain factors in a companys external environment pose threats to its profitability and competitive well-being. Threats can stem from the emergence of cheaper or better technologies, rivals introduction of new or improved products, the entry of lower-cost foreign competitors into a companys market stronghold, new regulations that are more burdensome to a company than to its competitors, vulnerability to a rise in interest rates, the potential of hostile takeover, unfavorable demographic shifts, or adverse changes in foreign exchange rates.

73THREATS TO FUTURE PROFITABILITYExternal threats may pose no more than a moderate degree of adversity or they may be so imposing as to make a companys situation and outlook quite tenuous. On rare occasions, market shocks can throw a company into an immediate crisis and battle to survive. Many of the worlds major airlines have been plunged into unprecedented financial crisis because of a combination of factors: rising prices for jet fuel, a global economic slowdown that has affected business and leisure travel, mounting competition from low-fare carriers, shifting traveler preferences for low fares as opposed to lots of in-flight amenities, and out-of-control labor costs. It is managements job to identify the threats to the companys future prospects and to evaluate what strategic actions can be taken to neutralize or lessen their impact.

74THREATS TO FUTURE PROFITABILITY Increasing intensity of competition among industry rivalsmay squeeze profit margins. Slowdowns in market growth. Likely entry of potent new competitors. Growing bargaining power of customers or suppliers. A shift in buyer needs and tastes away from the industrys product. Adverse demographic changes that threaten to curtail demand for the industrys product. Vulnerability to unfavorable industry driving forces. Restrictive trade policies on the part of foreign governments. Costly new regulatory requirements

75Strategic cost analysisIts the process of developing cost information to help managers making strategic choices and maximum(use of strategic resources) today and tomorrow.SCA examines the basic relationship between the cost of providing a product or a service and the value delivered And how?Understanding properly the underlying causes of costs

76Two main types of cost drivers

StructuralCapacity, set of resources and business model serve as variables, but only with a fundamental decisionExecutionalRange of decisions lie within existing capacity. Decisions about product and process design, quality control and capacity management

77Strategic cost analysisStrategic cost analysis helps managers to take strategic decisions basing on two main points: - clear understanding of relationship between costs and value delivered - maximizing overall profitability of limited resources used

78COST ANALYSIS AND VALUE CHAIN

79COST ANALYSIS AND VALUE CHAINA companys cost-competitiveness depends not only on the costs of internally performed activities (its own company value chain), but also on costs in the value chains of its suppliers and forward channel allies.

A companys value chain identifies the primary activities that create customer value and related support activities.

80COST ANALYSIS AND VALUE CHAINPRIMARY ACTIVITIESSupply Chain Management Activities, costs, and assets associated with purchasing fuel, energy, raw materials, parts and components, merchandise, and consumable items from vendors; receiving, storing, and disseminating inputs from suppliers; inspection; and inventory management. Operations Activities, costs, and assets associated with converting inputs into final product form (production, assembly, packaging, equipment maintenance, facilities, operations, quality assurance, environmental protection). Distribution Activities, costs, and assets dealing with physically distributing the product to buyers (finished goods warehousing, order processing, order picking and packing, shipping, delivery vehicle operations, establishing and maintaining a network of dealers and distributors). Sales and Marketing Activities, costs, and assets related to sales force efforts, advertising and promotion, market research and planning, and dealer/distributor support. Service Activities, costs, and assets associated with providing assistance to buyers, such as installation, spare parts delivery, maintenance and repair, technical assistance, buyer inquiries, and complaints.

81COST ANALYSIS AND VALUE CHAINSupport Activities

Product R&D, Technology, and Systems Development Activities, costs, and assets relating to product R&D, processR&D, process design improvement, equipment design, computer software development, telecommunications systems, computer-assisted design and engineering, database capabilities, and development of computerized support systems. Human Resources Management Activities, costs, and assets associated with the recruitment, hiring, training,development, and compensation of all types of personnel; labor relations activities; and development of knowledge-based skills and core competencies. General Administration Activities, costs, and assets relating to general management, accounting and finance, legal and regulatory affairs, safety and security, management information systems, forming strategic alliances and collaborating with strategic partners, and other overhead functions.

