IEM Topic4 Strategic Management

8/3/2019 IEM Topic4 Strategic Management

1/49

Escuela Politcnica SuperiorIntroduction to Engineering Management

Topic 4: Strategic Management

Contents: Business Strategy and Competitive Advantage

The Strategic Planning Process

Strategy formulation: Mission and Vision

Environment analysis: S.W.O.T. techniques

Porters Five Forces Model Corporate Strategy

Generic Strategies

Firm growth and development

Differentiation Strategies

Vertical Integration Globalization

Primary Reference:Robert M Grant, Contemporary Strategy Analysis, 3rd Edition, BlackwellPublishers.


2/49


What is Strategy?

Strategy has its origins in warfare.

Strategy is the overall plan for deploying resources to establish a

favourable position.

Tactics:

A tactic is a scheme for a specific action.

Tactics are concerned with maneuvers necessary to win battles

whereas strategy is concerned with winning the war.

Sun Tzu (Art of War, 500 B.C.)

Know the other and know yourself: Triumph without peril.

Know Nature and know the Situation: Triumph completely.


3/49


Some definitions of Strategy

Strategy is a detailed plan for achieving success in situations such as war,politics, business, industry or sport, or the skill of planning for such situations

(Cambridge Dictionary)

Strategy. The art of war, especially the planning of movements of troops and

ships etc., into favourable positions;plan of action or policyin business or

politics, etc. (Oxford Pocket Dictionary) The determination of the long-run goals and objectives of an enterprise, and

the adoption ofcourses of action and the allocation of resources necessary

for carrying out these goals. (Alfred Chandler, Strategy and Structure)

What business strategy is all about is, in a word, competitive advantage The

sole purpose of strategic planning is to enable a company to gain, aseffectively as possible, a sustainable edge over its competitors. Corporate

strategy thus implies an attempt to alter a companys strength relative to

that of its competitors in the most efficient way. (Kenichi Ohmae, The Mind

of the Strategist)


4/49


In the business world, a Company MUST design an appropriatestrategy to win battles against its competitors and eventually

achieve final victory in the war.

Outdoing the competitors means:

More business volume higher profits and returns

more market share

better image or reputation

ubiquitous brand names

& in general .. more SUCCESS !!!

Some definitions of Strategy


5/49


Strategic decisions are important.They define the path the company will take in the future.

Strategic decisions involve a significant

commitment of resources.They are not easily reversible.

Hence, it is very important to get the strategy right.

Nature of Strategic Decisions


6/49


Common elements of Successful Strategy

Goals that are simple, consistent andlong-term

A strategy is formulated for the long-

term and not the short-term

Profound understanding of the

competitive environment. Understanding the business in which

the company is, its competitors,

industry structure, etc.

Objective appraisal of resources

Knowing the strengths andweaknesses and how to fill the

required gaps.

Effective Implementation

Most critical.

Successful

Strategy

Effective Implementation

Simple,

consistent and

long-term

objectives

Profound

Understanding of

the competitive

environment

Objective

appraisal of

resources


7/49


A firm/company embodies three sets of key characteristics:

Its goals and values

Its resources and capabilities

Its organizational structure and systems

External environment

Comprises the whole range of economic, social, political and

technological factors that influence a firms decision and its performance.

For most strategy decisions, the core of the firms external environmentis the industry

Relationships with customers, competitors and suppliers.

Analyzing Business Strategy


8/49


Most strategy frameworks consider strategy as the linkbetween the firm and the external environment

Analyzing Business Strategy

THE FIRM

Goals and Values

Resources and

Capabilities

Structure andSystems

THE INDUSTRY

ENVIRONMENT

Competitors

Customers

Suppliers

STRATEGY


9/49


Competitive Strategy, Competitive Advantage

Competitive Strategy: The planning and implementation of

utilization of scarce resources of a company (both financial andhuman), in order to obtain results that are superior to those of

competitors.

Competitive advantage: The distinguishing feature of acompany that differentiates it from its competitors and allows itto reach a position ofsustainable superiority in the market.

In order to maintain that competitive advantage, the company needs tocontinuously review its strategy in order to adapt it to the changing

environment. Hence the importance of studying the environment.

The ultimate goal of any Corporate Strategy is the achievementof a Competitive Advantage that is sustainable over time.


