Strategic Management
What is Strategy?
Strategy is the overall plan for
deploying resources to
establish a favorable position.
Tactic is a scheme for a specific
maneuver.
Characteristics of strategic decisions…
Important
Involve a significant commitment of
resources
Not easily reversible
Basic Framework
External
The firm
Environment
Goals & Values
Competitors
Resources &
Strategy Customers
Capabilities
Structures & Suppliers
Systems etc
Basic Model of
Strategic Management
Four Basic Elements
1. Environmental Scanning
Environmental Scanning
SWOT analysis
PEST analysis
Five forces analysis
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SWOT analysis
Strengths (internal)
Weaknesses (internal)
Opportunities (external)
Threats (external)
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PEST Analysis
Political factors
Economic factors
Socio-cultural factors
Technological factors
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Political/Legal Factors
Political ideology of the government
Legislation and Acts
Anti Monopolies legislation
Environmental protection laws
Taxation policy
Employment laws
National Public policy
Global Public Policies
EEP Session-2 10
1.5 Economic Factors
Economic growth
Inflation
Employment
Disposable income
Business cycles
Availability and cost of energy
Availability and prices of raw materials
Socio-Cultural Factors
Demographic factors
Role of women
Extent of Poverty
Extent of Inequality
Regional Disparities
Caste and creed
Race and religion
Food habits
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Technological Factors
New discoveries and innovations
Speed of technology transfer
Rates of obsolescence
Internet connections
Information and Communications
Technology (ICT)
Strategic Management Process
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Strategic Management Process
Step 1: Identifying the organisation’s current
mission, objectives, and strategies
Mission: the firm’s reason for being
Who we are,
What we do, and
Where we are now
Goals: the foundation for further planning
Measurable performance targets
Step 2: Conducting an external analysis
The environmental scanning of specific and general
environments
Focuses on identifying opportunities and threats
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Strategic Management Process
(cont’d)
Step 3: Conducting an internal analysis
Assessing organisational resources, capabilities,
activities and culture:
Strengths (core competencies) create value for
the customer and strengthen the competitive
position of the firm.
Weaknesses (things done poorly or not at all)
can place the firm at a competitive
disadvantage.
Steps 2 and 3 combined are called a SWOT
analysis (Strengths, Weaknesses,
Opportunities, and Threats)
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Strategic Management Process
(cont’d)
Step 4: Formulating strategies
Develop and evaluate strategic
alternatives
Select appropriate strategies for all levels
in the organization that provide relative
advantage over competitors
Match organizational strengths to
environmental opportunities
Correct weaknesses and guard against
threats
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Strategic Management Process
(cont’d)
Step 5: Implementing strategies
Implementation: effectively fitting
organisational structure and activities to the
environment
Effective strategy implementation requires
an organisational structure matched to its
requirements.
Step 6: Evaluating results
How effective have strategies been?
What adjustments, if any, are necessary?
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The most important strategy concepts:
Vision: what does the company see for the future?
Mission: why does the company exist?
Strategy: covers the definition of objectives as well
as the methods and tools to help reaching the
objectives.
Objective: they say, what does the company want
to implement in a given time?
Tools: the way defined to fulfil the mission and
objectives, at the end of which the vision becomes
reality.
Strategic action: a main task derived from
strategic objectives often formulated as
“projects”.
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Vision and Mission
Vision
Picture of what the firm wants to be
What the firm ultimately wants to achieve
An effective vision statement is the responsibility
of the leader who should work with others to form
it
Foundation for the mission
Mission
Specifics business(es) in which firm intends to
compete and customers it intends to serve
More specific than the vision
The Strategic Management Process
Owners/Stakeholders
Local community
Trade Associations
Suppliers Managers Customers
Governme Employe The Public at
nt es large
Constituents of Strategic Building
Financial
performance
Competitive
advantage
Structural Process
Position Execution
Enterprise Synergies
Organizational
Capacity
The Architecture of Strategy
Competitive Advantage: The focal Point of Strategy
Differentiation
Competitiv Economic Market
Cost leadership e Value Value
Advantage added added
Quick Response
Criteria for Resources and Capabilities That
Become Core Competencies
Valuable
Valuable Rare
Rare
Core
Core
Competencies
Competencies
Nonsubstitutable
Nonsubstitutable Costly
Costly to
to Imitate
Imitate
How Resources and Capabilities
Provide Competitive Advantage
Valuable Allow the firm to exploit opportunities
or neutralize threats in its external
environment
Rare Possessed by few, if any, current and
potential competitors
Costly to When other firms cannot obtain them
imitate or must obtain them at a much higher
cost
Nonsubstitutable The firm is organized appropriately to
obtain the full benefits of the resources
in order to realize a competitive
advantage
Strategy Framework
Strategy Frameworks
q Industry level analysis
u Porter’ s 5 Forces
q Firm level analysis
u SWOT
u Core competencies
u Value Chain
q Other forms of analysis
u BCG 2x2 Matrix
u Benchmarking, best practices
Porter’s 5 Forces
Risk of Entry
(Barriers to Entry)
• brand loyalty
• absolute cost advantages
• econ of scale, cap req’t
• government regulations
• distribution access
Bargaining Power of Suppliers Bargaining Power of Buyers
High if:
High if: THE INDUSTRY
• product has few substitutes and • few large buyers
Rivalry Among • product unimportant to output
is important, few suppliers
• supplier has many other outlets Established Firms • buyers purchase in large
for product •competitive structure quantities and purchase large
• high switching costs •demand conditions percentage of industry output
• threat of vertical integration •exit barriers • low switching costs, little
forward differentiation
• threat of vertical integration
backward
Threat of Substitute Products
• existence of different products
that serve consumers’ needs in
a similar way
Bases of
competition
1. Customer oriented
a. Who they are?