82BENCHMARKINGBenchmarking is a potent tool for learning which companies are best at performing particular activities and then using their techniques (or best practices) to improve the cost and effectiveness of a companys own internal activities.

83COMPETITIVE CAPABILITIES TO COMPETITIVE ADVANTAGES Core competencies in ______. A strong financial condition; sample financial resources to grow the business. Strong brand name image/company reputation. Economy of scale and/or learning and experience curve advantages over rivals. Proprietary technology/superior technological skills/important patents. Cost advantages over rivals. Product innovation capabilities. Proven capabilities in improving production processes. Good supply chain management capabilities. Good customer service capabilities. Better product quality relative to rivals. Wide geographic coverage and/or strong global distribution capability. Alliances/joint ventures with other firms that provide access to valuabletechnology, competencies, and/or attractive geographic markets.

84Unit: 6STRATEGIC ANALYSIS AND CHOICE85Nature of strategic analysis and choiceEstablishing long-term objectivesGenerating alternative strategiesSelecting strategies to pursue Best alternative - achieve mission & objectives

86Generic A low-cost leader strategy c strategicA low-cost leader strategy: striving to be the overall low-cost provider of a product or service that appeals to a broad range of customers (a couple of examples are Sams Club and Southwest Airlines).87Generic strategicTwo of the essential decisions a firm has to made are related with its position within the industry, through opting by low cost or differentiation, and how broad or narrow a market segment to target. Porter produced a matrix using cost advantage, differentiation advantage and a broad or narrow focus to classify a set of generic strategies that the firm can pursue to generate and maintain a competitive advantage. 88Generic strategic

89The Cost Leadership strategyThe Cost Leadership strategy is frequently the domain of big business. Small firms are not in general resourced to achieve cost leadership (which requires scale). This generic strategy emphasizes efficiency once is considered for being the low cost producer in an industry for a given level of quality. Low costs allow firms to sell relatively standardized products that offer features acceptable to many customers at the lowest competitive price and such low prices will gain competitive advantage thus increasing market share. Whether a cost leadership strategy is sustainable depends on the ability of another competitor to match or develop a cost base than is lower than the cost leader. The lowest cost base must be able to be sustained if leadership is to continue. 90Differentiation strategy

Differentiation strategy is related with the development of a product or service that offers unique attributes that are valued by customers and that customers perceive to be better than or different from the products of the competition. The value added by the uniqueness of the product may allow the firm to charge a premium price for it. The firm hopes that the higher price will more than cover the extra costs incurred in offering the unique product.91Best cost provider strategyBest-cost strategy is when the company makes an upscale product at a lower price which in turn gives more value to customers in exchange of money. This means that the strategy involves focusing towards customers who are value-conscious and are willing to pay money in exchange of a good that has upscale features. 92Best cost provider strategyA best-cost provider strategy: giving customers more value for the money by emphasizing both low cost and upscale difference, the goal being to keep costs and prices lower than those of other providers of comparable quality and features (a couple of examples are the Honda and Toyota car companies with customer satisfaction ratings that rival those of much more expensive cars).93Focused strategyFocus is essentially a strategy of segmenting markets and appealing to only one or a few groups of consumers or industrial buyers, to a not many select target markets. It is also called a segmentation strategy or niche strategy. It is hoped that by focusing the marketing efforts on one or two narrow market segments and tailoring the marketing mix to these specialized markets, it is possible to better meet the needs of that target market. At same time it attempts to achieve either a cost advantage or differentiation.