10/49


The strategic management process: planning

Mission &

Objectives

of the firm

External

Analysis

Internal

Analysis

Design of

Strategic

Options

Evaluation

& Selection of

Appropriate

Strategy

Implementation

In

Practice

Control

Basic

orientation

of the firm

STRATEGIC ANALYSIS STRATEGY STRATEGY IMPLEMENTATION

FORMULATION

Diagnosis:

Weaknesses,

Strengths,Threats and

Opportunities

Corporate

And Competitive

Strategies

Adequacy,

feasibility,

acceptability

Support,

Planning &

Functional

strategies

Review of

strategy


11/49


Corporate Mission & Objectives

Mission: Strategic vision of what the organization intends to do and

become in the long term. Must be consistent with the culture (values ) of the company.

Core purpose is the reason that the firm exists, an idealistic

reason for being

What do we do?

Where do we go from here?

Binds the various activities of the firm

The mission & purpose are specific in the short to medium term.

Objectives & Goals: commitments of efforts made by management

in order to achieve concrete results in a bounded time period. This

is communicated to all levels of the firm.


12/49


Strategic Analysis Tools:

1. SWOT Analysis Simple but very useful and effective method to choose the best strategy and action

plans of the company. Introspective (internal) analysis of strengths and weaknesses within the company.

Externally, analysis of threats and opportunities presented by the market &environment

How is it done?: For internal analysis, it is necessary to know the resourcesand capabilities of the company

STRENGTHS

OPPORTUNITIES THREATS

WEAKNESSES

PatentsStrong brand namesGood reputationProprietary know-howFavorable access to distribution networks

Unfulfilled customer needsArrival of new technologyLoosening of regulationsRemoval of international trade barriers

Shifts in consumer tastes from the firm productsEmergence of substitute productsNew regulationsIncreased trade barriers

Poor brandsBad distributionLack of skillsLow customer loyaltyCustomer claims: High levelPoor management


13/49


2. Business Portfolio Analysis Tool

BCG Growth-Share Matrix

Graphically depicts the situation of need (cash/fundsrequirement) versus generation of resources (funds, cash-flow) by different products or business portfolios in thecompany

Model developed by The Boston Consulting Group to analyze themanagement of a portfolio of different strategic business units (SBU)or major product lines

The products may change their position in accordance with thebusiness life cycle


14/49


2. BCG Growth-Share Matrix

STARSHIGH

LOW

MARKETGROWTHRATE

(CashUsage)

HIGH

QUESTIONMARKS

CASH COWS

DOGS

LOW


15/49


Type of Business/Product

Cash Cow Business Unit (BU) or product with large Market Share (MS) in a mature,

slow growing industry

that requires little investmentand

generates cash that can be investedin other BUs

Star

BU or product with large MS in afast growing industry.

Will a Star generate cash?

It may generate cash but, because of the market growth, it requiresinvestmentto maintain a leading position.

Eventually, it will become a cash cow.



16/49


Type of Business/Product

Question Mark BU or product with small MS in a high growth market.

It requires resources to grow MS but the outcome is uncertain as it maybecome either a star or a dog depending on other factors.

Dog

BU or product with small MS in a mature industry.

It may not require substantial cash but it ties up capitalthat could bedeployed elsewhere.

It should be liquidated unless it serves some other strategic purpose.



17/49


3. Analysis tools for specific industry environment: The five

competitive forces model (Porter)

Perfect competition model implies that risk-adjusted rates of return should be

constant across firms and industries. In reality, different industries can sustain

different levels of profitability, partly explained by industry structure.

Porters 5 forces model helps in the analysis of an industry in order to know

the potential benefit in the industry in terms of profitability in the medium

and long terms.

Can be considered as a basic instrument to analyze the threats and

opportunities present in the sector in which the company is located.

The interaction of the 5 forces determines the profitability of the industry and

the distribution of value creation between the different actors.