b. When they use it?
c. How they use it??
2. Marketing Oriented
d. Theme/ Copy Strategy
e. Media Distribution Strategy
f. Distribution Strategy
g. Pricing Strategy
Resource –Oriented
Strategy
h. Raw Material
i. Employees
j. Financial –Resources
The Five Forces of
Competition Model
Threat of New Entrants: Barriers to
Entry
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of
scale
Government policy
Expected retaliation
Barriers to Entry
Economies of Scale
Marginal improvements in efficiency
that a firm experiences as it
incrementally increases its size
Advantages and disadvantages of
large-scale and small-scale entry
Barriers to Entry (cont’d)
ProductRequirements
Capital differentiation
Unique products
Physical facilities
Customer loyalty
Inventories
Products atactivities
Marketing competitive prices
Availability of capital
Barriers to Entry (cont’d)
Switching Costs
One-time costs customers incur when
they buy from a different supplier
New equipment
Retraining employees
Psychic costs of ending a relationship
Barriers to Entry (cont’d)
Access to Distribution Channels
Stocking or shelf space
Price breaks
Cooperative advertising allowances
Cost Disadvantages Independent of
Scale
Proprietary product technology
Favorable access to raw materials
Desirable locations
Barriers to Entry (cont’d)
Cost disadvantages independent of
scale
Proprietary product technology
Favorable access to raw materials
Desirable locations
Government policy
Licensing and permit requirements
Deregulation of industries
Barriers to Entry (cont’d)
Expected retaliation
Responses by existing competitors may
depend on a firm’s present stake in the
industry (available business options)
Bargaining Power of Suppliers
Supplier power increases when:
Suppliers are large and few in number
Suitable substitute products are not
available
Individual buyers are not large customers of
suppliers and there are many of them
Suppliers’ goods are critical to buyers’ marketplace
success
Suppliers’ products create high switching costs.
Suppliers pose a threat to integrate forward into
buyers’ industry
Bargaining Power of Buyers
Buyer power increase when:
Buyers are large and few in number
Buyers purchase a large portion of an
industry’s total output
Buyers’ purchases are a significant portion of a
supplier’s annual revenues
Buyers can switch to another product without
incurring high switching costs
Threat of Substitute Products
The threat of substitute products
increases when:
Buyers face few switching costs
The substitute product’s price is
lower
Substitute product’s quality and
performance are equal to or greater than
the existing product
Differentiated industry products that are valued
by customers reduce this threat
Intensity of Rivalry Among
Competitors
Industry rivalry increases when:
There are numerous or equally
balanced competitors
Industry growth slows or declines
There are high fixed costs or high
storage costs
There is a lack of differentiation
opportunities or low switching costs
When the strategic stakes are high
When high exit barriers prevent
competitors from leaving the industry
Interpreting Industry Analyses
Low entry barriers
Suppliers and buyers have
strong positions
Unattractive
Strong threats from
substitute products
Industry
Intense rivalry among
competitors Low profit potential
Interpreting Industry Analyses
High entry barriers
Suppliers and buyers have
weak positions
Attractive
Few threats from
substitute products
Industry
Moderate rivalry among
competitors High profit potential
Competitor Analysis
Competitor Intelligence
The ethical gathering of needed
information and data that provides
insight into:
A competitor’s direction (future objectives)
A competitor’s capabilities and intentions (current
strategy)
A competitor’s beliefs about the industry (its
assumptions)
A competitor’s capabilities
Competitor Analysis
Components
Competitor Analysis (cont’d)
• How do our goals
Future Objectives
compare with our
competitors’ goals?
• Where will the
emphasis be placed
in the future?
• What is the attitude
toward risk?
Competitor Analysis (cont’d)
Future Objectives
• How are we currently
competing?