94Grand strategicGrand strategy is a term of art from academia, and refers to the collection of plans and policies that comprise the state's deliberate effort to harness political, military, diplomatic, and economic tools together to advance thatstate's national interest. Grand strategy is the art of reconciling ends and means. It involves purposive action -- what leaders think and want. 95Grand strategicGrand strategies, often called master or business strategies provide basic direction for strategic actions. They are the basis of coordinated and sustained efforts directed toward achieving long-term business objectives. Grand strategies indicate the time period over which long-range objectives are to be achieved. Thus, a grand strategy can be defined as a comprehensive general approach that guides a firms major actions. Business managers can use tools and techniques such as Grand Strategy Selection Matrix or Grand Strategy Cluster or Matched-pair Analysis to design means that will be used to achieve long-term objectives.

96Grand strategic

97Four grand strategies in a corporate levelStability and expansion strategyRetrenchmentCorporate restructuringCombining strategies98Classification of Stability strategyNo change strategyPause/proceed with caution strategyProfit strategy99Classification of Expansion strategy100DiversificationConcentric DiversificationVertical expansion Horizontal expansionConglomentric Diversification

Types of retrenchmentTurnaround (undertaking temporary reduction)Captive company strategy (process of tying up with larger organization)Divestment strategy(sale of one or more portion)Bankruptcy(legal protective)Liquidation(unattractive process)101Concentration growthA concentrated growth strategy involves focusing on increasing market share in existing markets. This strategy is also sometimes called a concentration or market dominance strategy. In a stable environment where demand is growing, concentrated growth is a low risk strategy. Concentration may involve increasing the rate of use of a product by current customers; attracting competitor's customers; and/or attracting nonusers/ new customers.102Example: Concentration growthWith headquarters in Columbus, Ohio, Chemlawn is the North American leader in professional lawn care. Like others in the lawn-care industry, Chemlawn is experiencing a steadily declining customer base. Market analysis shows that the decline is fueled by negative environmental publicity, perceptions of poor customer service, and concern about the price versus the value of the companys services, given the wide array of do-it-yourself alternatives. Chemlawns approach to increasing market share hinges on addressing quality, price, and value issues; discontinuing products that the public or environmental authorities perceive as unsafe; and improving the quality of its workforce.103Market developmentA market development strategy involves selling present products or services in new markets. Managers take actions like targeting promotions, opening sales offices and creating alliances to operation a market development strategy. Example: Kmart pursued market development with its recent emphasis on increasing market share among HispanicsDu Pont used market development when it found a new application for Kevlar, an organic material that police, security, and military personnel had used primarily for bulletproofing. Kevlar now is being used to refit and maintain wooden-hulled boats, since it is lighter and stronger than glass fibers and has 11 times the strength of steel.

104Product developmentA product development strategy focuses on substantial modification of existing products developing new products for currently served markets and customers. The focus is often on products/services related to current offering. Sometimes quality variations or new models or sizes of products are developed. As part of a product development strategy, a company may emphasize getting a product to market quickly, developing a product that can be sold at the lowest cost, or developing a product that has the highest level of product performance, or developing a product with high levels of product quality and reliability. In some situations, product development is constrained by a development budget.Example: Pepsi changed its strategy on beverage products by creating new products to follow the industry movement away from mass branding. This new movement was designed to attract a younger, hipper customer segment. Pepsis new products include a version of Mountain Dew, called Code Red, and new Pepsi brands, called Pepsi Twist and Pepsi BlueGerbers recent introduction included 52 items that ranged from feeding accessories to toys and childrens wear.