This model can be used by business managers to: Better understand the industry context in which the firm operates to try and

develop an edge over competitors

Analyze attractiveness of other industries when searching for new business

opportunities


18/49


Competitive Analysis: Porters five forces Model

POTENTIAL

COMPETITORS

SUPPLIERS BUYERS/

CONSUMERS

SUSTITUTES

EXISTING

COMPETITION INTHE SECTOR

Intensity of Rivalry

Threat of substitutes

Products or Services

Bargaining power of

Buyers/consumers

Bargaining power

of Suppliers

Existence of barriers

to entry


19/49


Analysis of the five competitive forces

a) Intensity of Existing Competition:

It is one of the most important of the five forces and isdetermined by the following factors:

Growth Rate of Industry: A slow market growth causes firm to fight for

market share

Extent of fixed costs in the total value of business : Highfixed cost

produce economies of scale and more rivalry Degree of product differentiation: Low product differentiation increases

the intensity of rivalry

Concentration and balance among competitors: A large number of firms

increases rivalry, as they compete for the same customers and resources.

Product characteristics: Highly perishable products intensify competition

for customers and increases rivalry

Supplier switching costs: Low costs increase intensity of rivalry. The

contrary happens with brand identity.

Exit barriers: High exit barriers increases the intensity of existing

competition.


20/49


b) Potential Competition: Threat of Entry

The entry of new firms in the industry creates changes in supplier capacity,

market shares, changes in profit margins, etc ...The degree of threat depends on entry barriers.

For their part, companies that are within the industry will react to theirdefense.

The existence of barriers to entry defines the possibility of high profits

TYPES OF BARRIERS TO ENTRY

Economies of scale

Experience and learning effect

Customer Loyalty Need for specific technologies

Capital requirements

Access to distribution channels

Government Policies

Tariffs and trade restrictions


21/49


b) Potential Competition: Threat of Entry (continuation)

Barriers, that can be created or exploited to enhance a firm

position of advantage, arise from several different sources: Government regulatory actions: utilities, telecommunications

Patents and proprietary knowledge: pharmaceutical industry

Specificity of capital assets

Large investment in highly specialized plants and equipment is needed

Aircraft manufacturing

Existence of economies of scale: MES (minimum efficient scale) ofproduction is high. Unit cost decreases with volume until such highlevels that deter the entry of small, start-up business

Cost Advantages:

Established firms have cost advantages simply because they haveentered earlier,

cost of learning

access to cheap raw materials


22/49


b) Potential Competition: Threat of Entry (continuation)

Barriers, that can be created or exploited to enhance a firm position ofadvantage, arise from several different sources:

Product differentiation Advantages of brand recognition and customer loyalty

New entrants have to spend heavily on advertising, building awareness, etc.

Access to channels of distribution Limited capacity within distribution channels (lack of shelf space)

Retailers who are risk averse

Fixed costs associated with carrying an additional product

Retaliation Entrants expectations as to possible retaliation by established firms

Aggressive price cutting

Increased advertising and sales promotion and litigation

The likelihood of retaliation is also influenced by the scale of entry

Barriers to entry may not work with firms that are diversifying and thosethat have access to lot of resources and that use different strategies.

Dell computers (direct access to customers).

Barriers to exit work similarly to barriers to entry, though the impact isopposite


23/49


b) Potential Competition: Threat of Entry

(continuation)

TYPES OF REACTION OF BUSINESS TO A NEW COMPETITOR

Faced with the threat of a new competitor a firm can react to preserve itscompetitive position in the following ways:

Passively: no reaction, the company expects and see what happens in theindustry before starting a particular action.

Threatening Moves: taking steps that threaten the consolidation of thenew competitor, as lower prices or improve products and services.

Defensive Moves: from an established position, increased advertising, etc.


24/49


c) Threat of Substitute Products

Substitutes are those products/services in different industries that perform a similarfunction or satisfy the same needs

Car, train, airplane transportation, Iberia Shuttle and AVE between Madrid / Barcelona

Aluminum cans, glass bottles and plastic containers

Traditional versus on-line encyclopedia

The intensity of the threat depends on the price relative to the benefits and costs of

change:

Consumers compare prices and services, changes may be favorable to the new product.

Switching costs may come from the necessary training, acquisition of additional

equipment, technology costs, sociological and time.

The threat of substitutes exist when

Switching cost are low

Buyer inclination to substitute is high Price-performance trade-off of substitutes is similar

The extent of substitution on the basis of price differences will be lower if:

Complex needs are being fulfilled

Difficult to discern performance differences.


25/49


d) Bargaining Power of Buyers

If buyers enjoy significant bargaining power in the industry, they canforce down prices or demand better quality services.