Current Strategy • Does this strategy
support changes in
the competitive
structure?
Competitor Analysis (cont’d)
Future Objectives
• Do we assume the
Current Strategy future will be volatile?
• Are we operating
Assumptions under a status quo?
• What assumptions do
our competitors hold
about the industry
and themselves?
Competitor Analysis (cont’d)
Future Objectives
Current Strategy
Assumptions
• What are our
strengths and
Capabilities weaknesses?
• How do we rate
compared to our
competitors?
Competitor Analysis (cont’d)
Future Objectives Response
• What will our
Current Strategy competitors do in
the future?
Assumptions • Where do we hold
an advantage over
our competitors?
Capabilities • How will this
change our
relationship with
our competitors?
Stakeholders
Individuals and groups who can
affect, and are affected by, the
strategic outcomes achieved and
who have enforceable claims on a
firm’s performance
Claims are enforced by the
stakeholder’s ability to withhold
essential participation
The Three
Stakeholder
Groups
Capital Market Stakeholders
Shareholders and lenders expect
the firm to preserve and enhance
the wealth they have entrusted to it
Returns should be commensurate
with the degree of risk to the
shareholder
Product Market Stakeholders
Customers
Demand reliable products at low prices
Suppliers
Seek loyal customers willing to pay highest
sustainable prices for goods and services
Host communities
Want companies willing to be long-term employers
and providers of tax revenues while minimizing
demands on public support services
Union officials
Want secure jobs and desirable working conditions
Organizational Stakeholders
Employees
Expect a dynamic, stimulating and
rewarding work environment
Are satisfied by a company that is
growing and actively developing their
skills
Stakeholder Involvement
Two issues affect the extent of stakeholder
involvement in the firm
1.How to divide returns
to keep stakeholders
involved?
Capital
Organizational
Market
2.How to increase
returns so everyone
Product
Product
Market
Market
has more to share?
Firm level analysis
q First, consider units of
analysis
u Corporate level
u Business level
uFunctional level
Levels of strategy
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Tasks of Corporate Strategy
Moves to achieve diversification
Actions to boost performance of individual businesses
Capturing valuable cross-business synergies to provide
1 + 1 = 3 effects!
Establishing investment
priorities and steering
corporate resources into the
most attractive businesses
Tasks of Business Strategy
Initiating approaches to produce successful performance in a specific
business
Crafting competitive moves to build
sustainable competitive advantage
Developing competitively valuable
competencies and capabilities
Uniting strategic activities of functional areas
Gaining approval of business strategies by corporate-level officers
and directors
Tasks of Functional Strategies
Game plan for a strategically-relevant
function, activity, or business process
Detail how key activities
will be managed
Provide support for
business strategy
Specify how functional objectives
are to be achieved
What Is a Strategic Plan?
Its strategic vision
and business
mission
A
Company’s
Strategic Its strategic and
Plan
Consists financial
of objectives
Its strategy
Thinking Strategically:
Three Big Central Questions
1. What’s the company’s present situation?
- industry conditions and competitive pressure
- current performance and market standing
- resource strength and capabilities and competitive weaknesses
2. Where does the company need to go from here?
Business(es) to be in and market positions to stake out
Buyer needs and groups to serve
Direction to head
3. How should it get there?
A company’s answer to “how
will we get there?” is its strategy
Mintzberg’s Definition
Strategy is a pattern in a stream of
actions over time.
Mintzberg’s Definition
Strategy is a pattern in a stream of
actions
over time.
The Five P’s
Plan
The Five P’s
Ploy
Plan
The Five P’s
Ploy
Plan
Pattern
The Five P’s
Ploy
Plan
Perspective Pattern
Position
Different Kinds of Strategy
Intended Strategy
Different Kinds of Strategy
Deliberate
Intended Strategy
Unrealized
Strategy
Different Kinds of Strategy
Deliberate
Intended Strategy
Emergent
Strategy
Unrealized
Strategy
Different Kinds of Strategy
Deliberate
Intended Strategy Realized
Strategy
Emergent
Unrealized Strategy
Strategy
Dimensions of Strategy
Strategies contain goals, policies, and
action sequences.
Strategies develop around a few key
concepts.
Strategies deal with the unpredictable
and the unknowable.
Strategies require hierarchies of mutual
support strategies.
Examples of Strategies Based
on Distinctive Capabilities
Sophisticated distribution systems – Wal-Mart
Product innovation capabilities – 3M Corporation
Complex technological process – Michelin
Defect-free manufacturing – Toyota and Honda
Specialized marketing and merchandising know-
how – Coca-Cola
Global sales and distribution capability – Black & Decker
Superior e-commerce capabilities – Dell Computer
Personalized customer service – Ritz Carlton hotels