105InnovationA innovation strategy involves the creation of a new device or process based upon study, research and experimentation. An innovation strategy involves new processes, business ideas, and more basic R&D than is usually associated with a product development strategy. In a business setting, innovation may involve creation of new products and/or services. Innovation is usually paired with other strategies as a supporting or complementary strategy. firms find it profitable to make innovation their grand strategy. They seek to reap the initially high profits associated with customer acceptance of a new or greatly improved product. Then, rather than face stiffening competition as the basis of profitability shifts from innovation to production or marketing competence, they search for other original or novel ideas.Example:Intel, a leader in the semiconductor industry, pursues expansion through a strategic emphasis on innovation. With headquarters in California, the company is a designer and manufacturer of semiconductor components and related computers, of microcomputer systems, and of software. Its Pentium microprocessor gives a desktop computer the capability of a mainframe.Polaroid, which heavily promotes each of its new cameras until competitors are able to match its technological innovation; by this time, Polaroid normally is prepared to introduce a dramatically new or improved product. For example, it introduced consumers in quick succession to the Swinger, the SX-70, the One Step, and the Sun Camera 660.

106horizontal integrationA horizontal integration strategies focus on acquiring firms in current markets or in new markets. Such acquisitions eliminate competitors and provide the acquiring firm with access to new markets. A horizontal integration strategy can support a concentrated growth or a market development strategy.Example:Warner-Lamberts acquisition of Parke Davis, which reduced competition in the ethical drugs field for Chilcott Laboratories, a firm that Warner-Lambert previously had acquired.long-range acquisition pattern of White Consolidated Industries, which expanded in the refrigerator and freezer market through a grand strategy of horizontal integration, by acquiring Kelvinator Appliance, the Refrigerator Products Division of Bendix Westinghouse Automotive Air Brake, and Frigidaire Appliance from General Motors.Nikes acquisition in the dress shoes business N. V. Homess purchase of Ryan Homes

107Vertical integrationA vertical integration is a grand strategy that involves acquiring firms that supply it with inputs (such as raw materials) or are customers for its outputs (such as warehouses for finished products). The transaction may involve stock purchase, buying assets, or stock swap. Backward vertical integration involves acquiring a firm at an earlier stage of the value chain. Forward integration involves acquiring a firm at a later stage in the value chain.Example:Amoco emerged as North Americas leader in natural gas reserves and products as a result of its acquisition of Dome Petroleum. This backward integration by Amoco was made in support of its downstream businesses in refining and in gas stations, whose profits made the acquisition possible.

108Joint ventureA Joint Ventures involves creating complementary synergies. Occasionally two or more capable firms lack a necessary component for success in a particular competitive environment. For example, no single petroleum firm controlled sufficient resources to construct the Alaskan pipeline. Nor was any single firm capable of processing and marketing all of the oil that would flow through the pipeline. The solution was a set of joint ventures, which are commercial companies (children) created and operated for the benefit of the co-owners (parents). These cooperative arrangements provided both the funds needed to build the pipeline and the processing and marketing capacities needed to profitably handle the oil flow.Example:Diamond-Star Motors is the result of a joint venture between a U.S. company, Chrysler Corporation, and Japans Mitsubishi Motors corporation. Located in Normal, Illinois, Diamond-Star was launched because it offered Chrysler and Mitsubishi a chance to expand on their long-standing relationship in which subcompact cars (as well as Mitsubishi engines and other automotive parts) are imported to the United States and sold under the Dodge and Plymouth names.Bethlehem Steel acquired an interest in a Brazilian mining venture to secure a raw material source.

109Concentra tic diversificationA Concentric diversification is one type of strategic thrust. Concentric diversification focuses on creating a portfolio of related businesses. The portfolio is usually developed by acquisition rather than by internal new business creation. Product-market synergies are a major issue in creating the portfolio of related strategic business units (SBUs).Example:Head Ski initially sought to diversify into summer sporting goods and clothing to offset the seasonality of its snow business.

110Conglomerate diversificationA conglomerate diversification involves acquiring a portfolio of businesses based on financial performance criteria. Product-market synergies are not an issue.Example: ITT, Textron, American Brands, Litton, U.S. Industries, Fuqua, and I. C. Industries seek is financial synergy. For example, they may seek a balance in their portfolios between current businesses with cyclical sales and acquired businesses with countercyclical sales, between highcash/ low-opportunity and low-cash/high-opportunity businesses, or between debt-free and highly leveraged businesses.