The circumstances that make buyers into a powerful group with muchbargaining power are:

High concentration DOD & Defense contractors

When there is no differentiation between products & volume purchasedby the buyer is high Coca-Cola and bottle manufactures

Low switching costs for changing supplier

Real threat of backward integration of the buyer Large automobile companies and tire manufacturers

Availability of reliable and complete information (about the market andsuppliers)


26/49


e) Bargaining power of suppliers

Factors that contribute to strengthen the suppliers:

The customers that they serve are numerous and loosely organized collectively

They are concentrated Chip manufactures vs. PC manufacturers/ assemblers

Sell their products to different sectors

They provide an essential product, with no replacement

Offer differentiated products

High costs of switching

Microsoft relationship with PC manufacturers

Threat of forward integration by suppliers

Suppliers are weak if:

Product is standardized: many competitive suppliers and commodity products

Credible backward integration threat by purchasers Timber producers relationship to paper companies

Purchasers are concentrated or purchase in high volumes House appliances manufacturers and Corte Ingls


27/49


Criticisms of Porter's five forces model

There are substantial differences in the level of profitability ofcompeting firms in a given industry. Porter's analysis is based onindustry structure

The industry structure analysis also needs to be complemented withcapacity of each company to allocate its resources and develop its skills.

All industries are not alike. Different forces have different levels ofimpact and importance depending on the industry. To apply themodel appropriately, one has to take into account the importancethat each of the five forces has for a particular industry. This cannotbe done mechanically.

It is not enough to perform a static analysis, because the verystructure of any industry is dynamic in nature.

Needs to be complemented with estimates of trends.

h f i l l


28/49


The management function: management levels

: Who decides on the strategy to adopt?

STRATEGIC

LEVEL

TACTICAL LEVEL

MIDDLE-LEVEL

MANAGEMENT

OPERATIONAL LEVEL

Responsible for guiding the

company, setting targets and

the main strategies

Senior & middle management

related to supervision of

operational level

Are in direct contact with

workers doing the productive

work of the company


29/49


The management function: types ofdecisions

STRATEGIC

DECISIONS

TACTICAL OR

STRUCTURAL DECISIONS

OPERATIONAL

DECISIONS

Senior management of the company

High degree of Uncertainty

Long-term effects

Affects the basic objectives of the company

Middle-level management and staffdepartments

Less uncertainty than strategic decisions

Long-term and medium term

Affects the means of achieving the basic

objectives of the company

Supervisors of line functions

Low uncertainty- routine decisions

Short-term and medium term impact

Affects the day-to-day use of the means to

achieve business objectives


30/49


The strategy: levels of implementation

The business strategy should be based on the resources and

capabilities of the company. Implementation is at three levels:1. Corporate strategy (business development strategy): The business that a

firm should be in and its objectives identifies the Strategic Business Units (SBUs)

analyzes and evaluates the business portfolio, and opportunities

the ultimate goal is to maximize the value of the whole firm

2. Business strategy (strategy and competitive advantage): how a particularfirm competes within a particular industry or market analysis of the company's competitive position

how to achieve sustainable competitive advantages in the industry

1. Functional Strategies: a level of individual business functions (Sales,Production, Information Systems, HR, R&D, ....) that supports theachievement of competitive advantages for the business unit, the companyetc.


31/49


Corporate and Business Strategy

How can a firm make profits?

Select an industry wherefavourable industry conditions result in the industry earning arate of return above the competitive level.

Within an industry, attain a position of advantage over the rivals so as to make above

average profits in the industry.

RATE OF PROFITS

ABOVE COMPETITIVE

LEVEL

How do we makemoney?

INDUSTRY

ATTRACTIVENESS

Which industries should we

be in?

COMPETITIVE ADVANTAGE

How should we compete?

CORPORATESTRATEGY

BUSINESS

STRATEGY


32/49

Escuela Politcnica Superior

Introduction to Engineering Management

Strategic Levels in a Diversified and Complex Firm

Functions

Division CDivision BDivision A

Divisin CDivisin BStrategic BusinessUnits



Functions Functions

Level 1

Level 2

Level 3

Level 4

CorporateCorporate Strategies

BusinessStrategies

FunctionalStrategies


33/49



Strategic Options

Corporate Strategy (Strategy for the development of

business):

Diversification: Related and Vertical Integration

Geographical growth / globalization (internationalization)

Possible realization of the development strategies through partnerships

Business Strategy (Strategy and Competitive Advantage): Cost Leadership

Differentiation

Maybe applied to the whole market or to just specific business segments

Functional Strategies:

Commercial (leader, challenger, follower)

Production

Information Systems

HR, etc.