111Retrenchment/turnaroundA turnaround strategy is used when firms are struggling financially. The strategy usually involves cost reduction and asset reduction. Managers reduce costs by reducing staff, leasing rather than buying equipment, reducing marketing expenditures or R&D. Assets are also often sold to free up cash for new initiatives. In some cases assets are sold and then leased back by the company from the purchaser of the asset. Once costs are reduced and assets have been sold to generate cash a positive growth or diversification strategy must be implemented to complete the turnaround.Example:Decreasing the workforce through employee attrition, leasing rather than purchasing equipment, extending the life of machinery, eliminating elaborate promotional activities, laying off employees, dropping items from a production line, and discontinuing low-margin customersSale of land, buildings, and equipment not essential to the basic activity of the firm and the elimination of perks, such as the company airplane and executives cars

112divestitureA divestiture is a strategic action that involves selling a major component of a firm or the entire firm. The entity is sold as an ongoing business.Example:Sara Lee Corp. (SLE) provides a good example. It sells everything from Wonderbras and Kiwi shoe polish to Endust furniture polish and Chock full oNuts coffee. The company used a conglomerate diversification strategy to build Sara Lee into a huge portfolio of disparate brands. A new president, C. Steven McMillan, faced stagnant revenues and earnings. So he consolidated, streamlined, and focused the company on its core categoriesfood, underwear, and household products. He divested 15 businesses, including Coach leather goods, which together equaled over 20 percent of the companys revenue, and laid off 13,200 employees, nearly 10 percent of the workforce.

113liquidationA liquidation involves selling parts of a firm or the entire firm at auction or to a private buyer for its tangible asset value. The intent is not to operate an ongoing business. Contrast this strategic action with divestiture.Example:Columbia Corporation, a $130 million diversified firm, liquidated its assets for more cash per share than the market value of its stock.

114Unit: 7STRATEGIC ANALYSIS AND CHOICE115Evaluating and choosing strategiesSeeking Sustained Competitive AdvantageEvaluating Cost Leadership OpportunitiesEvaluating Differentiation OpportunitiesEvaluating Speed as a Competitive AdvantageEvaluating Market Focus as a Way to Win Competitive Advantage

116Advantages of a Cost Leadership StrategyLow-cost advantages reduce likelihood of pricing pressure from buyers.Sustained low-cost advantages may push rivals into other areas, lessening price competition.New entrants must face an entrenched cost leader without experience to replicate cost advantages.Higher margins allow low-cost producers to withstand supplier cost increases.

117Evaluating Differentiation Opportunities

Skills and Resources Fostering DifferentiationStrong marketing abilitiesProduct engineeringCreative talent and flairStrong capabilities in basic researchCorporate reputation for quality or technological leadershipLong tradition in an industry or unique combination of skillsStrong cooperation from channels and suppliers of major components

118Evaluating Differentiation Opportunities

Organizational Requirements Supporting DifferentiationStrong coordination among functions in R&D, product development, and marketingSubjective measurement and incentives instead of quantitative measuresAmenities to attract highly skilled labor, scientists, and creative peopleTradition of closeness to key customersSome personnel skilled in sales and operations - technical and marketing

119Evaluating Speed as a Competitive Advantage

Has become a major source of competitive advantage for many firmsInvolves the availability of a rapid response to customers byProviding current products quickerAccelerating new product development or improvementQuickly adjusting production processesMaking decisions quickly

120Advantages of a Speed-Based StrategyCreates a way to lessen rivalry because firm has the availability of something a rival may notAllows firm to charge buyers more, engender loyalty, or enhance its position relative to its buyersGenerates cooperation and concessions from suppliers since they benefit from increased revenueSubstitutes and new entrants are trying to keep up with the rapid changes rather than introducing them