Di ersification Strategies Choice of the B siness


34/49



Diversification Strategies: Choice of the Business

Portfolio

The company produces new products and / or enters new

markets other than its own. Expands its portfolio of businesses Types of diversification

Related: horizontal (common technology, market, etc.) and vertical

Unrelated

Why diversify? Strengthen competitive position (by exploiting resources and capabilities of

the company)

search for synergies (economies of scope)

economies of scale

Reduce overall risk for the firm Traditional market saturation (growth possible in other markets)

Invest surplus funds or seeking attractive investment opportunities


35/49



Ovens CookersMarine/Boats

Engines Lawn Mowers

Electric saws

Electrical

Energy

Air

Transport

Fertilizers

MarketTechnology

Toys Childrensclothing

Baby

Strollers

Example of related and unrelated diversification

Dish-washers


36/49



Strategy for related diversification

The company enters into a new business related to those that it

already has

Types of related diversification

Horizontal

Vertical (vertical integration)

Horizontal diversification Enters into complementary products or services or substitutes

May use the same distribution channels, profitable new brand

Ex 1: Grupo Pascual (initially: dairy products, at present, increased revenue

by: juices, cereals, mineral water, pasteurized eggs, ...)

Ex 2: Grupo Planeta (first was Editorial Planeta. Today, also in business of

communication (Antena 3, Onda Cero), produces TV serials, training ...)


37/49



Entry of a company in new activities that are related to its own value

chain (production / marketing of products or services), thus performingthe function previously performed by its supplier or customer

Types of vertical integration

Backward or upstream (assuming the activity of your supplier.)

Forward or downstream (assuming the activity of the customer)

Advantages of vertical integration:a) Control inputs and / or distribution, b) increased profitability by reducing

transaction costs, taxes, etc. c) greater independence from market fluctuations,

d)improvement in competitive position, e) protection of confidential information

Disadvantages:

a) Increased global risk, b) loss of flexibility, c) loss of benefits of specialization,Vertically adjacent activities are in very different types of industries: manufacturing

and retailing, d) increased administrative costs, e) diverts attention, developing

new competencies may compromise existing ones.

Vertical Integration Strategy


38/49



Vertical Integration Strategy

Raw Materials

IntermediateManufacturing

Assembly

Distribution

End Customer

Raw Materials


Assembly

Distribution

End Customer

BackwardsIntegration

Raw Materials


Assembly

Distribution

End Customer

ForwardIntegration


39/49



Strategies for Globalization

The internationalization strategy leads the company to enter

into a product market for customers in a foreign country

Two types of international businesses:

Exporting company

Production in the home country

Only marketing may be internationalized, but may be done from homecountry

possibility of exporting through another organization

Multinational Company

Direct presence and investment in the country of destination

Control of business through affiliates or subsidiaries that may be

engaged in marketing, manufacturing or R & D

Subsidiaries: can be created by the firm or by acquisition of existing

companies

B i St t F l ti


40/49



Business strategies based on Competitive Advantage

Search for leadership on the market two ways:

Offering lower prices: cost leadership

Better meet customer needs: DifferentiationIn addition, the ability to maintain this position over time (sustainable

competitive advantage)

Two types of Strategies:1. Cost Leadership Strategy: based on competitive cost advantage.Production occurs at lower costs, higher efficiency, firm can sell at equal or

lower prices as compared to competition, and can have higher margin

2. Product differentiation strategy:based on the competitive

advantage of differentiation: to better meet customer needs, it can be

successful only if the firm achieves perceptible product differentiation.

The two strategies can be applied to an entire market, or may focus on a

particular market segment created by applying market segmentation

strategy.

Business Strategy Formulation

Cost leadership strategy: sources of cost


41/49



Cost leadership strategy: sources of cost

advantage

1. Economies of ScaleIn an industry there exists economies of scale when the production costs

decreases with an increase in the volume produced. The origin of

economies of scale can be:1.1. Technology

1.2 High fixed costs: cost-sharing

1.3 Specialization and division of labor

2. The experience curve

The unit costs decreases for any process in proportion to the production

experience. In general, it has been estimated that the costs reduce by

between 15 to 35 % for every doubling of the production volume. The main

causes may be:

2.1 Increased skills in routine tasks

2.2 Increased capacity of coordination

2.3 Improvement in administrative organization

Cost Leadership Strategy: Sources of Cost


42/49



Cost Leadership Strategy: Sources of Cost

Advantage (II)

3. Production Techniques

Production techniques employed in a company can generate cost

advantages. Its origin can be due to:

3.1 Mechanization, Automation

3.2 Greater efficiency in the use of raw materials

3.3 Achieve a reduction in product defects, increase in quality and

production accuracy ... ..

4. Product Design (Design for Manufacture)

The design cost advantages can come from:

4.1 Design that facilitates mechanization and automation

4.2 Design that allows for economic use of materials

C L d hi S i Th U d l i


43/49



Cost Leadership Strategies: The Underlying

Threats

Focus on cost reduction may induce certain risks:

1. Less focus on the product quality

2. A misperception of the sources of cost advantage.

3. Focus on only production and neglecting other important activities. 4. Offer an inadequate product or poor service.

5. Imitation by competitors.

6. Stiffness or lack of flexibility induced by economies of scale.

7. Drastic changes in the market.


44/49



The Strategy of Differentiation

Actions carried out by a firm to design and implement a set of

significant product or service features such that the market

perceives it differently from those of the competitors

Competitive Advantage Competitive advantage due to differentiation lies in:

Tangible or intangible characteristics of the product

And / or characteristics of the company that manufactures or distributes

the product

The best differentiation : to exceed client expectations.


45/49



Differentiation Strategy: requirements

1. Select those needs that buyers value the most

2. Meet the requirements better than competition by having clearpriorities and adding appropriate characteristics to the firms

product / service

3. The customer must perceive the difference between before and

after the strategy has been implemented

4. The added cost for the differentiation must be less than theincrease in customer value, which the customer is willing to pay

The importance of perceived value (is the one that meet expectations)

VALUE RECEIVED: set of benefits received by customers when buying a productor service

PERCEIVED VALUE: A set of benefits that the customer perceives when he/she

purchases a product or service


46/49



Types of Differentiation

A) By Product:

Price format, presentation, style, design

Additional features

Quality level: low, medium, high,higher

Uniformity, durability, reliability,

repairability

B) By Service: Delivery and installation

Initial training and / or after salesconsulting services

Post-sale repair Financing, payment

Distribution, sales channels

C) By the employees of the

company:

Competent, courteous

Credible, honest, responsible

Communicative, helpful

D) By the image (of the product orthose associated with the firm):

Logos, colors, symbols of the company

and its products

Newspaper ads, TV, cinema, radio,

posters ...

Atmosphere /environment of sales or

production

Sponsored events


47/49



Business Creation: Steps

1. From a business idea

Observe unmet needs or business opportunities Source of Information

Close business circles

Specialized sources

Existing businesses (transfers, franchisees ...)

2. Develop business plan

Analyze feasibility of the business idea

Analyze environment, stage of market, demand for the product

Create implementation plan

Marketing Plan: range, price, distribution channels

Production plan: investment required

HR Plan: Number of employees, profiles, training, compensation

Financial Plan: Capital needs and availability

Choice of the legal form


48/49



Creation of a Business (II): steps

3. Obtain Funds If equity funding is insufficient then apply for loans or grants.

4. Legal Proceedings

Enrollment with the Companies Registry

Treasury: Request for CIF

Deposit appropriate capital in bank

Sign notarized deed of incorporation

Settle the taxes for transfer of property

Register at the Treasury

C ti f B i (III)


49/49


Creation of a Business (III):

Factors of success and Failures

Business factors Business Strategy & Direction

Personal factors Motivation:

Desire for independence or self-improvement Search social recognition

Self-employment

Attributes: Psychological: self-confidence, risk, creativity, innovation

Skills and Abilities: motivation, organization, negotiation

Institutional factors Business incubators (state schools of promotion of business)

IEM Topic4 Strategic Management

Documents

Transcript of IEM Topic4 Strategic Management