121Evaluating Market Focus as a Way to Win Competitive Advantage

Involves building cost, differentiation, and/or speed competitive advantages targeted to a narrow, market nicheAllows a firm toLearn its target customersBuild up organizational knowledge of ways to satisfy its target market better than larger rivalsRisks of focus strategiesCan attract major competitors to the segmentBelieving a focus strategy, by itself, creates success, rather than a form of low cost, differentiation, or speed

122Industry environment and strategy choiceEmerging IndustriesGrowth IndustriesMatureDeclining IndustriesFragmented IndustriesGlobal Industries

123Characteristics of Markets in Emerging IndustriesProprietary technology and technological uncertaintyCompetitor uncertainty regarding inadequate informationHigh initial cost structureFew entry barriersFirst-time buyers require initial inducementInability to easily obtain raw materials and componentsNeed for high-risk capital124Strategic Options for Emerging IndustriesAbility to shape industrys structureAbility to rapidly improve product qualityEstablish favorable relations with key supplyAbility to establish technology as dominant force.Acquire a core group of loyal customersAbility to forecast future competitors125Characteristics of Industries Transitioning to MaturityIntense competition for market shareIncreased sales to experienced, repeat buyersGreater emphasis on cost and serviceDeclining profitability

126Strategic Options for Maturing IndustriesPrune the product lineEmphasize process innovationEmphasize cost reductionsFocus on selecting loyal buyersPursue horizontal integrationExpand internationally127Characteristics of Mature/Declining IndustriesDemand grows more slowly than economy,or even declinesSlowing growth is caused byTechnological substitutionDemographic shiftsShifts in consumer needs

128Strategic Options for Mature/Declining IndustriesFocus on key market segments offering growth opportunitiesEmphasize product innovation and quality improvementEmphasize production and distribution efficiencyGradually harvest the business

129Characteristics of Fragmented IndustriesNo firm has a significant market shareNo firm can significantly influence industry outcomesExamplesProfessional servicesRetailingWood and metal fabricationAgricultural productsFuneral industry

130Strategic Options for Fragmented IndustriesTightly managed decentralization - Intense local coordination, high personal service, local autonomyFormula facilities - Standardized, efficient, low-cost facilities at multiple locationsIncreased value added - Difficult to differentiate products/servicesSpecialization - Product type, customer type, type of order, geographic areas

Bare bones/no frills - Intense low margin competition (low overhead, minimum wages, tight cost controls)131Characteristics of Global IndustriesDifferences in prices and costs among countries due toCurrency exchange fluctuationsDifferences in wage and inflation ratesOther economic factorsDifferences in buyer needs across countriesDifferences in competitors and ways of competing among countriesDifferences in trade rules and governmental regulations across countries

132Strategic Options: Pursuing Global Market Coverage License foreign firms to produce and distribute a firms products Maintain a domestic production base and export productsEstablish foreign-based plants and distribution in foreign countries

133Evaluating and choosing to diversityBusinesses with an effective diversity strategy will have a leading edge in employee productivity and retention. At a time when the pending retirement of the baby boomers will strip the workforce of massive numbers of skilled workers, businesses will experience a shortage of workers to replace retirees. An inclusive work environment is simply good business. The loss of one employee due to poor management practices is too many!

Managing Diversity for Success is a strategy that goes far beyond valuing individual differences or developing human resources policies. It takes into account the globalization of the world economy, as well as changes to the domestic demographic characteristics of the population (diversity). Business leaders that recognize these changes as a business and social opportunity to increase productivity and growth will invest the time and money needed to develop, implement, monitor, and review a diversity strategy that will have a positive effect on business, employees, suppliers, customers, products, and services. Businesses taking a strategic approach for Managing Diversity for Success will be in a position to gain a competitive advantage.

134Managing Diversity for Success is a four-step processRecognizing the economic consequences to the business.Developing an effective strategy for managing diversity.Implementing an action plan for organizational change. Evaluating the diversity strategy.135